APPAREL TRAINING & DESIGN CENTRE

SUBMITTED TO:
Mr. Deep Chand Joshi

SUBMITTED BY:
Nikhilendra Pratap
Singh
B.Voc [AME]
 Acknowledgement

I want to show my sincere thanks to my

teacher, Mr. Deep Chand Joshi who gave
me an opportunity to work on this project
report headed “APPAREL COSTING”.
I would also thanks my friends who helped
me throughout the project in collecting
data and pictures.
 CONTENT

 Introduction
 Costing Essentials.
 Costs to Consider.
 Garment Product Costing.
 Purpose of ascertaining cost.
 Manufacturing Cost.
 Methods of Garment Costing.
 Basic Method of Garment Costing.
 Direct Garment Costing.
 Stages of Garment Costing.
 Material Costing.
 Labor Costing.
 Actual Cost
 CMT Cost.
 Break-Even Point.
 What is Inco-term.
 Introduction
Globalization, which has shortened the world’s distance, impacted the garment
industry a lot because it is a massive labor-dependent and tech-savvy industry.
Although the world has come closer spatially, the garment industry’s supply chain
has gone multidimensional, which practically means that it is almost impossible to
incorporate all the processes under one roof, so various companies opt to outsource
some of the activities/ processes. The process outsourcing may be in the same or
different country, depending on the lead time requirement. The impact of
international outsourcing on the practice of costing and labour cost is significant.
Due to deficient resources (resource scarcity) and technological know-how, each
country is not competent in producing the garments up to the same standards and
matching the cost by their counterparts.

Costing is the procedure of determination of production and marketing cost of each

product in the line. Costing decisions include every functional division of an industry.
Pricing is the process of determination of selling price of the products that are
manufactured. It is based on information given in the costing process, the value
customers will place on the product, and the competition in the retail market. Under
the circumstances of untainted contest, the supply and demand of the particular
product decides the cost/price of the product. An industry’s success is mostly
decided by the top management’s perception of the company’s cost structure, the
market, pricing options and source of profit.

Garment costing is one of the most important and complex task. There are many
factors which are involve in pricing of single piece of clothing. Garment costing
includes all the activities like purchase of raw materials and accessories, knitting
fabrics, processing and finishing of fabrics, sewing and packing of garments,
transport and conveyance, shipping, over heads, banking charges and commissions,
etc. The merchandiser and the top management of a company are actively involved
in deciding the cost of a garment.
 Costing Essentials

 To make the garment costing, we have to find out following things.

1. Fabric consumption.
2. Gross weight of other components of the garment.
3. Fabric cost per kg.
4. Fabric cost per garment.
5. Other charges (print, embroidery, etc.)
6. Cost of trims (labels, tags, badges, twill tapes, buttons, bows, etc.)
7. CMT charges
8. Cost of accessories (hangers, polybags, cartons, etc)
9. Cost of a garment.
10. Price of a garment.

Costs to Consider

1. Direct cost: Cost of raw material — 66%. Cost of size and chemicals – 4%.
Production cost comprising of running the machine, maintenance, power fuel,
humidification and other utilities — 8 % and worker wages and salaries — 8%
losses incurred due to shrinkage, wastage, grading, and also selling commissions.

2. Indirect cost: Interest on investment, loan, working capital, depreciation, etc.

Above 7%, overheads and administrative expenses like traveling, telephone,
couriers, legal issues, taxes comprising of 7%.

3. Profit: 10 – 20% depending on the order size. In some companies, 70% of the
fabric cost will comprise of direct cost, but incorporate selling only 40% cost of the
fabric is direct cost and 60% is overheads.
 Garment Product costing
How much does it cost to make a garment is something you have to know before
you get too far in the process?

It goes without saying, the simplest garments cost less to make. As styling details are
added; pockets, fancy seaming, linings and trims etc, the cost of the finished
garment will increase labor cost in production. If you have chosen an expensive
fabric for one of your designs, it would be wise to keep the details to a minimum.
Using expensive fabric and many styling details often makes the finished cost of the
garment too high for the market which has been targeted.

