costing of apparel

8/18/2019 Costing of Apparel

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Manufacturing Cost


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What is a manufacturing

costManufacturing cost is the sum of costs ofall resources consumed in the process of

making a product. The manufacturingcost is classied into three categories:direct materials cost, direct labor cost andmanufacturing overhead (factoryoverheads).

anufacturing costs are the costs necessaryto convert ra! materials into products


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anufacturing or "on#

manufacturing$

The key to understanding if a cost ismanufacturing or non#manufacturingis to think about !here in the process

the cost occurs. %f the cost occurs inthe factory !hile being produced, it isconsidered a manufacturing cost. %f

the cost occurs after the product isproduced or outside the factory, it isconsidered a non#manufacturing cost.


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&roduct and &eriod 'osts

ll manufacturing costs are product costs.

*amples are ra! material, labor, factory depreciation, fuel andpackaging costs.

ll non#manufacturing costs are period costs.

( period cost is charged to e*pense in the period incurred. This typeof cost is not included !ithin the cost of goods sold on the incomestatement.

%nstead, it is typically included !ithin the selling and administrativee*penses section of the income statement).

*amples are advertising e*pense, selling e*penses, o+ce rent,sales commissions, general and administrative e*pense, o+cesupplies, o+ce depreciation, legal and research and developmentcosts.


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&roduct and &eriod 'osts

-nly product costs arecategoried as direct or indirect. Thelabels of direct and indirect pertain

to the relationship a product costhas !ith a product.

/ince period costs have no

relationship !ith products, they arenever labeled as direct or indirect.


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-verheads

%ndirectateria

l

%ndirect0abour

%ndirect*pens

es

-verheads

-verheads or indirect

costs are incurrednot 1ust for aparticular productunit or cost center,but for a number ofcost units or cost

centers. Therefore,they cannot beidentied with aparticular costcenter or cost unit.


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'lassication -f -verheads

Classication Of Overheads Based On Function2 anufacturing -verheads2 "on#manufacturing overheads

Classication Of Overheads Based On Behavior

2 3i*ed -verheads2 4ariable -verheads2 /emi#variable -verheads

Classication Of Overheads Based On lements2 %ndirect aterials

2 %ndirect labor (Wages)

Classication Of Overheads Based On Control2 'ontrollable -verheads2 5ncontrollable -verheads


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llocation and pportionment of-verheads

!llocation of overheads is the process of chargingoverhead costs to a particular department or cost center.

%t is the allotment or assignment of an overhead cost to a

particular cost unit.

%f the overhead cost is associated !ith a single departmentor cost center, the !hole amount is charged or distributedamong the units of output of that particular department.

3or e*ample, the !hole amount of repair and maintenancee*penses for a machine is charged or allocated to thatdepartment !here the machine has been installed.


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llocation and pportionment of-verheads

6istribution of an overhead cost to severaldepartments or cost centers is kno!n asapportionment of overheads.

%f a given cost is common to t!o or moredepartments or cost centers, such cost should beapportioned or divided among these departmentson an e7uitable basis.

3or e*ample, the amount of factory rent should beapportioned to all the departments. rent charges tobe distributed according to the 8oor space occupiedby each department.


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9ases of apportionment

"penses Bases

3actory rent /7uare feet

&o!er ilo!att hour (W;)

%ndirect material 6irect material

%ndirect !ages 6irect !ages

direct !ages


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=eneral -perating *penses

• *penditures related to the day#to#day operations of a business.=eneral and administrative e*penses

pertain to operation e*penses ratherthat to e*penses that can be directlyrelated to the production of any

goods or services. =eneral andadministrative e*penses include rent,utilities, insurance and managerial

salaries.


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Target 'osting

• target cost is the allo!able amountof cost that can be incurred on aproduct and still earn the re7uired

prot from that product. %t is amarket driven cost that is computedbefore a product is produced.

• ?@#A@B of the life cycle cost isdetermined at the design phase ofthe product

• Target costing !as invented by


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Target 'osting

• Target 'osting is dened as a costmanagement tool for reducing theoverall cost of a product over its

entire life#cycle !ith the help ofproduction, engineering, researchand design.


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Target 'osting -b1ectives

To identify the cost at !hich theproduct must be manufactured if itFsto earn its target prot margin at itse*pected or target selling price.

To decompose the production

process and then to set cost targetsfor each product element.


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Target 'osting

• T!#$T CO%T&'$

• Target costing is very much amarketing approach to costing. The'hartered %nstitute of arketingdenes marketing as:

• ‘The management process

responsible for identifying,anticipating and satisfying customerrequirements protably


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Target 'osting

• %n marketing, customers rule, and marketing departmentsattempt to nd ans!ers to the follo!ing 7uestions:

• re customers homogeneous or can !e identify diGerent

segments !ithin the market$• What features does each market segment !ant in the

product$

• What price are customers !illing to pay$

• To !hat competitor products or services are customers

comparing ours$

• ;o! !ill !e advertise and distribute our products$ (Thereare costs associated !ith those activities too.)


