Costing is used in the garment industry to establish the financial feasibility of producing a given design within a defined price range, acceptable to the target market. Costing enables the manufacturer to identify the profit potential of the design, aiding in the decision of whether or not a design should be added to the line.
Once a design has been added to the line, costing in the next stage helps in the formation of line budgets and set up a base selling price. Costing also assists in justification of procurement of new equipment or capacity expansion investments.
Stages of Costing
Costing is done at four broad stages in the entire garment manufacturing process:
- Preliminary or pre-costing done during the pre-adoption phase of the product development process, i.e. before the samples are made. This gives a rough estimate as to what to expect from the design, based on similar styles. This facilitates weeding out or modification of designs that are too costly for manufacturing.
- Cost of line adoption done to determine the expected investment required for the design in materials, labor and overhead. In this stage, the style is broken down into components and the assembly procedures to establish its financial viability and producibility of the design at a specific price point. This is based on the samples and standard data available.
- Post adoption or Pre-Production Costing, also known as Detailed Costing or Tech Design Costs, which include detailed costing, based on specific production methods (machine type, SPI, material handling methods, layout, etc. ) and costing standards (in-house standards, PMTS, etc.). It is conducted during the post-adoption stage, prior to the start of actual production.
- Actual costs, estimated during and after production. It includes the material and labor costs, compared to the allowed budget for the style. This costing can also be used to force changes in the style to limit the expense to the allocated budget.
According to Jeffrey and Evans (2011, 8), the three main categories of costs for garment manufacturers are, direct materials – contributing about 50% to the total cost, direct labor – contributing about 20% to the total cost and, overheads – contributing about 30% to the total cost:
- Material Costs: As the name itself suggests, this cost head consists of all the material costs of the product like fabric, thread, trims, etc.
- Labor Costs: This head chronicles the wages of the employees directly involved with the garment production, like the cutting, sewing and finishing helpers and operators.
- Overheads: this section comprises of both the variable and fixed, indirect manufacturing costs. This includes indirect labor costs (managerial labor, service personnel, quality control staff, etc. or the staff not directly involved in product manufacturing), occupancy costs like rent, depreciation, property taxes, insurance, and security; and other overheads like administrative costs, material management (carrying costs), machinery and equipment costs, compliance and regulation costs, etc.
When it comes to garment manufacturing, there are three main costing methods or strategies used, namely, direct costing, absorption costing and activity-based costing (ABC).
- Direct Costing: In this method of costing, only the variable costs like the direct material cost, the production labor costs, and the sales commissions are considered to be a part of the product cost. The fixed costs here are treated as time-period costs. So using this strategy, it becomes easy to clearly identify individual product costs, and compare each product/style and their level of contribution to the factory’s bottom line.
- Absorption Costing: This strategy includes both the variable and fixed manufacturing cost in product costing. Here, the overheads are allocated with an application rate. This application rate is a percentage of the direct labor costs.
Overhead Application Rate = Total factory Overhead ÷Total Direct Labor Costs (for the given period)
Accurate determination of the overhead application rate is tough and thus often leads to distortion of the actual value of the profit potential of particular products/styles.
- Activity Based Costing (ABC): This is a much more realistic approach that the above two. Every activity creates a cost, and these costs can be associated directly with the product, customer or supplier for which the activity is being done. All the factory overheads here as allocated to activity centers like design, MIS, merchandising, quality and distribution.
Apparel costing is one of the most critical processes in garment manufacturing and is rightfully called the heart of RMG business. A business’s actual profits depend on accurate costing, and any fallacies in costing procedure, or errors in estimation can wreck havoc to the whole style’s profitability.
Due to this high level of criticality, the top management is generally closely involved with merchandising and design teams in this process. Highly experienced experts are thus preferred in the garment costing process in factories. Multiple software support tools are also available tailored to the garment industry’s needs that enable companies to not only conduct this process with ease but with at most accuracy.