MERCHANDISING COSTING

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Session 9
 INTRODUCTION
 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.
 To do perfect garment costing, one must know about all these
activities thoroughly about their costs, procedures, advantages and
risk factors.
 How to solve the problems when occurred and to take suitable
alternate decision immediately in time.
 We must be aware that there are always fluctuations in the costs of
raw materials and accessories, charges of knitting, processing,
finishing, sewing and packing, charges of transport and conveyance.
 Hence we must have update knowledge about the latest prices and
charges, latest procedures, methods and quality systems, market
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prices and availability, transportation (road, sea, air) and freight
charges, etc.
 The quality depends on price; price depends on quality.

 The customer’s price level, quality & quantity and payment

terms, to be taken into consideration.

 There are two types of garments, namely woven and knitted

garments. Shirt, trouser, sarees, bedspreads, blankets, towels and
made ups are woven. T-shirts, sweaters, undergarments, pyjamas
and socks are knits.

 Costing is the deciding factor for fixing of prices and the

important thing to follow in all stages like purchase, production,
marketing, sales, etc.

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 The method of making costing will vary from style to style. As
there are many different styles in garments.
 COSTING ESSENTIALS
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 The method of making costing will vary from style to style.

 Men’s Basic T shirts,

 Men’s Printed Polo shirts,

 Ladies Night dress,

 Men’s Pyjamas,

 Men’s Solid Pique Polo shirts,

 Ladies yarn striped T shirts (Feeder stripes)

 Boys yarn striped T shirts (Engineering stripes)

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

 Fabric consumption.
 Gross weight or rate of other components of garment.

 Fabric cost per kg or per mtr.

 Fabric cost per garment.

 Other charges (print, embroidery, etc.)

 Cost of trims (labels, tags, badges, twill tapes, buttons, bows,

etc.)
 CMT charges

 Cost of accessories (hangers, inner boards, polybags, cartons,

etc)
 Cost of a garment. 6

 Price of a garment.
 COSTS TO CONSIDER
 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.

 Indirect cost : Interest on investment, loan, working capital,

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

 Profit: 10 - 20% depending on the order size. In some companies,

70% of the fabric cost will comprise of direct cost, but in
corporate selling only 40% cost of the fabric is direct cost and7
60% is overheads.
 There are set patterns and guidelines followed by the industry.
 It is difficult to find out costs for every process as there are
some inbuilt costs while costing.
 A larger picture has been taken into account while quoting the
cost.
 Costing depends a lot on quantity and order received.

 Indirect cost is about 15 - 20%.

 On top of the cost a profit of 15 - 20% is added.

 It is not only the cost of the final product that matters, for
exports the cost is generally given as FAS, FOB, CIF and LDP.

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 FAS (Free along Side): It is the cost of finished goods plus it includes
the delivery of the goods to port, dock, etc. The price does not include
loading into the ship, etc, or the shipping or any other charges incurred
from that point on.

 FOB (Free on Board): It is the cost of finished goods, cost of delivery of

the goods to port and loading onto the ship, plane, etc. The cost does not
include the shipping or any other costs incurred from that point on.

 CIF (Cost Insurance and Freight): It includes the cost of finished goods
plus it includes the delivery of the goods to the port, loading on the ship,
shipping charges, all applicable insurance fees along the way. The price
does not include going through customs or any duties or other costs
incurred from that point.

 LDP (Landed & Duty Paid): It is the cost of the finished goods, plus it
includes the delivery of the goods to port, loading on the ship, shipping9
charges and the goods brought through the customs with all applicable
duties and taxes paid.
 Lead time plays an important part in the domestic
and export market.
 Generally for production of greige fabric the lead time is
30 days.
 Processing time for grey fabric is 15 - 20 days but when
the buyer needs something urgently then the above
costing parameters sometimes are not significant; It
depends on demand and supply.

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 GARMENT PRODUCT COSTING

 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 an expensive fabric is chosen for one of the 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.
 Formula used to calculate the cost of the garment:

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

Garment Cost

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 For small business, overhead and all other expenses such as
design research, markdown sales losses, brand advertising,
promotions, rent etc that goes along with owning and running a
business are deducted from the total revenue generated per
garment.
 Profit is made after all of the expenses of running the business
from the revenue generated from the garments is deducted.
 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.
 Ultimately, the final figures may be a subjective call of what
the market will bear.
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SEA FREIGHT AND AIR FREIGHT

 Although most orders for garments are placed by buyers on

FOB basis, with buyers to pay for freight at the shipping
destination, it is still necessary for the shipper or the agent to
know how to calculate sea freight and air freight as buyers
always need to know how much freight the merchandise cost
per dz.
 If you are required to sell on CIF basis, (with the shipper to
prepay for freight at the shipping port) you will need to
calculate the freight accurately for your own costing.

