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COSTING OF APPAREL

PRODUCTS
Session I

Importance of Costing Today


Fashion changes are very quick
Prices are changing every season
For the same product buyers want better
prices than previous season
Expanded sourcing options
New types of retail outlets are growing

Importance of Costing Today


Too many variables exist today
New element of competitiveness due to
more sourcing options
Increasing number of new garment
styles and end uses
New types of retail outlets,which means
more consumer categories

COST ACCOUNTING - CONCEPTS

Cost accounting - The branch of accounting


dealing with the classification, recording,
allocation, summarization and reporting of
current and prospective costs.

Study of profitability or otherwise every line of


activity for cost control and decision making
besides the most economical and efficient use
of scarce recourses.

COST OF THE CAPITAL

Cost of Interest on investment.


Cost of working capital.
Depreciation of plant & machinery.
Taxes to be paid.
Cost of stock, WIP etc.
Opportunity Cost.

Cost-Total amount of money invested


Costs

in a product
Price-Amount of money asked or
received in x-change for a product.
The difference between the two is the
profit or loss on that product.
Revenue is the total of all receipts
from the sale of companys product
during a stated period.

Direct Costs

Direct material-actual cost of the


material that will make up the finished
product
Direct Labour-Wages cost of those
employees who actually manufacture
the finished product
Direct Expenses-incurred without
which a specific product could not be
made
DM+DL+DE= PRIME COST

Indirect Costs

Indirect materials-Materials used in


factory which do not form a part of
the finished product
Indirect Labour-Wages of employees
who work in the factory but do not
form a part of the finished product
Indirect Expenses-All other factory
expenses
IM+IL+IE=FACTORY OVERHEADS

PRIME COST+FACTORY OVERHEADS=


PRODUCTION COST
PRODUCTION COST+SELLING
DISTRIBUTION COST+ADMIN/FINANCE
COST=TOTAL COST

Fixed & Variable Costs


FC-costs that do not get affected by
output of business
VC-costs which vary with output of
business
Semi-variable costs-Contain
elements of both fixed and variable.

Costing v/s Pricing

Costing-Process of estimating the total resource


investment required to merchandise,produce
and market a product.
Pricing-Process of determining the x-change
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.

Retail Price
FOB price+
Cost of Freight/Insurance+
Import Duty+
Cost of distribution(number of variables)+
Cost of managing a store( if own stores)+
Profit Margin=
Retail Price

PROBLEM SOLVING

If s is 150 percent of T, than T is what percent of S


+ T?
If cost of x meters of wire is Rs. d, than what is the
cost, in Rs. of y meters of wire at the same rate?
Mohan, a shopkeeper bought a shirt of list price
Rs.225/- at a discount of 20%. If he wants a profit of
30%, than for how much he should sell the shirt for?
Depreciation applicable to an equipment is 20%.
The value of the equipment 3 years from now will be
less by how much percentage?

MORE PROBLEMS..

Subbaro was approached by two neighbors for


loan. He had Rs. 2450 a part of which he lent to
one person at 12% per annum, and the other part
was lent to the second person at 12.5%. At the
end of a year Subbarao received Rs. 306 as
interest on the total loan. Calculate the amount of
money lent by him at 12% interest?
What is the interest earned on Rs.100/-at 10%
simple and compounded annually for two years?

ANSWERS
40%
Yd/x
Rs. 234/ 48.80 %
Rs. 1180/-*
Rs. 20/- & Rs. 21/

COSTING OF APPAREL
PRODUCTS
Session II

FINANCIAL MANAGEMENT
Management of procurement of funds and
efficient use of resources

FINANCE AND ECONOMICS


Macroeconomics:
Institutional structure of the Banking
System, money & capital markets
Financial Intermediaries
Monetary, Credit & Fiscal Policies

FINANCE AND ECONOMICS


Microeconomics:
Supply & demand relationships
Profit Maximization Strategies
Optimal Sale level & product Pricing strategies
Measurement of utility preferences, Risk &
Determination of value
The Rationale of Depreciating assets

FINANCE AND ACCOUNTS

Closely Linked
Accounting is sub function of Finance
Accounting generates data/Information
The End Product of Accounting assists in Past performances & Future
Directions
Difference