Now keep in mind, the cost the garment is information you will need from the
factory. A simple formula is used to calculate the cost of the garment and looks like
this:

Costs of fabric + trims + labor + business overhead + profit = Garment Cost

This is how a factory will calculate the cost of manufacturing each garment. For you
as the small business, your overhead and all of your expenses such as design
research, markdown sales losses, brand advertising, promotions, rent, and
everything else that goes along with owning and running a business are deducted
from the total revenue you generate per garment. After you deduct all of the
expenses of running your business from the revenue you generate from the
garments you make and sell, you are left with your profit.

The cost of piece goods (fabric) is generally about one-third the initial production
cost of a garment. For the small company, the margin and mark-up will be higher
than for bigger mass-producing companies that have a lower margin and mark-up
percentages due to the volume they manufacture.

 Purpose of ascertaining cost

For the determination of cost, the entire industry should be segregated into small
elements of sections and every small section should be taken as a cost center, to
which costing has to be done. A cost Centre may be a locality or machinery for which
the assessment of costing should be carried out and which is utilized for cost
control. The main purpose of determination of cost of a cost center is cost control.
Cost estimation is concerned with the calculation of actual costs. Ascertainment of
actual costs uncovers non-profitable exercises or activities and losses. Cost
evaluation is the process of foreordaining expenses of products or services. The
costs are estimated in advance of manufacture of the product.

Manufacturing costs
The cost accounting structure is normally planned by cost centers; hence, the unit
costs for every operation can be estimated. Manufacturing costs comprise all the
expenditures that are involved in the production of a final product. These costs are
called ‘cost of goods manufactured’ on the income statement. Manufacturing costs
are split up into three parts such as raw material cost, direct labour cost and factory
overhead.

Raw materials like fabric, sewing thread and trim are called direct variable costs.
Direct labour costs in most of the garment units comprise wages of supervisors and
employees who work on an incentive, piece rate or hourly wage basis. Factory
overhead includes both variable and non-variable indirect manufacturing costs.
Factory overhead costs are exclusive to each industry; however, they are normally
subdivided into-

(1) Indirect labour,

(2) Factory Occupancy Costs.

(3) Other overhead.

Indirect labour includes quality control, service personnel, material handlers,

maintenance workers, industrial engineers and security. The job of these persons is
vital to efficient production of a product line. Non-variable factory tenancy costs
comprise rent, depreciation, insurance, property taxes and security. Machine parts
and repairs and needles are examples of variable factory costs and other overhead
costs include machinery and equipment costs, materials management and cost of
compliance with regulations.
General working cost/expenses or administrative overhead are indirect costs that
incorporate the costs of working the offices and all departments that are not directly
concerned with the working of the industry but are important to the operation of
the firm. Cost centers such as the accounting department, computer programming,
management information systems, secretarial and clerical staff, personnel office,
design and merchandising, marketing and sales and management could be
considered as part of administrative overhead.

 Methods of Garment Costing

Costing is the operation for ascertaining the total resource investment essential to
manufacture and market a product.
Costing includes:

1. Determination of variable and non-variable material cost and labour cost

necessary to manufacture a product.
2. Overhead required to operate the industry.
3. General operating cost.

For efficient costing, information related to cost must be specific and accurate.
Inaccurate costing could lead to cancellation of an order having good profit
potential. Management in an organization utilizes costing to estimate.

1. The reducibility of a style within an established price range.

2. The profit potential in a style.
3. To decide whether a style could be added to the line.

Costing could also be used to defend the procurement of New machinery or the
extension of production facilities. The method of costing indicates the systems and
processes involved in the estimation of costs and it depends on the type and nature
of manufacturing activity.

 The two basic methods of costing are

1. Job costing: This is the cost estimation for a particular work order where the
estimation of cost was carried out separately.
2. Process costing: This method is practiced in bulk manufacturing units where cost
is accumulated for each department.
Product costing needs in-depth knowledge in materials, product development,
production processes and plant operations. The costs involved in manufacturing a
product are only taken into account in product costs. Two kinds of product costing
are generally used in the garment industry, such as absorption costing and direct
costing. Manufacturing costs are separated between variable manufacturing costs
and non-variable manufacturing costs.
Direct costing and absorption costing are included in variable manufacturing costs,
but only absorption costing is included in non-variable manufacturing costs.

