Costing in Apparel Industry:
Costing is an essential and very important task in apparel industry. Proper costing and negotiation is a crucial part in apparel export business. In a business, cost is the amount of money that is spent on the production or creation of a garment. In this article I will discuss about different components of apparel costing, elements of costing and steps involved of apparel costing.

In apparel industry, the process of costing a product is very dynamic. Since, the fashion changes every season and sometimes very often, the product which the manufacturing company receives for manufacturing from the buyer also differs every season. Most of the time, the products are manufactured only once. This leads the manufacturing company to work on accurate costing on every product in order to run the business profitable. The knowledge on the costing process is very essential for a merchandiser. Since, he or she is involved from the product development stage, the knowledge on costing is very essential. From medium size to small scale and sometimes in large scale industry also, the responsibility of costing a new product often comes under merchandiser’s responsibility. He or she needs to develop the cost sheet from the product development stage, with all necessary components that go into the cost sheet.

The merchandiser should have a strong understanding about the different elements of cost and their influence on the products pricing. The major role of the merchandiser in the costing process is, after the costing process, he or she should monitor the variables that influence the cost of any product and to analyze it and to adjust it to maintain the profitability of a company in all worst case scenario.

The apparel costing is also known as the bill of materials, the apparel costing details the costs of every item attributable to the production of a particular apparel. The sum of these costs plus the profit margin is the selling price, which the company will quote to customers. Whilst each company has its own method of preparing to cost, generally the components of a costing are grouped under four headings: direct materials, direct labor, factory overhead and general overhead.

Components of Apparel Costing:
Normally, the costing is prepared by considering the raw material cost, market demand, operating cost of the industry and forecasted profit of the firm and also considering the expectations of the buyer. The various elements in apparel costing are:

1. Fabric
2. Trims and accessories
3. CMT (cut, make and trim) charges
4. Embroidery, appliqué, printing, washing and other value added processes
5. Apparel testing
6. Logistics and transportation cost
7. Profit of the industry

All these components of apparel costing depend upon certain parameters which drastically affects above cost parameters. These costing parameters plays vital role when production merchandiser does the costing of garment; as these parameters are very dynamic and keep fluctuating frequently.

The parameters that affect the apparel cost mostly are; Unit of Measurement, MOQ, Incoterm decided between raw material vendor and garment manufacturer, order quantity, etc.

Elements of Apparel Costing:
Cost is classified as direct or indirect on the basis of behavior or traceability. These costs can be further elaborated. The direct cost elements are as follows.

1. Direct material cost:
The direct material cost is the cost of material that after value addition is converted into a finished apparel. The direct material cost is approximately 45-60% of the apparel’s cost, depending on the types of the apparel and the automated sophistication used to produce the apparel. So, raw material is still a major cost driver. Even a little reduction in direct material cost significantly impacts the total cost of a apparel. The major reason to select an appropriate supplier, using supplier selection criteria, is to bring the total cost down. The fabric, as a raw material for the apparels, is a major cost component, so optimum utilization of fabric is vital at the planning, laying out and cutting stages. An example of direct material cost in apparel manufacturing may include yarn, fabric, zippers, buttons, fabric fillings, hooks, labels, etc. The price paid to bring the material from the supplier to the manufacturing unit is also accounted as a direct material cost, which is transportation cost and also called ‘inbound logistics cost’.

2. Direct labor cost:
Labor cost is the most essential component in the overall cost of apparel. According to labor cost can be divided into direct labor and indirect labor, where direct labor is skilled and indirect is unskilled labour. The term ‘direct labor cost’ in this chapter includes both types of labor costs defined above, which are involved in making a apparel. Thus, direct labor cost means the wages given to the workers who are directly involved in manufacturing of the apparels and the cost that can be traced per apparel. So, the wages cost may include the salaries for cutters, sewers, press operators and packing operators as well. ‘Labor on cost’ is an additional cost that is paid to the employees managing payroll tax, employer contribution to superannuation funds, workers insurance, etc. Some companies treat these costs as manufacturing overheads.

3. Direct expenses:
The proportion of direct expenses is not very significant, but this is the cost involved in assisting apparel manufacturing. An example would be a company purchases any license to run a machine or process or any royalty paid by the company to another company as a part of business. Also, any small contract work involved, such as embroidery, special finish to a apparel, etc., is treated as direct expense.

4. Indirect cost or overhead:
Another element of cost is indirect cost, the cost that cannot be traced to a apparel in an economic way. Indirect cost is the cost to run a company, which is otherwise referred to manufacturing overhead or simply overhead. Manufacturing overhead covers all other cost not associated with direct material and labor cost. The overhead contributes around 30% to the total cost of the apparel. The cost to move the apparel batches from one process to another may be regarded as an indirect cost.

Other overhead costs may include machinery depreciation, factory insurance, electricity, overtime and the support department. The support departments are not directly involved in production but assist in production. Idle time is also an overhead when machine and labor are not being utilized due to machine breakdown, scheduled maintenance or machine set-up time. Apart from manufacturing overhead there is administrative overhead, selling overhead and money spent in research and development.