Treatment of Funds
Accrual system for measuring Funds Vs Cash inflow & outflow
Decision Making
Collection of Data Vs financial Planning, Controlling & decision
Making

FINANCE & OTHER DISCIPLINES


FINANCIAL DECISION AREAS

Investment Analysis
Working capital Management
Sources & cost of Funds
Determination of capital structure
Dividend Policy
Analysis of risk & returns

Shareholder Wealth Maximization

Primary disciplines

accounting

Macroeconomics

Microeconomics

Other Related disciplines

Marketing

Production

Quantitative Methods

SCOPE OF FINANCIAL MANAGEMENT

Traditional Approach
Procurement of Funds
Accounting generates data/Information
The End Product of Accounting assists in Past performances & Future
Directions
Modern Approach

Investment Decision
Capital Budgeting
Working Capital
Financial decision
Dividend Policy decision -

SCOPE OF FINANCIAL MANAGEMENT


INVESTMENT DECISION

Capital Budgeting
The Long Term assets & and their composition
The Business Risk Complexion of the firm
Concept & Measurement of the Cost of the Capital
Working Capital
An Overview of Working Capital Management as a Whole
Efficient Management of the Individual Current Assets eg. Cash,
Receivables, Inventory

SCOPE OF FINANCIAL MANAGEMENT


Dividend Policy Decision
Investment
Financing
Dividend

COSTING OF APPAREL
PRODUCTS
Session III

OBJECTIVES OF FINANCIAL MANAGEMENT

Profit Maximization
Wealth Maximization

OBJECTIVES OF FINANCIAL MANAGEMENT

Profit Maximization Decision Criterion


Select assets, Projects and Decisions Which are Profitable
Reject assets, Projects and Decisions Which are not Profitable
Limitations

Ambiguity
Timing of Benefits
Quality of Benefits

OBJECTIVES OF FINANCIAL MANAGEMENT

Wealth Maximization Decision Criterion


Concept of Cash Flows Generated by
Decision
Consideration of Quality & Quantity
Dimension of Benefits

Conflict of Goal between Management &


Owners: Agency problem
Provision of Appropriate incentives
1. Stock Options
2. Performance Shares
3. Cash Bonus
4. Perquisites
Monitoring of Agents/managers
1. Bonding the Agent
2. Auditing Financial Statement & Limiting Decision
Making by the Management

Organization of Finance Function


Board of Directors

MD/Chairman

VP/Director (Finance)

Treasurer

Controller

Cash Manager

Tax Manager

Credit Manager

Data Processing Manager

Capital Expenditure Managerl

Cost accounting Manager

Portfolio Manager

Finance/Accounting Manager

REVIEW QUESTIONES
Wealth Maximization Decision Criterion
What are the Major Management decisions a Finance
Manager Takes?
Finance is Beyond Procurement of Funds? Comment.
The Wealth Maximization objectives provide a
operationally appropriate decision criterion?
Profit, Profitability & Wealth Maximization, Explain?
Consideration of Quality & Quantity Dimension of
Benefits

COSTING OF APPAREL
PRODUCTS
Session IV

SOURCE OF CAPITAL

Sources of Working Capital

SOURCE OF CAPITAL

Sources of Fixed Capital

CAPITAL STRUCTURE THEORY

Wealth Maximization Decision Criterion

ANALYSIS TECHNIQUES

Wealth Maximization Decision Criterion

COSTING OF APPAREL
PRODUCTS
Session V

How are overheads divided among


various styles?
They are divided over estimated
production hours
Estimated total overheads/Estimated
Production hours= Overhead rate per
production hour
Numerical example

Manufacturing Costs

All expenses incurred in making a finished


product available.
Divided into-DM,DL & overhead.
Direct Materials-Fabric,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.

Manufacturing Costs

Overheads(O/H)-Consist of variable and non-variable


indirect manufacturing costs.
Sub divided into-IL,Occupancy and others.
Indirect Labor-Service, personnel QCs, material
handlers,mechanics &maintenance workers &
security.Work of these individuals is essential to
efficient manufacturing but none of them work directly
on the product.
NVC- rent,depreciation,insurance ,property,taxes.

Manufacturing costs
Variable(O/H) costs-Machine
parts,repairs,marker paper,needles
Other overhead costs-Materials
management,Machinery and equipment
costs.

