Garment Costing: A Step-by-Step Guide on How to calculate it

Garment costing is a critical aspect of fashion production that directly impacts profitability. Understanding how to accurately calculate the cost of manufacturing a garment is essential for designers, manufacturers, and fashion brands. This guide will walk you through the essential components of garment costing, offering best practices and insights to help you optimize your pricing strategy.

Basics of Garment Costing

Garment costing involves determining the total cost incurred in producing a piece of clothing. It includes the cost of raw materials, labor, overheads, and other associated expenses. The goal is to ensure that the selling price of the garment covers these costs while providing a reasonable profit margin.

Key Components of Garment Costing

a. Fabric Cost

The fabric is the most significant component of garment costing, often accounting for 50-70% of the total cost. Factors influencing fabric cost include:

• Type of Fabric: Different fabrics, such as cotton, silk, polyester, or blends, have varying costs.
• Fabric Width: The width of the fabric roll affects the amount of fabric required for a garment.
• Fabric Wastage: Wastage occurs during cutting and sewing. Typically, a 5-10% allowance is considered to account for wastage.

Calculation Example:

Total Fabric Cost=Fabric Requirement (yards) X Cost per Yard + Wastage Allowance

For Knits Garment s like T-shirt the average of fabric is calculated based on below formula at the time of initial costing

= (Body length + Sleeve length + allowance) x (Chest + allowance) X 2 X GSM

10000

For Woven Fabric like Shirt the average of fabric is calculated based on below formula at the time of initial costing

(Full length + Sleeve length + allowance) x (Chest + allowance) X 2 X Fabric width

39.37

b. Trims and Accessories

Trims and accessories include buttons, zippers, labels, elastic, lace, and other embellishments. The cost of trims varies based on material, design, and brand.

Considerations:

• Quality: High-quality trims increase the garment’s overall appeal but also add to the cost.
• Quantity: The number of trims required for each garment influences the final cost.

c. CMT (Cost of Making) Cost

Labor costs include wages paid to workers for cutting, sewing, finishing, and quality control. Labor costs vary based on:

• Complexity of Design: More intricate designs require more time and skilled labor, increasing costs.
• Production Volume: Higher volumes can reduce labor costs per unit due to economies of scale.

Calculation Example:

Labour cost per minute = (Monthly salary of an operators / Total minutes available in the
month) at 100% efficiency.
CM cost = (SAM of the garment * Minute cost of the labour)/Line efficiency (%).

d. Overheads

Overheads are indirect costs that are not directly tied to the production of a specific garment but are necessary for operations. These include:

• Factory Rent and Utilities
• Maintenance of Machinery
• Administration Costs
• Insurance

Allocation of Overheads: Overheads are typically allocated based on production volume or labor hours. Proper allocation ensures that each garment absorbs its fair share of overhead costs.

e. Packaging and Shipping

Packaging and shipping costs cover materials like poly bags, boxes, labels, and transportation to distribution centers or retailers.

Calculation Example:

Total Packaging and Shipping Cost=Cost per Unit X Number of Units

Methods of Garment Costing

Garment costing is a complex process that can be approached using various methods depending on the business model, production scale, and specific needs of the fashion brand or manufacturer. Each method has its own advantages and is suited to different scenarios within the garment industry. Below, we delve deeper into some of the most common methods of garment costing:

1. Direct Costing

Direct costing, often referred to as variable costing, is a simple approach that considers only the expenses directly linked to garment production. These costs typically include:

• Materials: The cost of fabric, trims, and accessories used in the garment.
• Labor: Wages paid to workers directly involved in cutting, sewing, and finishing the garment.
• Variable Overheads: Costs that vary directly with production volume, such as utilities used by production machinery.

Advantages:

• Simplicity: Direct costing is easy to implement and understand.
• Focus on Variable Costs: It highlights the variable costs, making it easier to assess the impact of production decisions on profitability.

Limitations:

• Excludes Fixed Costs: This method does not consider fixed costs like rent, salaries of administrative staff, or depreciation, which can lead to underpricing.
• Not Suitable for Long-Term Pricing: As it excludes fixed costs, direct costing might not reflect the true cost of production, making it less suitable for long-term pricing strategies.

Best Suited For:

• Small-scale manufacturers or designers who have lower overhead costs and focus on short-term production runs.

