ESTIMATE COST OF PRODUCTS AND SERVICES

WHAT IS THIS LESSON ABOUT?

This lesson will teach you how to estimate costs of products and
services. You will learn how to analyze and compute accurately for the
production cost of your own business venture.

WHAT WILL YOU LEARN?

At the end of the module you should be able to:

1. Apply the rules of production in your enterprise; and

2. Compute the cost and price of the product or service of your chosen
business.

LET US STUDY

WORDS TO STUDY
Capital Cost - a payment of interest for the duration of the loan
Cost - represents form of payment
Direct Cost - payment and expenditure made for the production or
service that become part of the product like acquisition
of raw materials and salaries/wages of the workers
Indirect Cost - sum of other expenses or cost generated from the
business and also known as overhead expenses
Material Cost - all materials needed both for direct manufacturing and
those needed for the functioning of the business
Production - process of making or manufacturing goods
Staff Cost - are salaries or wages plus additional costs as payments
or incentive on overtime works, social security, annual
and sick leaves of workers.
 APPLYING THE RULES OF PRODUCTION
TO AN ENTERPRISE

The rules of production describe the behavior of the business condition

in the aspect of profit, loss, payment and production. Total Revenue or TR
represents income; while Total Cost or TC reveals expenses.

How will you know when to produce more? When to stop producing?
When to maintain production? Each situation below follows a decision.
Remember what to do in the following instances:

1. What will be your decision, when the TR (INCOME) of your

business is equal to TC (EXPENSES)?
EXAMPLE: TR = TC
2,000 = 2000

DECISION: There is a need to maintain your production.

2. What will you do when the TR of your enterprise is less than to the
TC?
EXAMPLE: TR = TC
5,000 = 8,000

DECISION: The production needs to stop.

3. What action do you need to take if you have greater TR than your
TC?
EXAMPLE: TR = TC
10,000 = 7,000

DECISION: You have to produce more

COMPUTING THE COST OF THE PRODUCT OR SERVICE OF

YOUR CHOSEN BUSINESS

The cost of the product or service is done on estimate approach. It is

vital to list down and determine the costing to make a product or to deliver a
service. It does not matter how big or small your business is. What is
important is to know and estimate the cost of your production or service
delivery. There are factors that cause successful industries to fail because they
are not aware of their costs.
 What are the benefits if you know your costs? Look at the chart below
and find out how helpful it is to know the cost of your business:

PRODUCTION COSTS BENEFITS CHECKLIST

1 You can draft your estimates without worries.
2 You can anticipate for estimated profits.
3 You can identify the expensive and cheap materials you need.
4 You can have a chance to do the cost-cutting.
5 You can sense the improvements of your business.

Now that you know the importance of the production cost, how will you
compute for your costs? Here is how to do it:
1. List down your needed raw materials
2. Determine the other raw materials you need in the operation of your
business and services
3. Specify your estimate for the needed manpower
4. Come up with the facilities and machineries required in the operation
of your chosen business.
5. Survey on the quality but cheapest source of materials you need.

After completing your list, estimate for the DIRECT COST and INDIRECT
COST your business is facing. These are the two types of costs. The direct cost
refers to the item which becomes part of the products or services composing
material cost, wages and benefits. The indirect costs are referring to those
items needed in running a business and are better known as overhead
expenses. These are the expenses on building, machines, maintenance,
salaries, office costs, selling cost and financial cost.

DIRECT COST COMPUTATION

Description Estimated Cost
Monthly Wage and Allowance for 4 4 workers x P5,000.00 +
workers receiving Php5,000.00 & 1 1 supervisor x P10,000.00
Supervisor receiving Php10,000.00 =P30,000.00/monthly
Yearly Wage and Allowance for P30,000.00 x 12 months
4 workers and 1 supervisor =P360,000.00/yearly
Calculation for the Total Number of 47 weeks x 40 hours/week x 4
Hours spent by the workers in a year workers = 7,520 Hours
Hourly Labor Cost = Total Yearly P360, 000.00/7,520 Hrs.
Wage Bill/total number of hours =P47.87/Hour
worked in a year
Hours needed to complete a wood
bench (it takes only 2 workers, each 4.0 x 2
consuming 4.7 to do it): Labor time = 8 Hours
 taken x no. of workers = total no. of
hours
Direct Labor Cost of the wood bench: 8.0 Hrs x P47.87/Hour
No. of Hours x Hourly labor rate = =P382.96
Total labor cost per wood bench =considered – P380.00
To compute for the direct material cost for one wood bench, include the
cost of all other materials and parts in manufacturing as shown in the table
below.
BILL of MATERIALS of 1 WOODEN BENCH

