apparel costing

*B.VARADARAJAN, MBA, [M.Tech],DPM.*

B.VARADARAJAN, MBA, [M.Tech],DPM.*B.VARADARAJAN, MBA, (M.Tech),DPM.*


B.VARADARAJAN, MBA, [M.Tech],DPM.

*B.VARADARAJAN, MBA, [M.Tech],DPM.*Elements of Cost


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Materials:

The substances from which the products are made are known as materials. They can be direct or indirect.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Direct materials: Those materials which form a part of finished Product.

It is a part of a prime cost, e.g.Cloth in the dress making, leather in shoe making,


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Indirect materials: Those materials which do not form a part of a financial product. Cost of indirect materials cannot be identified with and allocated, but can be apportioned to a particular product, process or job, e.g.Cotton waste, lubricant, grease, etc.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Labour: Human effort needed For conversion of raw materials into finished product is called labour.

Labour can be direct as well as indirect.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Direct Labour:Labour which is directly engaged in the production of goods or services. The wages of such labour are known as direct wages.

It is a part of the prime cost, e.g Wages of spinners and weavers in a textiles factory.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Indirect labour:Labour which is not directly engaged in production of goods or services.The wages paid for indirect labour is known as indirect wages.e.g. wages of machines, supervisors,watchman, sweepers, time-keeper etc.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Expenses may be direct expenses or indirect expenses.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*All expenses (other than direct material cost or direct wages) that are directly charged to production are direct expenses. It is parts of the prime cost e.g. excise duty, royalty on production, cost of special drawings and designs, architects fees or equipment for a particular job etc.Direct Expenses



Expense (other than indirect material and indirect labour) that are not directly charged to production are indirect expenses.

It can be classified asFactory overheadsAdministrative overheadsSelling overheadsDistribution overheads

Indirect Expenses


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Factory overheads

Factory overheads cover all indirect expenses incurred from the stage of raw materials to finished goods.

It includes indirect material,indirect wages and indirect expenses e.g. factory rent, supervisors salary, power and fuel, heating and lighting, depreciation of factory building etc.



These are expenses incurred for runningadministrative office

e.g. office rent and salaries, printing and stationary, legal expenses, telephone expenses etc.b) Administrative overheads


*B.VARADARAJAN, MBA, [M.Tech],DPM.*c) Selling overheads:These are expenses incurred for actual sales and promotion of sales

e.g. salaries of sales manager, commission, traveling expenses of salesman and promotion expenses like advertising and publicity,after sales service etc.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*These are expenses concerned with the packing and delivery of goods to the customers

e.g. packing charges, warehouse expenses, depreciation of delivery van, loading charges etc.d) Distribution overheads:


*B.VARADARAJAN, MBA, [M.Tech],DPM.*CLASSIFICATION OF COST1.By Nature or Elements Materials, Labour and Expenses. 2.By Functions Production, administration selling and distribution.3.As Direct and Indirect 4.By Variability Fixed, variable and semi-variable.5.By Controllability Controllable costs, Uncontrollable costs


*B.VARADARAJAN, MBA, [M.Tech],DPM.*6.By Normality Normal cost, Abnormal cost7.By Capital or Revenue8.By Time Historical costs, Predetermined costs9.According to Planning and Control Budgeted costs, Standard CostCLASSIFICATION OF COST


*B.VARADARAJAN, MBA, [M.Tech],DPM.*10.For Managerial Decisions.

Marginal cost, Out of pocket costs, Differential costs, Sunk costs, Imputed costs, Opportunity cost, Replacement cost, Avoidable and unavoidable cost.CLASSIFICATION OF COST


*B.VARADARAJAN, MBA, [M.Tech],DPM.*1. Job costing: It is also called specific order costing. It is adopted by industries where there is no standard product and each job or work order is different fromthe others.

2. Contract costing: It is also known as terminal costing. Basically, this method is similar to job costing. However, it is used where the job is big and spread overa long period of time.METHODS OF COSTING


*B.VARADARAJAN, MBA, [M.Tech],DPM.*3. Batch costing: It is an extension of job costing. A batch is a group of identical products. All the units in a particular batch are uniform in nature and size. Hence each batch is treated as a cost unit and costed separately.

4. Process costing: It is called continuous costing. In certain industries, the raw material passes through different processes before it takes the shape of a final product. In other words, the finished product of one process becomes the raw material for the subsequent process. Process costing is used in such industries.METHODS OF COSTING


*B.VARADARAJAN, MBA, [M.Tech],DPM.*5. Unit costing: This method is also known as single or output costing. It is suitable to industries where production is continuous and units are identical.