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 SEA FREIGHT
 Sea freight is usually charged based on volume—how much per
CBM (cubic meter)—very rarely by weight as “density cargo”.
 In fact ANERA (Asia North America eastbound rate agreement)
has designed the freight tariff more based on the usual value of
the type of goods, than the usual weight of them, taking into
consideration that for low value merchandise they should give a
low freight rate in order to make it possible for the importers to
buy goods overseas.
 However, for high value merchandise, they should charge a high
freight rate, as it is believed that the buyer can afford to pay
more on freight.
 The have designed the freight tariff in such a way that
everybody can do business and there is sufficient profit for the
shipping lines. 14
Container Calculated Practical Container FCL rate LCL Rate
size Capacity capacity FCL rate for CBM per CBM
20” 29.5 CBM 27 CBM 3500 130 160
Capacity
40” 61.32 CBM 54 CBM 5000 92 160

40” Hi Cube 69.15 CBM 62 CBM 6500 92 160

 Note: FCL: Full container Loading

LCL: Loose container Loading

 If you ship very heavy goods as loose cargo because the size of the
shipment is very small, the shipping lines will charge you by weight
or by volume whichever is higher.
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 1 CBM (100 cm X 100 cm X 100 cm) = 1000 Kg
 AIR FREIGHT
 Unlike sea freight, the airlines have decided to charge for the
heavy merchandise (high density goods) by weight, and
lightweight merchandise (low density goods) by volume.
 However, as airplanes can take less weight than ocean liners,
the way they set the standard, in the garment industry, when
you ship goods by air, you have a 70% chance to be charged by
weight, about 30% chance by volume.
 The followings are the relationship between weight and volume
as set by IATA (International air transport association).
 From most shipping locations in the Far east to the U.S. destinations
and Canada 7000 cubic cm = 1 kilo.
 From certain locations in the Far east to the U.S. destinations and
Canada 6000 cubic cm = 1 kilo

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 Therefore when there is low density goods to ship by air, it
should tried to make the cartons as small as possible to save
freight.

 It is checked with the local air forwarding agent by asking

him in the country, how many cubic cm is considered 1 kilo
in weight. It is generally either 7000 or 6000.

 The weight and measurements of the goods packed for the air
shipment is checked physically.

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 SHIPPING TERMS
1. CM: Cost of making/ cutting and making
2. FOB: Freight on board
3. C & F: Cost and freight / Clearing and forwarding
4. CIF: Cost, insurance and freight
5. CIFI: Cost, insurance, freight and interest
6. CIFE: Cost, insurance, freight and exchange
7. COD: Cash on delivery
8. CWO: Cash with order
9. FOW: Free on wagon
10. Franco: (…Named Port of Shipment)
11. FOB: Free on Board (…Named Port of Shipment)
12. CFR: Cost and Freight (…Named Port of Destination)
13. CIF: Cost, Insurance and Freight (…Named port of Destination)
14. CPT: Carriage Paid To (…Named Place of Destination)
15. CIP: Carriage and instruction paid to (…Named Place of Destination)
16. DAF: Delivered at frontier (..Named Place)
17. DES: Delivered Ex Ship (…Named Port of Destination)
18. DEQ: Delivered Ex QUAY (…Named Port of Destination)
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19. DDU: Delivered Duty Unpaid (…Named Place of Destination)
20. DDO: Delivered Duty Paid (…Named Place of Destination)
 COUNTRY AND PORT
Country Port & price Buyer
Sweden Hamburg New Wave Mode Lab
Sweden Gothenburg Cellbes Post Order AB
Spain Barcelona (1500) Geologistics Barcelona
S.A.
Italy Genova Samar Spa
Sweden Barcelona Rueca Europea S. L.
France Leharve (1200)
U.K. Liverpool (1400)
Germany Quaken Bruech (1645) Centerline mode
Vertriebs GMBH
Netherlands Rotterdam 19