COSTING OF APPAREL PRODUCTS

INTRODUCTION TO COST ACCOUNTING

Cost
A cost to any business, is the measurement, in financial terms, of the use of business resources in order to produce its output

Cost
Cost is the total amount invested in a product. Cost of goods represents all the expenditure associated with the manufacturing of the product line including material costs, Labour costs, Factory & administrative overhead expenses.

Cost
Costs have a major impact on a firms success and thus must be managed well. The key to successful cost control is information & the ability to use that information to manage the firm

Cost
Performance report provide comparisons of the actual costs against the budgeted costs Effective managers utilize this information to make appropriate business decisions for the company.

Costing
Costing is the process of estimating the total resource investment required to merchandise, produce and market a product. Costing is an exact calculation by the costing department, using actual figures for the materials, labour and other expenses.

Costing or Cost Accounting

Is the process of Collecting Classifying Calculating Organising Reporting and using costs.

Advantages of cost accounting

It reveals profitable and unprofitable activities It helps in controlling costs with special techniques like standard costing and budgetary control It supplies suitable cost data and other related information for managerial decision making such as introduction of a new product, replacement of machinery with an automated plant etc. It helps in deciding the selling prices, particularly during depression period when prices may have to be fixed below cost. It helps in inventory control It helps in the introduction of a cost reduction programme and finding out new and improved ways to reduce costs.

 Cost audit system which is a part of cost accountancy helps in preventing manipulation and frauds and thus reliable costs can be furnished to the management.

Essentials of a good cost accounting system

The method of costing adopted, it should be suitable to the industry. It should be tailor made according to the requirements of the business. A ready made system can not be suitable. It must be fully supported by executives of various departments and everyone should participate in it. In order to derive maximum benefits from a costing system, well defined cost centers and responsibility centers should be built with in the organisation Controllable and uncontrollable costs of each responsibility center should be seperately shown. Cost and financial accounts should be integrated in order to avoid duplication of accounts. Well trained and educated staff should be employed to operate the system It should prepare accurate reports and promptly submit the same to appropriate level of management so that action may be taken without delay. Resources should not be wasted on collecting and compiling cost data not required. Only useful cost information should be compiled and used when required.

Management Accounting
Management accounting includes costing but it goes beyond costing to consider the preparation of the other management information Eg. Budgets, Forecasts, Capital requirements, evaluations, financial statistics, measures of profitability.

Financial Accounting
Is largely concerned with the recording information for the production of statutory financial accounts These are revenue statement (Profit & Loss account) & balance sheet. Financial accounting will also involve accounting for taxation VAT, etc.

Classification Of Cost
Materials Labour ( Essential wages/ salaries) Other Expenses

Elements Of Costs
The three main resource categories in classification of cost which can be divided in to more detailed breakdown of cost. This is known as elements of cost.

Elements of Cost
1. 2. 3. Direct Material Direct Labour Direct Expenses

PRIME COST + 1. Indirect materials 2. Indirect Labour FACTORY OVERHEAD = Production Cost + Selling & Distribution + Admin & Finance = TOTAL COST

Direct Cost
Direct Cost: Cost incurred by increasing the value of a product Only variable cost- Labour, Material sales, communication 1. Direct Material 2. Direct Labour 3. Direct Expenses

Direct Cost
Direct material is the actual cost of the materials that will make up the finished product. Direct Labour is the wages of those employees who actually manufacture the finished product. Direct expenses are expenses that are incurred without which a specific product could not be made. They only relate to that specific product. The most imp example in the clothing industry would be the royalties i.e. payment made to a designer or a payment made to use a specific motif on a garment. The sum of the direct cost is known as the PRIME COST.

Direct Cost
Direct materials 1. Fabrics 2. Buttons 3. Threads 4. Zips 5. Trimmings 6. Velcro 7. Packing Material & etc

Direct Cost
Direct Labour 1. Cutting Room-Persons involved in spreading cutting, ticketing, bundling, fusing, helpers, etc. 2. Sewing Room: Operators and feeding helpers 3. Post Sewing: Button & Buttonhole, Overlock, checkers 4. Washing Department: Persons in checking, washing, hydro-extract,drying and segregations 5. Finishing Departments: Persons in checking, iron folding and packing

Indirect Cost
Indirect materials are those materials used in the factory which do not contribute directly to the making of the product. Wages and salaries paid to the employees working in the in factory but do not make finished product Indirect expenses are all other factory expenses The sum of Indirect costs are known as factory overheads (manufacturing overheads)

Indirect Costs
Building rents & rates Electricity Water charges Cleaning & maintenance Transportations Boiler & other maintenance Telephone Wear & Tear of machines

Production Cost
Prime cost (Direct cost) + Factory overhead (Indirect Cost) = Production cost The sum of the prime cost and the factory overhead is the Production Cost

Total Cost-Elements of Cost

Other overhead cost in addition to production cost 1. Selling + distribution costs 2. Selling & distribution overhead 3. Administration + Finance cost 4. Administration + Finance Overhead 5. Production cost + Selling & distribution overhead + Administration + Finance Overhead = Total cost

Costs
Costs can also be analyzed in terms of how they behave: 1. Fixed cost 2. Variable cost

Fixed or Non variable cost

costs that remain unchanged despite changes in volume (Rent, Salaries, depreciation, insurance, tax & security). These are normally fixed for the year. These costs are often referred to as period costs, because they relate to a period of time.