Absorption garment costing:

Absorption costing comprises every single manufacturing cost, both variable and
non-variable, to be product costs that should be allocated to products. Overhead is
generally calculated as a percentage of direct labour. The estimation of a sensible
overhead application rate is a major drawback in absorption costing. Further, it is
also difficult to concentrate on the actual variable costs and profit prospective
related to a particular product. Factory overhead costs that do not differ with
deviations in volume are included as part of cost of products produced with
absorption costing. Industries repeatedly project the anticipated total overhead for
the particular period based on the past year’s costs and expected changes.
The risks connected with using absorption costing are the dependency of the costing
system on the accuracy of the estimation of direct labour and the determination of
the overhead application, which is arbitrary. For these two reasons, direct costing is
mostly recommended for cost ascertainment in place of absorption costing.

Direct garment costing

Marginal cost is the increase in the total production cost that results from
manufacturing one more unit of output and variable costs. Direct costing is a theory
that takes into account only the variable costs like labour, material costs and sales
commission to be product costs. Non-variable costs, namely, manufacturing and
nonmanufacturing, are treated as time period costs.
A direct costing system gives information about costing in a way that can be easily
understood and used by management. Since the individual product costs are
obviously identified, direct costing makes it easier to evaluate the cost of production
and the contribution of product to non-variable sewing and administrative costs and
profit. Direct costing makes it easier to categories the product styles with the
highest contribution rate and the most profit potential.

 Stages of Garment Costing

Costing could be carried out at various stages of production, like

1. Preliminary or pre-costing, which is carried out during product development

before samples are made.
2. Final costing, which is done before the production and price fixing.
3. Re-costing is done where there is a change in machinery, production
processes, materials or garment components.
4. Actual costs are determined during production.

Preliminary costing
The preliminary costing could be useful for the fashion product manufacturers, who
can use it in the development stage to come to a conclusion of whether the fashion
design developed by the designers is reproducible and merchantable within the
established cost range. Generally, it provides only a rough assessment of costs of
manufacturing a specific garment style based on determination of raw materials cost
as well as labour costs of previously produced similar styles. Costing at this early
phase of development of product is especially crucial for the manufacturer because
of the wider range of ideas the designer could use.

Cost estimating
Cost estimating, which is done just prior to price setting and production, requires a
detailed analysis of garment components and the specific assembly procedure for
each style. Cost estimating determines the expected investment in materials, direct
labour and overhead required to produce a single unit of a style. It requires more
detail and greater accuracy than preliminary costing. Costing at this stage is based
on production samples and standard data.
 Materials costing
Direct costs of fabric, trim and materials for a particular product are based on
estimates arrived in the process of sample manufacturing. The initial step in
materials costing is to estimate the yardage and materials required for the
production of one garment. Industries with computerized design systems use the
data entered for each product to estimate the required fabric yardage for a single
garment. Other direct materials costs like inspecting and shading of fabrics are
figured on a per yard basis.
Materials costs are influenced by the rate of utilization and it relies on quantity of
material, which is used compared to the total purchased. Poor use can originate
from inadequately engineered designs, inconsistent widths, imprudent cutting etc.
Many industries have setup benchmarks for fabric utilization.

Labor costing
The time is the origin of production standards and labour costing and hence it
should be determined beforehand if it can be controlled and managed. A production
standard reveals the normal time necessary to finish one operation using a
particular method that will give predictable quality. Production standards are set up
as a measure of productivity of labour and operators under standard conditions.
Production standards aid to develop consistency of an operator and to discover the
most cost-effective method of production.

