garment costing for level III.pptx

11.1 © 2006 by Prentice Hall
Course name; Perform Job Estimate and
Costing
Mary help college
Fashion Design
For-Level-III
Mezgebu Tesfaye
January , 2024

Introduction
 In apparel industry, Costing is the process of estimating and
then determining the total cost of producing a garment,
including the cost of materials, labor, and transportation as
well as the general expenses of operating the business.
 Managers use costing to determine
 The producibility of a design within an established price range
 The profit potential in a design and
 Whether a design should be added to the production line.
 Once a style is included in a line, specific cost information is
used to plan line budgets and to establish a base for the selling
price.

What is costing
Costing
 It is the process for estimating the total resource investment
required to merchandise, produce, and market a product
 Product costs accumulate from all functional divisions of a
company – Research&Development, Sample & design,
marketing, production, engineering, finance, purchasing etc.
 It is the process of calculating all the expenses involved in
producing and selling a product

What is pricing
Pricing
 It is the process of determining the exchange value of goods for sale.
 Process of determining the exchange value of goods that are made
available for sale based on:
− the data produced in the costing process
− the value customers place on the product, and
− the competition in the market

Is there a need for
COSTING in a clothing
Write down as many reasons as you can for the
need for COSTING.
Group discussion

Is there a need for
COSTING in a clothing

…CON’t >>

Why costing is important???
Group discussion

Apparel costing is used for a number of reasons, including for:
 Classification and sub-divisions of Costs, Control of Materials,
Labour and Overhead Costs, and for Business Policies.
 It helps the management to take decisions.
 It helps to create an expansion strategy.
 Ensures Optimum Profitability, and Helps the management to take
suitable steps to meet seasonal variations in volume and costs. etc.

 Fashion changes are very quick
 Prices are changing every season
 For the same product buyers want better prices than
previous season
 Expanded sourcing options, thereby increasing
competition
 Too many variables exist today
 Increasing number of new garment styles and end uses

Group discussion
What are the difference
between Cost and price?

Cost vs price
• Distinguishing between cost and price is fundamental to
understanding profit and loss.
• Cost is the total amount of money invested in a product.
• Price is the amount of money asked /received in ex-change for
a product.
• The difference between the price and the cost of a product is
profit or loss on that product. For a firm, revenue minus costs
equals profit or loss.
• Revenue is the total of all receipts from the sale of the firm's
products during a stated time period. In order to make a profit,
revenue must exceed costs. When costs exceed revenue, a loss
is incurred.

Cost=Total amount of money invested in a product
Price=Amount of money asked /received in ex-change
for a product
 Manufacturer's price = Manufacturing costs + Operating expenses
+ Profit
MP = MC + OE + P
Relationship between Cost, Price and profit

Manufacturer's price = Retailer's cost
MP = RC
 Retailer's price = Retailer's cost + Operating expense + Profit
RP = RC + OE + P
 Profit = Revenue/Price – cost
Relationship between Cost, Price and profit

Next class

Elements of costs
Indirect
labour
Indirect
material
Factory
overheads
Office
overheads
Selling & distributive
overheads
Direct
material
Direct
labour
Direct
expenses
overheads
Indirect
expenses

Material cost
 It is the cost of the substance from which the product is made
 It may be in a raw or a manufactured state
 It can be direct as well as indirect
A. Direct Material:
 Mostly termed as raw material
 Direct material refers to all materials which becomes an integral part of
the finished product and which can be conveniently assigned to specific
physical unit

 Examples
All materials specifically purchased, produced or
requisitioned from stores like,
Fabrics
 Trims and Accessories (sewing Threads, button, interfacing…..)
Primary packing material (e.g. cartoon, wrapping, cardboard,
boxes etc.)
….Con’t

B. Indirect Material:
 Indirect Material is that material which cannot be easily and
conveniently identified and related with a particular product, job,
process, and activity.
 Examples: Consumable materials, marker paper, oil, printing and
stationery etc.
 Indirect material are used in the factory, the office or the selling
and distribution division
….Con’t

