 line in I'm not I'm not saying hey is it variable cost for for cost of good souls a part of inventory I'm just looking for all variable cost because they behave in a similar fashion for managerial accounting that's very important because it helps us to you know measure things a lot more easily so variable costs are going to include direct materials and we can indent that by going to the home tab alignment indent going to k4 equals direct materials then we have direct direct wages which is direct labor and so we're going to click on that we're going to go here we're going to go to the alignment indent that and I'm going to say that equals this item and we could then highlight those two items and say okay we found a home for those we're converting it from yellow back to blue when we find a home for these now and then we have the sales commission so this is a difference okay with the sales commission it's going to go up here not because it's part of inventory that's a sales item obviously but I'm going to go to the home tab alignment and but it is variable it changes with production in a similar way so we want to group those by the behavior of the cost not what the cost is doing in terms of production inventory or in sales so this is the difference and that's why we need these two statements for different purposes so we got the font underline and that's going to be our our calculation there and that'll give us the total variable cost so I'm going to say total variable costs and I'm going to go ahead and indent that home tab alignment indent like so and then we're going to go and sum that up in the outer column l7 equals the sum of these items here and we have the uh 378 now if we wanted to check these I can highlight this and say okay does that make sense this this this adds up to three seven thirty eight hundred yes it looks correct all right and then we're going to calculate what's called the contribution contribution margin nothing else okay and we're going to sum that so that's this is the major number we're going to use oftentimes so we're going to take these sales minus the variable cost that gives us the contribution margin again this isn't financial accounting financial statements you're not going to see this generally on financials this is the managerial type report contribution margin being very important for many types of internal decisions then we're going to break out the fixed cost the costs that act differently in terms of being fixed as opposed to variable and we're going to say those are that and we're going to find the fixed cost we got taxes on the factory we're going to assume those taxes like maybe property taxes or something like that are going to be pretty fixed same the same so we're going to say okay let's indent that we're going to bring that to the inside and say that equals to 13 five and then I'm going to go back over here highlight that and make that blue found a home for it we got the maintenance on the factory says that that's fixed so we're going to have that I'm going to say that that equals to 27,000 I'm going to right click on that make that blue as well and we could indent that to home tab alignment indent all right then we've got the depreciation on the factory so that equals the depreciation on the factory so I'm going to hit that home tab to factory equipment I should say and that equals the 87,000 so we click on that of course depreciation doesn't change with the level of production generally and then we've got the lease on factory equipment so so again the the equipment lease we're saying that that's going to be the same it's not going to change no matter how many stuff we have to produce we still have to pay the kind of the rent on the equipment 27 and then we have the administrative salaries so again we're jumping from the factory and produce and stuff to administrative stuff over here but the administrative stuff they're salaries so anything that says salary means that it's fixed so it doesn't matter how much stuff we produce it's fixed so we need to think about it when we budget and plan and whatnot as the fact that it will not change with the level of production rent on administrative office same thing the rent on the administrative office not going to change when we when we have other things the level of production changes so we're going to say that's the 50 and we're going to highlight that and then we've got the rent on the sales office we're going to take that we're going to go to the home tab alignment indent and we're going to say that equals the 77 and that will finally give us the total so i'm going to go back over here going to home tab i'm going to underline that i'm going to go down here and say this is total total fixed costs enter i'm going to indent that a couple times home tab alignment indent two times then we're going to go over here in the outer column l 17 equals the sum of we're going to highlight 13 five down to the 7 7 000 and enter and that will give us the total fixed costs i'm going to highlight this we found the home for that too so we got that and we only have the tax that we have to relate to and we'll break that out separate as we did before so we have the income before tax before income tax and that's going to equal the contribution margin that's what we left off last time mine is the fixed cost that's what we have before the income tax at this point then we're going to have the income tax so income tax again a lot of problems might just say hey calculate the income tax we're going to tell you what the rate is anyway anywhere between 30 and 40 often times and this in this case we have it in the trial balance so that we can tie out the ending number in the trial balance here which is going to be net income and then we finally have the net income so net income then equals actually i shouldn't have underlined this i'm going to un i'm going to un-underline that and it should be underlined here we're going to underline that and then we're going to go here and we're going to go to home tab and underline that and then we're going to say that the net income then is the income before income tax minus the income tax given us the net income so the