25 Costing

R. Sunitha

TYPES Learning Objectives

To impart knowledge on strategies of costing To explain about system and type of costing

1. Costing

• Costing is the process of estimating the total resource investment required to merchandise, produce and market the product. Product costs accumulate from all the functional divisions of a company.
• Costs have major impact on a firm’s success and thus must be managed. The key to successful cost control is information and the ability to use that information to manage a firm.
• Cost goods sold represents all expenditures associated with the manufacture of the product line including material costs, labour costs and, factory and administrative overhead expenses.
• Costing is done for all the activities such as purchase of raw materials and accessories, fabrics, processing and finishing of fabrics, sewing and packing of garments, conveyance and transport shipping, over heads, banking charges and commissions.
• To do perfect garment costing, one must know about all these activities thoroughly about their costs, procedures, advantages and risk factors. Also he must know how to solve the problems when occurred and to take suitable alternate decision immediately in time.

There are always fluctuations in the costs of raw materials and accessories, charges of knitting, processing, finishing, sewing and packing, charges of transport and conveyance. One who is doing the costing activity should update the knowledge about the latest prices and charges, latest procedures, methods and quality systems, market prices and availability, transportation and freight charges. The garments must be manufactured in various qualities as it

is not only for one customer. When the garment costing is done the customer’s price level, quality & quantity and payment terms, should be taken into consideration.

The different garments are shirt, trouser, sarees, T-shirts, sweaters, undergarments, pyjamas and socks and other linens namely bedspreads, blankets, towels fabricated by weaving and knitting. Costing is the factor that decides about fixing prices and is essential at all stages. It includes all the activities like purchase of fabrics and accessories, processing and finishing of fabrics, sewing and packing of garments, transport and conveyance, shipping, over heads, banking charges and commissions. There may be fluctuations in the costs right from the raw materials till the finished goods which should be considered while costing. Also transport and conveyance should be considered while costing. This may vary from style to style.

When garment costing is done, things to be considered are, consumption of fabric, weight of garment, cost of the fabric per kg, cost of the garment, Embroidery and printing charges, Trimming charges and Accessory charges

2. Manufacturing costs

Manufacturing costs are the costs which include all the expenditures that are incurred in making a finished product. These costs are summarized as cost of goods sold on the income statement.

Direct materials costs include fabric, thread, trim and findings used in the garments. Direct labor costs include wages of employees who work on the product in the plant, including cutters, sewers and finishers. Direct materials and labor are direct variable costs. The cost varies with the quantity of goods produced.

Overhead consists of both non variable and variable indirect manufacturing costs. Overhead costs are unique to each firm, and they generally are subdivided into direct labour, occupancy and other overhead. Indirect labour costs consists of service personnel, quality control, material handlers, mechanics and maintenance workers and security. The work of these individuals is essential to efficient manufacturing of a product line, but none of them work directly on the product.

Non variable or occupancy overhead costs include rent, depreciation, insurance, property taxes and security.

General operating expenses or administrative overhead are indirect costs that include the costs of operating general offices and departments that are not directly involved with the product line that are essential to the operation of the firm. Administrative overhead includes engineering, merchandising marketing accounting, management information systems., secretarial and clerical staff, and human resources.

3. Systems of costing:

Cost information is mainly based on the decision making. Decision making is related to the time span of activity which may be short and long range. Cost consist of variable and non-variable change. Labor costs and factory costs are variable costs when viewed in long range as these increase or decrease depending on the fluctuation in the demand of the products. The same costs when viewed in short range it is a non variable cost.

Costing process involves the aspects such as material cost to produce the product, Overhead for operating the factory and general operating expenses.

4. Elements of Costs

There are three main elements of costs. They are materials, labour costs and other expenses. These can either be direct or indirect cost. All Indirect Expenses give rise to Overhead expenses. This includes: Production or Works overheads, administration overhead, selling overhead, distribution overhead, research and development overhead.

4.1. Direct Materials

Direct materials include: All raw materials, materials specifically purchased, parts or components purchased or produced, and primary packing materials.

4.2. Direct Labour

          Direct labour includes: Labour engaged on the actual production, labour engaged in aiding the manufacture, and specially required for production. For example, Inspectors.

4.3.   Overhead

Overhead is the aggregate cost of indirect materials.

