stages of costing
DESCRIPTION
COSTING OF GARMENTTRANSCRIPT
STAGES OF COSTING
Where?In fashion industry, apart from a
merchandiser in an export house who else will be interested in costing a garment
Retail merchants/ ManagersCost estimatorsDesignersProduction mangersCombination of number of individuals who
are involved with a product line
IN FASHION RETAILA retail merchant / manager uses costing to
determineProducibility of a design within an established
price rangeThe profit potential of a designWhether a design should be added to a line
COSTING STAGESStage 1 •Preliminary / Precosting
Stage 2 •Prior to line adoption
Stage 3 •Post adoption / pre production
Stage 4 •Actual cost determination
PRELIMINARY COSTINGEarly in the design development stageChecking of designer’s sketches
ProducibilityMarketability in a price range
Rough estimate based onMaterials, laborSimilar styles produced in the past
Necessary even at this early stageDesigners styling ideas for a range
IMPORTANCE OF PRELIMINARY COSTINGPreliminary costing helps in
Weeding out designs that are too costly for the line before additional time and resources are invested
Modifying the design which has potential but is too costly to produce
Helps in saving sample cost at retailer end which can vary from $50 to $300
COST ESTIMATION FOR LINE ADOPTIONDone just prior to line adoptionMore detailed than precostingRequires a breakdown of
Garment componentsAssembly procedures
Cost estimation at this stage determines theEstimated investment in materialsDirect laboroverhead
Helps in decision making process of style decisions related to producibility at specific price point
Costing at line adoption stage is based on SampleStandard data
DETAILED COSTING FOR POST ADOPTION PRODUCT DEVELOPMENTProvides as opportunity to pick up any costs missed during
earlier stages Overlooked label Extra button Complex operation that could be simplified
More accurateTedious and time consumingDetailed costing is based on
Specific production methods Machine type SPI Work place layout Material handling methods
What about PMTS? Use of standard data (in-house) Use of PMTS to determine production cost
DETAILED COSTING ENABLESChanges made
To economize fabric and sewing timeMight result in increase in cost
Decision taken on plaid matching Increased seam allowances for quality
Provides basis for establishing production budgets
DETERMINING ACTUAL COSTSCalculated after data collection from
productionMight need rate adjustments
Calculated productivity is too highFew construction require elaborate operations
If the retailer owns the factory then rate adjustments are feasible
In current scenario, rate adjustments happen only if buyer adds any extra trims, / operations
METHODS OF COSTING
What are we concerned withCalculation of variable and non variable
costs of materials and labor requiredOverhead necessary to operate a firmGeneral operating expense
Three costing methodsDirect costingAbsorption costingActivity based costing (ABC)
DIRECT COSTINGConsiders 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 = contributionContribution has to cover non variable costs
and profit
Advantage:Easy to identify the individual styles and their level of
contribution
Disadvantage:Easy to miscalculate the margin and end up in
loss
ABSORPTION COSTINGConsiders all manufacturing costs, both
variable and non variable as product costs that can be allocated to products
Overhead is allocated with an application rate which is a percentage of direct labor cost
Over head application rate is the ratio of total factory overhead and total direct labor costs for the factory
Disadvantage: Arriving at the correct overhead application rate as it can easily distort the profit potential of a product
ACTIVITY BASED COSTINGActivities 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