Labor
Human effort needed for conversion of materials into finished
goods
Labor can be direct as well as indirect
A. Direct Labor (process L/ manufacturing L or direct wages)
 Takes an active and direct part in the production of a particular
commodity
 conveniently traceable to specific products E.g. Salary of
Designers, salary of sewing operators, off-line quality

B. Indirect Labor
Labor employed for the purpose of carrying out tasks incidental to
goods or services provided
Does not alter the construction composition or condition of the product
It cannot be practically traced to specific units of output
Examples: Wages of store-keepers, production managers, time-
keepers, directors' fees, salaries of salesmen
Indirect labor may relate to the factory, the office or the selling and
distribution divisions
….Con’t

Expenses
 All cost incurred in the production of finished goods other than
material and labor cost are termed as expenses.
 Expenses can be direct expenses and Indirect expenses (An item of
overheads)
A. Direct Expenses (Chargeable expenses):
 Directly, conveniently and wholly allocated to specific cost centers or cost units
Examples: hire or purchase some special machinery required for a particular
contract, cost of defective work incurred in connection with a particular job or
contract, cost of stonewashing denim garments to achieve a fashionable look

 Direct expenses constitute the last of the direct costs and are the least
significant in terms of percentage of cost.
B. Indirect Expenses:
 These are expenses which cannot be directly, conveniently and wholly
allocated to cost centers or cost units
 Cost center means a location, person, or item of equipment or group of
these for which costs may be ascertained and used for the purpose of cost
control
….Con’t

 Indirect expenses are treated as part of overheads.
 Example: Rent, rates and taxes of building, repair, insurance and
depreciation on fixed assets, etc,
….Con’t

Overhead
 The term overhead has a wider meaning than the term indirect
expenses.
 Overheads include the cost of indirect material, indirect labor and
indirect expenses.
 Overheads are classified into three categories:
 Factory/works/ production overheads
 Office and Administrative overheads
 Selling and Distribution overheads

Factory/works/ production overheads
 All indirect costs incurred in the factory for production of goods is
termed as factory/works overhead
 These cost includes the following:
1. Indirect materials:
 Grease, oil, lubricants, cotton waste etc.
 Small tools, brushes for sweeping,
 Cost of glue, etc.
 Consumable stores and Factory printing and stationery
….Con’t

2. Indirect wages:
 Salary of factory manager,
supervisors, etc.
 Salary of storekeeper
 Salary and fee of factory
directors and technical
directors
3. Indirect expenses:
 Rent of factory buildings and land
 Insurance of factory building, plant,
and machinery
 Municipal taxes of factory building
 Depreciation of factory building,
plant and machinery, and their
repairs and maintenance charges
 Power and fuel used in factory
 Factory telephone expenses.
….Con’t

Office and Administrative Expenses
 They are related to the management and administration of
business
 Expenses incurred on the direction and control of an undertaking
business
Examples are:
 Office rent
 Lighting and heating
 Postage and telegrams
 Telephones and other charges
 Depreciation of office building, furniture and equipment
 Bank charges, legal charges, audit fee etc.
….Con’t

Selling and Distribution Expenses
Expenses incurred for:
Marketing of a commodity
Securing orders for the articles
Dispatching goods sold
For making efforts to find and retain customers
Examples are:
‒ Advertisement expenses
‒ cost of preparing formal written documents for supply of goods.
‒ travelling expenses, collection charges etc.
‒ warehouse charges, packing and loading charges, carriage outwards, etc.
….Con’t

Components of Total cost
1. Prime cost
– Costs of direct material + direct labor + direct expenses
– It is also known as basic, first or flat cost.
2. Factory cost (works, production or manufacturing cost)
– Prime cost + factory overheads (costs of indirect material,
indirect labor, and indirect expenses of the factory)
– The cost is also known as works cost, production or
manufacturing cost.

