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COSTING OF APPAREL PRODUCTS

Session II

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Relationship of cost, price and profit

Manufacturing costs + Operating Expense +

Profit = Manufacturers price

MC + OE + P = MP

Manufacturers price = Retailers' Cost

MP = RC

Retailers Cost + Operating Expenses +

Profit = Retailers Price

RC + OE +P = RP

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Income Statement

A financial statement that relates revenue

(sales) to costs to determine profit.

It is also called profit and loss statement.

It is a summary of revenue and expenses

for a specific period of time.

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Sections of the Income Statement

Revenue - is the amount of total sales

Cost of Goods Soldexpenses associated with the

manufacturer of the product line including material costs,

labor costs, and overhead expenses.

The Gross profit Margin (also called gross profit or gross

margin) is the amount of income remaining after cost of

goods sold is covered.

Contribution or Contribution margin is the revenue

remaining for covering overhead and profits after variable

costs have been deducted from total sales.

When General Operating Expenses are deducted from the

gross profit, the bottom line becomes profit or loss.

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A Simple Income Statement

Sales $ 10,500,000 100%

Cost of goods Sold $ 6,300,000 60%

Materials Costs

Direct Labor

OverheadGross Profit Margin $ 4,200,000 40%

- General Operating Expenses $ 3,150,000 30%

Net Profit or Loss (+ or -) $ 1,050,000 10%

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Relevance of Income Statement

The different parts of the income statement

identify basic areas of profit potential

Careful examination of an income statementcan help identify where improvements or

change need to be made in order to improve

profits

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For Example

An increase in sales without an increase in COGS or OE -

May be attained by increase in price

A reduction in the COGS without a change in sales. -

COGS may be affected by changes in cost of materials,

labor, and/or overhead

A reduction in in GOE would result in larger profits if

income and COGS remains constant.May be attained by

reduction in Admin. Salaries or Expenses of cleric &

record keeping services.

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But Remember..

Though

Income statement is useful in identifying the overall status

of the firmbut.

Sources of profit or costs among the products of the firm

cannot be ascertained

Hence..Each style needs to be evaluated separately on its

contribution to profit

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OBJECTIVE OF COSTING

Costing helps in periods of trade depression and trade competition

Aids in Price Fixation

Helps in estimate

Helps in channelising production on right lines

Wastages are eliminated

Costing makes comparison possible

Provides data for periodical profit and loss accounts

Aids in determining and enhancing efficiency Helps in inventory control

Helps in cost reduction

Assists in increasing productivity

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Fixed, Variable, semivariable Costs

The concept of fixed and variable costs holds good in short run

and hence it is more of a theoretical concept.

Hence those costs which tend to vary with output or have major

relation with output should be termed as variable costs

If a cost varies more than proportionality, then also it is a semi

variable cost

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Shut Down and Sunk Cost

When a Manufacturer shuts down his operationstemporarily, he still has to incur expenditure ondepreciation, rent, maintenance etc.

Such costs of the idle plant are called as ShutDown costs.

Sunk costs are historical or past costs which havebeen created by a decision that was made in thepast that cannot be changed by any decision thatwill be made in future.

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Opportunity, Relevant & Irrelevant Costs

Which has been foregone on account of not using the

facilities in the manner originally planned

The term Opportunity costrefers to the alternative

revenue foregone

Relevant costs are those which will be changed by

managerial decisions while irrelevant costs cannot be

affected and hence may be ignored

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Methods of Differentiation

Methods of costing

Job Costing - Items of prime cost are traceable to specific orders

Process CostingWhere identity of prime cost is lost in operationsTechniques of Costing

Marginal CostAllocation of expenditure on manufacturing is

restricted to variable expenses

Direct CostingIndirect costs are written of against profits

Absorption CostingCharging all costs, variable or fixed

Uniform Costingstandardized principles and methods of costing

are employed

Activity Based CostingApportionment of overheads are

identified with each activity

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Need for Differentiation

Manufacturing IndustriesMarginal

Costing

To control costs and identify profitableordersActivity Based Costing

Where production is not repetitiveJob

Costing

Where large quantities of the product are

being madeProcess Costing

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Class exercise..

Record different costs which may be

incurred in apparel manufacturing

Unit

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Classify these costs in different

categories.