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Entrepreneurship
2nd Semester
QUARTER 4– MODULE 3_WEEK 3
Demonstrate Understanding of the 4 M’s of
Operations (COST)

http://www.businessworld.in/article/The-Young-The-Bold-The-Restless/15-01-2018-
137330/

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I. TITLE OF THE TOPIC: 4 M’s of Operations in Relation to the Business Opportunity and
Developing Business Model
After your encounter with this module, you are expected to:
•Content Standards: The learner demonstrates understanding of environment and market in
one’s locality/town.
• Performance Standards: The learner independently creates a business vicinity map
reflective of potential market in one’s locality/town.
• Most Essential Learning Competency:
▪ Demonstrate understanding of the 4 Ms of operations / Forecast the costs to be incurred
TLE_ICTAN11/12EM-Ia-2

Background Information for the learners

Lesson 1: Costs of Materials
Before preparing the production schedule, the projected sales figure must be finalized. The
production schedule is highly dependent on the sales forecast. The production schedule simply
shows the cost of making or producing a product. It reflects the following information:
a. number of units and the cost of raw materials
b. direct labor cost
c. manufacturing overhead cost

Material Cost
What is ‘Material’? The material here means all kinds of
materials which are used to produce a product or service. The
material may be the basic raw material and all other materials
such as components, fuel, lubricants, packing material, other
consumables etc. Normally, the direct material is confused with
materials, but material includes both direct and indirect
materials.
Now what is the material cost? Material cost means the cost of
acquiring the material. It clarifies one thing that material cost
does not only mean the cost of purchasing the material from the
supplier. On the contrary, material cost includes all expenses
which are directly attributed to the acquisition of any material.

For example, the expected sale in terms of units of units of JENNY Trading in 2019 is 40, 868.00.
Assume further that there are three types of raw materials required to produce one unit of finished
product indicated as follows:

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 Material AA 2 units
Material BB 3 units
Material CC 5 units

To manufacture 40,868 finished products, the total requirements are as follows:

Material AA (2 units x 40,868) 81,736 units
Material BB (3 units x 40,868) 122,604 units
Material CC (5 units x 40,868) 204,340 units

To determine the total cost of materials required to manufacture the product, the number of
materials requirement is multiplied by the prevailing price of raw materials.

For example, if material AA is priced at P 1.50 per unit, then the total cost to purchase Material
AA will be P122,604 (81,736 units x P1.50).

Learning Task 1
Directions:
A. Determine the total cost for Material BB at P2.50 per unit as required to manufacture the
40,868 finished products. Show your solution and use yellow pad for this activity (5
points)
Cost Material BB 3 units

B. Determine the total cost for Material BB at P3.50 per unit as required to manufacture the
50,868 finished products. Show your solution and use yellow pad for this activity (5
points)
Cost Material BTS 5 units

C. Determine the total cost for Material BB at P4.50 per unit as required to manufacture the
60,868 finished products. Show your solution and use yellow pad for this activity (5
points)
Cost Material GG 6 units

D. Determine the total cost for Material BB at P5.50 per unit as required to manufacture the
70,868 finished products. Show your solution and use yellow pad for this activity (5
points)
Cost Material UY 7 units

Lesson 2: Labor Cost

Another important element in production schedule is labor cost. It refers to the amount paid to
workers directly involved in making the product.

Labor Cost
What is labor? The labor here means all the human efforts
whether physical or mental use for creation of a product or
service. The labor does not only mean the direct labor working in
the factory, but it includes all the employees of the company in all
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departments. It includes all the permanent employees, temporary and contractual workers etc or any
other source of physical or mental labor for which the company pays for.

Now, what is labor cost? Labor cost means all the payment made by the company towards
acquiring services of the labor as defined above. It means the salary and wages paid to the employee
or wage earners along with all the fringe benefits such as provident fund contribution, gratuity,
incentive, bonus etc. provided to the employees.

For example, JENNY Trading needs 25 workers to make 40,868 finished products. Based on past
year’s performance, 3 hours is required to finished one product. Since 40,868 units are expected to
be produced, the total number of direct labor hours will be 122,604 (40,868 x 3 hrs.). In case the
labor rate per hour is P8.00, then the projected labor cost for the 40,868 units will be P980,832
(122,604 x P8).

Learning Task 2
Directions:
Ben Trading Company needs 30 workers to make 50, 585 units to be delivered on
December 2020. Based on the company’s previous production, 4 hours is required
to finish one product. Determine the labor cost of Ben’s Trading project on
December 2020 if the labor rate is at P9.00. Show your solution (5 points)

Lesson 3: Manufacturing Overhead Cost

The manufacturing overhead costs refer to costs incurred
in producing a product that cannot be classified as direct
materials or direct labor costs. These costs include, among
others, the salary paid to the supervisor, light and water,
depreciation of machinery, fuel and gas related to production,
and indirect materials.

Overhead expenses are other costs not related to labor, direct

materials, or production. They represent more static costs and pertain to general business functions,
such as paying accounting personnel and facility costs.

These costs are generally ongoing regardless of whether a business makes any revenue. Unlike
operating expenses, these costs are fixed, meaning they can be the same amount over time.