3. Total cost of production
– Production cost + office and administrative overheads
– This is also termed as administrative cost or the total cost of
production
4. Total cost of sales
– Total cost of production + Selling and distribution overheads
….Con’t

Classification of cost
Based on behavior /Variability
i. Fixed: have no particular relationship with volume of output
ii. Variable: Cost which increase or decrease when the production
increase or decrease
iii. Semi-variable: A cost could be variable for one level of activity whereas
it could be fixed for another.
Based on Nature/Element
 Materials
 Labor
 Expense
Based on function
i. Production/Manufacturing cost
ii. Administrative cost
iii. Selling and distribution

Technique/Method of Costing
 To be effective, cost data must be specific, accurate, and timely
 The more accurate the costing, better the business decisions and the
greater the potential for business success
 Product costing requires in-depth understanding of product
development, materials, production processes, and plant operations.
 Methods of product costing strategies in apparel industry:-
i. Direct costing,
ii. Absorption costing,
iii. Activity based costing.

Direct costing
 DC Sometimes referred as variable costing
 It Considers only variable costs directly related to labor and materials
as product costs
 All non variable factory expenses, marketing, product development,
and general and administrative costs are allocated through gross
margins as either a fixed cost per garment or as a target gross margin
percentage
 Direct costing also makes it possible to identify individual styles and
their level of contribution
 It is good for make or buy decision
….Con’t

Fabric $1.10
Trimming 0.5
Labor 0.47
Cost of goods $2.07
Markup or gross margin contribution for factory overhead,
general and administrative costs, and profit $1.18
Wholesale selling price $3.25
Example 1:
AB T-shirt Company has been using direct costing. It applies its factory overhead,
general and administrative costs, and profit, which totals $472,000 for its projected
400,000 unit sales at $1.18 per unit .The cost of goods, contains only direct variable
costs for materials and labor. T-shirt has the following cost of goods:
….Con’t

Example 2:
The company decides to add a 3-button placket polo shirt to its product line. This
transition requires a new capital investment for equipment and additional marketing and
product development costs; which increases its gross margin contribution to $2.18 per
unit. Under its current costing system the two products would price out at:
T-Shirt Polo-Shirt
Fabric $1.10 Fabric $1.9
Trimming 0.5 Trimming 0.7
labor 0.47 labor 1.38
Cost of Goods $2.07 Cost of Goods $3.98
Gross margin contribution $2.18 Gross margin contribution $2.18
Wholesale selling price $4.25 Wholesale selling price $6.16
….Con’t

o The price of T-shirts increases 30 percent in the selling price, thus makes company
out of the market.
o DC is effective for companies with
 Stable product lines / with little variation in labor, product development, and
marketing costs.
o Direct costing is easy to use
 It requires measuring only the variable expenses directly related to materials
and labor
 Accumulates the rest of the costs in one large cost pool where those costs are
often applied to a product on a per unit basis
….Con’t

Absorption Costing
Allocates variable manufacturing costs & fixed
manufacturing overhead per each product
called as “whole cost method”, b/c it Treats all costs of
production as product costs
 Takes into account relative effect of variable and fixed
manufacturing overhead to each style produced
 Variable manufacturing overhead is applied to each product
as a percentage of the direct labor cost

The AB T-shirt company decides to evaluate absorption costing in introducing its 3-button
placket polo shirt into its product line. The direct cost of T-shirt for labor, material and trimming
is constant as previously produced as shown on the table.
The company calculates its variable factory overhead to be $341,000, which can be absorbed by
the total direct labor cost of $326,000 for projected sales of 400,000 T-shirts and 100,000 polo
shirts at the rate of 105 percent of direct labor. The gross margin contribution of $400,000 for
500,000 unit sales will require increasing the markup to $ 0.80 per unit.
As per the data given calculate Selling price of T-shirt & Polo Shirt.
T-Shirt $ per Unit Polo-Shirt $ per unit
labor 0.47 labor ???
Factory O.H ??? Factory O.H ???
Cost of Goods ??? Cost of Goods ????
Wholesale selling price ??? Wholesale selling price ???
Problem