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Target 'osting

• -f course, there !ill probably be a range of products andprices, but the company cannot dictate to the market,customers or competitors. There are po!erful constraints onthe product and its price and the company has to make there7uired product, sell it at an acceptable and competitiveprice and, at the same time, make a prot. %f the prot isgoing to be ade7uate, the costs have to be su+ciently lo!.

• Therefore, instead of starting with the cost andwor(ing to the selling price by adding on thee"pected margin, target costing will start with theselling price of a particular product and wor( bac( tothe cost by removing the prot element. This meansthat the company has to nd !ays of not e*ceeding thatcost.


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Target 'osting

• 3or e*ample, if a company normallye*pects a mark#up on cost of E@Band estimates that a ne! product !ill

sell successfully at a price of HCI,then the ma*imum cost ofproduction should be H?:

• 'ost J ark#up K /ellingpriceC@@B E@B CE@B

H? HL HCI


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Target 'osting

• !n emphasis on the planning anddesign stage. This becomes veryimportant to the cost of the product

because if something is designedsuch that it is needlessly e*pensiveto make, it does not matter ho!

e+cient the production process is, it!ill al!ays be a struggle to makesatisfactory prots.


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3actors to be considered for 6esignM planning a product:

• ;ere are some of the decisions, made at the designstage, !hich can aGect the cost of a product:

• the features of the product

• ho! to avoid Nover designO• the number of components needed

• !hether the components are standard or specialied

• the comple*ity of machining and construction

•

!here the product can be made• !hat to make in#house and !hat to sub#contract

• the 7uality of the product

• the batch sie in !hich the product can be made


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Target 'osting

• ctivity#based costing can also play an important part in targetcosting. 9y understanding the cost drivers (cost causers) acompany can better control its costs.

• 3or e*ample, costs could be driven do!n by increasing batch

sie, or reducing the number of components that have to behandled by stores.

• The concept of value engineering (or value analysis) can beimportant here. )alue engineering aims to reduce costs byidentifying those parts of a product or service which do

not add value + where value- is made up of both• use value /the ability of the product or service to do

what it sets out to do + its function0 and

• esteem value /the status that ownership or use confers0.


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4alue ngineering:

• The concept of value engineering (or valueanalysis) can be important here.

• )alue engineering aims to reduce costs

by identifying those parts of a product orservice which do not add value + wherevalue- is made up of both

• use value /the ability of the product or

service to do what it sets out to do + itsfunction0 and

• esteem value /the status that ownershipor use confers0.


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Target 'osting

• 3or e*ample, if you are sellingperfume, the design of its packagingis important. The perfume could be

held in a plain glass (or plastic)bottle, and although that !ould notdamage the use value of the product,

it !ould damage the esteem value. The company !ould be un!ise to tryto reduce costs by economiing too

much on packaging.


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Target 'osting

• /imilarly, if a company is trying to reduce the costsof manufacturing a car, there might be manycomponents that could be satisfactorily replacedby cheaper or simpler ones !ithout damaging

either use or esteem values.• Tube less tyres can be replaced !ith normal tyres.

• ;o!ever, there !ill be some components that arevital to use value (perhaps elements of the

suspension system) and others !hich endo! theproduct !ith esteem value (the 7uality of the paintand the upholstery).


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&roduct life cycle costing:

• s mentioned above, target costing places greatemphasis on controlling costs by good productdesign and production planning, but those upPfrontactivities also cause costs. There might be other

costs incurred after a product is sold such aswarranty costs and plant decommissioning. This is the concept of life cycle costing,

• When seeking to make a prot on a product it is

essential that the total revenue arising from theproduct e*ceeds total costs, !hether these costsare incurred before, during or after the product isproduced.


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The cost phases of a product can be identied as:

1hase "amples of types of cost

2esign


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&roduct life cycle cost:

• any costs !ill be linked.

• 3or e*ample, more attention todesign can reduce manufacturingand !arranty costs.

• ore attention to training can reducemachine maintenance costs.

• ore attention to !aste disposalduring manufacturing can reduceend#of life costs.


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Typically, the follo!ing pattern of costs committed and costsincurred is observed:


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&roduct life cycle costing:

• The diagram sho!s that by the endof the design phase appro*imately?@B of costs are committed. 3or

e*ample, the design !ill largelydictate material, labour and machinecosts.


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&rime 'osts

1articulars !mount !mount

-pening /tock ***

(J) &urchases ***

(#) 'losing /tock (***)

6irect aterials'onsumed

QQQ

dd: 6irect 0abour QQQ

dd: 6irect *penses QQQ

&


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'ost /heet

Cost sheet is a statement prepared toshow the various elements of costs, li(eprime cost, factory cost of production

and total cost. &t is prepared at regularintervals, for e"ample, wee(ly, monthly3uarterly, yearly.

%n some cases comparative gures of various

periods are also sho!n in the cost sheet sothat assessment can be made about theprogress of a business.


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'ost /heet

1articulars !mount

6irect aterial QQ

6irect 0abour QQ

6irect *penses QQ

&


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Than( 6ou

C! 1oo7a

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costing of apparel

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