2. Absorption Costing

Absorption costing, also known as full costing, is a more comprehensive method that includes both variable and fixed costs in the calculation of garment costs. This method ensures that all costs incurred in the production process are absorbed into the cost of the garment.

Components:

• Direct Costs: This includes all variable costs such as materials and direct labor.
• Fixed Overheads: Costs that do not vary with production volume, such as rent, salaries, insurance, and equipment depreciation, are allocated to each garment.

Advantages:

• Complete Cost Representation: Absorption costing provides a more accurate representation of the total cost of producing a garment.
• Regulatory Compliance: This method is often required by accounting standards for financial reporting, ensuring consistency and compliance.
• Long-Term Viability: By including fixed costs, absorption costing supports more sustainable pricing strategies over the long term.

Limitations:

• Complexity: This method is more complex to calculate and requires detailed tracking of all costs.
• Potential for Overpricing: Since it includes fixed costs, there is a risk of overpricing, especially in situations where fixed costs are high.

Best Suited For:

• Larger manufacturers and brands that need to account for significant fixed overheads and are focused on accurate financial reporting.

3. Activity-Based Costing (ABC)

Activity-Based Costing (ABC) is a more sophisticated method that assigns costs to products based on the activities required to produce them. This method is particularly useful for businesses that produce a wide range of garments with varying levels of complexity.

How It Works:

• Identify Activities: First, all the activities involved in the production process are identified, such as fabric cutting, stitching, quality control, and packaging.
• Assign Costs to Activities: Costs are then assigned to each activity based on resource consumption. For example, more complex garments that require additional quality checks will have higher costs assigned to the quality control activity.
• Allocate Costs to Garments: Finally, the costs of these activities are allocated to the garments based on their usage of each activity. A garment that requires more time or resources for a particular activity will have a higher cost associated with it.

Advantages:

• Precision: ABC provides a more accurate cost assessment by linking costs directly to the activities that generate them.
• Cost Control: This method helps in identifying inefficient processes, enabling better cost control and process improvements.
• Flexibility: ABC can be tailored to suit businesses of different sizes and complexities.

Limitations:

• Implementation Complexity: ABC is more complex to implement and requires detailed data collection and analysis.
• Time-Consuming: It can be time-consuming to identify and assign costs to all relevant activities, especially in a large-scale operation.

Best Suited For:

• Companies with diverse product lines and complex production processes that need a detailed understanding of cost drivers.

4. Standard Costing

Standard costing is a method where costs are predetermined based on historical data or industry benchmarks. These standard costs are used as a baseline to estimate the cost of producing a garment.

Components:

• Material Cost: Based on the average cost of fabric and trims used in past production runs.
• Labor Cost: Derived from standard labor hours required for similar garments.
• Overhead Costs: Allocated based on standard rates for factory operations, utilities, and other fixed costs.

Advantages:

• Benchmarking: Provides a consistent benchmark for evaluating production efficiency and cost control.
• Variance Analysis: Enables easy identification of variances between standard costs and actual costs, allowing for timely corrective actions.

Limitations:

• Potential for Inaccuracy: If not regularly updated, standard costs can become outdated and lead to inaccurate pricing.
• May Not Reflect Actual Costs: The method assumes that production conditions remain constant, which might not always be the case.

Best Suited For:

• Companies looking to streamline costing processes and maintain consistent pricing over time, especially in stable production environments.

5. Marginal Costing

Marginal costing focuses on the cost of producing one additional unit of a garment. It considers only the variable costs associated with the production of that extra unit, excluding fixed costs.

Components:

• Variable Costs: Includes only the costs that vary with the level of production, such as materials, direct labor, and variable overheads.

Advantages:

• Decision-Making: Ideal for decision-making in situations like pricing special orders, making or buying decisions, and optimizing production levels.
• Simplified Calculation: Easier to calculate since it does not involve fixed costs.

Limitations:

• Excludes Fixed Costs: Does not provide a complete picture of overall profitability, as fixed costs are ignored.
• Short-Term Focus: Primarily useful for short-term decisions rather than long-term pricing strategies.

Best Suited For:

Businesses that need to make quick, short-term production decisions or those operating in highly competitive markets with tight margins Activity-Based Costing assigns costs to products based on the activities required to produce them. This method is particularly useful for complex garments with multiple components.

