Garment Costing

1

Prof.Dr.S.Kathirrvelu

Introduction to costing

Cost components

Introduction of costing tools

Costing techniques in Apparel industry

Cost process flow

Costing sheet

Calculation of Gmt/Kg ratio

2GEC

Cost components

3

Cost=Total amount of money invested in a product.

Price=Amount of money asked /received in ex-change for a product.

Profit = Price- cost

Revenue = Total of all receipts from the sale of company’s product during a stated period.

GEC

Cost components

GEC 4

Costing = Process of estimating the total

resource investment required to

merchandise,produce and market a product.

Pricing = Process of determining the exchange

value of goods that are made available for sale.

It is based on data produced in costing process,

value customers place on a product & the

competition in the market.

Retail Price

Retail Price =

FOB price + Cost of Freight/Insurance

+ Import Duty + Cost of distribution +

Cost of managing a store + Profit

Margin.

5GEC

Direct Costs

Direct material = Actual cost of the material

that will make up the finished product.

Direct Labor = Wages cost of those

employees who actually manufacture the

finished product.

Direct Expenses = Without which a specific

product could not be made.

DM+DL+DE= PRIME COST6

GEC

Indirect Costs

Indirect materials = Material used in factory

which do not form a part of the finished

product.

Indirect Labor = Wages of employees who

work in the factory but do not form a part of

the finished product.

Indirect Expenses = All other factory

expenses.

IM+IL+IE=FACTORY OVERHEADS

7GEC

DM+DL+DE= PRIME COST

IM+IL+IE=FACTORY OVERHEADS

P.C + F. O/H = PRODUCTION COST

PRODUCTION COST + SELLING

DISTRIBUTION COST +

ADMIN/FINANCE COST = TOTAL COST

8GEC

Fixed & Variable Costs

FC = Costs that do not get affected by

output of business. E.g. Rent.

VC = Costs which vary with output of

business.

Semi-variable costs = Contain elements of

both fixed and variable.

9GEC

Manufacturing Costs All expenses incurred in making a finished product

available.

Direct Materials = Fabric (shell, lining) , thread, trims etc

are Direct variable costs.

Direct Labor = Include wages of employees who work on

the product in the plant,including cutters,sewers and

finishers.

Indirect Labor = Work of these individuals is essential to

efficient manufacturing but none of them work directly on

the product. e.g personnel QCs, material handlers,

10GEC

Manufacturing Costs

Overheads (O/H)-Consist of variable and

non-variable indirect manufacturing costs.

NVC = rent, depreciation, insurance

,property, taxes.

Variable (O/H) costs = Machine parts,

repairs, marker paper, needles.

11GEC

General Operating Expenses

Also called administrative overheads.

Indirect costs,which include the costs of operating the

general offices and departments that are not directly

involved with the product line but are essential to the

operation of the firm.

E.g. merchandising, marketing, accounts,

secretarial, managerial staff.

12GEC

DIRECT

MATERIALSDIRECT

LABOR

DIRECT

EXPENSES

PRIME COST

INDIRECT

MATERIALS

INDIRECT

LABOR

INDIRECT

EXPENSES

FACTORY

OVERHEAD

PRODUCTION COST

SELLING AND

DISTRIBUTION COST

ADMIN

AND FINANCE

TOTAL COST

13

GEC

Stages/Flow of Costing

Pre-costing

Costing done prior to adoption of line

Costing done prior to production

Post production costing

14GEC

Pre Costing/ Preliminary Costing Done during the pre adoption phase of product

development.

Used in early development stage

To determine whether designer’s sketches areproducible or marketable within the establishedprice range.

Rough estimate/based on estimates of costs ofproducing a style based on estimate of material, labouror costs of previously producing a similar style.

Helps to weed out styles that would be too costly for theline before additional time and resources are invested.

Necessary for fashion manufacturer.

15GEC

16GEC

Costing for Line Adoption

Done prior to line adoption

Requires breakdown of garment components and specific assembly procedures.

Determines expected investment in materials , direct labor and overheads for each style.

Based on samples & standard data.

Requires more detail and greater accuracy than preliminary costing.

17GEC

18GEC

Detailed costing

Done after styles are adopted in line.

