3/15/2018 How Factory Overhead Cost is Calculated in Garment Export Business?

| Online Clothing Study

How Factory Overhead Cost is Calculated in

Garment Export Business?
 30  Prasanta Sarkar

Question: I would like to know, how to calculate overheads? Because so many times I have seen that merchants are using a
xed number as overheads. When I ask them how they got this number, they failed to give a satisfactory answer. Please give a
brief description. It will be helpful for not only me but also so many new merchants. ... asked by Alok De

When you are making a garment for export orders you should know correct method of costing your product.

Secondly, what are the cost factors to be included to have complete cost?

At the time product cost estimation actual gures are considered for direct material cost and actual direct labor cost. But for
the overhead cost, a percentage of direct labor cost (overhead ratio) is considered in costing calculation. 

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Here is the formula, 

Garment manufacturing cost = (Direct Labor cost + Direct Material Cost + Factory Overhead)

Where overhead = x % of direct labor cost

Now the question is how do you nd the value of x?

In this article, I have tried to gure it out and explained how you can determine factory overhead ratio.

What is the overhead cost?

Costs those are not directly related to production volume. No matter how many garments factory produces or sales revenue
factory generate, xed cost to be met each month. These are xed expenses or indirect cost required to operate a business.
For example rent of the factory building, administration cost etc. Two types of overheads are there – xed factory overhead
and variable factory overheads.

What costs are included under overheads?

List of overheads may vary factory to factory based on organization structure. When you calculate overheads for a
production factory only then factory has less overhead. On the other hand, if you calculate overhead of a company having
marketing, design, sales and warehouse departments then you will have a lot of other overhead parameters.

Common overheads of a garment factory are like,

Building rent 
Salary of the staffs and associate payroll costs 
Electricity Bills 
Utilities (Phone bill, internet bills) 
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Transport expenses 
Expenses on consumables (Diesel, Chemicals for nishing department) 
Administration cost (salary and travel cost for the managers, CEOs and VPs), 
Employee welfare expenses 
Stationary & printing (indirect material cost) 
Professional and Legal expenses 
Pantry expenses 
House keeping 
Overtime expenses etc. 

For the actual list of overheads cost parameters of your factory you can contact to your accountant department.

How to nd overhead factor (Overhead Ratio) of factory?

To calculate factory overhead ratio you have to collect following data from accounts departments for last six months. Fixed
factory overheads will be same for all six months but for variable factory overheads take average value to calculate factory
overhead ratio.

1. Direct labor wages (A)

2. Factory overheads (B)

So factory overhead over direct labor = B / A

For example, suppose monthly direct labor cost and factory overheads of a small factory are INR 1,042,000.00 and INR
2268,000.00 respectively.

Factory overhead ratio = 2,268,000.00 / 1,042,000.00 = 2.18

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3/15/2018 How Factory Overhead Cost is Calculated in Garment Export Business? | Online Clothing Study

An example of the overhead factor calculation sheet is shown in the following table. Note that the ratio may vary from factory
to factory. The gure shown below is just for an example.

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Table: Factory Overheads

Second Method: Calculation of Factory Overhead per piece:

You can also determine factory overhead per piece using monthly production data or machine productivity gures. Calculate
average monthly production of your factory. Divide Monthly factory overheads by monthly production quantity to determine
per piece factory overheads. OR calculate monthly production using machine productivity gure.
For example, Suppose machine productivity of the factory (having 150 sewing machines) discussed in above example is 10
pieces per day.
Monthly production of the factory = 150 X 10 X 26 (working days) = 39000 pieces
So, Factory overhead per piece = (Factory overhead / Production quantity)
= ( 2,268,000.00 / 39000 ) = INR 58.15

How to use overhead ratio in garment cost estimation?

First, calculate labor cost of the garment from garment SAM, line e ciency and labor daily wages. Suppose labor cost per
garment is INR 30.00

Calculate overhead amount using overhead ratio and add overhead amount to labor cost and direct material cost to estimate
garment manufacturing cost. I am using factory overhead ratio from the above table.

So, overhead cost per garment will be 30 * 2.18 = INR 65.40

Direct material cost is 150.00

Total Cost of the garment = INR (30.00 + 150.00 + 65.40 ) = INR 245.40

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