ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Cost Accounting: How Do You Properly Account for Overhead? 8 Views

Share It!

Description:

How do you properly account for overhead? Overhead has to be accounted for by dividing the overhead amount by the recorded number of labor hours to get proper allocation rates for accounting. Overhead must include all forms of overhead, meaning any costs associate with running the business like electricity, building costs, etc.

Language:

English Language

Subjects:

Transcript

00:00
and finance Allah shmoop properly accounting for overhead And yes
00:08
it's an important question for very tail Giants and N
00:11
BA centers are also key question for business owners Will
00:15
you run a business that makes candles scented like particular
00:18
cities You know for people who have moved away and

00:21
gotten homesick You have your Brooklyn coffee shop model your
00:25
Dubai Lamborghini dealership model there your Paris and San Francisco
00:29
St Urine model Each candle cost you twelve bucks to
00:33
make and they sell for thirty each That twelve dollars
00:36
represents what's called any accounting world Caw gse Nora cost
00:40
of goods sold well It encompasses the direct expenses that
00:44
go into making the candles You know the wax the
00:46
wick the glass holder the artificial and natural ingredients needed
00:50
Teo make the smell It also includes things like direct
00:53
labor and all the other costs that you Khun directly
00:55
attribute to each candle But those CAW GSE expenses don't
00:59
account for everything You've got a whole set of other
01:02
costs that get incurred for things outside of the production
01:05
process You've got the accounting in HR departments You've got
01:08
the R and D lab constantly trying to match smell
01:12
combinations with different cities You've got the fleet of executive
01:15
private jets and a small island in the Caribbean where
01:18
you hold your annual too weak you know think sessions
01:21
These things cost the company money but you can't assign
01:25
the expenses to any particular candle thes air known as
01:28
Yes overhead costs Yeah because a while to get to
01:30
the title there But we did in accounting speak They
01:33
get a special name They're known as SG any expenses
01:36
or sales general and administrative expenses So we're talking stuff
01:41
related to sales or admin obviously plus anything that applies
01:44
to the company in general I eat not to any
01:46
particular product So like for your candle company these overhead
01:50
costs Mike total five million bucks a month You have
01:54
to pay those expenses those overhead expenses whether you sell
01:57
one candle or yourself five million the overhead does not
02:00
change based on your sales volume But you have to
02:03
sell enough candles to reach that five million dollar mark
02:05
Otherwise well you post a loss for that month enough
02:08
losses in a row and well you'LL run out of
02:10
money and then the b word bankruptcy Remember you're selling
02:13
candles for thirty bucks that cost twelve bucks to make
02:16
The thirty represents your revenue That twelve represents your cog
02:20
which leaves eighteen left Poor candle for everything else So
02:24
that eighteen dollars is known is the gross profit It's
02:26
the prophet you earn from each candle net not counting
02:30
the overhead cost The gross profit represents the first off
02:33
along the income statement You started revenue and go through
02:36
COGSA and then you end up at the gross profit
02:39
right there Well the next step takes care of the
02:41
S g N A Expenses You sell half a million
02:44
candles in a month Each one is worth a gross
02:46
profit of eighteen bucks there That's nine million dollars in
02:49
total gross profit for that month Well you have five
02:53
million in overhead right It's sixty million a year to
02:55
run your business Those DNA expenses all told five million
02:59
a month So what does that get you while you
03:00
got nine million gross there minus the five million and
03:03
overhead and that gives you four million bucks after overhead
03:06
Well that four million dollars number represents what's called your
03:09
operating profit or pretax profit If you want to know
03:12
you're operating margin Well you just relate that number to
03:16
the revenue figure like that So you sold five hundred
03:18
thousand candles at thirty bucks each Total revenue fifteen million
03:21
dollars With that sales lovely ended up with four million
03:23
in operating profit and four million divided by fifteen million
03:26
gives you an operating margin about twenty six point seven
03:29
Some like that So when you sold five hundred thousand
03:31
candles you paid all the expenses needed to make the
03:33
product Then he paid all your overhead which left you
03:36
with four million dollars over twenty six point seven percent
03:39
of your total revenue wealth To figure out your break
03:41
even point you just have to work through the process
03:44
backwards You have five million dollars in overhead you have
03:46
to pay for well Each candle gives you a gross
03:49
profit of eighteen dollars So the question How many eighteen
03:52
dollars bits of gross profit do you need to pay
03:55
for five million in overhead We just divide that five
03:58
million by eighteen and that gets you roughly two hundred
04:00
seventy seven thousand eight hundred seventy eight thousand candles That's
04:04
your break even production level Sell that many candles and
04:07
you'LL pay your overhead All sales beyond that point Well
04:10
generally fall to the bottom line like through that n
04:13
ba center Yeah you need to make sure all the
04:15
door jams and ceilings in your house or at least
04:17
eight feet tall Then you don't have to worry about 00:04:19.614 --> [endTime] you know bumping into that overhead
Full Transcript