BUDGETING

COST OF OPERATIONS,DEPARTMENTS
ANALYSIS OF VARIANCES/PROFITABILITY
SOCIAL USE OF RESOURCES

USED FOR CUTTING DOWN COMPANYS COST AND

IMPROVING PROFITABILITY

MEASURED USING NOMINAL CURRENCY

TRANSLATING THE SUPPLY CHAIN INTO VALUES
Elements of cost
1. Material
A. Direct material
B. Indirect material
2. Labour
A. Direct labour
B. Indirect labour
3. Overhead
A. Indirect material
B. Indirect labor
They are grouped further based on their functions as,
1. Production or works overheads
2. Administration overheads
3. Selling overheads
4. Distribution overheads
Classification of cost means, the grouping of costs
according to their common characteristics. The
important ways of classification of costs are:

By nature or element: materials, labour, expenses

By functions: production, selling, distribution,

administration, R&D, development,

As direct and indirect

By variability: fixed, variable, semi-variable
By controllability: controllable, uncontrollable
By normality: normal, abnormal
UNIT MANUFACTURING
FIXING OF PRICE- OWN ORICE COMPETITORS PRICE
COST OF OWN PRODUCT
REDUCE WASTAGE
PROCESS FOR CALCULATING HOW MUCH COST IS INCURRED
CONTROL COST
INTERNAL ASPECT OF THE ORGANIZATION
MEASURES THE OPERATING EFFICIENCY OF THE ORGANIZATION
CALCULATION OF PROFITABLITY
PREPARATION OF STATISTICALDATA

´Cost accounting is the process of accounting

from the point at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centres and cost units.
1. Cost book-keeping: It involves maintaining complete record of all costs
incurred from their incurrence to their charge to departments, products
and services. Such recording is preferably done on the basis of double
entry system.

2. Cost system: Systems and procedures are devised for proper

accounting
for costs.

3. Cost ascertainment: Ascertaining cost of products, processes, jobs,

services, etc., is the important function of cost accounting. Cost
ascertainment becomes the basis of managerial decision making such
as pricing, planning and control.

4. Cost Analysis: It involves the process of finding out the causal factors
of actual costs varying from the budgeted costs and fixation of
responsibility for cost increases.
v. Cost comparisons: Cost accounting also includes comparisons between
cost from alternative courses of action such as use of technology for
production, cost of making different products and activities, and cost
of same product/ service over a period of time.

6. Cost Control: Cost accounting is the utilisation of cost information for

exercising control. It involves a detailed examination of each cost in
the light of benefit derived from the incurrence of the cost. Thus, we
can state that cost is analysed to know whether the current level of costs
is satisfactory in the light of standards set in advance.

7. Cost Reports: Presentation of cost is the ultimate function of cost

accounting. These reports are primarily for use by the management at
different levels. Cost Reports form the basis for planning and control,
performance appraisal and managerial decision making.
Objectives of cost accounting

There is a relationship among information needs of

management, cost
accounting objectives, and techniques and tools used for
analysis in cost
accounting. Cost accounting has the following main
objectives to serve:

1. Determining selling price,

2. Controlling cost
3. Providing information for decision-making
4. Ascertaining costing profit
v. Facilitating preparation of financial and other statements.
Importance to Management:
Helps in ascertaining cost
price fixation
wastage control
cost reduction
unprofitable aread
fixing inventory control
selling price
estimate

Importance to Employees
Cost accounting and creditors
Importance to National Economy
It is expensive
The results shown by cost accountant differ
from those shown by a financial accountant.
It is unnecessary because it involves duplication
of work.
BASIS FINACIAL ACCOUNTING COST ACCOUNTING
OBJECTIVE It provides information It provides information
on the financial of
performance and the financial
financial position performance and
ascertainment of cost to
control

NATURE It classifies records and It classifies records and

interprets transaction in interprets in as
terms of money significant manner the
material labour and
overhead costs
RECORDING OF DATA It records historical data It records and presents
the estimated budget
USERS OF INFORMATION Sharholders, creditors Internal management at
Finacial anaylists , govt all levels
and its agencies
ANALYSIS OF COST AND It shows the profit and It provides the cost and
PROFIT loss of the organization profit of eachproduct
process, job and
TIME PERIOD Financial statements are Reparts and statements
prepared for a year are prepared as and
when required
PRESENTATION OF A set format is used for There are no set formats
INFORMATION presenting financial for cost information
information
USE OF ACCOUNTING INFORMATION BY MANAGERS TO MAKE BUSINESS
DECISIONS
MANAGEMENT AND CONTROL FUNCTIONS