Garment Cost Calculation for a Polo Neck T-Shirt

Assumptions:

• Fabric Used: 2/60s 100% Cotton Single Jersey (S/J) Fabric
• GSM: 180
• Number of Pieces: 6,500
• Operator Salary: ₹16,000 per month (equivalent to $200/month)
• Working Days: 26 days
• Line Efficiency: 50%
• Sewing SAM: 15 minutes
• Cutting SAM: 7 minutes
• Exchange Rate: $1 = ₹80

1. Fabric Consumption Calculation

Formula to calculate fabric consumption in kilograms:

Fabric Consumption (kg)=(Body Length + Sleeve Length + Allowance) X (Chest + Allowance)X 2 X GSM

10000

{Fabric Consumption (kg)} = (75+25+2)×(60+1)×2×180

1000

=0.224kg+0.08kg (weight of cuff and collar)

2. Calculation of CMT (Cut, Make, Trim) Charges

Total available capacity per month (in minutes):

Total Available Capacity=Working Days×8 hours per day×60=26×8×60=12,480 minutes

3. FOB (Free on Board) Cost of Garment

Cost Breakdown:

• Fabric Cost: $1.97 + 7% duty = $2.11
• Trim Cost: $0.30 + 7% duty = $0.32
• Fabric and Trims Transportation Charges: $0.06
• Testing & Inspection Charges: $0.20
• Commission on Foreign Exchange: $0.08
• Buying House Commission: $0.16
• Rejection (5%): $0.16
• Value Addition Services: $0.20
• CMT Cost: $0.82
• Margin(30%): $1.23
• Total FOB Cost of Garment: $5.34

The final FOB cost per polo neck T-shirt is $5.34.

Best Practices for Accurate Garment Costing

a. Use Realistic Assumptions

Ensure that the assumptions used in costing, such as fabric wastage and labor hours, are realistic and based on historical data or industry standards.

b. Regularly Update Costing Data

Keep your costing data updated to reflect changes in material prices, labor rates, and overheads. This helps in maintaining accurate pricing and profitability.

c. Factor in Hidden Costs

Hidden costs, such as machine downtime, rework, and quality control failures, can significantly impact overall costing. Include a buffer to account for these potential costs.

d. Review and Adjust Costing Models

Regularly review your costing models to identify areas for improvement. This could involve optimizing fabric usage, reducing waste, or negotiating better rates with suppliers.

Parameters that Affect Garment Costing

Garment costing is a multifaceted process influenced by a variety of factors that determine the final price of a garment. Understanding these parameters is crucial for manufacturers, brands, and designers to set competitive prices while ensuring profitability. Below are the key parameters that affect garment costing:

1. Fabric Cost

Fabric is the most significant component in garment costing, often accounting for up to 50-70% of the total cost. Several factors influence fabric cost:

• Type of Fabric: Natural fibers like cotton, silk, and wool generally cost more than synthetic fibers like polyester and nylon.
• Quality: Higher thread counts, finer weaves, and premium finishes can drive up fabric prices.
• Fabric Width and Utilization: The usable width of the fabric and the efficiency with which it’s used in production (fabric yield) can affect overall costs.
• Supplier and Source: Prices may vary depending on the supplier, the country of origin, and market conditions such as availability and demand.

2. Trims and Accessories Cost

Trims and accessories include all the additional components that complete a garment, such as:

• Buttons, Zippers, and Fasteners: Quality and material (e.g., metal vs. plastic) impact cost.
• Labels and Tags: Branding elements, care labels, and size tags contribute to the overall cost.
• Lining and Interfacing: Essential for structure and comfort, particularly in tailored garments.
• Decorative Elements: Embellishments, appliqués, embroidery, and other decorative details add to the cost.

3. Labor Cost

Labor cost varies widely depending on the complexity of the garment and the location of production. Key factors include:

• Wages: Labor costs are influenced by local wage standards, which vary from country to country.
• Skill Level: Garments requiring specialized skills or detailed handwork (e.g., couture, embroidery) have higher labor costs.
• Production Time: The time taken to cut, sew, and finish a garment affects labor costs; more time-intensive garments will be more expensive to produce.

4. Overhead Costs

Overhead costs refer to the fixed and variable expenses required to keep the production facility running. These include:

• Factory Rent: The cost of leasing or owning the production space.
• Utilities: Expenses for electricity, water, and other utilities required for production.
• Maintenance: Costs for maintaining machinery and equipment.
• Administrative Costs: Salaries of non-production staff, office supplies, and other administrative expenses.
• Depreciation: The gradual loss of value of equipment and machinery over time.

