One of the most important planning functions performed within a company is the costing of apparel products. In today’s fast-paced, global marketplace, it is crucial for an apparel manufacturer to have a mastery of pricing and costing. Costing must be done in a way that takes into account all manufacturing, distribution, and management processes, as well as the desired profit margin. The main objective of an ideal garment costing and pricing strategy should always be to minimize the wholesale price while maximizing the difference between the retail selling price.
It is important that the cost of a garment is calculated accurately so that a competitive market price can be established. This is the responsibility of both a merchandiser and the accountant.
The merchandiser will be responsible for production costs, and the accountant will be responsible for overhead expenses. Together, they will allow for making effective costing and pricing decisions. A merchandiser must be aware of each and every cost from production to financing, as he will be responsible for all pricing decisions.
What Are The Garment Costing and Pricing Strategies?
There are three types of cost accounting strategies used for identification, measurement, and allocation of costs.
- Direct Costing
- Absorption Costing
- Activity Based Costing
1. What is Direct Costing?
This is one of the most basic costing strategies used in the apparel industry, sometimes also referred to as variable costing. This method of costing compiles all the variable costs related to materials and labor as product cost or cost of goods. In addition, all non-variable factory expenses, marketing, product development, general and administrative costs are allocated through gross margin as either a fixed cost per garment or as a target gross margin percentage. This form of costing strategy can be very effective for companies manufacturing basic garments like basic T-shirts, jeans, khakis, classic suits, etc. with very little variation in labor, product development, and marketing costs
Example costing for a new shirt line
2. What is Absorption costing?
Absorption costing is a method of allocating both fixed and variable manufacturing costs to each unit of production. This approach is also known as the whole cost method. All manufacturing costs are absorbed into the cost of goods under this system, which is then used to establish the costing values.
One advantage of this type of costing is that it takes into account the relative effect of variable and fixed manufacturing overheads on each style produced. This means that the distribution of manufacturing overhead costs between different styles is more equitable, and that low direct labor products do not have to bear the burden of high direct labor product’s overhead costs..
The below example demonstrates how absorption costing impacts the bottom line when a new product is introduced to a basic shirt line. In this example, variable manufacturing overhead is applied to each product as a percentage of direct labor. Additionally, general and administrative costs are applied on a per-unit basis.
3. What is Activity-based costing?
Activity-based costing is considered to be one of the most difficult and accurate costing methods. This system focuses on activities as the base for allocating costs. Department managers must use these activities with maximum efficiency to justify their expenditures and ensure accurate allocation of costs. This system can be difficult to implement, but is considered to be very accurate.
Below example shows the effect of activity-based costing on the same above example. By this process, the basic shirt is not carrying the overhead burden or additional general and administrative costs generated by the T-shirt. The shirt is also benefited from the fact that some of the fixed costs that it was totally absorbed are now being partially absorbed by the new T-shirt.
Companies can implement various other strategies to determine the product costing. It can be based on the type of result they are looking for. Consider the above points while making the decision.
Apart from the above, there can be many specialized strategies or variations of the above for product costing depending upon the type of business but the intent of each one of them is to take in consideration each and every expense into the costing as accurately as possible.
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Article References:
Apparel Merchandising: The line starts here By Jeremy A. Roseneu and David L. Wilson