In contrast to financial accounting information, management

accounting information is:

designed and intended for use by managers within the organization,

whereas financial accounting information is designed for use by
shareholders and creditors.

usually confidential and used by management, instead of publicly

reported;
forward-looking, instead of historical;
computed by reference to the needs of managers, often using
management information systems, instead of by reference to financial
accounting standards
What Does alance Sheet Mean?
A financial statement that summarizes a company's assets, liabilities
and shareholders' equity at a specific point in time. These three balance
sheet segments give investors an idea as to what the company owns
and owes, as well as the amount invested by the shareholders.

As on the last date of the accounting period

Assets = Liabilities + Shareholders' Equity

Definition
A balance sheet is a statement of the total assets and liabilities of an
organisation at a particular date - usually the last date of an
accounting period.
The balance sheet is split into two parts:

(1) A statement of fixed assets, current assets and the

liabilities (sometimes referred to as "Net Assets")

A balance sheet does not necessary "value" a company, since assets

and liabilities are shown at "historical cost" and some intangible
assets (e.g. brands, quality of management, market leadership) are
not included.
Definition of Assets
ýAn asset is any right or thing that is owned by a business. Assets
include land, buildings, equipment and anything else a business owns
that can be given a value in money terms for the purpose of financial
reporting.
Definition of Liabilities
To acquire its assets, a business may have to obtain money from various
sources in addition to its owners (shareholders) or from retained profits. The
various amounts of money owed by a business are called its liabilities.

Long-term and Current

To provide additional information to the user, assets and liabilities are
usually classified in the balance sheet as:
- Current: those due to be repaid or converted into cash within 12 months of
the balance sheet date;
-Long-term: those due to be repaid or converted into cash more than 12

months after the balance sheet date;

-Fixed asset

-A "fixed asset" is an asset which is intended to be of a permanent nature

and which is used by the business to provide the capability to conduct its
trade. Examples of "tangible fixed assets" include plant & machinery, land &
buildings and motor vehicles. "Intangible fixed assets" may include goodwill,
patents, trademarks and brands - although they may only be included if they
have been "acquired". Investments in other companies which are intended to
be held for the long-term can also be shown under the fixed asset heading.
Definition of Capital
As well as borrowing from banks and other sources, all companies receive
finance from their owners. This money is generally available for the life of the
business and is normally only repaid when the company is "wound up". To
distinguish between the liabilities owed to third parties and to the business
owners, the latter is referred to as the "capital" or "equity capital" of the
company.

In addition, undistributed profits are re-invested in company assets (such as

stocks, equipment and the bank balance). Although these "retained profits"
may be available for distribution to shareholders - and may be paid out as
dividends as a future date - they are added to the equity capital of the
business in arriving at the total "equity shareholders' funds".
Profit and Loss Account
The profit and loss account differs significantly from the
balance sheet in that it is a record of the firm's trading
activities over a period of time whereas the balance sheet
is the financial position at a moment in time.
The profit and loss account looks at how well the firm has
traded over the time period concerned (usually the last 6
months or year). It basically shows how much the firm has
earned from selling its product or service, and how much
it has paid out in costs (production costs, salaries and so
on). The net of these two is the amount of profit they've
earned.
m A profit and loss account would usually be
made up as follows:-
m £ million
m Turnover (sales revenue) v
m less Cost of goods sold (2 )
m Gross profit 3
m less other costs @ (1 )
m Trading / operating profit 2 ****
m Profit for shareholders (dividends) 7v
m Retained profit 12v
m @ These other costs may include marketing and
distribution costs, office costs and so on. They are
also known as indirect costs or overheads.
m **** In here may also be included any other income
or expenses. These may include interest - paid or
received - tax,
m extraordinary items (profits from selling assets or
parts of the company) and so on.

m The final retained profit figure is the one that goes to

the balance sheet as a source of funds for the
company to use. This retained profit may be used to
buy fixed assets (machinery, equipment etc.) or it
may remain as current assets (cash in the bank
perhaps).
×Too many Variables exit today.
×New element of competitiveness due to

more sourcing options

×Increasing number of new garment styles

and end uses

×New types of retail outlets which mean

more consumer catagories

Revenue is the total of all receipts from the sale of a
companies product during a stated year
Fashion changes are very quickly
Prices are changing every season
For the same product buyers want better
prices than he previous season
sourcing options
New types of retail outlets are growing
COST is the total amount invested in a product or
refers to the monetary value expended to produce
a garment styles .This includes everything from
the material to the labour used to produce this
style to the overhead expenses of the firm.