5. Production Volume

The number of units produced significantly impacts the cost per garment. This is often referred to as economies of scale:

• Small Production Runs: These usually have higher costs per unit due to setup costs, wastage, and less efficient use of resources.
• Large Production Runs: Larger volumes often reduce the cost per garment, as fixed costs are spread over more units, and suppliers may offer bulk discounts on materials.

6. Production Efficiency

The efficiency of the production process plays a crucial role in garment costing:

• Line Balancing: Efficiently distributing tasks among workers can minimize idle time and improve productivity.
• Work-in-Progress (WIP) Inventory: Managing WIP effectively reduces the time and cost associated with production delays.
• Waste Management: Minimizing fabric wastage and optimizing the use of materials can significantly reduce costs.

7. Location of Production

The geographical location of production affects several cost parameters, including:

• Labor Costs: Countries with lower labor costs, like Bangladesh or Vietnam, tend to have lower garment production costs.
• Logistics and Shipping: Costs related to transporting raw materials to the factory and finished goods to the market can vary significantly depending on the location.
• Tariffs and Taxes: Import and export duties, as well as local taxes, can affect the overall cost of production.

8. Compliance and Certification Costs

Many brands require compliance with labor laws, environmental regulations, and ethical standards. The costs associated with obtaining certifications and maintaining compliance can add to the overall garment cost:

• Social Compliance: Ensuring fair labor practices, safe working conditions, and no child labor.
• Environmental Compliance: Adhering to regulations on waste disposal, water usage, and chemical management.
• Sustainability Certifications: Costs associated with obtaining certifications like GOTS (Global Organic Textile Standard) or OEKO-TEX.

9. Freight and Shipping Costs

Freight and shipping are essential cost considerations, especially for brands that source materials globally or sell in international markets:

• Mode of Transportation: Air freight is faster but more expensive than sea freight.
• Shipping Distance: The longer the shipping distance, the greater the cost..
• Customs and Duties: Import duties, taxes, and customs clearance fees can add to the overall cost of the garment.

10. Markup and Profit Margin

The final cost of a garment also includes a markup, which covers the brand’s profit margin, marketing, and other selling expenses. The markup can vary depending on:

• Brand Positioning: High-end brands typically apply higher markups to maintain their luxury image.
• Market Competition: Competitive markets may force brands to reduce their markup to offer competitive pricing.
• Retail Channels: Costs associated with selling through various channels (e.g., online, brick-and-mortar stores) can influence the final price.

11. Packaging Costs

Packaging is an often-overlooked component of garment costing, but it can have a significant impact:

• Materials: Costs for packaging materials like boxes, bags, tissue paper, and hangtags.
• Branding: Custom packaging with brand logos and messaging can increase costs.
• Sustainability: Eco-friendly packaging solutions, while better for the environment, often come at a higher price.

12. Currency Exchange Rates

For brands and manufacturers operating in international markets, fluctuations in currency exchange rates can impact costs:

• Material Sourcing: If materials are sourced from a country with a volatile currency, costs may vary unpredictably.
• Labor Costs: Wages paid in a foreign currency can be affected by exchange rate changes.
• Export and Import Costs: The cost of shipping goods across borders can fluctuate with currency values.

Garment costing is influenced by a wide array of parameters, each contributing to the final price of the product. By carefully managing these factors, manufacturers and brands can optimize their production processes, maintain competitive pricing, and achieve better profitability. Understanding these parameters is essential for anyone involved in the garment industry, from designers to financial planners, to ensure the success of their business in a highly competitive market.

Conclusion

Garment costing is a vital process that requires careful consideration of various factors. By understanding the key components and employing best practices, fashion professionals can ensure accurate pricing that covers costs and secures a healthy profit margin. Whether you’re a designer, manufacturer, or brand, mastering garment costing will empower you to make informed decisions and succeed in the competitive fashion industry.

FAQs on Garment Costing

Q: What is the most important factor in garment costing?

A: The fabric cost is typically the most significant factor, as it can represent 50-70% of the total garment cost.

Q: How can I reduce garment costing?

A: Reducing wastage, optimizing labor efficiency, and negotiating better rates with suppliers are effective ways to lower garment costs.

Q: What method of costing is best for complex garments?

A: Activity-Based Costing (ABC) is often preferred for complex garments, as it allocates costs based on the specific activities required for production.

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