Just see: Overhead Ratio and do the fractions on your own. It won't hurt...much.
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Cost Accounting: How Do You Properly Acc...8 Views
and finance Allah shmoop properly accounting for overhead And yes
it's an important question for very tail Giants and N
BA centers are also key question for business owners Will
you run a business that makes candles scented like particular
cities You know for people who have moved away and
gotten homesick You have your Brooklyn coffee shop model your
Dubai Lamborghini dealership model there your Paris and San Francisco
St Urine model Each candle cost you twelve bucks to
make and they sell for thirty each That twelve dollars
represents what's called any accounting world Caw gse Nora cost
of goods sold well It encompasses the direct expenses that
go into making the candles You know the wax the
wick the glass holder the artificial and natural ingredients needed
Teo make the smell It also includes things like direct
labor and all the other costs that you Khun directly
attribute to each candle But those CAW GSE expenses don't
account for everything You've got a whole set of other
costs that get incurred for things outside of the production
process You've got the accounting in HR departments You've got
the R and D lab constantly trying to match smell
combinations with different cities You've got the fleet of executive
private jets and a small island in the Caribbean where
you hold your annual too weak you know think sessions
These things cost the company money but you can't assign
the expenses to any particular candle thes air known as
Yes overhead costs Yeah because a while to get to
the title there But we did in accounting speak They
get a special name They're known as SG any expenses
or sales general and administrative expenses So we're talking stuff
related to sales or admin obviously plus anything that applies
to the company in general I eat not to any
particular product So like for your candle company these overhead
costs Mike total five million bucks a month You have
to pay those expenses those overhead expenses whether you sell
one candle or yourself five million the overhead does not
change based on your sales volume But you have to
sell enough candles to reach that five million dollar mark
Otherwise well you post a loss for that month enough
losses in a row and well you'LL run out of
money and then the b word bankruptcy Remember you're selling
candles for thirty bucks that cost twelve bucks to make
The thirty represents your revenue That twelve represents your cog
which leaves eighteen left Poor candle for everything else So
that eighteen dollars is known is the gross profit It's
the prophet you earn from each candle net not counting
the overhead cost The gross profit represents the first off
along the income statement You started revenue and go through
COGSA and then you end up at the gross profit
right there Well the next step takes care of the
S g N A Expenses You sell half a million
candles in a month Each one is worth a gross
profit of eighteen bucks there That's nine million dollars in
total gross profit for that month Well you have five
million in overhead right It's sixty million a year to
run your business Those DNA expenses all told five million
a month So what does that get you while you
got nine million gross there minus the five million and
overhead and that gives you four million bucks after overhead
Well that four million dollars number represents what's called your
operating profit or pretax profit If you want to know
you're operating margin Well you just relate that number to
the revenue figure like that So you sold five hundred
thousand candles at thirty bucks each Total revenue fifteen million
dollars With that sales lovely ended up with four million
in operating profit and four million divided by fifteen million
gives you an operating margin about twenty six point seven
Some like that So when you sold five hundred thousand
candles you paid all the expenses needed to make the
product Then he paid all your overhead which left you
with four million dollars over twenty six point seven percent
of your total revenue wealth To figure out your break
even point you just have to work through the process
backwards You have five million dollars in overhead you have
to pay for well Each candle gives you a gross
profit of eighteen dollars So the question How many eighteen
dollars bits of gross profit do you need to pay
for five million in overhead We just divide that five
million by eighteen and that gets you roughly two hundred
seventy seven thousand eight hundred seventy eight thousand candles That's
your break even production level Sell that many candles and
you'LL pay your overhead All sales beyond that point Well
generally fall to the bottom line like through that n
ba center Yeah you need to make sure all the
door jams and ceilings in your house or at least
eight feet tall Then you don't have to worry about 00:04:19.614 --> [endTime] you know bumping into that overhead
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What is overhead? Overhead refers to a business’s operating expenses. These can include, rent, supplies, insurance, utilities, payroll, etc. Over...