For example, the estimated overhead costs of JENNY Trading considering the estimated
number of units to produce is 28,595 are as follows:
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 Variable cost based on unit produced:
Indirect materials and supplies P6 per unit
Light and water 12 per unit
Other variable cost 18 per unit

Fixed cost
Salary of supervisor P250, 000
Depreciation 420, 000
Taxes 100, 000
Other fixed cost 230, 000
To determine the total manufacturing overhead cost:
Variable cost based on unit produced:
Indirect materials and supplies (28,595 x 6) P171,570
Light and water (28,595 x 12) 343,140
Other variable cost (28,595 x 18) 514,710
Total variable cost P1,029,420
Fixed cost
Salary of supervisor P250, 000
Depreciation 420, 000
Taxes 100, 000
Other fixed cost 230, 000
Total fixed manufacturing cost P1,000,000
Total estimated manufacturing overhead cost P2,029,420

Acrivity 1

Directions:
Determine the estimated overhead costs of BEN Trading Company with an estimated
number of units to produce are 50, 585 on December 2020: (10 points)

Variable cost based on unit produced:

Indirect materials and supplies P8 per unit
Light and water 10 per unit
Other variable cost 15 per unit
Fixed cost
Salary of supervisor P300, 000
Depreciation 400, 000
Taxes 150, 000
Other fixed cost 50, 000

Learning Task 3
Assessment A.

Directions:
Read each item carefully and write the letter of your choice on your answer sheet.

1. This refers to costs incurred in producing a product that cannot be classified as direct materials
or direct labor costs.
A. material cost C. indirect material cost
B. labor cost D. manufacturing overhead cost

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 2. This refers to the amount paid to workers directly involved in making the product.
A. manufacturing overhead cost C. material cost
B. indirect material cost D. labor cost

3. This cost is for the power supply consumed during the company’s production.
A. light C. fuel
B. water D. gas

4. This cost is for the water supply consumed during the company’s production.
A. gas C. water
B. fuel D. light

5. This cost is for the fuel consumed during the company’s production or any business
transaction related to product production.
A. fuel C. light
B. air D. water

6. Mr. Arnel estimates 20, 567 units to produce before the year ends. How much he would pay
for the light and water as one expenses for the production if it cost P15 per unit?
A. P308,505 C. P306,507
B. P307,506 D. P305,508

7. Ms. Bia assumes to produce 15, 876 units before the deadline. How much she would allocate
payment for the supplies for production if it cost P13 per unit?
A. P205, 388 C. P206, 388
B. P204, 388 D. P207, 388

8. Mr. Skam plans to purchase material BB to complete his 51, 822 units for the December 2020
launching. How much the total cost of material if it is priced at P2.50?
A. P129, 555 C. P127, 555
B. P128, 555 D. P126, 555

9. Ms. Alma May aims to buy material CC for her 24, 678 units project on January 2021 to
pursue the production. How much the total cost of material if it is priced at P3.00?
A. P73, 430 C. P74, 430
B. P74, 043 D. P74, 034

10. Mr. Vergel needs 30 workers to make 45, 786 units before December 2020 ends. Based on
his experience, 3 hours is required to finish one unit. How much is the labor cost if the labor
rate per hour is at P2.00?
A. P276, 716 C. P275, 716
B. P274, 716 D. P277, 716

Assessment B.
Direction: Modify True of false
1. _________Labor cost means the cost of acquiring the material. It clarifies one thing that material
cost does not only mean the cost of purchasing the material from the supplier. On the contrary,
material cost includes all expenses which are directly attributed to the acquisition of any material.
2. _________ Another important element in production schedule is labor cost. It refers to the
amount paid to workers directly involved in making the product.
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3. __________ Overhead expenses are other costs not related to labor, direct materials, or
production. They represent more static costs and pertain to general business functions, such as
paying accounting personnel and facility costs.
4. __________Labor cost means all the payment made by the company towards acquiring services
of the labor as defined above.
5. _________ The manufacturing overhead costs refer to costs incurred in producing a product that
cannot be classified as direct materials or direct labor costs. These costs include, among others,
the salary paid to the supervisor, light and water, depreciation of machinery, fuel and gas related
to production, and indirect materials.
6. _________Material cost these costs are generally ongoing regardless of whether a business
makes any revenue. Unlike operating expenses, these costs are fixed, meaning they can be the
same amount over time.

7. ________Labor cost it means the salary and wages paid to the employee or wage earners along
with all the fringe benefits such as provident fund contribution, gratuity, incentive, bonus etc.
provided to the employees.

8. _______ Material cost includes all expenses which are directly attributed to the acquisition of
any material.

9. _______ Overhead expenses they represent more static costs and pertain to general business
functions, such as paying accounting personnel and facility costs.
10. _________To determine the total cost of materials required to manufacture the product, the
number of materials requirements is multiplied by the prevailing price of raw materials.

References

Dr. Marife Agustin-Acierto (2017). Entrepreneurship. Room 215 ICP Building,

CabildoSt., Intramuros Manila: Unlimited Books Library Services and Publishing, Inc.
https://www.deped.gov.ph/wp-content/uploads/2019/01/SHS-Applied_Entrepreneurship-CG.pdf
https://efinancemanagement.com/costing-terms/material-labor-and-expenses
https://www.acquisition.gov/far/part-31
https://quizlet.com/154718103/ch-4-procurement-process-hw45-flash-cards/
https://www.nerdwallet.com/article/mortgages/closing-costs-mortgage-fees- 10. b
explained 9. d
https://www.investopedia.com/ask/answers/101314/what-are-differences- 8. a
between-operating-expenses-and-overhead-expenses.asp 7. c
6. a
https://kfknowledgebank.kaplan.co.uk/acca/chapter-1-traditional-and-advanced-
5. a
costing-methods
4. c
3. a
2. d
Compiled by 1. a
Merinnie B. Uy, Teacher 1 Babag National-SHS, Division 8