Determining the appropriate price to charge a buyer is a crucial decision in any industry. Selling below the cost of production and operations will inevitably result in losses, while overcharging will render the company non-competitive. As a result, many companies engage industry experts to devise product cost and pricing strategies.
Additionally, numerous companies invest in advanced software tools like Gerber and Sew-Easy to accurately calculate the Standard Minute Value (SMV), ensuring optimal efficiency. They also provide training to employees and managers on various management systems such as lean manufacturing.
How is product costing carried out?
In a typical apparel manufacturing plant, the responsibility of costing falls on the account manager. However, in many cases, costing is delegated to a development and costing merchandiser. When a well-organized buyer makes an inquiry, they provide a Bill of Material (BOM) that precisely lists the required fabric and accessories for the product.
The merchandiser then contacts suppliers to obtain the latest prices based on the order quantity. Simultaneously, they collaborate with the pattern making department to determine fabric consumption and the work-study department to obtain an accurate SMV. Once all the necessary information is gathered, the merchandiser can easily calculate the costs on a costing sheet using formulas to determine the free on board (FOB) cost.
Seems straightforward, right?
Well, let’s explore some examples of how costing is carried out in many companies. Some companies with slightly more sophisticated operations conduct two rounds of costing: one known as “developmental costing” for a quoted order and the other called “production costing” once the order is confirmed.
The idea behind developmental costing followed by production costing is to refine the costing process by scrutinizing logistical and production requirements more closely. During preliminary developmental costing, fabric yardage and yield consumption (YY) are roughly calculated, allowing room for improvements in determining the actual production costing.
Similarly, SMVs are re-evaluated to explore whether the sample room or any production technician has discovered a more efficient method to reduce the required minutes for product completion by suggesting alternative sewing techniques. Often, there will be savings for the manufacturer as the required fabric quantity decreases and some of the production time is reduced.
Once this stage is reached, the order is released to the bulk merchandiser, also known as the production merchandiser. They are responsible for ordering fabrics and accessories and updating the enterprise resource planning (ERP) system as needed.
It’s worth noting that, for practical reasons, the development merchandiser often sends out the fabric purchase order (PO) to the fabric mill well in advance of production to save time and reduce lead time. However, if the PO is sent before production costing is completed, it is crucial to revise the fabric PO if there are changes in fabric consumption (YY). The reason behind sending the fabric PO as soon as possible is to reserve production capacity at the mill. Changes to order quantities are still possible without affecting the initially quoted delivery dates.
It is advisable to follow the same procedure for all other bookings, including elastic, tapes, and thread.
The Importance of Post Costing
Now, let’s delve into the significance of post costing, which refers to costing performed after the order has been shipped to the customer. Conducting this important task serves several purposes. Firstly, it ensures that the company adheres to the parameters established in the original costing.
For instance, it allows the company to compare the amount of fabric booked versus the actual fabric used in production. It also enables a comparison between the authorized minutes based on the SMV and the actual minutes utilized.
Post costing also helps track the quantities of thread cones ordered and left unused on the production line or stored away. Often, by the time one order is completed, a significant portion of the thread intended for the next order is already consumed.
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