ENTREPRENEURSHIP

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 Entrepreneurship
MODULE

Module No. 4 : Week 4 : 2 Quarter

REVENUE AND COSTS FORECAST

Learning Competency
1. Forecast the revenues of the business

2. Forecast the costs to be incurred

3. Compute for profits

Code: TLE_ICTAN11/12EM-Ia-2

Objectives:

After reading this module, the learners will be able to:

1. Understand the how to make a basic computation of revenue and costs

2. Compute the profit.

Let’s Recall
The previous weeks, you have learned about supply chain, basics of human resource
as well as the P’s of marketing wherein part of this is the price and also the market size, all of
those would be necessary as we turn the next page of our lesson. Recall that value chain
speaks of the materials and these materials entail costs same human resource such that you
are obliged to pay the salaries and wages of people. On the other hand your products would
also have an economic value and can give inflows once sold. In your household, please
determine the items on the table below.

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Source(s) of income per month: Total monthly income

1.

2.

3.

(Add more if needed)

Expenses (break it down below): Total Monthly Expenses:

1.

2.

3.

(Add more if needed)

Once you are done completing the table above you can now compare the total
monthly income and the total monthly expenses. Which one is greater? By doing the simple
exercises above, you could see whether you family is falling short of income to have deficit
or lesser expenses as compared to income to have savings. Now let us understand further
income, expenses, costs.

Let’s Understand

Revenue Forecast

There are diversified ways on how to forecast revenues, usually those that use
statistical data and meta data. In a start-up like the one you are anticipating, forecast is more
of an art than science. To forecast your revenue you need to have basic understanding of the
following terminologies:

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Market Size – the number of individuals who would potentially buy your products in a
market segment.

Cost price – the price of the product that covers its production and distribution costs. For a
merchandising business, it is the price when you buy the product.

Mark-up – the amount added to the product to obtain a profit.

Selling Price – the price of the product when mark-up is added to the cost price.

By understanding the above terms, we make basic computations of the following:

1. Selling Price. To compute the selling price, you need to know the cost price of the
product, determine how much mark-up expressed in percentage are you going to add.

For a Merchandising Business:

Suppose that the cost price of the products that you bought are as follows, compute
their selling price given a mark-up of 30%.

You can compute for the individual selling price of each product above by
following the formula below:
SP = CP x (1+MU)
Denotation:
SP = Selling Price
CP = Cost Price
MU= Mark-up (*Convert to decimal)

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 By applying the formula above, selling price below for all products are obtained:

Illustrated below is the computation for PRODUCT A, same computation applies for
other products, you try it yourself:
PRODUCT A: SP = P35 x (1+0.3)
= P45.50
For a Manufacturing Business:
You have to note that manufacturing is different from merchandising which simply
just buys and sells the products, the former on the other hand, creates or assembles the
product from raw materials to finished products. The cost price or the PUC (Per Unit Cost) of
the product can be computed by understanding different production costs. To better
understand this we need to first immerse ourselves to terms such as TPC (TOTAL
PRODUCTION COST), DC (DIRECT COSTS), DM (DIRECT MATERIALS),
DL(DIRECT LABOR), OHC (OVERHEAD COST), PUC (Per Unit Cost) and TQP(Total
Quantity Produced. Consider basic formulae below:
TPC = DC + OHC
DC = DM+DL
PUC = TPC/TQP
To further understand them, we may defined and give examples of them. Direct
materials can be explained as those materials that are directly attributable or can be seen on
the product, for example in a barbecue that you buy, its direct materials are the meat, stick,
and its direct labor is the person who makes it and the overhead costs pertains to those costs
that may not be directly seen on the products but are contributors to the cost of the product
such for a barbecue, you need a charcoal, oil, spices and condiments.
Using the example above for barbecue, let us try computing its PUC given the
following data.

Direct Materials Php 1,000.00

Direct Labor 250.00
Overhead Costs 500.00
Quantity Produced 200 sticks

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 DC = P1,000 + P250 = P1,250
TPC = P1,250 + P500 = P1,750
PUC = P1,750 / 200 sticks = P8.75 per stick of Barbecue
Since we have already computed the per unit cost of our product we may now proceed
to computing the SELLING PRICE, same formula illustrated in merchandising can be used,
suppose that we want 38% mark-up for our barbecue, how much are we going to sell it per
stick?
SP = P8.75 x (1+0.38)
= P12.08
2. Computing the Sales. Now that we have tried computing the selling price above, we
may now proceed to computing the sales. We simply compute sales by multiplying
the Selling Price to the actual quantity sold for a start-up like yours, you may use the
estimated quantity to be sold. See formula below:
S = SP x QS
Now let us try computing the sales for the products illustrated above from
merchandising and manufacturing. See below data on the quantity sold for the products
below:

Applying the formula for products, A to D, we will obtain the sales for each product
as well as the total sales.