5.  Division of Costs

1.  Prime Cost = Direct Materials + Direct Labours + Direct Expenses.

2.  Works or Factory Cost = Prime Cost + Works or Factory Overheads.

3.  Cost of Production = Works Cost + Administration Overheads.

4.  Total Cost / Cost of Sales = Cost of Production + Selling Overhead + Distribution Overhead.

6. Cost Classifications

Costs can be classified: By nature or elements or analytics, by functions, as direct or indirect cost, by variability, controllability, normality, time, according to planning and control and for managerial costs.

6.1. By Nature, Elements or Analytics

Costs can be classified by Nature, Elements or Analytical classification: This includes Material, labour and expenses.

6.2.   By Functions

Cost  can  be  classified  by functions.  Either  by:  Manufacturing and  Production  Cost,  or  by Commercial Cost. This includes:

(1) Administrative Cost.

(2) Selling and Distribution Cost and

(3) Research and Development Cost.

6.3. By Variability

Costs can be classified by variability, such as: Fixed or Period Cost, Variable or Product Cost and Semi-variability Cost.

6.4. By Controllability

   Costs can be classified by controllability. These are: Controllable costs and Uncontrollable costs.

6.5.By Normality

Costs can be classified by normality. These are: Normal costs and Abnormal costs.

6.6.  By Time

Costs can be classified on the basis of time. These are: Historical costs and predetermined costs.

7.  Types of costing:

1)  Direct costing

2)  Absorption costing

3)  Activity based costing

7.1. Direct costing:

Direct costing is one of the types of costing and it considers only the variable costs such as production labor, material costs and sales commission are treated as product costs. Non-variable cost, manufacturing and non-manufacturing are treated as time period costs. Direct costing is easy to determine the contribution margin for each product.

Direct costing is possible to compare the cost of production and also used to identify the individual styles and their level of contribution. It is used for determine to make or buy a product.

It is the practice of charging all direct costs to operations, processes or products leaving all indirect costs to be written off against profits in which they arise.

7.2. Absorption costing:

Absorption costing is the costing system that recovers overhead costs by assigning a percentage to some element of direct labour. It considers all the manufacturing costs, both variable and non variable, to be product costs that can be allocated to the products. An overhead application rate is a percentage determined to be rep of all the overhead costs. The overhead application rate may ne determined by dividing the total factory overhead by the total direct labour costs for the period.

It is the practice of charging all costs, both variable and fixed to operations, processes or products. This differs from marginal costing where fixed costs are excluded.

7.3. Activity-based costing

It is a costing system that treats all costs as variable elements of products costs. This costing builds product cost data by determining the demands of particular styles on what is regarded, in other costing systems, as indirect resources. Activity-based costing is used as a diagnostic tool that allows focus on cost reduction and reductions in direct labor. Activities create costs and product consume activities. Cost can be associated with products, customers or suppliers and it should be allocated accordingly. ABC builds realistic product cost data by determining the styles on the other costing system. As a result, product cost data provides a realistic product cost for making long-range business decisions. It is very different from absorption costing because it is very easy to focus the overhead cost reduction and the reduction in direct labor. ABC provide realistic information and it is frequently refused to as cost management tool.

7.4. Uniform Costing

When a number of firms in an industry agree among themselves to follow the same system of costing in detail, adopting common terminology for various items and processes they are said to follow a system of uniform costing. In such a case, a comparison of the performance of each of the firms can be made with that of another, or with the average performance in the industry. Under such a system it is also possible to determine the cost of production of goods which is true for the industry as a whole. It is found useful when tax-relief or protection is sought from the Government.

7.5. Marginal Costing:

It is defined as the ascertainment of marginal cost by differentiating between fixed and variable costs. It is used to ascertain effect of changes in volume or type of output on profit.

7.6. Standard Costing and variance analysis

It is the name given to the technique whereby standard costs are pre-determined and subsequently compared with the recorded actual costs. It is thus a technique of cost ascertainment and cost control. This technique may be used in conjunction with any method of costing. However, it is especially suitable where the manufacturing method involves production of standardized goods of repetitive nature.

7.7. Historical Costing

It is the ascertainment of costs after they have been incurred. This type of costing has limited utility.

8. Stages of costing:

Managers use costing to determine Productivity of a design within price range, Profit potential in a design and whether a design should be added to the line.

Costing may be done at different stages throughout manufacturing process such as

(1)   Preliminary costing for creative design.

(2)   Cost estimating for line adoption.

(3)   Detailed costing for technical design.

