Garment Costing

BY WENDOSEN SEIFE

BAHIR DAR UNIVERSITY

ETHIOPIAN INSTITUTE OF TEXTILE AND FASHION
TECHNOLOGY

2021
 Introduction to costing

Components of cost

Introduction of costing tools

Costing techniques in Apparel industry

Out line
Cost process flow

Costing sheet

Calculation of Gmt/Kg ratio

 Introducti on to costi ng
 Cost is the economic value placed upon the resources consumed to make a
product.
 “Costing is the technique and process of estimating the cost for a product or
service or process”.
 In fashion industry, the process of costing a product is very dynamic.
 Since, the fashion changes and the received order differ every season, the
products are manufactured only once.
 This leads the manufacturing company to work on accurate costing on every
product in order to run the business profitable.
 Conti …

 Cost = Total amount of money invested in a product.

 Price = Amount of money asked /received in exchange for a product.
 Profit = Price- cost
 Revenue = Total of all receipts from the sale of company’s product during a
stated period.
 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.
 Components of cost
 The costing is done by keeping in mind the cost of the various raw
materials, operating cost of the company, the competition and expected
profit of the organization.
 The components on which cost of garment depends on as follows
 Fabric
 Trims
 Cut Make & Trim charges
 Value added services: printing, embroidery, washing, applique
 Testing of the garment
 Quality
 Transportation and logistics cost
 Profit of the manufacturing organization
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 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 COST
 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
 Indirect Costs

 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
 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.
 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
 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.
 General Operati ng 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
 Costi ng tools

 Costing tools
 Costi ng Techniques

 Basically, there are three method of costing;

Direct costing Absorption costing Activity based costing

Considers only variable costs It charges fixed and variable
production labor, materials, overheads to individual cost
sales commissions to be units. It takes into account all
product costs costs incurred in the production
of the product; they are
absorbed.
all of the company’s activities exist
to support the production &
therefore all be considered as
product costs.
 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.
 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.
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 and have to be
estimated in advance.
 OH rate per Production hrs.=Total OH/Estimated Production Hrs..
Absorption costing

 Considers all manufacturing 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 GEC in O/H
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
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
Stages/Flow of Costing

Pre-costing Costing done prior to Costing done prior Post production

adoption of line to production costing
 Pre-costing

 Done during the pre adoption phase of product development.

 Used in early development stage
 To determine whether designer’s sketches are producible or marketable within the
established price range.
 Rough estimate/based on estimates of costs of producing a style based on estimate
of material, labor or costs of previously producing a similar style.
 Helps to weed out styles that would be too costly for the line before additional time
and resources are invested.
 Necessary for fashion manufacturer.
 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.
 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.
 Changes may be made to economize on fabrics or sewing time.
 Provide basis for establishing production budgets.
 Detailed costing

 Determined by using actual data from production.

 Costs are monitored throughout production.
Cutting section costs

 In cutting department of an apparel industry, the general process flow will be,
a) Relaxing of the fabric
b) Marker planning
c) Spreading and marker making
d) Cutting
e) Bundling and sticking sticker in the pieces.
 In calculation of the cutting cost, one has to consider the various raw materials
involved in the each stage of the manufacturing process and labors involved in the
process.
Cutting section costs

 In cutting department of an apparel industry, the general process flow will be,
a) Relaxing of the fabric
b) Marker planning
c) Spreading and marker making
d) Cutting
e) Bundling and sticking sticker in the pieces.
 In calculation of the cutting cost, one has to consider the various raw materials
involved in the each stage of the manufacturing process and labors involved in the
process.
Cutting section costs

 Other technical parameters which have direct influence in the costing process,
 Number of plies used per spread – this determines the time required to complete
the order. More number of plies per spread will reduce the operating time
 Type of cutting used – manual cutting or machine cutting.
 Fabric type – The thickness, fibers used and structures decides the number of layers,
spreading methods and direction.
 Marker planning –may suggest few changes in the spreading length width and
number of plies.
 Ply direction –The fabric type decides the of ply direction.
 Style complication of the garment and number of components.
Sewing section costs

 In general, the influencing factors are:

a) Garment style details and number of operation – Based on the style
complication, the number of machines and operators need to be used will vary.
b) Number of component and the size –the required time to complete the
particular operation or garment will be high.
c) Type of fabric – The type of fabric has direct influence of the production.
d) Special operations –require a special machine to perform it. Thus, the rental cost
of the machine and operator cost may hike the total garment cost.
e) Quality requirements –The quality details defines expected requirements.
Sewing section costs

 In trimming and checking department, the cost factor depends up on the following
factors:
 Size and style complication of the garment -This leads to more places to trim and thus
increases the time per garment. With respect to larger garments, the handling will
delay the process time per garment.
 In checking – More number of parts or complicated styles lead to deviate from the
standard checking procedure and hence, the time consumption increases.
 Quality requirement – Based on the specific requirement for individual styles, the
trimming and checking points are increased.
 Costing sheet

 The risk of changes in the expected value of a contract between its signing and its
execution as a result of unexpected changes in foreign exchange rates.
 A transaction exposure arises due to fluctuation in exchange rate between the time
at which the contract is concluded in foreign currency and the time at which
settlement is made.
 Transaction exposure is short term in nature, usually for a period less than one year.
 The risk, faced by companies involved in international trade, that currency exchange
rates will change after the companies have already entered into financial
obligations.
Calculation of Gmt/Kg ratio

 A firm's translation exposure is the extent to which its financial reporting is affected
by exchange rate movements.
 The exchange gain or loss occurring from the difference in the exchange rates at the
beginning and the end of the accounting period.
 A firm is exposed to translation loss, if it uses current exchange rate to translate its
assets and liabilities.
 The key difference between the transaction exposure and translation exposure is
that the transaction exposure impacts the cash flow of the firm whereas
translation has no effect on direct cash flows.
 Retail Price

 Retail Price = FOB price + Cost of Freight/Insurance + Import Duty + Cost of

distribution + Cost of managing a store + Profit Margin.
THANK
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Negative impacts of fast fashion

 Greenwashing issue in the marketing strategy

 According to Kim et al. the concept of sustainability is important in marketing and
branding, since it can strengthen customer interest and loyalty (Kim et al., 2020).
 The greenwashing marketing strategies themselves do not have a direct
environmental impact, but by convincing the consumer to choose a brand because
of its efforts towards improving sustainability in its system.
 They enable these brands to increase their customer base, therefore creating a
potential environmental impact linked to the consumption of these new
customers.