Price is the amount asked or received in exchange

for a product OR refers to the monetary value or
revenue that is collected from the
consumer/customer who purchases the product
Costing is the process for estimating the total
resource investment required to merchandise ,
produce and market the product .Product cost
accumulate from all the functional divisions of
the company .
Variable cost
All th those costs which increase and decrease with the number
of units produced.Labour, Material, frieght

Fixed costs
All the cost which are inversely proportional to the number of
units produced
Greater the number of units smaller the unit cost for the fixed
expense since the amount is spread over more no. of units
E.g. Telephone bills , Rent , Property, Payments, Taxes , Benefits
expenses for personnel other than the construction.
Includes all expenses that are incurred in making a
finished product available
Direct material
Direct Labour and
Overheads
All variable and non variable cost hat cannot be
traced to specific unit of production
Overheads can be divided further into
Indirect cost
Other overheads
Fixed cost ---fixed overheads
Variable cost ² Direct
costs/Variable Overheads
Direct Materials : Fabric , Threads, Trims and
accessories are direct materil cost which are
part of Direct Variable cots.
Direct Labour :Includes e.g. cues the wages of
people who work on the product, cutters,
stitchers operators and finishers
Includes wages of individuals who provide support
and do not actually make the product.

E.g. Quality Assurance, security personell,material

handlers, mechanics and maintenance workers
ýMATERon cIAL MANAGEMENT
ýMACHINERY AND EQUIPMENT COST

ýCOST OF OWNING AND RENTING THE MANUFACTURING FACILITY

ýCOST OF COMPLIANCE WITH REGULATIONS

ýUTILITIES TO KEEP THE FACTORY RUNNING

ýIF A FIRM OWNS ITS MANUFACTURING OR CONSTRUCTION FACILITIES ,

IT MAY ELECT TO PUT SOME OF THE ABOVE EXPENSES IN THE
OVERHEAD CATEGORY OR TRANSFER THEM TO THE OPERATIONAL
EXPENSES CATEGORY
Most business estimate the cost of goods sold
\manufacturing cost at 4 -6
of total sales

The goal is to keep the overall cost of the goods

for all products as low as possible somewhere
around v
of the wholesale price
PRIME COST+FACTORY OVERHEADS = PRODUCTION COST /COST OF
MANUFACTURING GOODS

PRODUCTION COST +OPERATIONAL EXPENSE OR SELLING

DISTRIBUTION +ADMIN /FINANCIAL COST = TOTAL COST
SALES MARKETING COST SUCH AS SALES PERSONELL,
SHOWROOM AND ADVERTISING
Cost of discount and charge backs and corporate
overheads
Corporate overheads include
SALARIES OF CORPORATE EXECUTIVE PRODUCT
DEVELOPMENT TEAM AND OFFICE PERSONELL
EXPENSES INCURRED FOR CORPORATE REAL ESTATE
AND UPKEEP
Insurance and taxes, office equipment and supplies ,
computer equipmebnt , technology and maintainence
Transportation of goods
Fee of agents
Quota cost and tariffs ( taxes collected on goods
imported .
CALCULATION OF VARIABLE AND NON VARIABLE
COST OF MATERIAL LABOUR REQUIRED TO
PRODUCE A PRODUCT
Overhead necessary to operate a facility
Calculation of general operating expenses
Only material, construction labour and sales commissions are
treated as product costs.
All expenses are placed in general expense category i.e. all non
variable costs both manufacturing and non manufacturing are
treated as time period costs
ýThey can be high end middle end or low end
ýHigh end like BCBG, Ann Taylor