1st. Let’s calculate the total cost incurred to produce 400,000 of T-shirts
 direct labour cost (T-shirt) = Unit cost/ piece * total pcs produced (pieces)
= 0.47/pc *400,000 pcs
= $188,000
 Direct Labour (Polo) = Unit cost/ piece * total pcs produced (pieces)
Since unit cost of polo is not given, we have to calculate it from the total cost
Total DLC = DLCT-shirt + DLC Polo
DLC Polo = Total DLC - DLCT-shirt
= 326,000 – 188,000 = 138,000
DLC Polo = 138,000
Unit Cost of polo = DLC of pol/Total produced
= 138,000/100000 = $1.38
Solution

2nd. Let’ calculate the Unit over head cost for T-shirt & Polo
Unit over head = Total FOH polo / Total Produced
= 105% * $138000 = $144,900
Unit over head = Total FOH polo / Total produced of polo
= $144,900/100,000 = 1.449 = $1.45
Total FOH T-shir = Rate * DLC T-shirt
= 105% * 188,000 = $197,400
Unit over head = Total FOH T-shirt / Total produced of T-shirt
= $197,400 /400,000 = 0.4935 = $0.459
Solution
overhead application
rate is determined by
dividing the total
factory overhead by the
total direct labor costs
for the period
Total FOH polo = Rate * DLC Polo

T-Shirt $ per Unit Polo-Shirt $ per unit
labor 0.47 labor 1.38
Factory O.H 0.49 Factory O.H 1.45
Cost of Goods 2.56 Cost of Goods 5.43
Wholesale selling price 3.36 Wholesale selling price 6.23
3rd . Let’ calculate the selling price of T-shirt & Polo
Selling price = Cost of goods + Marginal profit
Selling price Polo = Cost of Polo + Marginal profit
Cost of polo = Fabric cost + trimming + labour + FOH = 1.90 +0.7+1.38 + 1.45 = $ 5.43
Selling price Polo = Cost of Polo + Marginal profit = 5.43 + 0.8 = 6.23
Selling price T-shirt = Cost of T-shirt + Marginal profit
Cost of T-shirt = Fabric cost + trimming + labour + FOH = 1.10 +0.5+0.47 + 0.49 = $ 2.56
Selling price T-shirt = Cost of Polo + Marginal profit = 2.56 + 0.8 = 3.36

Activity Based costing
 Activity-based costing is a multistage process
 Treats all cost as variable element of product cost
 A cost pool is created for each “Activity” that generates cost and then is
assigned to garments styles based upon their use of the cost pool.
Reading Assignment:
 Steps used in ABC Method
 Terms used in ABC costing (Activity, Cost objective, resource &
activity cost drivers)
 How cost pool are assigned to product unit

STAGES OF COSTING
 Costing may be done at different stages throughout
manufacturing:
I. Preliminary or pre-costing is done during the pre-adoption
phase of product development before samples are made,
II. Cost estimating is done prior to line adoption,
III. Detailed costing is done during the post-adoption stage
prior to production, and
IV. Actual costs are determined during and following
production.

….Con’t

 Determine whether designers' sketches are producible and marketable within
the established price range
 Pre-costing package is developed and distributed to prospective buyers,
often accompanied by prototype garment and/or garment specifications
 Pre -costing or "best guess" is based on judgment and past experience
 Accuracy - 10 to 15% of the actual cost
 Quick cost helps the manufacturer:
 whether to reject the style or accept it as part of the line, or
 Send it back to the designer or merchandiser for changes to reduce its cost
Preliminary Costing for Design Development (Pre-costing)
….Con’t

 Cost estimating may be done just prior to line adoption
 It requires Operation Breakdown of garment components for each style
 Determines expected investment in materials, direct labor, and overhead
required to produce a single unit of a style
 Requires more detail and greater accuracy than preliminary costing
 Costing, at this stage, is based on:
 Firm's samples produced
 Standard data
Cost Estimating for Line Adoption
….Con’t

 Done after styles are adopted into the line /on process
 Provides opportunity to pick up any costs missed during cost estimating
like:
 Complex operation that could be simplified
 Any missed Accessories and Trims
 It is tedious and time-consuming, but essential if a firm wants an accurate
account of product costs.
 Changes may be made to economize on the fabric and sewing time.
 A pattern maker may recommend a potential increase in costs in order to
simplify production or improve the quality level
Detailed Costing for Post-adoption
….Con’t

