Garment Costing

Prof.Dr.S.Kathirrvelu

1
 Introduction to costing
 Cost components
 Introduction of costing tools
 Costing techniques in Apparel industry
 Cost process flow
 Costing sheet
 Calculation of Gmt/Kg ratio
GEC
2
 Cost components
 Cost=Total amount of money invested in a
product.

 Price=Amount of money asked /received in ex-

change for a product.

 Profit = Price- cost

 Revenue = Total of all receipts from the sale of

company’s product during a stated period.
GEC
3
 Cost components
 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.

It is based on data produced in costing process,

value customers place on a product & the
competition in the market.
GEC 4
 Retail Price
Retail Price =

FOB price + Cost of Freight/Insurance

+ Import Duty + Cost of distribution +
Cost of managing a store + Profit
Margin.

GEC 5
 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
GEC
6
 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
7
 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
GEC
8
 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.
GEC 9
 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
GEC 10
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.

GEC 11
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.

E.g. merchandising, marketing, accounts,

secretarial, managerial staff.

GEC 12
 INDIRECT
DIRECT DIRECT DIRECT INDIRECT
INDIRECT EXPENSES
MATERIALS LABOR EXPENSES LABOR
MATERIALS

FACTORY
PRIME COST OVERHEAD

PRODUCTION COST

SELLING AND
DISTRIBUTION COST

ADMIN
AND FINANCE

GEC TOTAL COST

13
Stages/Flow of Costing
 Pre-costing
 Costing done prior to adoption of line
 Costing done prior to production
 Post production costing

GEC 14
Pre Costing/ Preliminary 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, 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 15
GEC 16
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 17
GEC 18
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 19
Detailed costing
 Changes may be made to economize on
fabrics or sewing time.
 Provide basis for establishing production
budgets.

GEC 20
 Actual costing
 Determined by using actual data from
production.
 Costs are monitored throughout production.

GEC 21
 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 22
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 23
There are two aspects of labor
costing:
 Budgeting for production
 Labor costing for individual style.

GEC 24
 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 25
 Labor Costing-Budgeted
 Total DLC = No. of Operators * hours / week * weeks / year * avg
hourly earnings.

 DLC = Std Labor Cost + Excess Labor Cost

 Std LC = Money earned to produce the product / piece rate

earnings.

 Std LC = % Plant efficiency * No. Of work hours * weighted average

base rate.

 Std LC is needed to determine the cost of producing each style &

excess cost of each style.

 Based on plant efficiency and weighted average base rate.

GEC 26
 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 27
 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 specific
GEC
operation. 28
 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 of production would have a $0.55
direct labor costs. GEC 29
 Employee Working hrs. Salary Payment
(Month) (ETB.)

A 208 3100 3100

B 208 3100 3100

C 208 2500 2500

D 208 2900 2900

Total 832 11600

Labor cost = 11600/832 = ETB 14/ Hr.

GEC 30
Direct labor cost
 Remuneration paid to employees who make
the garment-cutters, machinists (operators)
,pressers etc.
 2 options of remuneration:
Time based wages(Hrs worked* Wage rate
per hour)
Piece rates(Pieces produced*rate per piece)
GEC 31
Who sets the rates?
 Minimum wage laws
 In India differ for every state
 Minimum wages in Delhi-Rs. 2600/month for
a 26 working days in a month
 Each working day is 8 working hours
 Each working hour=Rs12.50/-
GEC 32
 Piece Rates

 Often difficult to set

 Involve work study techniques to
measure time taken to perform an
operation.
 Problems associated with Piece rate
systems
GEC 33
 Direct Labor Cost
 Fashion vs Staple Merchandise

Marker Making costs affected by

 Variations in width of piece goods

 Fabric design

GEC 34
 Spreading Costs
 Type of Fabric spread
 Length of spread
 Consistency of fabric
 Spreaders attention to fabric defects
 Complexity of spread

GEC 35
Cutting Costs
 Pattern Configuration
 Die cutting requirements
 Fabric type
 Fabric design
 Spread Height

GEC 36
 Assembly/Bundling

 Bundle integration
 Bundling specifications required

GEC 37
 Sewing Operations
 Size of sewing bundles
 Size and color variations
 Variations in fabrics
 Utilization of Equipment
 Quality Specifications

GEC 38
 Pros & Cons of Piece Rate
System
 Advantages-
Labour can be hired on need basis
Avoids union activities
Can be fired if performance is not of
expected level
Mfger doesn’t have to spend on training
GEC 39
 Dis-advantages
 Workers work at their own free will.
 Slow workers are not able to earn as much.
 Mfger might not find the best workers specially
during season
 To earn more workers might produce inferior quality.
 Every time a mfger hires, there needs to be price
negotiation.
 Operators not responsible for upkeep of machines
and equipments.
 Elaborate records need to be kept of pcs produced.

GEC 40
 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 41
 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

 Workers in a factory who are paid on piece rate

basis, the time rate shall be deemed equivalent
to the daily average of their full time earnings for
the days on which they actually worked on the
same or identical job during the month
immediately preceding the calendar month
during which the overtime work was done.

GEC 42
METHODS/TECHNIQUES OF
COSTING

 Direct costing
 Absorption costing
 Activity based costing

GEC 43
 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 44
 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 45
 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 46
 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 reduction
GEC in O/H 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 areGECestimated in advance 48
 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 49
 How are overheads divided among
various styles?

They are divided over estimated

production hours

Estimated total overheads

Estimated Production hours = O/h rate per
production hr.

GEC 50