Production standards used for estimation of labour costing are generally based on
work measurement techniques such as predetermined time (PMTS), standard data
and time studies. The time values are normally expressed in terms of standard
allowed minutes. An operation breakdown represents the complete list of all the
sequence of operations involved in sewing a specific garment style. Each operation is
recorded in the sequence in which it will be performed along with SAM of every
operation. The costing of each operation has to be done independently and could be
then converted to dollars per unit. In the garment industry which gives hourly wages
to the operators, production could be based on production standards representing
what an operator is anticipated to finish in a definite period of time.
While estimating the direct labour cost, the production standard stipulates the SAM
to finish one cycle. The direct labour cost could be estimated by multiplying the
quantity or volume that could be produced in one hour and base rate and divided by
the actual quantity produced in an hour. The certain percentage of benefits like
insurance, sick leave and vacations should be added to the above cost. Machine time
is regularly determined separately from handling time which is almost the same
when an operation is done. But, the total of time required to complete a line of
stitching differs with the seam length, stitches per inch (SPI) and the machine speed.
The stitching time may be calculated by taking into account the time variations that
may occur with the stitching process. Then converted to dollars per unit in the
garment industry which gives hourly wages to the operators, production could be
based on production standards representing what an operator is anticipated to
finish in a definite period of time.
While estimating the direct labour cost, the production standard stipulates the SAM
to finish one cycle. The direct labour cost could be estimated by multiplying the
quantity or volume that could be produced in one hour and base rate and divided by
the actual quantity produced in an hour. The certain percentage of benefits like
insurance, sick leave and vacations should be added to the above cost. Machine time
is regularly determined separately from handling time which is almost the same
when an operation is done. But, the total of time required to complete a line of
stitching differs with the seam length, stitches per inch (SPI) and the machine speed.
The stitching time may be calculated by taking into account the time variations that
may occur with the stitching process.

Seam length x Stitches per inch

SAM for stitching = -------------------------------------------
Machine speed (rpm)
 Actual costs
Actual costs are estimated by the collection of information from the production
department. After a particular style has reached the assembling section, an
industrial engineer could face some rates that are too tight and that more time is
needed to complete specific operations. If a rate adjustment is required, it will
certainly influence the costs.

CMT cost (COST OF MAKING):

The cost of making done “in house” is based on the total cost per hour
multiplied by the number of hours it takes to make the style and divided by
the number of units produced if the making is done by a contractor; the
contractor adds profit on to this amount.

 Labour cost per minute =

(Monthly salary of an operators/Total minutes available in the month) at
100% efficiency

 CM cost =
(SAM of the garment * Minute cost of the labour)/Line efficiency (%)

Value added services:

This is cost added to of special process like embroidery, printing, washing

used to impart the type of look buyers wants. These are associated cost of
garment manufacturing are wet processing chemicals, washing and
contracted operations.

Wet processing chemicals include bleaches, detergents, softeners,

neutralizers, wetting agents and resins. Complicated wet process finishes
contribute a significant amount to the price of a product. Merchandizer must
know in detail about each of these operations, sourcing, contracting
requirement and time involved. Cost of these varies depending on different
styles. For example-Embroidery costing requires derivation of
thread consumption, additional cost of hand embroidery is involved etc.
printing cost is dependent on no. of colours for printing, MOQ, and type of
print.

Example of garment costing:

The example of garment cost is given by assuming the following dimensions
for polo neck T-shirt, no. of pieces = 4000, salary of the operator =6000
Rs./month=120$/month no. of working days = 26, line efficiency
considered= 50%, sewing SAM= 15 min., Cutting SAM= 7 min. 1$=50INR
Chest = 60 cm, Length (HSP to waist) = 75 cm, Sleeve length = 25 cm
Fabric used is 2/60s 100% cotton S/J fabric. GSM is 180

The fabric consumption can be calculated as:

= (75 + 25 + 2) X (60 +1) X2X 180/10000
= 0.224kg + 0.08(weight of cuff and collar)

CMT charges are calculated as:

Total available capacity per month (in minute)
= 26 working days*8 hours/day*60
=12,480 minutes

Labour cost per minute

= (Monthly salary of an operators/Total minutes available in the month) at 100%
efficiency
= 6000/124
= 0.480 Rs.

Sewing cost
= (SAM of the garment * Minute cost of the labour)/Line efficiency (%)
= 15* 0.480/50
= 0.288$

Cutting cost
= (SAM of cutting * Minute cost of the labour)/cutting efficiency (%)
= 7*0.480/50
=0.134$
Trimming cost is considered as 0.06$ as it depends upon how many operators are
there for trimming.

Production cost of garment (CMT)

= sewing cost+ cutting cost + trimming cost
= 0.288+0.134+0.06
= 0.482$

What is the break-even point? What is a break-even

analysis?

Break-even point usually means the business volume that balances total
costs with total gains. At break-even volume, in other words, total cash
inflows equal total cash outflows. At Break-Even, in other words, net cash
flow equals zero.

Business people calculate break-even to answer questions like these:

 How many product units must we sell to Break-Even?
 How many rooms must we rent to cover costs?
 At what unit sales volume do we earn a profit?