(4)   Determining actual costs.

8.1. Preliminary costing for creative design

It is also called as pre costing it is done during the creative design phase of product development. It is the early in the development stage to determine whether the designer’s sketches are producible and marketable within the price range. Costing at the early stages of product development is particularly necessary for fashion manufacture because of broad range. Labor costs are estimated based on production of similar styles.

8.2. Cost estimating for line adoption:

Costing may be done prior to line adoption. It determines the expected investment in materials, direct labor and overhead required to produce single unit of style.

Labor costs are estimated based on lone required to produce a style and the average hourly wage.

8.3.  Detailed costing for technical design

Detailed costing is done after the styles are adopted into the line and refined for production. This stage of costing aids in including the costs those are missed like overlooked label or extra button.

8.4. Determining actual costs.

Actual costs are determined by the collection of data from production. Once a particular style reaches the sewing section, it may be found that the rates are too tight and that more time is needed to complete specific procedures. If the rate adjustment is required, it will inevitably affect the costs. The actual costs must be monitored throughout the production.

9. Different Costing methods include

Job Costing, Batch Costing, Contract Costing, Single Costing, Process Costing, Operation Costing, Operating Costing, Departmental Costing, Multiple Costing.

9.1. Job Costing

Job Costing is done on job works which may differ from case to case basis. By giving different job numbers and debiting the costs on the jobs, cost of each job work can be ascertained. Costs are collected and accumulated for each job.

9.2. Batch Costing

Batch Costing is similar to job costing but pertains to batches. A Batch may represent a number of small orders passed through the factory in batch. Each batch is treated as a unit of cost and separately costed. It is an extension of job costing.

9.3. Contract Costing

Contract Costing is also called Terminal Costing. It is done for large contracts. In such contracting firms, the cost sheets are maintained for individual contracts. In the absence of expense budgets, inefficiencies are often hidden in the cost sheets.

9.4. Single Costing

Single Costing is also called as output costing. It is done when the end product is single like a power station. Here the cost per unit of output and the cost of each item is ascertained. The manufacture is continuous and units are identical.

9.5. Process Costing

Process Costing is useful when a product passes through various processes, yielding different byproducts of commercial value. This is useful in industries like refineries. A separate account is opened for each process to which all expenditures incurred thereon are charged so that cost per unit at each process can be ascertained.

9.6. Operation Costing

Operation Costing is followed by mechanical engineering industries which make products or parts. In this type each manufacturing operation cost is taken into account. There is no difference between this and process costing. This takes into consideration the rejections in each operations for calculating input units and cost. It refers to conversion cost from raw material to finished products.

9.7. Operating Costing

Operating Costing method is followed when the company does not have a specific product as output like the service industries. It is used to ascertain the cost of services rendered.

9.8. Departmental Costing

When an end product is ultimately manufactured by different departments this method can be useful.

9.9. Multiple Costing

Multiple Costing is useful when a product is manufactured in an assembly line like an automobile. It represents the application of more than one method of costing in respect to the same product. It is important to choose the most appropriate method of costing for your business or industry. There are many free lance cost accountants available and they can be engaged on need basis.

10. Factors affecting garments costing

Apparel business is totally dependent on costing. The aspect which directly manipulate on garments costing are fabric consumption, size specification, order quantity, yarn price, knitting price, dyeing price, fabrication cost, sewing thread consumption, trimming and accessories costing, CM cost, print, embroidery, wash, carton consumption, poly consumption, test requirement, inspection, commercial cost, profit and also shipment date.

The designer  worksheet consists  of Pre costing and Final  costing. The  Pre costingincludes Fabric, trim cost, labor cost and all the material cost, roughly estimate the wholesale cost and the Final costing includes the import department estimates the exact calculation of fabric   consumption   and   costing,   yarn,   knitting,   dyeing,   fabrication   cost,   sewing   thread consumption and costing, trimming and accessories costing, cm cost, print, embroidery, wash, carton costing, poly consumption, test cost, inspection cost, commercial cost, profit and also shipment cost.

Determining Product costs

Determining direct costs of materials and labor for individual styles is an important part of accurately costing a product line. Material costs are the largest part of product costs. Labor costs are based on time.

Materials Costing

Direct costs of materials for a style, including piece goods, trim, and findings, are based on estimates derived from an approved style sample. While costing, the specific products to be used and the number of units to be produced should be first determined.

