Determining Cost per SMV

by Syed Salahuddin Munna

syed.munna@gmail.com
 Determining Cost per SMV
What is cost ? If I simply define then cost is a value of expenditure with profit for selling
a product or service to a customer.

Value of expenditure mean spending money for producing a product for the customer &
profit mean gain of monetary benefit against the product made & sold.

In garment manufacturing industries cost of manufacturing means same and it is better

to calculate based on yearly expenditure cause in some cases expenditures needed to be
determined yearly basis like employee bonus 2 in every year, expenditure for licenses
renewal, expenditure for various certification & audit, bank interest, insurance
premium, depreciation, company taxation ect. ect.

However, in garment manufacturing industries we used to hear regarding line cost. This
line cost is told because that amount of money needed to be earned everyday otherwise
company cannot meet daily, monthly or yearly expenditure so it is important to produce
certain amount of product which will earn particular amount of money according to
daily expenditure.

Now again come to the point of CM i.e. cost of manufacturing and lots of garment
manufacturing factories are given 65% of CM to meet factory expenditure. Do you know
why it is done like so ? It is done like so cause if a factory is making profit of 5% on total
turnover then the proportion of this profit is covering 30% to 35% into Cost of
Manufacturing and to secure this profit for further investment, factories are given 65%
of CM to meet every expenditure within that 65%. Let’s clarify it :

A 5 pocket denim boy’s bottom order has been finalized @ US $ 6.90/Pc. While costing,
CM has been calculated US $ 1.00/Pcs in which 5% Profit was included,

so without profit product price is :

Profit = (5 x 6.90) ÷ 100 = US$ 0.345/Pc

Actual Product Cost (Material + CM) = 6.90 – 0.345 = US$ 6.555/Pc

So Profit % against CM is (0.345 x 100) ÷ 1 = 34.50%

Now let’s say a production line consisting 50 machines with line efficiency of 50%
having cost of Tk. 100,000/- per day according to yearly expenditure and a 5 pocket
denim boy’s bottom order has been taken @ CM US $ 1.00/Pc. So what should be the
target needed to be produced to meet line cost based on 65% of CM.

Simple calculation is :
CM = US $ 1.00/Pc & it’s 65% is US $ 0.65/Pc i.e 0.65 x 85 = TK. 55.25 (US $ 1 = Tk.
85.00)

so targeted production to meet the line cost Tk. 100,000/- per day is 100,000 ÷ 55.25 =
1809 Pcs.

and production less than 1809 Pcs will cause loss for the company.

In this situation what should be the SMV of the product ? and what will be cost per SMV
?

We can calculate it from following equation :

Line Target = (Total working minute in a day x No. of Operator x Line Efficiency %) ÷
SMV

So SMV = (Total working minute in a day x No. of Operator x Line Efficiency %) ÷ Line
Target.

SMV = (600 x 60 x 50%) ÷ 1809

SMV = 9.95 Minute

Now CM per piece is Tk. 55.25 and SMV per piece is 9.95 minute

So cost per SMV is Tk. 55.25 ÷ 9.95 = Tk. 5.55 i.e. US$ 0.065

So cost per SMV is = US$ 0.065

This is how Cost per SMV is determined.

I’ve made an excel sheet which will help to calculate instantly Target against expenditure
and Cost per SMV. Picture of excel sheet has been given here & can be provided upon
request.