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,accounting,MIS,secret
arial,managerial staff.

Design, Selling & Administrative costs


For a company involved in fashion
merchandise,designing/new product
development becomes important
Designing includes costs of-Hiring
designer(s), Expenditure on travel to
international fairs/exhibitions to understand
latest trends/ideas,cost of experimenting
with new fabrics,prototype development
Skilled sample master/operators,sample
yardage and trims.

Design, Selling & Administrative costs


The exporters to a large extent incur selling
costs to :
Sustain existing customers by marketing new
product development
Market products to new customers
Broader customer base calls for a
combination of more product line & more
styles-greater marketing operation
More styles-larger sample lines

Design, Selling & Administrative costs


Cost of managing
Finance,accounts,shipping departments
Communication charges
Can u think of some more..???

Materials costing

Derived from approved sample style.


First step-Determine what specific products will be
used and the required number of units per garment.
Material costs are affected by % of utilization.
Utilization depends on how much material is actually
consumed compared to the amount that becomes a
part of the final product.

Materials costing

Most people use % of cost of each material to


cover waste.
Poor utilization produces waste.
Other costs associated with materials such as
inspecting and shading of fabrics are treated as
an activity cost or included in total cost of the
product.

Fabric Costing

Important to know the following:


Count/construction/weight of the fabric
The area from where this fabric has been
sourced
The order quantity
Width of the fabric
The no.of colors in a print/yarn dyed fabric
Limitations of each type of fabric

Fabric Costing
2 types of costs Value added process cost
Commercial cost
VAP Cost-Starts from the fiber/yarn stage
and goes on till the fabric is ready.
Commercial Cost-Rate at which the fabric
is selling in the marketplace.

VAP cost

Fiber-Spinning-Dyeing-Weaving/KnittingFabric.At each stage there is finishing so


that the input to the next stage ready for
use and clean

Commercial cost
The price at which the fabric is being sold
in the market.
This cost is VAP cost+Profit of the
manufacturer or agent.

Materials & Trim costs


Costs increase when moving from basic/staple to
fashion garments
What are Staple or Fashion garments
Some trims might show very little variance in
cost between staple to style
Other considerations are minimum quantities
and lead times
Risks involved in fashion colors

Style requires Precise Cost Information


Tracking actual vs standard costs
Even with common fabric & trims usage
can vary greatly
Important to know which styles are
winners
Important to realize these areas of cost
and price the line accordingly

Example

1000pcs fashion pants order


60% with pink stripe fabric with matching
drawstring & piping
40% with same fabric 3/4 elastic,pink drawstring
and pink zippers
The color pink was a special run-hence both for
fabric and trims-required premiums.
After receipt of trims & fabrics,order was revised:
Total 800pcs:80% 5pocket jeans and balance
was full elastic

Risks of fashion goods

Buying high fashion fabric at a premium price


Customer changing style at the last minute
50% more time spent by
sales,marketing,manufacturing to overcome
crisis
Fabric, trim carry over costs
Re-dying trims

Fabric Procurement Considerations


Quality
Delivery
Service
Price

Costing in Fashion Colors


All color price
All color price with exceptions
Base price with specific color up charges
Base price with color up charges for each
color group
Advantages and disadvantages to an
apparel Manufacturer

Forecasting Fabric color demands

Mfger doing basic items decided to take


orders for fashion items for Spring99
Spring line included ladies full elastic shorts in
stripe sheeting of various colors.
Based on first estimates given by buyer,it was
calculated that about 230,000mts of fabric
would be required
Based on historical color
consumption's,merchandising estimates etc
the color usage was :

Quality Considerations

Fabric Inspection
Identification & removal of fabric defects
through out manufacturing cycle
Loss of fabric yield due to defect splice out
Additional cutting room costs
Sewing room costs to re-cut and re sew
defective panels
Fall out effect of irregulars during final
inspection

Case Study -1
Fabric color Up-charges

>

Color
Sky blue
Khaki
White
Pink
Fuschia
Lime

>

Burgundy

>
>
>
>
>

Yardage
36,800
29,900
75,900
46,000
16,100
20,700
4,600

Fabric color Up-charges

All color Price = Rs 60/mt


All color price with exceptions:
All colors:Rs 55/mt
Except
Fuschia- Up-charge of Rs 5/mt
Lime- Up-charge of Rs2.50/mt
Burgundy- Up-charge of Rs 3/mt