The objective of this method is to ascertain the total cost as well as the cost per unit.METHODS OF COSTING


*B.VARADARAJAN, MBA, [M.Tech],DPM.*COST SHEETThe expenses of a product are analysed under different heads in the form of statement.

This statement is called cost sheet.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*It provides details of total cost under logical

classification.

2. It provides cost per unit in difference stages.

3. It helps in comparison and control of cost.

4. Cost sheet is helpful in estimation of cost for preparation of tender and quotations.

5. It acts as basis for fixation of selling price.PURPOSE OF COST SHEET


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Prime cost: This is also called direct cost. It is the aggregate of direct materials, direct labour and direct expenses, which are easily identifiable with the product.

Work cost: It consists of the total of all items of expenses incurred in the manufacturing of a product, viz., prime cost plus factory expenses. It is also known as factory cost or manufacturing cost.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Cost of Production:

This includes work cost and administration expenses.

Production is not deemed to be complete without the managerial and facilitatingcosts.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Cost of Sales:

It represents cost of production plus selling and distribution cost incurred. Thus, the cost of sales is the aggregate of all the direct and indirect costs connected to the goods sold.

When profit is added to the cost of sales, sales can be found. Usually, selling prices are fixed on the basis of the cost of sales. It ensures that all the costs are recovered and any desired profit is also obtained.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*The price at which the items of output areoffered for sale is known as tender or quotation price.

In order to prepare the tender the followingitems are to be analysed.Raw materials Direct labour.Chargeable expenses Works overhead

5. Office overhead 6. Selling overhead7. Estimated profits


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Estimation of different elements of cost has to be made. The following are the accepted norms:

(A) Direct material and direct labour cost is generally estimated on the basis of cost per unit of preceding period, subject to fluctuations in the marked price of materials and labour rates


*B.VARADARAJAN, MBA, [M.Tech],DPM.*(B) Overhead is estimated on the basis of past experience as a percentage as given below:


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Illustration 1

Calculate Prime Cost, Factory Cost, Cost of Production, Cost of Sales and Profitfrom the following details:Direct Materials =Rs. 10,000Direct Labour = Rs. 4,000Direct Expenses = Rs. 500Factory Expenses = Rs. 1,500Administrative Expenses = Rs. 1,000Selling Expenses = Rs. 300Sales = Rs. 20,000


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Solution:

Prime Cost = Direct Materials + Direct Labour + Direct Expense(Rs.14,500) = Rs. 10,000 + Rs. 4,000 + Rs.500Works Cost = Prime Cost + Factory Expenses(Rs.16,000) = Rs. 14,500 + Rs.1,500Cost of Production = Works Cost + Administrative Expenses(Rs.17,000) = Rs. 16,000 + Rs.1,000Total Cost = Cost of Production + Selling Expenses(Rs.17,300) = Rs.17,000 + Rs.300Profit = Sales Total Cost(Rs.2,700) = Rs. 20,000 Rs.17,300


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Illustration 2The following data relate to the manufacture of a product during the month of JanuaryRaw materials consumed Rs.80,000Direct Wages Rs.48, 000Machine hour worked 8,000Machine hour rate Rs.4Office overhead 10% of works costSelling overhead Rs.1.50 Per unitUnit produced 4,000Units sold 3,600 at Rs.50 each.Prepare cost sheet and show (a) cost per unit and (b) profit for the period.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*COSTS-VOLUME PROFIT ANALYSIS The analysis of three variables, viz., cost, volume and profit. Measure variations of costs and profit with volume. Helps or assists the management in profit planning. When volume of output increases, unit cost of production decreases, and vice versa; because the fixed cost remains unaffected. When the output increases, the fixed cost per unit decreases. Therefore, profit will be more, when sales price remains constant. A small change in the volume will affect the profit.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*The management is always interested in knowing that Which product or product mix is most profitable? What effect a change in the volume of output will have on the cost of production and profit? etc.

All these problems are solved with the help of the cost-volume-profit analysis.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*To know the cost volume profit relationship, a study of the following is essential:

1. Marginal cost analysis;2. Break-even analysis;3. Profit volume ratio;4. Profit graph;5. Key factor; and6. Sales mix. etc.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*SOME IMPORTANT CONCEPTS OF COST-VOLUME-PROFIT ANALYSISFIXED COST: Those costs which are termed Period costs or Time costs. Do not depend on the volume of production and sales. Fixed cost are fixed in total but variable per unit.

Examples: Office rent, Factory rent, Managers salary, etc. i.e., fixed overheads.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*VARIABLE COSTS These are the costs which increase or decrease in proportion to the output and sales. Variable costs are called Product costs or Marginal costs. Usually they vary in direct proportion to the output. They include all the direct costs, i.e.,

direct material, direct wages, direct expenses and variable overheads. The variable costs vary in total but they remain constant per unit Variable costs or marginal costs are the focal point in the application of marginal costing as a technique..