Garments are manufactured in different sizes. Such as large and small so some firms consider weight of the garments for costing. The amount of material required is also assessed by CAD Systems. Mini markers of standard mix of sizes are also used for detailed costing. Material cost are affected by the percentage of utilization. Utilization depends on the actual amount of materials used for making the product. Some wastage is inevitable. So firms develope own policy for costing the waste materials. These wastes are resulted from poor quality materials, inconsistent fabric width, splicing and re cuts. other cost associated with the materials such as inspecting and shading of fabrics may be figured on a per-yard basis treated as on activity cost are included in the total cost of the product. Freight cost may also be calculated for each unit or trim.

Labour Costing

Two salient aspects of the roll of labour costing are budgeting for production and labour costing for individual styles.

Budgeting for Production

The basis for labour costing is time labour costs both direct and indirect must be budgeted for a firm for examining the financial commitments and evaluating its capacity to produce a product. Direct labour includes all the factory employers that are directly involved with the cutting, sewing , finishing and pressing of styles. Total direct labour cost is determined by the following.

Total direct labour cost = no of operators x hours per week x weeks per year x average hourly earnings Total direct labour cost represents the firms financial commitment to employ A predetermined number of operators for a specific period of time. TDL cost are used to establish budgets , schedule work and hire employes. Direct labour cost consist of standard labour cost and excess labour cost.

Total labour cost = standard labour cost + excess labour cost Standard labour cost Standard labour cost is compensation for producting the fiems line. It is earned money or piect rate earnings. It is estimated by the following.Standard Labour Cost = Percentage of plant efficiency x Number of work hours x weight average base rate.

Estimates of standard labour costs are needed to determine the cost of productin each style and excess cost for each style. Estimates of standard labour costs are based on the plant efficiency and the firms weighted average base rates. The volume of production related to the input of work hours determines the plant efficiency.

Base rate is an established compensation for one hour of work. Firms may use one flat base rate for all operators or a different rate for each skill level. For budget purposes a weighted average provides suffieient accuracy.

Excess Labour Cost

Excess labour cost is compensation for time spent on the job not producing a product. It is the difference between the total earned and total paid to direct employes. Excess labour = direct labour – standard labour Excess labour may be the result of machinedown time attending meetings , being out of garments to work on or taking inventory.

Cost individual styles

Labour costing for individual styles begins with the breakdown. Break down is a complete sequential list of operations involved in assembling a style. A single assembly process such as attaching a pocket is called an operation or cycle. In reality some operations require more skill and attention by the operator: thus, firms may use variable base rates to compensate operations for different skill levels. In a plan that pays hourly wages may depend on production standards representing what operators are expected to complete in a specified time period. The excess labour cost is a part of style cost and is refered as off standard which means operators are working but not being compensated according to the production standard. Each firm may establish policy for compensating excess labour time.

Conclusion

This module would have been useful for you in understanding and gaining knowledge about costing methods, stages and types. To do perfect garment costing, one must know about all the activities thoroughly about their costs, procedures, advantages and risk factors. Also one should know how to solve the problems when occurred and to take suitable alternate decision immediately in time.

Web links

• https://en.oxforddictionaries.com/definition/fashion_magazine
• http://en.wikipedia.org/wiki/File:Spherical_pressure_waves.gif
• http://www.drgeorgehearingaids.com/node/27 (How we hear) on youtube
• http://www.drgeorgehearingaids.com/how-we-hear
• http://www.dosits.org/images/dosits/compositb-intensit1.gif
• http://davidjarvis.ca/dave/gallery/sm/sine-wave-frequency_tn.png
• http://www.dosits.org/images/dosits/1x.gif
• http://www.dosits.org/images/dosits/compositb-frequenc.gif
• http://www.physicsclassroom.com/Class/sound/u11l1c2.gif
• http://www.slideshare.net/cartlidge/8-l-sound-hearing-boardworks

References

• Ellen Diamond, Fashion Retailing, A multi – Channel Approach, 2nd Edition, Pearson Prentice Hall, Delhi, 2007, Pp. 300 -314.
• Donnellan John, 2014, Merchandise Buying and management 4th edition , , Library Of Congress Cataloguing In Publication, Data , USA. Pp. 139 & 153.
• Glock.E.Ruth and Kunz.I.Grace, Apparel Manufacturing, Sewn Product Analysis, Fourth Edition, Pearson Education, Inc, 2005, Pp. 233-237, 242.