Base Price with color up-charge for each color


Base-Rs 45/mt
Sky blue-Rs 2.50/mt Khaki-Rs 2.00/mt White- Rs 0/mt
Pink- Rs 3.00/mt, Fuschia-Rs 4.50/mt, Lime-Rs 4.75/mt
Burgundy- Rs 5.00/mt

Fabric color Up-charges

Base price with color up-charges for color groups


Light- Blue/Khaki/White=Rs 50/mt
Medium-Pink/Lime=Rs 54/mt
Dark-Fuchsia/Burgundy=Rs 65/mt

Calculate the weighted average price/mt


for all the 4 types of fabric costing.

Case Study -2
First Quality Fabric v/s Off Quality
Fabrics

First Quality Fabric v/s Off Quality Fabrics

First quality fabric 19.25yds/doz@$2.55/yd


Off Quality fabric 19.25yds/doz@2.20/yd
Additional Costs
Spreading/cutting $0.60/yd
Fabric Cn varinance $1.12/dz
Sewing floor extra handling $0.73/dz
Finishing room extra handling $0.05/dz
Loss of profit due to irregulars$1.14/dz
Fallout effect on finished goods inventory$1.11/dz

TOTAL

$4.752/dz

First Quality Fabric v/s Off Quality Fabrics

Comparison of costs per dozen

1 st quality

Off Quality

@$2.55
@$2.20
Yds Reqd
$49.09
$42.35
Addnl Handling
0 $4.75
Total
$49.09
$47.10

Net Saving

$1.99-4%

Case Study -3
Costing for Material variances

800 dozen of pink stripe sheeting


Initial size ratio: 3 5 7 9 11
2: 3: 3: 2: 2
60 fabric width, 1.25mt consumption
Revised Size ratio 5 7 9 11 13
2: 3: 3: 2: 2
48 fabric width, 1.60mt consumption

Projected Actual
Cn/doz 15.0204mts/doz 19.24mts/doz
Size Mix
3 5 7 9 11
5 7 9 11 13

(Cn=19.2450 on
48

to 19.8420 on
48)

Fabric Cost

3.1875(60)

2.55(48)

Calculate fabric cost per dozen in each case

Basic Trousers

Fashion Tops

Deal with Mill Only


Bigger Dye lots
Easy fabric
replacement
Physical features
Co-op of mill in
solving problems
Sewing FeaturesPredictable
Lead time-Long

Deal
/mill,finishers,jobbers
Small dye lots
No replacement of fabric
Physical features
Co-op reqd. at 3 levels

Sewing FeaturesPredictable
Lead time-Long

Direct Labor Cost

Important to calculate direct labor cost:


Calculate direct labour cost per hour
Calculate direct labour cost per item

Direct Labour Cost per hour


Employee
Working hrs Salary per
Payment for
per month month
time in production
A( Skilled Tailor) 208 3100.00
3100.00
B( Skilled Tailor) 208 3100.00
3100.00
C( semi-Skilled Tailor) 208 2500.00
2500.00
D(Folding,Pressing)
208 2900.00
2900.00

832 11600.00

Labour Cost 11600/832 Rs 14/hour

Direct labor
Any work that alters the
composition,condition,conformation or
construction of a product
Any operation that advances a product
towards its ultimate condition for sale
thereby adding to its value

Direct labour cost


Remuneration paid to employees who make
the garment-cutters,machinists,pressers etc.
2 options of remuneration:
Time based wages(Hrs worked* Wage rate
per hour)
Piece rates(Pieces produced*rate per piece)

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/

Piece Rates
Often difficult to set
Involve work study techniques to measure
time taken to perform an operation.
Problems associated with Piece rate
systems

Piece rate calculation

If operation A takes .75minutes and the


rate per SAM is Rs .042 and operator
produces 4850 pieces in a week then the
weekly earning of this operator=Rs

Labor Costing-Budgeted

Basis for labor costing is time.