Picks up any cost that may have been missed during

cost estimation.

Accurate account of product costs.

Time consuming activity.

Based on specific production methods for each

operation including machine type, stitches per inch ,

workplace layout , pre determined time systems and

material handling methods.

19GEC

Detailed costing

Changes may be made to economize on

fabrics or sewing time.

Provide basis for establishing production

budgets.

20GEC

Actual costing

Determined by using actual data from

production.

Costs are monitored throughout production.

21GEC

DIRECT EXPENSES

Expenses that are incurred without which a

specific product could not be made. They

only relate to that specific product.

Example:

Royalties i.e. a payment made to a designer

or made to use a specific motif on the

garment.22GEC

Direct labor The wages cost of those employees who actually manufacture

the finished product.

Any work that alters the composition, condition, conformation

(compliances) or construction of a product.

Any operation that advances a product towards its ultimate

condition for sale thereby adding to its value.

Important to calculate direct labor cost:

Direct labor cost per hour

Direct labor cost per item( SAM * Wages per Minute)

( SAH * Wages per Hour)

23GEC

There are two aspects of labor

costing:

Budgeting for production

Labor costing for individual style.

24GEC

Labor Costing-Budgeted

Basis for labor costing is time.

Labor costs = Direct & Indirect need to be budgeted

for a firm to examine it’s financial commitments &

evaluate its capacity to produce a product.

This represents the firm’s financial commitment to

employing a pre determined no.of operators for

specific time period.

Calculated to establish Budgets, schedule work and

hire employees.25GEC

Labor Costing-Budgeted Total DLC = No. of Operators * hours / week * weeks / year * avg

hourly earnings.

DLC = Std Labor Cost + Excess Labor Cost

Std LC = Money earned to produce the product / piece rate earnings.

Std LC = % Plant efficiency * No. Of work hours * weighted average base rate.

Std LC is needed to determine the cost of producing each style & excess cost of each style.

Based on plant efficiency and weighted average base rate.

26GEC

Labor Costing-Budgeted Plant efficiency is determined by the volume of

production relative to the input of work hours.

Based on operational history of plant.

Base rate is established compensation for one

hour of work . May vary for skilled operators.

Excess labor cost is compensation for time spent

on the job but not producing a product.

It is the difference between total earned and total

paid to direct employees.

It may be result of machine downtime, out of

fabric to work on, etc.

27GEC

Labor Costing-Individual

Style Begins with a breakdown of all operations involved

in assembling a style.

The style can be broken into component parts and

sub totaled or the production standards for each

operation can be added together for the total

garment.

Production standard reflects the normal time

required to complete one operation using a

specified method that will produce expected

quality.

Production standards set a consistent work rate or

time for completing each specific operation.28GEC

Labor Costing- Individual Style Time values specified in production standards are

referred to as SAM/SAH.

Prodn time is converted into Re/$ by determining

the value of each minute.

Example:

Std. rate is $6.00 per hr, each minute of actual

production is worth $0.10. A garment that required

5.5 minuets of production would have a $0.55

direct labor costs.29GEC

Labor cost = 11600/832 = ETB 14/ Hr.

Employee Working hrs.

(Month)

Salary

(ETB.)

Payment

A 208 3100 3100

B 208 3100 3100

C 208 2500 2500

D 208 2900 2900

Total 832 11600

30GEC

Direct labor cost

Remuneration paid to employees who make

the garment-cutters, machinists (operators)

,pressers etc.

2 options of remuneration:

Time based wages(Hrs worked* Wage rate

per hour)

Piece rates(Pieces produced*rate per piece)31GEC

Who sets the rates?

Minimum wage laws

In India differ for every state

Minimum wages in Delhi-Rs. 2600/month for

a 26 working days in a month

Each working day is 8 working hours

Each working hour=Rs12.50/-

32GEC

Piece Rates

Often difficult to set

Involve work study techniques to

measure time taken to perform an

operation.