 Determined by the collection of data from production
 Production engineer may find too tight rates and then more time
may be needed to complete specific operation
 If a rate adjustment is needed, it will certainly affect costs
 Actual costs need to be monitored throughout production
 If a style exceeds budgeted costs, it may need to be reengineered or
dropped from the line
Actual Costs
….Con’t

 Cost sheet: statement, which shows various components of total cost
of a product
 Basic document for controlling the cost of producing and selling a
garment
 It should list all the costs per garment
 Many companies use cost sheet containing:
 Sketch of the garment,
 Style name,
 Style number for identification purposes
COSTING SHEET

 Cost sheet may also record:
 size range,
 colors,
 selling season, and other pertinent information
i. Cost ascertainment
 Objective of the cost sheet is to find out cost of a product.
 Helps for determining cost after they are incurred
 It also helps to ascertain the actual cost or estimated cost of a Job
Importance of Cost Sheet
….Con’t

Importance of Cost Sheet
ii. Fixation of selling price
 To fix the selling price of a product or service or
 Helps in fixing selling price of a product or service by providing
detailed information of the cost
iii. Help in cost control
 Estimated cost sheet helps in the control of material cost, labor cost and
overheads cost at every point of production
iv. Facilitates managerial decisions
 Whether to produce or buy a component, what prices of goods are to be
quoted in the tender, whether to retain or replace an existing machine etc
….Con’t

Costing sheet includes five main elements included in costing a
garment:
1) Fabric cost
2) Findings/ Trimming cost
3) labor cost
4) overhead, and
5) Other costs
….Con’t

 Fabric is most significant factor in costing
 Accounts for 60 to 70% of the total cost of basic-styled garments
 Evaluating Quality and amount of Fabric used in a garment indicates
better than any other factor of costing
 Fabric specifications must be established in order to accurately estimate
the cost
 Wight, fabric type, weave/knit type, method of fabrication (Complex) or
type of finishing chemical used (expensive) etc
 To determine fabric costs, first need to estimates the consumption of
fabric required to produce a style, including a waste factor
Fabric Cost
….Con’t

 Findings, notions includes all materials other than fabric required to
produce a garment.
 For example, most cost sheets incorporate as findings such items as
o Trims: sewing Thread, closures (buttons and zippers), labels (care,
brand, and size), and miscellaneous materials (elastic and shoulder pads)
Findings /Trimming Cost
….Con’t

 Includes costs for:
 Spreading, & cutting,
 sewing,
 Pressing and finishing, and any wet-processing operations required to produce a
garment
 Also cover the cost of
 Designing, sample making, patternmaking, grading, and marker making
 Applying price tickets, hang tags, and hangers and preparing pre-packs etc
 Sometimes Labor accounts as much as 1/2, of total cost of garments produced (USA)
 In low-wage countries, labor requirements have less impact on total cost of garment
Labor Cost
….Con’t

 Overheads cost includes:
 Machine depreciation, utility cost, Employee benefits such as insurance and
pensions, salary of supervisors, managers, cost of marker paper, pattern, m/c oil
etc.
 Cost of directors, managers, community and charitable donations, cost of
telephone, water, cost of papers, printing, rent of building etc.
 Advertising , discount terms (usually 8% of the wholesale price) offered to
retailers who pay their bills on time, and the sales commissions (typically 7 to
10% of wholesale price) paid to the sales reps who sell the line to retail buyers.
Distribution costs, covering items such as shipping and warehousing,etc.
Overhead Cost
….Con’t

 Other associated garment costs include special care washing,
chemicals, packaging materials, advertising labels, and contracted
operations.
o Packaging materials include hangers, plastic bags, and packaging
cartons.
o Advertising label expenses include stickers, hang tag, billboards (paper
labels, belly bands (paper strips wrapped around shirts and other folded
apparel), etc
Other Cost/Expenses
….Con’t

Cost sheet format

garment costing for level III.pptx

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