AppArel exports

Export

Costing

After a detailed evaluation of the difference between export costing and pricing, Vasant Kothari gives an insight into the export price calculation methods. These nuances are likely to benefit apparel manufacturers/exporters in the long run.

n the apparel industry, the most popular method to calculate the export price of any product is the Cost-Plus Method. The Cost-Plus Method of calculation requires a costing sheet so that it enables the exporter or manufacturer to check that every expense has been covered while arriving at the selling price. It also enables him to provide a detailed record of the terms that have been quoted to the foreign buyer.

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The iTems covered by The exporT cosTing sheeT are:
• Unit cost of product – The starting point in export pricing is the production cost per unit of the product. This would be the variable cost plus fixed cost or overhead. In case of a garment, normally it is done for 1.03 to 1.05 pieces by considering 3-5% wastages. • Profit – Once the product cost is calculated, the exporter needs to include profit margin into the

calculation. Margin will depend on costs, export objectives, the circumstances prevailing in the target market and intended pricing strategy. However, an exporter can also add extra allowance for profit, in order to cover the risk involved in selling abroad. In today’s competitive world, the garment industry takes a profit of 6-10%. • Agent's commission abroad – This is usually calculated on a percentage basis. In case of a garment, this could be the Buying House commission.

• Packing – The cost of packing for overseas shipment will vary according to the product, destination and means of transportation. The manufacturer must include reasonable provision for this. • Labels – These may have to be printed in a foreign language, perhaps containing information not included in the labels used within the exporter's country. Also, from the sales point of view, they must be suitable to the foreign consumer. The selling price of the product must include sufficient allowance for these extra labeling costs.

Margin will depend on costs, export objectives, the circuMstances prevailing in the target Market and intended pricing strategy.
• Marking – A small cost is involved in stenciling an identification mark on each package for export and should be considered while calculating the costing for export. • Pre-Shipment Inspection – In the garment industry, it is mandatory that the goods must be inspected before they leave the exporter's premises. Buyers could ask for an independent third-party inspection too. In certain cases, the exporter needs to include these inspection fees as part of export costs. • Loading Charges – Once the goods are packed and inspected for export, the next step is to load the goods onto the means of transportation that is to be used to move the goods to the airport or harbour. In the case of Ex Works, the seller is only responsible for placing the cargo at the buyer's disposal at a convenient point in the factory or warehouse. If the seller is loading
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AppArel exports
documents to the foreign buyer. If not, he must make adequate provision in the price to cover their cost. • Other charges – Here space is left for the inclusion of unexpected additional expenses such as the cost of overseas telegrams or telephone calls or extra storage charges.
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• Ocean freight – This involves the cost of shipping the goods by sea to the foreign port. The cost may be quoted by the ocean carrier in local currency or US dollars. • Freight forwarder's fee - If the exporter uses the services of ‘Freight Forwarder’ for documentation and book the shipping space required, an allowance must be made for the fee involved. The amount of these fees can be obtained in advance from the forwarder or shipping agent. • Financing charges – Until payment is received, the export firm will have part of its working capital tied up in export merchandise. Even if no credit is given, it will have to wait until the goods are shipped or delivered before payment is made. If credit is given to the foreign customer, it may have to wait an additional 60, 90 or 180 days for payment. The selling price should include an amount to cover the cost of this working capital.

the goods, then he needs to cost the loading of the goods onto the truck to be supplied by the buyer as part of the Ex Works cost. • Freight to seaboard – The cost of transporting the goods from the inland town or city to the seaport for shipment abroad. • Unloading charge – There is a charge for unloading goods from railway cars or trucks. This cost will be incurred when the goods arrive at the seaport. There may also be unloading and loading costs incurred if goods are moved from one transport medium (e.g. truck) to another (e.g. rail) somewhere along the inland freight component and such costs must also be taken into consideration.

• Terminals – These are handling, wharfage and harbour dues that must be paid by the exporter to the wharfage company. The exporter needs to account for his fees in the costing exercise. Similar costs are incurred at airports but these services are provided by the airline in question and are included in the air freight costs and are usually not accounted separately. • Long or heavy load charge – If the shipment is exceptionally long or heavy, extra charge may be incurred. • Consular documents – These documents can be quite expensive, particularly in the case of exports to Latin American countries. Initially, the exporter may wish to quote a price in dollars plus the cost of consular

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cost of working capital tied up in the shipment. • Foreign exchange conversion – The foreign buyer will usually ask for a price quotation in US dollars or even in Euros, Yen or some other currency. Therefore, the price in the exporter's local currency must be converted to a price into the required foreign currency. Care must be taken to use the correct exchange rate. The exporter may wish to eliminate the risk of an exchange loss by selling the foreign currency to a bank on a forward basis,

in exchange for local currency. The cost of this bank service, which provides the exporter with a pre-determined, fixed rate of exchange for its foreign currency, should be included in the export price quoted to the foreign importer.

desTinaTion-wise cosTing

Each costing stage identifies the different delivery terms, which will affect exporter’s responsibilities and risks in the transaction. At each stage of pricing, costs and quoted price for buyer will increase. Below is a summary of the export costing process by the four most common Incoterms.

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Fig 1 shows export costing process by the four most common

If the exporter intends to discount at its bank a time draft that has been accepted by the foreign importer, so that the exporter can obtain his money sooner, then allowance must be made in the export price for bank discount charges. • Export credits insurance – The exporter may buy insurance or ‘factoring’ on its credit sales abroad. Therefore, allowance should be made for it. • Marine insurance – The exporter will want to insure against financial loss from all possible risks, including damage to the goods or theft, while they are being shipped abroad. Usually, ocean ships are insured for 110% of their total cost to cover anticipated profit and the interest

Fig 2 shows the 14 major costing points during the cargo movement

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cosT facTors of exporT-imporT goods

In order to calculate export costing, it is important to understand the major costing points during the movement of the cargo from the seller to the buyer. Here, it necessary to consider all the costing points e.g. for FOB summation all cost till point 7 should be done in the costing sheet at the same time, while for DDP costing all 14 points should be taken into consideration.
Fig 3 shows the 14 major cost factors for the shipment from seller to buyer

Fig 4 shows Incoterms 2010 as per costing points

cosTing head
1 • Materials, labour and overhead • Custom packaging • Inspection fees • Licensing fees • Royalties 2 • Buying agent’s commissions • Trader’s markups 3 • Bank charges and commissions • Overseas agent’s commissions • Freight forwarder’s charges • Documentation charges • Insurance premiums • Export license fees • Certification fees • Consular fees 4 • Road freight (cartage, drayage) and/or rail freight • Routing costs (canal and inland waterway links) • Uninsured damages • Theft and pilferages • Handling charges • Demurrage 5 • Brokerage fees • Export levies 6 • Insurance • Air freight 7 • Theft and pilferages • Overtime charges • Handling charges • Warehousing • Loading fees • Demurrage • Wharfage 8 • Insurance • Ocean freight • Lighterage 9 • Uninsured damages • Pilferages 10 • Lighterage 11 • Theft and pilferages • Quarantine charges • Overtime charges • Handling charges • Unloading fees • Warehousing • Demurrage • Wharfage 12 • Import duties and taxes • Bank charges and commissions • Import license fees • Brokerage fees 13 • Road freight and/or rail • freight Routing costs • Theft and pilferages • Uninsured damages • Handling charges • Demurrage 14 • Unloading charges • Warehousing • Interest charges

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