Problems associated with Piece rate

systems33GEC

Direct Labor Cost

Fashion vs Staple Merchandise

Marker Making costs affected by

Variations in width of piece goods

Fabric design

34GEC

Spreading Costs

Type of Fabric spread

Length of spread

Consistency of fabric

Spreaders attention to fabric defects

Complexity of spread

35GEC

Cutting Costs

Pattern Configuration

Die cutting requirements

Fabric type

Fabric design

Spread Height

36GEC

Assembly/Bundling

Bundle integration

Bundling specifications required

37GEC

Sewing Operations

Size of sewing bundles

Size and color variations

Variations in fabrics

Utilization of Equipment

Quality Specifications

38GEC

Pros & Cons of Piece Rate

System

Advantages-

Labour can be hired on need basis

Avoids union activities

Can be fired if performance is not of

expected level

Mfger doesn’t have to spend on training

39GEC

Dis-advantages

Workers work at their own free will.

Slow workers are not able to earn as much.

Mfger might not find the best workers specially

during season

To earn more workers might produce inferior quality.

Every time a mfger hires, there needs to be price

negotiation.

Operators not responsible for upkeep of machines

and equipments.

Elaborate records need to be kept of pcs produced.

40GEC

Working Hours & Overtime

Rates◦ Section 51-Weekly Hours

◦ No adult worker shall be required or allowed to

work in a factory for more than forty eight hours

in any week.

◦ Section 54-Daily hours

◦ No adult worker will be required or allowed to

work in a factory for more than nine hours in

any day41GEC

Section 59-Where a worker works in a factory for

more than eight hours a day or for more than 48

hours a week, he shall in respect of overtime

work be entitled to wages at the rate of twice his

ordinary rates of wages

Workers in a factory who are paid on piece rate

basis, the time rate shall be deemed equivalent

to the daily average of their full time earnings for

the days on which they actually worked on the

same or identical job during the month

immediately preceding the calendar month

during which the overtime work was done.

42GEC

METHODS/TECHNIQUES OF

COSTING

Direct costing

Absorption costing

Activity based costing

43GEC

Direct Costing

Considers only variable costs-production labor,materials,sales commissions to be product costs.

Non variable costs,both manufacturing and non manufacturing are treated as time period costs.

Individual product costs are clearly identified.

Makes it possible to compare the cost of production,contribution each product makes to non variable selling & administrative costs & profit.

44GEC

Direct Costing

No consideration given to absorbing fixed O/H

Variable O/H is usually treated as a part of direct

cost.

It is Pure Cost

This method weakens the impact of managerial

responsibility.

Most important impact-Proper allocation of semi

variable expenses

Direct cost advocates feel, fixed O/H should be

tracked but not charged to product costs.

45GEC

Absorption Costing

Principle-All costs including an appropriate share of all O/H are borne by all products.

Fty O/H have to be added together in some way and then divided amongst all products.

Problems-Some costs are easily traced to a garment others are not.

Fty O/H in some cases are accounted over long periods of time.Have to be estimated in advance.

OH rate per Prodn hr=Total OH/Estimated Prodn Hrs..

46GEC

Absorption Costing

Considers all mfging costs( variable & non variable)

to be product costs.

O/H is allocated with application rate which is a %

of direct labor cost

O/H application rate-Factory overhead/Total direct

labor cost

RISKS-

-DLC calculation might not be accurate

-O/H application rate might not be accurate

-As DLC reduces it shows reduction in O/H 47GEC

Absorption Costing

All costs including an appropriate share of overheads

are borne by all products

Some costs are easily traceable while others are not.

Problems with factory overheads-

• Overheads have to be added in some way and then

divided amongst all the products.

• Some overheads are accounted over longish period of

time.

• Hence some overheads are estimated in advance 48GEC

Activity Based Costing (ABC) A more realistic approach.

Virtually all of the company’s activities exist to support the production

& therefore all be considered as product costs.

Build accurate direct labor & materials cost data.

All factory o/h, S&D costs, Admin costs are assessed to activity

centers (design, merchandising, quality etc.) and then allocated to

styles which demanded these resources.

Most factory o/h are divisible or separable and can be traceable to

specific products.

All costs are budgeted, both direct & indirect.

It is a diagnostic tool that allows focus on overhead cost reduction as

well as reductions in direct labor cost.

49GEC

How are overheads divided among

various styles?

They are divided over estimated

production hours

Estimated total overheads

Estimated Production hours = O/h rate per

production hr.

50GEC