Suppose that the entire barbecue sticks were sold out, how much would be the sales?
Sales = P12.8 x 200 sticks
= P2,416.00
From our illustration we were able to compute REVENUE from SALES, note that
there are other types of REVENUE or INCOME which could also be from rendering a

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 SERVICE and other types of revenues such as those incidental and donations, so we
say that below are the general types of revenue or income.
1. Sales Income/Revenue – income that is generated by selling a tangible products or
we simply call it as goods, items, merchandise etc.
2. Service Income/Revenue – income that is generated by rendering a service such for
example when a dentist gives a dental service, or a spa gives a massage to a client.

Forecasting of Costs and Expenses

We are done with the forecast of revenue but we cannot compute profit unless we try
to enumerate first the expenses to be incurred along the way of creation of values both for a
tangible goods and a service-oriented business. You may notice from above that we have
included both costs and expenses, for this purpose we will use expense to compute the profit,
but why have we included costs? Is it the same with expenses? The answer is no, they may be
mingled as same term but we need to understand that they are not the same. Cost is an
expenditure wherein it speaks of acquisition of things needed for the firm such as the
equipment, building, machineries, supplies, merchandise among others however they may not
yet be consumed so the treatment for them is yet an asset until such time that they are used
and consumed that they become expenses. For example, you bought the machine for a certain
cost; it cannot be called expense yet until such time that you use the machine.
Below are the common expenses that a firm may incur:
Cost of Sales/Cost of Goods Sold – the cost of the product sold or manufactured
Operating Expenses/Administrative and Advertising – expenses incurred in a normal
business operation
-Supplies Expense -
-Utilities Expense
-Rent Expense
-Maintenance and Repairs
-Depreciation
-Salaries and Wages
-Advertising
Others:
- interest
- Tax

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 Now that we have established the common expenses, we can now proceed to
computing the profits. Profit is simply the excess of Total Income less Total Expenses. If
income is greater than Expenses the firm would have process otherwise, losses shall be
incurred. If income is equal to expenses, it results to what we call Breakeven. See the
illustration below.

We may use the merchandising example above to illustrate and Income

Statement/Profit & Loss Statement then and now called Statement of Comprehensive Income.
Suppose that it was the income of ABC Merchandising for the Month of August 200X and
the following were the expenses, we can come up with an Income Statement.

Above is an example of Income Statement which is a basic financial statement that

shows the profitability of a firm for a certain period of time. Note the Cost of Goods Sold was
computed by multiplying the Cost Price to the Quantity Sold.

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 Let’s Apply (Pagyamanin)

Perform the tasks below about forecasting of Revenue and Expenses.

1. Complete the table below by computing the Selling Price of the following.

2. Angelica Rice Trading was able to sell quantities of rice below for the month of
March 20A1. Complete the table by performing computations.

3. The following are the expenses of ANGELICA RICE TRADING. Prepare a profit
and loss statement and compute the cost of goods sold using the data above.

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 Let’s Analyze - Subukin natin

Answer the following questions:

1. Why is it important to prepare Forecast of Income and Expense?

2. What do you think are the ways to maximize the profit of a firm?

Let’s Try (Evaluation)

MULTIPLE CHOICE. Choose the best answer from the choices provided. Multiple
Choice: Choose the best answer from the choices below.

1. It is the result when revenue equals expenses.

a. Profit c. Breakeven
b. Losses d. Revenue
2. It refers to earnings when a product is sold or a service is rendered.
a. Income c. Sales
b. Expense d. Costs
3. Result when Income is less than the expenses.
a. Profit c. Income
b. Loss d. Expense
4. Which of the following is the best way to define an income statement?
a. It is a statement of income that breaks down the list of income of a firm
b. It is a statement of expense that shows the different expenses incurred for
the period with corresponding amount.
c. It is simply an income and expense summary
d. It is a basic financial statement that shows the performance of business in
terms of profits for a period
5. Which of the following will be the gross profit and net income of Atnonio’s Catering
if their Total Income for the Month of August is P76,420.00 and its cost of goods sold
is 43% of total income and total expenses P15,980?
a. P43,559.40; P47,795.40
b. P53,559.40; P27,579.40
c. P43,559.40; P27,579.40
d. None of the above
TRUE OR FALSE. Write T if statement is correct and F if statement is false.
6. Cost and expense are the same.
7. Expense is always less than revenue.
8. Profit result if expense is smaller than revenue.
9. Profit and Loss statement is different from Income statement.
10. Breakeven is a result when there is no loss and no profit.

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ENTREPRENEURSHIP (Grade XII)
Self-Learning Module
Quarter 2 - Module 4: Revenue and Cost Forecast

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Published by the Department of Education

Secretary: Leonor Magtolis Briones
Undersecretary: Diosdado M. San Antonio

Development Team of the Module

Writer: Lorence B. Abejuela

Editor: Lorence B. Abejuela

Reviewers: Dr. Emma R. Cunanan – EPS in Mathematics

Illustrator: Teddy C. Sarmiento
Layout Artist: Christian Jake Laspiñas
Management Team: Wilfredo E. Cabral, Director IV
Genia V. Santos, CLMD Chief
Dennis M. Mendoza, Regional EPS In Charge of LRMS
Evangeline P. Ladines, CESO V, Schools Division Superintendent
Bernardo N. Mascariña, Curriculum Implementation Division Chief
Rodel C. Apostol, Division EPS In Charge of LRMS

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