ýMass market Like K mart Wal mart

ýSingle buyer can have two a high value range and an

economy range
ýGAP ² Old Navy ² middle segment

ýBanana Republic ² more classsy value added

Delivery charges , duties or tariffs on imported
textiles , testig requirement and fabric
inspection cost
Delivery charges
Surface logistics ²road or rail
Logistics by sea ²FCL and LCL
Logistics by air
Testing requirements and fabric inspections
These are additional costs which are incurred
to ensure good quality fabric and end of
shipment cancellation
Fabric and trim consumption represent the single largest
cost item for the apparel manufacturer comprising of 6 to
8 percent of the total cost
Of material cost fabric cost is he single largest line cost in
acost sheet
Fabric cost is affected by he below factors
Customer/Buyer
Price range / Price point
Logistics
Physical properties of Fabric type , count construction and
weight
Wastage in fabric consumption,optimum utilization of fabric
ordered.
LOGISTICS
Production lead time /production min yardages
In case of quantities esp fabrics which are not
meeting the minimums required by the mill supplier
.The supplier will introduce an upcharge in the fabric
cost
In order to lower the minimum quantities suppliers
increase the required lead times hoping to
accumilate sufficient orders to make an efficiently
sized production run.
Based on these fabric properties the broad sourcing
catagories of fabrics would be
Handloom
Powerloom
Millmade
Imported piece goods
Fabric type
Piece dyed
Printed
Yarn dyed
Piece dyed
All color price
All color price with exeptions
Base color price with specific color up charge
Base color price with color upcharges for each group
Printed
No of colors printed
Number of colourways per print
The fabric wastage commonly calculated in the
industry is based on the broad category of imported
piece goods 3
and Indian Piece goods of v

The indian piece goods wastage percentage is
nearly double the amount of wastage expected in
imported piece goods, the parameters affecting are
Fabric detect point count
Fabric grouping globally
Weight of fabric
Chiffons /georgette/crepe/moss crepe
Voiles
Cambric
Poplins
Sheeting
Canvas
Twills
Dobby and jacquard
Fabric defects
Inherent to fabric present due to weaving , dyeing ,
finishing thereby resulting in fabric wastage
Defect splice out , additional cutting costs
Sewing room costs to recut and resew defective
panels
Fallout effect of irregular finished good inventories
Fabric quality
Fabric defects
Fabric shade bands
Fabric width
Fabric roll length/piece length
Space dyed fabric being used for tops
The constraint working in the marker making process
would be , the front , the back and the sleeve will have to
be cut from the same portion i.e. will have to be place on
the side
There by increasing the cuttable width of the fabric
If the finished width of the fabric is a constraint then the
front and the back to be placed alongside and both the
sleeves on the other end of the fabric width and will have
to be done to reduce the possibility of garment looking
defects
Indian mills have fabric width working as a major constraint due
to which Indian Exporters look for changeable widths in fabrics
and find importing of fabrics a better option
Although the cost involved in importing goods are not viewed as
extra cost due to the fact that it brings benefits in form of duty
draw backs and also more order comes into the kitty of the
exporter who is able to deliver the good to the buyer
The production marker should be able to make the
optimum use of the fabric width ordered
T/fthe marker /final consumption per garment is the
decisive factor while ordering the garment
At times the commercially available fabric width might not
give the optimum utilization in such cases the fabric
wastage percentage goes up thereby increasing the cost of
the garment
Size range S, M, L, XL,XXL
Ratio in which the sizes are distributed in the
garment order
An apparel manufacturer needs to analyze the overall
impact in the following areas
Fabric inspection
Identification and removal of defects through the
manufacturing cycle
Loss of fabric due to splice outs
Additional cutting room costs
Sewing room cost to recut and resew defective panels
Fallout effect of irregulars on finished good inventories n
Effect on inventory turn over
The bottom line effect of setting off irregular finished
garments
Fabric trim consumption is the estimated usage which
includes wastage allowance and is then mentioned on
the cost sheet in yards unit/trims unit
Variances of material usage from the cost sheet can
significantly reduce bottom line profitability
An apparel manufacturer needs to track these variances
for each product class/style /category in order to
accurately reflect these variances
Raw material usage variances can be attributed to the
Size ratio

Marking variance , Difference between actual marker

length and standard allowed marker length.

Spreading variance :The difference between actual wastage

in spreading and the standard allowed waste used on the
cost sheet