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

contributionDisadvantage:

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