Costing of apparel products

Costing Methods
 Costing Methods
What are we concerned with
 Calculation of variable and non variable costs of
materials and labor required
 Overhead necessary to operate a firm
 General operating expense
Three Costing methods
Direct Costing (or Variable or Marginal Costing)
Absorption costing
Activity based costing (ABC)
Direct or Variable or Marginal Costing:
Considers only the variable costs such as direct labor,
material costs and sales commission to be product
costs
Non variable costs, both manufacturing and non
manufacturing are treated as time period costs

Price-cost taken = contribution.

Contribution has to cover non variable costs and profit

Direct or Variable or Marginal Costing:
Direct costing is concept that consider only the
variable cost,

Variable costing is a costing system under which

those costs of production that vary with output are
treated as product costs.

This would usually include

 Direct materials,
 Direct labour and
 Variable portion of manufacturing overhead.
Direct or Variable or Marginal Costing
Fixed manufacturing cost is not treated as a product
costs under variable costing.
 Fixed manufacturing cost is treated as a period cost.

selling and administrative expenses, it is charged off in

its entirety against revenue each period.

Consequently the cost of a unit of product in

inventory or cost of goods sold under this method does
not contain any fixed overhead cost.
Comparison of absorption and variable costing, we
need to consider briefly the handling of selling and
administrative expenses.
These expenses are never treated as product costs,
regardless of the costing method in use.
 Thus under either absorption or variable costing, both
variable and fixed selling and administrative expenses
are always treated as period costs and deducted from
revenues as incurred.
Absorption Costing or Full Costing System:
Absorption costing is a costing system which treats all costs of
production as product costs, regardless weather they are
variable or fixed.
The cost of a unit of product under absorption costing method
consists of direct materials, direct labour and both variable and
fixed overhead.
Absorption costing allocates a portion of fixed manufacturing
overhead cost to each unit of product, along with the variable
manufacturing cost.
 Because absorption costing includes all costs of production as
product costs, it is frequently referred to as full costing
method.
Activity based costing
Activity Based Costing (ABC) is one of several
approaches to job costing.
Traditionally, job costing has been measured by
allocating all direct costs associated with a certain job .
ACTIVITY BASED COSTING
Activities creates costs and those that can be associated
with certain products, customers or suppliers should be
allocated accordingly
All factory overhead, administrative overhead and any
other resource used in support of a product are first
assessed to activity centers such as design, merchandising,
MIS, quality and distribution
For example, if a ladies fashion style has taken more time in
designing then designer’s time spent is taken into account
for that style where as a regular shirt for which designer
has not spent anytime will not be considered for costing
 Basic costing systems
Direct costing
– considers only material + labour cost. All other
expenses are placed in a general ‘expense’
category.
- treats fixed costs (overheads such as
administrative and selling costs) as period costs
(associated with time and not output)
- E.g. vertically integrated companies
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 Basic costing systems
Absorption costing
- all costs associated with manufacturing a
particular product
-the total direct costs and overhead costs
-direct materials, direct labour, and both
variable and fixed manufacturing overhead

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 Basic costing systems

Activity based costing (ABC)

– treats all costs as elements of product costs
- identifies activities in an organization and
assigns the cost of each activity resource to all
products and services according to the actual
consumption by each
- most comprehensive and realistic

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