Labor costs-Direct & Indirect need to be budgeted
for a firm to examine its financial commitments &
evaluate its capacity to produce a product.
Total DLC=No.Of Operators*hours /week*
weeks/year*avg hourly earnings.
This rep the firms financial commitment to
employing a pre determined no.of operators for
specific time period.

Labor Costing-Budgeted

Calculated to establish Budgets, schedule work and hire


employees.
DLC=Std LC+Excess LC
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.

Labor Costing-Budgeted

Plant efficiency is 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=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.

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.

Labor Costing- Individual Style

Prodn standards are the basis of establishing


standard labor costs and managing available
production time.
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.

Direct Labour Cost


Fashion vs Staple Merchandise
Marker Making costs affected by
Variations in width of piece goods
Fabric design

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

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

Assembly/Bundling
Amount of SKUs involved
Bundle integration
Bundling specifications required

Sewing Operations
Size of sewing bundles
Size and color variations
Variations in fabrics
Utilisation of Equipment
Quality Specifications

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 doesnt have to spend on training

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 qualityEvery 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.

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

Section 59-Where a worker works in a factory


for more than nine 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.

Cost Centers
Departments of the factory for which costs can
be identified.
Production Cost Centers
Service cost centers
Within service cost centers all costs are
overhead costs
Hence these costs have to be allocated to the
products.

Cost Centers-Advantages
The entire factory is divided into smaller
depts.
Each dept. hence is accountable for
cost control
Allows costs to be appropriately
distributed

ABC mfging company has the following


estimates:

Production Cost Centers:


CR
SR
PR
DL hrs
740
2000
760
O/H
-Indirect L 750
2500
1500
Others
800
1500
1200
Service Cost Centers
HR Dept
Maintenance Dept
Indirect L 2500
2000
Others
300
700

SCC are shared out to PCC on based onFactory Personnel-in proportion of estimtaed
DL hrs.
Maintenance-half to sewing room,remainder
equally divided between cutting and press
rooms

Indirect
Costs
All other
costs, except direct costs, that is
required for running a business.
Depreciation-Loss of value of
equipment.The total cost is divided by the
number of years of expected use.
Depreciation normally calculated for
equipment of -High value and that lasts
for a long time.
Depreciation calculations is based on
accounting regulations

A company has 4 sewing


machines.Estimates of use are:

2 machines for 5 years


1 machine for 3 years
4rth machine is 2nd hand and will be used for 5
years

Calculate depreciation of every machine per


year,convert it to per month cost

Indirect Costs

Total Indirect costs per item=


Total Indirect Costs per month/Total hours
in production per month

Stages of Costing
Pre-costing
Costing done prior to adoption of line
Costing done prior to production
Post production costing

Pre Costing

Used in early development stage


To check whether designers sketches are producible
or marketable within the established price range.
Rough estimate 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.

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.
Requires more detail and greater accuracy than
pre-lim costing.

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.
Based on specific production methods for
each operation including machine type,stitches
per inch,workplace lay out,pre determined time
systems and material handling methods.

Detailed costing
Changes may be made to economize on
fabrics or sewing time.
Provide basis for establishing production
budgets.

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

Costing Methods- Direct Costing

Considers only variable costs-production


labor,materials,sales commissions.
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.

Costing
MethodsDirect
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.

Costing Methods-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..

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 are estimated in
advance

Absorption
Costing
Considers all
mfging costs( variable &
non variable)
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 in O/H

Costing Methods-Activity Based


Costing(ABC)

A more realistic approach.


Build accurate direct labor & materials cost data.
All fty O/H,S&D costs.Admin costs are assessed
to activity centres and then allocated to styles
which demanded these resources.
It is a diagnostic tool that allows focus on
overhead cost reduction as well as reductions in
direct labor cost.