point is if we unhide this i'm going to highlight from c to j let go right click unhide now we can see the differences so the point of this is that we're taking this information from the same information the same kind of trial balance can be formatted in different forms just like a jigsaw puzzle the contribution margin income statement is just taking that same information that we could compile an income statement in and putting it in a different format that format not being broken out by basically the cost of the good soul the cost of the inventory but rather being broken out by behavior of the the information behavior of the expenses okay so last thing we want we could take a look at is the contribution margin per unit contribution margin per unit all right so in order to calculate this i'm going to take the sales and we're going to we're looking at the sales price basically sales per unit and the sales per unit will be if we take if we scroll back over to the information we're saying units produced four three five zero and sales price per unit they give us sales price per unit two eight five so two eight five is going to be the sales price per unit so we're going to go back over here sales price per unit two eight five and then we're going to have the variable costs per unit and colon and so the variable costs are going to be these items here divided by the number of units so the number of units if i scroll back over here is going to be the four three five zero so four three five zero is the number of units so i'm going to take then the direct material direct materials here and we can indent that home tab and alignment indent and we're going to take this number the two forty seven nine fifty in dollars and divide it by the four three five zero so i'm going to take that divided by the four three five zero i'm going to write that over here four three four three five zero all right so that's how many units we have okay so then we're going to do the same for direct wages direct wages is here we're going to go to the home tab we're going to go to the alignment indent and we're going to go to oh five equals to three seventy three eighty seven one fifty divided by four three five zero gives us the eighty nine uh direct wages per unit then we've got the sales commission here we're going to go here going to go to the home tab alignment indent and we're going to take the total equals to ninety five seven over the four three five zero units that's the sales commission per unit we can go here home tab we can go to the font underline and that's going to give us the total variable cost per unit all right total variable cost per unit i'm going to go to the home tab and indent that two times and then we're going to go into the outer column i'm going to sum this up equals the sum of just this column we only do one column at a time i'm not going to jump back and forth 57 89 and 22 giving us the 168 then i'm going to go home tab gonna go to the font and underline and that will give us the contribution margin per unit the very the very thing that we were looking to get so that's going to equal the sales price per unit minus the contribution margin uh minus the variable cost per unit so this is sales per units let's say so we got the sales per unit minus the contribution margin per unit now that's going to be that's going to be really important when we think about projections because now we can think about oh so that's how much we're getting basically after just the variable cost which act in a similar way as sales and so now we can think about how many units we need to sell in order to clear the uh fixed cost which we'll talk about later so we can think about okay so how many units if i multiply that times how many units how many units do i have to sell in order to clear the fixed cost which in this case is 388 500 so if i wanted to kind of break even before income taxes we'd have to say okay well fixed cost 388 500 and we have we're getting 177 117 after variable cost per unit sold therefore the break even would be this divided by this if i didn't have to pay taxes and so we'd have to sell 3321 units right so we can do a count that becomes very interesting to make calculations on that now the next thing that becomes important is the contribution margin ratio so so we're going to in order to get the contribution margin ratio what we would do is compare the contribution margin to the sales meaning it's a division problem so ratio so we're going to say okay we're going to take the uh 117 that's what we're walking away with divided by the sales price and that would give us the contribution margin ratio which i've already made a percentage we've formatted this by going to the home tab alignment and making a percentage 41 percent or 0.41 would be the contribution margin ratio so basically we're going to we're walking away uh i'm just after variable cost with 41 cents on the dollar of sales now we can clearly do that as well with the total variable cost we can say okay well what's the other piece of that what's the variable cost as a proportion to sales so if we took the variable cost of 168 as a proportion to sales we would then get the 59 59 plus 41 being the 100 so when every dollar sales would have uh 59 in variable costs and 41 being what we would walk away with if we didn't have to cover the fixed costs now notice we could do that we can do the same type of thing if we were to do the contribution margin here divided by the total sales so if i was to do that for example if i took the contribution margin over total sales and i was to go to the home tab and the alignment and make it a percentage we would get the same 21 percent right and the reason is because the because the behavior of the variable costs and the fact that they will go up in a similar fashion as the sales so that's why that's why that's an important now what will not happen of course is is if we took the net net income and compared it to the total sales as we had different production volumes that that that doesn't work so that's why we need to break out between variable cost and fixed cost to help with certain types of decisions and projections going into the future