Steps Involved in Apparel Costing:

Composition of cost of the apparel:
In continuation of the other functions, a production merchandiser is also required to do the costing of the product. The costing is done by keeping in mind the cost of the various raw materials, the operating cost of the company, the competition and expected profit of the organization. At the same time, it is necessary to keep in mind the buyers costing expectations. The cost of a apparel depends on these components: fabric, trimmings, cut make and trim charges, value-added services: printing, embroidery, washing, appliqué, testing of the apparel, quality, transportation and logistics cost, profit of the manufacturing organization. All these components of apparel cost depend upon certain parameters which drastically affects the above cost parameters. These parameters play a vital role when the production merchandiser does the costing of the apparel; as these parameters are very dynamic and keep fluctuating frequently.

Cost of the apparel is the total of material cost/apparel, cut, make, trim charges, trim accessories charges, shipment charges gives the total cost of the apparel.

If we add profit margin and commission percentage on the total cost we get selling price.

Total cost/apparel = Fabric cost/apparel + Cutting, Making and Trimming (CMT)/apparel + Trims or accessories/apparel + Shipment charge

Selling price/apparel = Total cost/apparel + profit %

Fabric cost:
The fabric is generally the most significant factor in cost of the apparel. Fabric accounts for 60–70% of the total cost of basic-styled apparels. In many cases, evaluating the quality and the quantity of fabric consumed in the apparel indicates better than any other factor, the cost of producing it.

The cost of fabric depends upon the type of fabric that is going to be utilized in the apparel. The types of fabrics are woven/knitted fabric, power loom/automatic loom fabric, fiber/yarn/fabric dyed fabric, fiber content of fabric, such as cotton, wool, polyester, silk, blended fabric and so forth, type of dyeing and finish used, gram/square meter (GSM) / weight of fabric, type of yarn used, such as ring spun, open-ended, or carded/combed and so forth.

Calculating the cost of fabric:
The cost of fabric can be calculated in the following way:

Yarn cost + fabric manufacturing cost (knitting or woven) + dyeing cost + finishing cost = total fabric manufacturing cost.

Dyeing cost indicates that if the fabric is yarn-dyed or fibre dyed or piece dyed, the respective cost will be added depending upon the fabric type. The finishing cost includes heat setting cost, normal finishing, compacting (knitted fabric) and so forth.

Fabric consumption:
Cost calculation of fabric in a apparel considering the knitted fabric and t-shirt as an end product, then fabric consumption can be calculated as:

………………..(Body length + Sleeve length + allowance) × (Chest + allowance) × 2 × GSM
Fabric consumption in kg = ———————————————————————————————
………………………………………………………………………….10000

Fabric consumption for woven fabric and for woven fabric and shirt as an end product, then the fabric consumption can be calculated as:

………..(Full length + Sleeve length + allowance) × (Chest + allowance) × 2 × Fabric width
Fabric consumption in meters = —————————————————————————————-
……………………………………………………………………….39.37

These methods are used to calculate the fabric consumption roughly at the sampling stage by merchandiser. These formulas will give approximate calculation for precosting stage of the apparel. Sometimes fabric consumption is also done by forming the miniature marker by the Computer Aided Design (CAD) department. These are the constraints of fabric consumption: Fabric cuttable width, repeat size, pattern type to be informed to the CAD along with buyer tech-pack in order to calculate exact width and consumption. The marker efficiency considered 80–85% depending upon the fabric type, that is, solid dyed, stripe, checks fabric. Efficiency can be changed depending upon the fabric parameters, matching parameters of the buyer and type of style. The buffer in the consumption should be added to the fabric by merchandiser, generally it is 0.03–0.08% of total fabric consumption. In case of trim fabric, that is, interlining the 10–20% more buffers is kept while ordering the interlining, in order to maintain the inventory and to avoid the shortage during the production and fabric wastage percentages, to be added also, while calculating the fabric consumption. Considerable wastage depends on factory practices, type of fabric and type of apparel.

Conclusion:
Apparel costing is a very complex procedure, with set patterns and guidelines followed by the industry, and it is difficult to find out costs for every process there are some inbuilt costs while costing. Apparel costing includes all the activities related to purchase of raw materials and accessories, fabrics, processing and finishing of fabrics, sewing and packing of apparels, transport and conveyance, shipping, overheads, banking charges and commissions, etc. The apparel costing is very dynamic process; at international level negotiation is done only on cost of production or most popularly known FOB of the garment. Hence, garment merchandiser should be very careful while negotiating the cost of garment with the buyer.

References:

1. Apparel Manufacturing Technology By T. Karthik, P. Ganesan and D. Gopalakrishnan
2. Apparel Merchandising by R. Rathinamoorthy and R. Surjit
3. Garment Manufacturing Technology Edited by Rajkishore Nayak and Rajiv Padhye
4. Fashion Marketing Management by A. Arunraj and V. Ramesh Babu

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Founder & Editor of Textile Learner. He is a Textile Consultant, Blogger & Entrepreneur. He is working as a textile consultant in several local and international companies. He is also a contributor of Wikipedia.

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