Sunday, February 19, 2017

Garments Costing and Its Classification

Garment costing:
When a garment is manufactured in an industry it is viewed as an asset, or an inventory; and when the garment is sold, the cost of making the garment is classified as a cost of goods sold expense. If the revenue generated is more than the expenses incurred, the company is said to be profitable; otherwise the company shows losses on their balance sheet.

From the customer’s perspective, the cost of the garment, which is often termed the ‘price of a garment’, is the price paid by the customer to own a garment, which includes the mark-up and margin. So, practically the price of a garment is always higher than the cost to make the garment, for the sake of generating profit.
Garment costing
Fig: Garment costing
Garment costing is very complex procedure in apparel manufacturing process. Garment merchandiser and the top management of a company are involved to costing of garment. Because profit depends on proper costing. Garment manufacturer main aim is to earn profit. Because profits are essential to achieve the following:
  1. Cover expenses in the business.
  2. Buy more inventory and replenish stock.
  3. Be able to expand the business.
  4. Provide a return on investment.
Classification of garment costing:
Any activity performed within the garment industry supply chain incurs cost, and understanding the behaviour of each cost is very important to plan and manage the cost. There are number of ways in which the cost can be classified. Apparel costing can be classified on the following ways.
  1. Cost classification on the basis of behaviour
  2. Cost classification on the basis of traceability
1. Costing classification on the basis of behavior
The cost is classified as fixed or variable according to the behavioural aspect. The total cost in garment manufacturing on the basis of behavior is thus the sum of fixed cost and variable cost.

Fixed cost remains unchanged, irrespective of the number of garments produced, for a fixed period. The term ‘fixed’ should not be thought that the fixed cost never changes. An example of fixed cost may be the rent of a company, which is fixed for a certain time-frame. Conventional economics defines variable cost as the cost that changes with short-term fluctuations in the output.

Modern management accounting defines variable cost as the cost that varies depending on the number of garments produced, in garment context; for example, the raw material used. So the total variable cost tends to increase in proportion to the output (garments produced). The variable cost is also referred to as marginal cost. For example, to produce a shirt, approximately 1 m of a fabric may be needed; but to produce 100 shirts, 100 m of fabric will be required. The variable cost will increase in direct proportion to the number of units produced unless a volume discount is offered.

2. Garment Costing classification on the basis of traceability
Cost can be classified as direct or indirect, depending on their traceability. Direct cost is a cost that can be traced in relation to a produced product. The direct cost in the garment industry may be the direct cost of material (cost of fabric, cost of trims and accessories, etc.) and direct cost of labour. Indirect cost is a cost that is unidentifiable; e.g. the job of a design manager is to oversee the designs of the garments, so how much time he is investing on checking each design is difficult to quantify, so the salary of a design manager in this situation may be treated as an indirect cost.

The major concern in the garment industry is to control costs due to the fast-paced and competitive market. The Asian market has dominated in garment production because of achieving economies, but few top-end brands are still manufactured in Europe and other parts of world irrespective of being expensive. The major proportion of the garment cost is the material cost, followed by overhead (indirect cost) and labour. These three costs summarize the cost of a garment, where materials cost is the raw material used, to be value added into the finished garment; labour cost is the cost of the operators who help in manufacturing the garment; and finally, the overhead cost is the cost to run the business.