The term Break-Even is a verb, as in "When do we Break-Even?" The

form break-even is an adjective, as in "The break-even point." However,
it is also correct to spell the adjectives as Break-Even or breakeven.

Break-even analysis
Break-even analysis attempts to find break-even volume by analyzing
relationships between fixed and variable costs on the one hand, and
business volume, pricing, and net cash flow on the other.
Understanding how these factors impact each other is crucial in
budgeting, production planning, and profit forecasting, And, break-even
analysis, is central to this understanding.
 Break-Even Point as Unit Volume

In business, the break-even point usually means the unit volume that
balances total costs with total gains. For the analyst, Break-Even is the
quantity Q for which cash outflows equal cash inflows, exactly. At the
break-even quantity, therefore, net cash flow equals zero.

The Simple break-even analysis finds Q by analysing relationships

between just three variables: fixed costs, variable costs, and cash
inflows. The analyst must consider additional factors, however, when
semi-variable costs or variable pricing are present.
What is INCOTERMS?
INCOTERMS is the combination of IN – International, Co – Commercial,
Terms – Terminology. It is very important in readymade garment export
business. INCOTERMS or The delivery terms are governed by the
international chamber of commerce (ICC). They issue international
commercial terms also known as INCOTERMS which governs all the exports
and imports made around the globe. These terms are widely used in
international purchase processes. These terms will be normally three
lettered abbreviations which are related to contractual sales practices.
Normally the letters in the abbreviation will denote the first alphabet of the
word thereby conveying the meaning of the INCOTERM.

These INCOTERMS were initially advocated in the year 1936 and at present,
the 8th version of it is being used from January 1, 2011 and is known as
INCOTERMS 2010. It is periodically updated by ICC. These terms clearly
provide explanation about the responsibility and allocation of costs to the
buyer and seller in a transaction. The responsibility and allocation of costs
varies from ex-works EXW (all responsibility of loading from exporter’s place
of manufacture, transporting, shipping, unloading, transport to importer’s
warehouse, insurance payment, customs clearance, duty payment belongs
to the importer) to delivery duty paid (DDP) (all responsibility of loading
from exporter’s place of manufacture, transporting, shipping, unloading,
transport to importer’s warehouse, insurance payment, customs clearance,
duty payment belongs to the exporter).

Mostly in the garment industry, FOB (Free on board) delivery term is

followed and is commonly known as FOB pricing. Sometimes CFR (Cost and
freight) is also followed. It is imperative to understand the different delivery
terms available and select the appropriate one for the export of goods as
per the requirement. In this section, the various delivery terms are
discussed. In this article I also discussed about INCOTERMS 2000.
For example, when importing the fabric from another country,
the merchandiser must deal with the supplier for transportation or
shipment of the fabric based on incoterms, namely, EXW, FOB, CIF, DDP, etc.
based on these, who can bear the transportation cost can be decided.
Whatever type of incoterm used, all the cost should be claimed from the
buyer. For instance, if the fabric is purchased under EXW incoterm, the
merchandiser should add the cost of transportation in addition to the
custom clearance charges and fabric cost while determining the cost of the
garment.

 Ex works (EXW):-
As per this delivery term, the seller gets the goods ready for shipment and
informs the buyer about the shipment being ready. It is the buyer’s
responsibility to take the material from seller place of manufacture to his
place. The buyer takes care of export customs declaration and all other
activities thereof till the material reaches his place. The entire risk of
shipment is on the buyer in the case of ex works. This kind of term will
normally be used to quote the pricing of the product apart from the delivery
charges so that it will be easy for the buyer to calculate the product cost.
However, if the buyer has good knowledge and presence in the exporting
country with enough people working for him, then he can opt for EXW and
transport the goods. If buyer is new to the exporting country, then it is
better to avoid choosing this delivery term as he will not have any
knowledge about the legal and export procedures followed in the exporting
country and hence avoid the cumbersome process.
  Free carrier (FCA):-
When FCA is used, then seller obtains export clearance and carries the
material to the designated place as instructed by the buyer. It could be like
handing the material over to the carrier or placing the material in seller’s
own premises for the buyer to come and take it. This term is eclipsed
nowadays by FOB. As per FCA term, if the material is placed anywhere
outside the seller’s premise, then unloading the material from the transport
vehicle and loading on to a vessel becomes the responsibility of the buyer. If
the material is kept in areas where it is under seller’s control, then seller is
responsible for loading the goods on to the buyer’s carrier.

