Contribution Margin to Cover Life's Overhead

The Jesse Mecham Show

YNAB

Kids & Family, Education

4.7 • 1.1K Ratings

🗓️ 2 November 2020

⏱️ 7 minutes

🔗️ Recording | iTunes | RSS

🧾️ Download transcript

Summary

In the world of cost accounting, there's a concept known as contribution margin. Basically, it's how much you make on a product or service after you consider how much it cost to make that thing. The formula is revenue less the variable costs that go into making the product. Contribution margin is an important metric for businesses because it tells you whether you are making a profit on the things you sell. After all, it would do no good to sell a bunch of t-shirts for $18 a piece, if each of them costs you $20 to make!

Now, Jesse asks, what if we apply this concept to our life? We have jobs that earn us revenue. What do they cost to do? Time, obviously, but perhaps also driving/commuting, stress? The point is, the things that earn us money have a non-zero cost associated with them, and it's wise to keep track of that cost and make sure, at the end of the day, that we are using our time in a profitable manner.

Transcript

Click on a timestamp to play from that location

0:00.0	Hello, Winebbers. My name is Jesse Meekum and this is podcast number 452 for Wineab, where we teach
0:09.9	you four rules to help you stop living paycheck to paycheck, get out of debt and save more money.
0:16.5	I want to hearken back to my accounting days and talk to you a little bit about a very basic principle that is in the
0:25.2	managerial side of accounting. So either fall asleep or hop along for the ride in
0:31.7	product accounting when you're accounting for various products the most crucial
0:37.2	metric that you look at if like say you're Walmart or a Lowe's or whatever and you've got all these products or even if you're just a solo product kind of shop.
0:48.0	The thing you look at most is what they call the contribution margin.
0:52.0	So if you are Wineb, you would say what you pay for
0:57.0	Wineb is the revenue, less any costs that are directly associated to the creation of that product.
1:07.0	That is the contribution margin.
1:10.0	So you've got price, you know sale, the receipt of the good, what you actually get from a
1:16.8	customer, less the costs that it takes to produce that revenue directly for that product.
1:26.2	After you have the contribution margin, then you look at all of the other overhead, all of the
1:31.2	other expenses, the rent for the office, the salary for the administrative
1:37.2	staff, running the AC, taxes, name your thing.
1:42.2	It just goes on and on and on, it can totally vary by business.
1:45.0	But the key is that the contribution margin must cover its share of the overhead.
1:52.0	Now, there's also... share of the overhead.
1:53.6	Now there's also this idea of mental margin and 2020 has been less than stellar. So I was thinking through what we might draw from a
2:09.6	lesson in managerial accounting and apply that to our own lives. When you think through what you do day
2:16.8	to day and like what your top line means of production is, so your job, like top priority, you might say, my work, my family, my community,
2:28.7	you know, where you're primarily active in things that you could see that as like your revenue this the biggest thing the most important thing and then you would say what are the things that I have to what are the energies that I have to expend in order to have my family
	...

Please login to see the full transcript.

Previous episode | Next episode

Disclaimer: The podcast and artwork embedded on this page are from YNAB, and are the property of its owner and not affiliated with or endorsed by Tapesearch.

Generated transcripts are the property of YNAB and are distributed freely under the Fair Use doctrine. Transcripts generated by Tapesearch are not guaranteed to be accurate.