Total Board Price/ Unit Total Cost

Quantity Description
Feet (bdft) Bdft Cost

1 pc. 2”x2”x8’ (leg) 3 P29.00 P87.00 P87.00

4 pcs. 1”x3”x10’ (frame) 2.5 72.50 290.00

1 pc. 1.5”x2”x6’ (brace) 1.5 43.50 43.50

4 btls Plastic varnish 120.00 480.00

½ kl. 2” finishing nails 50.00 25.00

1 btl wood glue 65.0 65.00

4 pcs sand paper 15.00 60.00

1pc 2” paint brush 49.50 49.50

DIRECT MATERIAL COST PER BENCH P1,100.00

LEG=1.5ft
.
 Can you compute now for the total direct costs of the bench? Get the
sum of the total direct labor, costs per wood bench, total direct material and
costs per wood bench. Analyze the computation below:

Total direct labor

Costs per wooden bench P380.00
Add: Total direct material
Costs per bench 1,100.00
TOTAL DIRECT COST PER BENCH P1,480.0

The entrepreneur has many other expenses compared to the direct cost.
The following is an example of how to estimate or compute the indirect cost:

A. INDIRECT COST COMPUTATION

Interest on loan P10,000.00
Insurance of machines/stocks 5,000.00
Maintenance of machines 20,000.00
Power and electricity 24,000.00
Rent of building 25,000.00
Salaries/Wages 60,000.00
Selling cost (transportation/representation) 20,000.00
Telephone 5,000.00
TOTAL INDIRECT COST+20 percent P169,000.00
of 169,000.00 for taxes, etc. + 33,800.00
TOTAL INDIRECT COSTS FOR THE YEAR P202,800.00

If one product is developed by an entrepreneur for the computation of the

indirect cost, the indirect cost is simply the indirect costs divided by the
calculated number of wood benches to be manufactured during the year.

Let us say that the entrepreneur targets for 1,500 wood benches:

P202,800.00 = P135.20
1,500

Computation for the total costs:

Total direct costs per bench P380.00
Add: Total indirect costs per bench 135.20
TOTAL COST PER BENCH P515.20
 The entrepreneur’s computation of the wood bench is based on 1,500
sales units for a year. If there will be no increase in indirect costs, then the
indirect cost will be:
P772, 800 = P 515.20
1,500

The total cost of the bench now becomes:

Direct cost per bench P380.00

Add: Indirect cost per bench 515.20
TOTAL COST PER BENCH P895.20

LET US REMEMBER

The rules of production are helpful to the entrepreneurs. These will

guide him to know what and how to decide on his production. It tells when
they need to produce more, when to stop production or when to maintain the
production. Likewise, it is good for all the business enterprises to know the
computation of their production to avoid failure of business operations.

LET US APPLY WHAT YOU HAVE LEARNED

A. Given the following nominal values of revenues and

costs, decide whether you need to produce more, stop your production or
maintain production of goods or services. Draw an upward (↑) arrow if your
answer is to produce more; downward arrow (↓) when you need to stop and
draw a smiley face (☺) when your decision is to maintain production.

BUSINESS TR TC ENTREPRENEUR’S
NO.
NAME (INCOME) (EXPENSES) DECISION
1 Son’s Academy 18,000 21,000
2 Sea-Bricks Co. 24,500 19,000
3 Jay’s Fashion Shop 15,880 15,880
4 Jr/Sr Internet Café 6,800 8,300
5 Celjun’s Transpo 22,100 15,500

B. Compute for the cost and analyze the following problems. Write
your answers inside the box. Show the solution in a separate sheet to
arrive at the correct answers.

1. If you have two (2) workers receiving each a daily wage of P250.00 a
 day, with 5 working days a week, how much is your total wage bill
for a month? ANSWER/SOLUTION: ______________________________

2. Based on your answer in number 1, how much is your annual wage

cost of production? ANSWER/SOLUTION: _________________________

3. How much will be your total direct costs per bench if the total direct
labor is P200.00 and the total direct material is 450?
ANSWER/SOLUTION: ____________________________________________

4. What is 25% of the assumed P150, 000.00 indirect costs?

ANSWER/SOLUTION: ____________________________________________

5. As an entrepreneur, what will you expect for a cost of a unit of wood

bench when you target for 2,000 unit yearly sales with P225, 000.00
total indirect costs for the year? ANSWER/SOLUTION:
___________________________________________________________________

HOW MUCH HAVE YOU LEARNED FROM THIS LESSON?

Directions: Copy the letter of the correct answer on your quiz notebook.
1. This is the time when you need to decide to maintain your production.
a. When the TR is equal to TC
b. When the TR is greater than TC
c. When the TR is lesser than TC

2. It refers to the situation when you need to decide to produce more when
the _________.
a. TR is equal to TC
b. TR is greater than TC
c. TR is lesser than TC

3. Time may come when you really need to decide to stop your business
production. When the ___________.
a. TR is equal to TC
b. TR is greater than TC
c. TR is lesser than TC

4. It is the way you calculate or estimate the cost to have for a product.
a. costing
b. pricing
c. producing

5. The direct labor cost and direct raw material costs are under which type
of production cost?
a. direct cost
b. indirect cost
c. purchasing cost

A. Write on the worksheet below at least 5 particulars of the direct and

indirect costs of any service type or production business.

DIRECT COST INDIRECT COST

1. 1.
2. 2.
3. 3.
4. 4.
5. 5.