Variable Costs
Variable costs are costs that increase with the output of garments Costs that increase or decrease in direct proportion to a change in the volume of production, m/c parts Direct material is a good example of a variable cost of the garment factory , cost increases with the increase in output of garments

Semi-Variable Costs
Some costs do not fit neatly in to fixed or variable cost category, and these are known as semi-variable or semi-fixed costs eg. Electricity charges are semi variable The standing charge is the fixed cost element but the units consumed could be linkedto the output of the factory and their charges could be considered as variable cost elements.

Price
Price is the amount asked/charged/ received in exchange for a product. Or Price is the value placed on what is exchanged. Or price quantifies the value of the products or service Cost is the total amount invested in a product. Total cost + Profit = Selling Price
Note: --Profit (Markup a percentage on total cost)

Pricing
Pricing is the process of determining what a company will receive in exchange for its products Pricing is based on data produced in the costing process

Pricing
Pricing factors are manufacturing cost, market place, competition, market condition and the quality of product Pricing is a fundamental aspect of financial modelling and is one of the 4 Ps of the marketing mix The other three are Product, Promotion and Place Price is the only revenue generating element amongst the 4 Ps, the rest being cost centres.

What a Price should do?

A well chosen price should do three things I. Achieve the fiancial goals of the company (eg. Profitability) II. Fit the realities of the market place (Will cutomers buy at that price) III. Support a products positioning and be consistent with other variables in the marketing mix.

Relationship of cost, price & profit

Manufacturing cost+ operating expenses + profit = Manufacturers Price Manufacturers Price = Retailers cost Retailers cost + Operating Expenses + Profit = Retailers Price

 The difference between the price and cost of the product is the profit or loss made on the product. The profit on the product may be taken as a percentage cost This is often referred to a Mark up or Margins.

General Operating Expenses or Administrative overhead

General Operating expenses are the indirect costs that 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. Administration overheads includes engineering, merchandising, marketing, accounting, management information systems (MIS), secretarial, clerical staff & human Resources.

Overhead
Variable & non variable manufacturing coststhat can not be traced to specific units of production Factory overheads: a. Rents b. Maintenance of Machine c. Wear & tear of machines d. Electricity e. Fuel-Gas & oils f. Water g. Telephone

Overhead Recovery
Estimate the factory overheads for the period The total can be divided amongst the products on various bases & these are divided over estimated production hour Estimated total overheads / Estimated Production hours = An overhead rate per production hour

Job/Product Costing
Prime cost + Factory Overhead = Production cost + Administrative overhead (Selling & distribution + Admin & Finance) On the basis of 5 % of production cost = Total Cost + Profit = Selling Price

Revenue
Revenue is the total of all receipts generated from the sale of the firms products during a stated time period. Profit-Revenue must exceed the Cost Loss-When Cost exceeds Revenue

Material Costing
Direct material Indirect material

Material Costing
Direct cost of material for a particular style Fabrics, trims, findings, as based on the estimates derived from an approved style sample. The first step in costing materials is to determine the specific products to be used and number of units of each required for one garment.

 Unit specification and put up are specific to the type of materials Fabrics: Yards, meters, kgs, lbs Buttons: per gross or package

Material costing
Garment sample represents only one size Larger sizes take more fabric, smaller sizes require less fabric Firms have to make a mini marker of a standard mix of size for requirement of fabric Firms may use a weighted average to accommodate all sizes that are to be produced.

Material Costing-Minimum Quantities

Materials are usually priced and sold in minimum quantities (1000 yds, 1000 sets) If order quantities are lesser than minimums, the up charge will be attracted towards the same. Example: 500 pcs X 1.7 yds Consumption= Require 850 yds only, either material can be ordered 150 yds extra to cover up minimum or the up charge to be paid for the same.

Material Costing
Resource Optimizations Resources utilization Material costs are affected by the percentage of utilization Utilization depends on how much of material is actually used compared to what is costed/targeted Utilization may be more or less against target This may be due to poorly engineered design, patterned fabric or an inefficient marker.

Material costing
While placing the material order: 1. Extra fabric/ trims allowances may need to be added to orders even though they may result in waste. 2. Each firm develops its own policy for coting material waste 3. Wastage % may vary from 3-10% based on past history of material & vendor

Material Costing-Depreciation
This is essentially the cost of using the fixed assets of the business for the period covered by the cost statement. Fixed assts are those tangible items purchased by the business for usually over several years. Example of Fixed assets: Sewing machine, Band Knife, Straight Knife, Furniture & fitting, washing machine, Finishing equipments, motor transport.

Price/Quality relationship
The price/quality relationship refers to the perception by most consumers that a relatively high price is a sign of good quality. The belief in this relationship is the most important with complex products that are hard to test, and experiential products that can not be tested until used (such as most services) The greater the uncertainty surrounding a product, the more consumers depend on the price/quality hypothesis and the greater the premium they are greater to pay.

Price/quality relationship
The classic example is the pricing of Twinkies, a snack cake which was viewed as low quality after the price was lowered. Excessive reliance on the price quality relationship by consumers may lead to an increase in prices on all products and services, even those of low quality , which causes the price/quality relationship to no longer apply.