Costing Methods-Activity Based


Costing(ABC)
Companies can determine the products &
customers that contribute higher gross margins
and those that do not.
Provides realistic information about support
activities and product costs.
Makes all costs traceable
Makes each activity center accountable for time
& productivity

Garment Costing

The various heads for a garment costing are:


Fabric Cost(Fabric rate*Cn)-DM
Material cost(Trims,accessories)-DM
Making Cost(cutting-sewing)-DL
Finishing-packing Cost- DM/DL
O/heads- IM/IL
ProfitQuota may or may not be included

Overhead Costs
Mfging OH consist of all expenses that are
not directly connected w/mfging
Fixed OH
Variable OH

Types of Cost Systems


Standard costs(SC)
For every std hour of labor content
produced, a certain fixed OH is applied to
direct labor.
The OH is hence absorbed into product
cost

Types of Cost Systems


Actual Costs(AC)-A % of fixed OH is
applied to the true cost of mfging a
particular product
A pre determined volume is assumed
Also called COST plus PROFIT

Types of Cost Systems


SC and AC are also called ABSORPTION
COSTING
Main difference SC-all elements are held std,so the OH applied
to each unit of production is always the same
fixed %.
AC-OH included in each unit of production varies
as the actual variable cost varies.

Types of Cost Systems


Direct Costing-No consideration given to
absorbing fixed OH.Variable OH treated
as a part of direct cost.
Fixed OH is known & hence no attempt is
made to charge each unit of production
w/that fixed OH.
TRUE/PURE cost reflected

Semi Variable expenses


Production and Service centers
Rule is

all elements of prodn centre should be charged into


product costs
Service centres should be charged into production
centres to the extent to which they serve a production
centre
Non prodn portions of service centres become fixed OH
operations

Why is use of cost centres better way of


a/cing for fty OH

Better

control of OH,in smaller areas


Enables people at ground level to be
put in charge of controlling costs
Not every job will pass thru all
depts.Hence considers centres which
were actually involved in the job

Impact of Changes

How is allocation of OH costs affected by


more styles,greater use of alternate
sources of production and improved
manufacturing techniques?

Excel sheet on OH costs

Fty OH have to be added in some and


then divided among all the products.
Many OH are accounted over longish
periods of time and are unknown figures at
the time of costing
OH hence are estimated in advance

Overhead recovery
Other methods:
Percentage of Direct material cost
Percentage of Direct labour cost
Percentage of Prime cost

Costing-Michael Jeffrey

P/copy page 6.
Exercise on page 10.
Define fixed and variable costs.
Exercise on page 14.

Costing
Direct Materials
Direct Labor
Direct Expenses
Factory Overhead
Selling & Distribution Cost
Administration & Finance overhead

Costing
Fixed Costs-Those costs which are not
affected by the output of business
Variable Costs-That increase with the
output of business.
Divide costs into VC,FC.

Costing

An manufacturing unit has received a order to export


shirt.Details are:
Fabric 2/80*40,Yarn Dyed Plaid=Rs.80/mt
Trims= Rs 2.00/garment
Production time of the shirt=30hrs
Staff is paid @ Rs20/hr
Overhead Recovery rate is Rs 5/hr.
S,D,A and Finance cost is 5% of Production Cost
Calculate the total Cost.

Acceptance Criteria for 100 sq. meters of fabric


Individual Roll Total Shipment
Group Maximum Penalty Points in a roll per 100
sq. meters
Maximum Average Penalty Points of
Shipment per 100 sq. meters
One
18 points 14 points.
Two
24 points 19 points
Three
30 points 24 points
Four
48 points 38 points

Group Two
Group One

Basic denims (ring spun) > 12 oz


All synthetics
sq.yards
(polyster/nylon/acetate) Basic knitted fabrics
Basic denims (open end Canvas
spun)> 12 oz sq. yards Carded fabrics
Dress shirtings > 50/1 Lightweight denim > 4 oz < 8 oz
sq.yards
Filament rayons
Midweight denims > 9 or < 12 oz
Twills (Imported)
sq. yards
Worsted Spun
Poplin/oxford/gingham shirting >
32/1, < 50/1
Spun rayons (Viscose)
Woolen spun
Twills (Indian)

Group Three

All specialty fabrics


(jacquard/seersucker/dobby/s
ateen)
Chambray/indigo yarn dyes
Coated fabrics with wax, oil,
p.u.type coating on the face
side
Corduroy
Flannel
Fleece
Cotton- synthetic blends
Silk Fabrics (except Indian
silk and Dupioni)
Knitted and woven stretch
fabrics, i.e., stretch twill
Velvet

Group Four

Dupioni silk
Indian Madras (hand
dyed-power/hand loom)
Indian Silk
Linen and Linen blends
Muslin
Patchwork