ShmoopTube

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and finance Allah shmoop properly accounting for overhead And yes

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it's an important question for very tail Giants and N

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BA centers are also key question for business owners Will

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you run a business that makes candles scented like particular

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cities You know for people who have moved away and

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gotten homesick You have your Brooklyn coffee shop model your

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Dubai Lamborghini dealership model there your Paris and San Francisco

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St Urine model Each candle cost you twelve bucks to

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make and they sell for thirty each That twelve dollars

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represents what's called any accounting world Caw gse Nora cost

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of goods sold well It encompasses the direct expenses that

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go into making the candles You know the wax the

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wick the glass holder the artificial and natural ingredients needed

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Teo make the smell It also includes things like direct

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labor and all the other costs that you Khun directly

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attribute to each candle But those CAW GSE expenses don't

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account for everything You've got a whole set of other

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costs that get incurred for things outside of the production

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process You've got the accounting in HR departments You've got

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the R and D lab constantly trying to match smell

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combinations with different cities You've got the fleet of executive

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private jets and a small island in the Caribbean where

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you hold your annual too weak you know think sessions

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These things cost the company money but you can't assign

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the expenses to any particular candle thes air known as

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Yes overhead costs Yeah because a while to get to

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the title there But we did in accounting speak They

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get a special name They're known as SG any expenses

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or sales general and administrative expenses So we're talking stuff

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related to sales or admin obviously plus anything that applies

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to the company in general I eat not to any

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particular product So like for your candle company these overhead

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costs Mike total five million bucks a month You have

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to pay those expenses those overhead expenses whether you sell

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one candle or yourself five million the overhead does not

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change based on your sales volume But you have to

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sell enough candles to reach that five million dollar mark

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Otherwise well you post a loss for that month enough

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losses in a row and well you'LL run out of

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money and then the b word bankruptcy Remember you're selling

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candles for thirty bucks that cost twelve bucks to make

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The thirty represents your revenue That twelve represents your cog

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which leaves eighteen left Poor candle for everything else So

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that eighteen dollars is known is the gross profit It's

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the prophet you earn from each candle net not counting

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the overhead cost The gross profit represents the first off

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along the income statement You started revenue and go through

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COGSA and then you end up at the gross profit

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right there Well the next step takes care of the

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S g N A Expenses You sell half a million

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candles in a month Each one is worth a gross

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profit of eighteen bucks there That's nine million dollars in

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total gross profit for that month Well you have five

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million in overhead right It's sixty million a year to

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run your business Those DNA expenses all told five million

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a month So what does that get you while you

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got nine million gross there minus the five million and

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overhead and that gives you four million bucks after overhead

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Well that four million dollars number represents what's called your

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operating profit or pretax profit If you want to know

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you're operating margin Well you just relate that number to

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the revenue figure like that So you sold five hundred

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thousand candles at thirty bucks each Total revenue fifteen million

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dollars With that sales lovely ended up with four million

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in operating profit and four million divided by fifteen million

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gives you an operating margin about twenty six point seven

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Some like that So when you sold five hundred thousand

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candles you paid all the expenses needed to make the

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product Then he paid all your overhead which left you

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with four million dollars over twenty six point seven percent

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of your total revenue wealth To figure out your break

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even point you just have to work through the process

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backwards You have five million dollars in overhead you have

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to pay for well Each candle gives you a gross

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profit of eighteen dollars So the question How many eighteen

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dollars bits of gross profit do you need to pay

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for five million in overhead We just divide that five

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million by eighteen and that gets you roughly two hundred

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seventy seven thousand eight hundred seventy eight thousand candles That's

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your break even production level Sell that many candles and

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you'LL pay your overhead All sales beyond that point Well

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generally fall to the bottom line like through that n

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ba center Yeah you need to make sure all the

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door jams and ceilings in your house or at least

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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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