 In this presentation we will discuss forecasting. Many of the tools that we've taken look at so far breaking out the variable cost, the fixed cost, the contract, support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page we also include added resources such as excel practice problems pdf files and more like quick books backup files when applicable so once again click the link below for a free month membership to our website and all the content on it contribution margin the contribution margin per unit the contribution margin ratio are very useful for the skill of forecasting once we have this all set up once we have the fixed cost once we have the variable costs once we can break this down to a fixed cost variable cost per unit contribution margin then we can do a lot of forecasting very easily in other words we could set this system up and put it into an excel worksheet and we can then make projections with very limited amount of adjustments to that worksheet in other words we can project for example what our sales volume is going to be increasing and decreasing and let the worksheet basically make the adjustments for us given the fact that we've put into our sheet the idea of fixed cost and variable cost and since it's in the system by behavior we can then let the worksheet do the forecasting work for us and this is very useful when we start to think about okay what happens if we do this in the future what happens if we sell more what happens if we sell less what happens if we want to adjust something like our advertising budget we think that's going to increase more here and less here in other words fixed cost possibly going up and then maybe we're going to sell more as a result of that all these types of scenario type of analysis a lot easier to do once we have this information down once we have this information in the format of a cvp type of analysis in the format of a contribution margin type of income statement here's going to be our information note that if you're talking about problems they're often going to have the current information and then the future information note that when we're thinking about how to break this information down we're going to have the financial statements which are always built on something in the past so we got the past financial statements then we're typically taking that information and projecting into the future that's usually where we think about the cvp analysis now note that anytime we do that we we're going to take the past information into consideration the past is what we have to go on to project into the future but also note that the past information is not all that we have to go on so we can't just take the past information projected forward so when you take a look at book problems they're going to emphasize that a lot and they may actually give you the past information the future information and just note that we're going to have to make that adjustment in the book problem and in real life in a book problem you're going to have to know that if you're talking about a forecasting problem then of course you're going to take the estimates in the future to do your forecasting estimates which will be slightly different than the past information from the prior year obviously in real life to forecast into the future you're going to start with a prior year information and then do any kind of thought experiments you can have to think about how you're going to adjust that into the future or is the price going to go up what's going to happen and if the price goes up then possibly you sell a little less maybe you're going to increase the price and sell less or maybe you're going to increase advertising and the volume will change so these these type of adjustments of course will be taking prior your numbers then making the adjustments with it so this is the current year sales and the current year variable cost and then we have here the fixed costs now these may be very similar from year to year because they're fixed like the rent is the rent typically going to be pretty similar from year to year then we have the estimated sales in units this is the thing that we're typically going to change so when when we we're thinking about the future we're often going to be changing the the sales units and that's the thing that we're going to we want this to be set up so that I can basically change this sales units number and the whole worksheet will recalculate for us give us a new net profit number because of the ease of it to do so because of the breaking out between the variable cost and the fixed costs then we have the estimated sales price and the estimated variable costs per unit so if we consider our contribution margin income statement type format for our forecasting this is our forecasting our contribution margin income statement we have the sales so the sales are going to be in units we've got the 40 that 40,800 units and that's going to be our projected units that we're going to sell we're going to sell them for 208 dollars 208 per unit 40,800 times 208 is going to give us the 8,486,400 next we're going to have the variable costs so again we're going to take the same 40,800 units multiply that times the variable cost per unit and again we're going to know that because we're breaking that out in our cvp analysis and we're going to say that the variable cost per unit are the 148 if we multiply the 40,800 times the 148 we get the 6,038,400 then we can have the contribution margin which once again we can do this two ways now the contribution margin we can take the 40,800 in units multiply it times the contribution margin per unit the 208 minus the 148 or the 60 so 40,800 times 60 2,448,000 or we can take the total sales minus the variable cost the 2,448,000 so we kind of double check our number in this in this way the next item will be the fixed costs and notice we're not taking now the 40,800 because the fixed costs don't matter it doesn't matter how many units we make they're fixed that's the point so the fixed cost is going to go right over to the end we're going to say 638 it is what it is it's fixed and therefore we just keep that as is then we've got the income before taxes which is going to be the contribution margin the 2,448,000 minus the 638,000 or the 1,810,000 then we would calculate the tax and we're just going to say the tax is 635 and that'll give us the net income so that's going to be our base calculation now of course when we think about our forecasting then this would be basically a static set we're going to say there's 40,800 that's how many units we're going to make now if we were using just a normal type of income statement and budgeting it out then it would be a lot of work for us to do that with one set income number but in this setup we could say well what would happen if we made you know different levels of units that were sold but what happened if we sold 30,000 what happens if we sold 50, 60, 70 we can make that adjustment very easily by just by just changing this top part the bottom part is going to stay the same because it's fixed in other words the fixed cost won't change and these will change at a constant rate that's why we broke it out between fixed and variable cost so for example if we change this number to 60,000 we're going to say all right now the units are 60 the variable 60 the contribution margin is 60 if we had an excel worksheet we would just say that these items are going to be pulling from that cell and so they're at what happened automatically so you can see we can just change this one number it'll then multiply out in this format these numbers will change automatically by just changing one cell in essence and and then it'll basically be able to recalculate the whole thing so 60,000 times the 208 60,000 times the 148 60,000 times 60 and in essence we've got the 3600 contribution margins minus the same fixed costs those didn't change they're fixed that's why we broke the two out that's going to give us our income income before taxes calculating the taxes on it and then subtracting that out will give us our net income so if we change it then to 35,000 same thing which changes one item it's going to change these automatically these will change for us and that'll pull right through and adjust these items to get to our bottom line number so that projection item is going to be very easy we can see other types of projections that we might make we might we might have some adjustments we think are going to happen to the fixed costs for example if we say that we we increase the advertising budget or something like that as a fixed cost this could go up and we would have to adjust the fixed costs with relation to that static increase and then that that could increase or decrease the estimated sales price but just note how easy how much easier it is to do this than if we had a normal type of income statement that we put into a budgeted type of format and then wanted to run a bunch of scenarios with it would be much more difficult given the nature of the expenses being mixed in many cases instead of broken out by behavior between the fixed and variable costs now we can consider this in terms of a worksheet that will just be broken out in this format we're going to say okay here's the same idea we've got the sales we got the variable costs we got the contribution margin let's just put the units up top now and we could just say okay here's the 208 sales times the 20 000 units gives us the 4 million 160 here's the variable costs 148 times the 20 000 units gives us the 2 2 million 960 and the contribution 60 times the 20 1 million 2 or 4 million 160 minus the 2 million 960 is the 1 million 200 fixed costs remain the same and this all calculates out and we could put then well what would happen at 30 000 right next to it which would be the 208 times the 30 000 6 million 240 the 148 times the 30 000 4 million 440 60 times the 30 000 1 million 8 or 6 million 240 minus the 4 4 40 1 million 8 and so on and then we can say okay what would happen at 40 000 what would happen at 50 000 and we can break these out very easily and you can see how this type of setup can give us a nice picture of how things could look in a forecasting type of perspective very quickly with very minimal type of changes as opposed to of course once again a standard kind of income statement that we were going to budget forward given the fact that we're breaking this one out by behavior by the how the costs act in terms of fixed or variable in nature