 Free alongside ship (FAS):-

In FAS delivery term, the seller delivers the goods alongside the buyer’s
vessel at the named port of shipment. The export clearances, carriage of
material to port of export and unloading of truck in the port of export are all
responsibilities of the seller and once material is unloaded at the port of
shipment and placed alongside the vessel, then the responsibility shifts to
the buyer. This term should only be used for non-containerised sea freight
and inland waterway transport.

 Free on board (FOB):-

It is the most commonly used pricing term in apparel export. As the name
indicates, the seller spends money and holds responsibility of the goods till
he loads the material on to the buyer’s vessel. The buyer pays the cost for
transportation (sea / air), insurance fees, bill of lading fees, unloading and
transportation of goods from port of destination. Due to FCA being
advocated in 1980, FOB has to be used only for non-containerized sea
freight and inland waterway transport. However, in the real time scenario,
FOB pricing is used for all modes of transport. Sometimes it leads to
contractual risks.

 Carriage paid to (CPT):-

As per this delivery term, seller’s responsibility increases. The seller has to
pay for the transport (sea / air), unloading of goods at named port of
destination and transporting the goods to the named place of destination.
The seller bears all the cost till the material reaches the place of destination.
Sometimes, the unloading costs at the port are borne by the buyer; however
that has to be mentioned in the contract clearly. If buyer requires insurance,
then carriage and insurance paid (CIP) should be followed.

 Cost and freight (CFR):-

The seller pays for the carriage of the goods to the named port of
destination. But the risk is transferred to the buyer once the material is
loaded on to the ship in the country of export. Insurance and delivery cost at
the named place of destination should be borne by the buyer. Sometimes
cost for unloading in the port of import belongs to seller as per the contract
requirements. In this case, seller pays the money for transport but the risk
of transporting the material belongs to buyer. So if there is any issue in
transit, it is at buyer’s risk.

 Cost, insurance and freight (CIF):-

It is similar to CFR, with the exception that the seller has to pay for the
insurance for the goods in transit till it reaches the port of destination. This
delivery term requires seller to insure for 110% of the value of items
shipped. CFR should only be used for non-containerised sea freight and for
all other modes of transport, CIP should be used.
  Carriage and insurance paid (CIP):-
CIP is similar to CFR where seller pays the insurance for the goods till it
reaches the port of destination, with the exception that CIP can be used for
all modes of transport whereas CFR can only be used for non-containerized
sea freight.

 Delivered at terminal (DAT):-

The responsibility of the seller increases in DAT where the seller delivers the
material at the named terminal. All the costs of transport, insurance and
unloading at port of destination are borne by the seller. Loading at the port
of destination and carrying to buyer’s place is done by the buyer. The
terminal can be a sea port, airport which is having a facility to store the
material for taking it to the buyer’s place later. All cost like import duty,
taxes, customs, carriage costs, etc., after unloading at the terminal should
be borne by the buyer.

 Delivered at place (DAP):-

DAP means that the material is ready at the buyer’s place for unloading.
Hence all the costs till the material reaches the named place of destination
is borne by the seller excluding import customs clearance and payment of
import duties and taxes. However, the risk passes from seller to buyer once
the material reaches the port of destination although the costs are borne by
the seller. The unloading at the named place of destination should be done
by the buyer. These type of delivery terms are used only when the seller has
a strong foothold in the buyer’s country as new exporters may not be aware
about the carriage facilities and transport regulations in the buyer’s
country.
  Delivered duty paid (DDP):-
The most responsible person as per this delivery term is the seller. All the
obligations till the material reaches the named place of destination is
completed by the seller. Seller pays all the charges including import duties
and taxes and takes care of import clearance also. This type of term is very
risky for a new exporter who is not aware of the import policies of the
buyer’s country. The only responsibility of the buyer as per this term is that
he has to take care of unloading at the named place of destination. This
term is similar to a non-INCOTERM called free in store (FIS). It is a very risky
term for the exporter as he / she may not be aware of the extra unforeseen
costs at the buyers place and also delay in delivery.