Professional Documents
Culture Documents
Costing
Costing
Cost components
Introduction of costing tools
Costing techniques in Apparel industry
Cost process flow
Costing sheet
Calculation of Gmt/Kg ratio
GEC
1
Cost components
Cost=Total amount of money invested in a
product.
GEC 4
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 COSTGEC
5
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.
GEC
6
DM+DL+DE= PRIME COST
10
GEC 10
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.
GEC 11
INDIRECT
DIRECT DIRECT DIRECT INDIRECT
INDIRECT EXPENSES
MATERIAL EXPENSES LABOR
MATERIAL
S LABOR S
FACTORY
PRIME COST OVERHEAD
PRODUCTION COST
SELLING AND
DISTRIBUTION COST
ADMIN
AND FINANCE
GEC 13
Pre Costing/ Preliminary Costing
Done during the pre phase of product
adoption development.
Used in early development stage
To determine whether designer’s sketches are
producible or marketable within established
the price range.
Rough estimate/based on estimates of costs of
producing a style based on estimate of material, labour
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.
GEC 14
GEC 15
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.
GEC 16
GEC 17
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.
GEC 18
Detailed costing
Changes may be made to economize on
fabrics or sewing time.
Provide basis for establishing production
budgets.
GEC 19
Actual costing
Determined by using actual data from
production.
Costs are monitored throughout
production.
GEC 20
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.
GEC 21
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)
GEC 22
There are two aspects of labor
costing:
Budgeting for production
Labor costing for individual
style.
GEC 23
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.
GEC 24
Labor Costing-Budgeted
Total DLC = No. of Operators * hours / week * weeks / year * avg
hourly earnings.
GEC 25
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.
GEC 26
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 GEC
specific operation. 27
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
direct of production GEC
labor costs. would have a $0.55 29
Employee Working hrs. Salary Payment
(Month)
(ETB.)
A 208 3100 3100
GEC 33
Spreading Costs
Type of Fabric spread
Length of spread
Consistency of fabric
Spreaders attention to fabric defects
Complexity of spread
GEC 34
Cutting Costs
Pattern Configuration
Die cutting requirements
Fabric type
Fabric design
Spread Height
GEC 35
Assembly/Bundling
Bundle integration
Bundling specifications required
GEC 36
Sewing Operations
Size of sewing bundles
Size and color variations
Variations in fabrics
Utilization of Equipment
Quality Specifications
GEC 37
Pros & Cons of Piece
Rate System
Advantages-
GEC 39
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 day
GEC 40
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
GEC 41
METHODS/TECHNIQUES OF
COSTING
Direct costing
Absorption costing
Activity based costing
GEC 42
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.
GEC 43
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.
GEC 44
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..
GEC 45
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 redGuECction in 47
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 areGEeC stimated in 48
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
well as reductions in direct labor cost.
GEC 48
How are overheads divided
among various styles?
GEC 49
Mark-up
GEC 50
Mark-up
-Based on Cost
Markup = Rate of markup x cost
GEC 51
Mark-up
GEC 52
Mark-up
-Based on Selling Price
Rate of markup = SP/Markup
Ex-
Markup is Rs 5
Selling Price is Rs 15
GEC 54