*B.VARADARAJAN, MBA, [M.Tech],DPM.*CONTRIBUTION The difference between sales and marginal cost. It is the contribution towards fixed costs and profit.

A very important concept as it is used to find the profitability of products, processes, departments and divisions.

Contribution = Selling price Marginal costContribution = Fixed expenses + ProfitContribution Fixed expenses = Profit


*B.VARADARAJAN, MBA, [M.Tech],DPM.* CONTRIBUTION TO SALES ( C/S) (OR) P/V (PROFIT VOLUME) RATIOThis is the ratio of contribution to sales. It is an important ratio analyzing the relationship between sales and contribution. A high P/V ratio indicates high profitability and low P/V ratio indicates low profitability. This ratio helps in comparison of profitability of various products. Since high P/V ratio indicates high profits, the objective of every organization should be to improve or increase the P/V ratio.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*P/V Ratio can be improved by:(1) Decreasing the variable cost by efficiently utilizing material, machines and men.(2) Selecting most profitable product mix for production and sales.(3) Increasing the selling price per unit.Formula for P/V Ratio


*B.VARADARAJAN, MBA, [M.Tech],DPM.*When two periods profits and sales are given, the P/V ratio is calculated as given below:


*B.VARADARAJAN, MBA, [M.Tech],DPM.*BREAK EVEN ANALYSIS AND BREAK EVEN POINT Break even analysis is a method of studying

relationship between revenue and costs in relation to sales volume of a business enterprise

A break-even analysis determines at what

level cost and revenue are in equilibrium.


*B.VARADARAJAN, MBA, [M.Tech],DPM.* BREAK EVEN POINT: Level of activity where total sales are just equal to total costs.

At the break even point a business man neither earns any profit nor incurs any loss. Break even point is also called No profit, no loss point or Zero profit & zero loss point.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*MARGIN OF SAFETYMargin of safety is the difference between actual sales and break even sales.Margin of safety is calculated in rupees, units or even in percentage form.Margin of safety indicates the value/volume of sales which directly contribute to profit, as fixed costs have already been recovered at break even point.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Illustration 1: Calculate Break-Even Point from the following particulars.

Fixed expenses Rs. 1,50,000Variable cost per unit Rs. 10Selling price per unit Rs. 15


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Illustration 2: From the following information relating to Quick Standard Ltd.,you are required to find out (a) P.V. ratio (b) Break even point (c) Profit (d) Margin of safetyTotal Fixed Costs Rs. 4,500Total Variable cost Rs.7,500Total sales Rs.15,000(e) Also Calculate the Volume of sales to earn profit of Rs.6,000.


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Solution:


*B.VARADARAJAN, MBA, [M.Tech],DPM.*Fabric Cost EstimationPiece Weight Formula:

T- Shirt [if body & sleeve are cut in the

same diameter fabric] {Length + Allowance + Sleeve Length + Allowance} X {Chest + Allowance} X GSM X 2

10,0000Cost/kg = DM + DL + DE + OH Total Production


*B.VARADARAJAN, MBA, [M.Tech],DPM.*2. If separate fabric used for each body & sleeve:a) Body Only: (Length + Allowance) X (Chest + Allowance) X GSM X 210,000b) Sleeve only [S Cutting]: (Sleeve Length + Allowance) X (Arm hole + Sleeve Open + Allowance) X GSM X 210,000c) Sleeve only [Normal Cutting]: (Sleeve Length + Allowance) X (Arm hole X 2 + Allowance) X GSM X 210,000


*B.VARADARAJAN, MBA, [M.Tech],DPM.*3. Shorts/ Pants:Length + Allowance) X (Front Rise + Back Rise + Allowance) X GSM X 210,0004. Per Garment Fabric Cost= Piece Weight X Per kg Fabric WeightFabric Cost= Yarn Cost + Knitting or Weaving Cost + Processing Cost + Finishing Cost




*B.VARADARAJAN, MBA, (M.Tech),DPM.*

B.VARADARAJAN, MBA, (M.Tech),DPM.*B.VARADARAJAN, MBA, (M.Tech),DPM.*

B.VARADARAJAN, MBA, (M.Tech),DPM.*B.VARADARAJAN, MBA, (M.Tech),DPM.*

B.VARADARAJAN, MBA, (M.Tech),DPM.

apparel costing

Documents

indirect labour

indirect wages

cost of indirect materials

direct material cost

wages of machines

prime cost

g wages of spinners

conversion of raw materials