Apparel Costing

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Saturday, March 28, 2015
B.VARADARAJAN, MBA, [M.Tech],DPM.
2
Essential work for the efficient management.

Gives most useful information for preparing financial
Finds cost of various jobs or processes to compare wit
Indicates where losses / wastages are occurring so as

Shows which type of output will yield a profit.
Will point out the weak spots and enables to put forth
bring improvements and reduce costs.
3
Advance cost determination.

Budget preparation.
Achieve Economy in production.
Selling price.
Output targets.
Reduction in wastages.
4
Comparison with estimate.

Locate Profit and Loss.
Selling price change.
Decide Discount provision.
Legal provision.
Pricing of new product.
5
Elements of Cost
6
Materials:
The substances from which the
products are made are known as
materials. They can be
direct
or
indirect.
7
Direct materials:
Those materials which form a
part of finished Product.
It is a part of a prime cost, e.g.
Cloth in the dress making,
leather in shoe making,
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Indirect materials:
Those materials which do not
form a part of a financial product.
Cost of indirect materials cannot
be identified with and allocated,
but can be apportioned to a
particular product, process or job,
e.g.
Cotton waste, lubricant, grease,
9
Labour:
Human effort needed For
conversion of raw materials into
finished product is called labour.
Labour can be
direct as well as
indirect.
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Direct Labour:
Labour which is directly
engaged in the production of
goods or services. The wages of
such labour are known as direct
wages.
It is a part of the prime cost, e.g
Wages of spinners and weavers
in a textiles factory.
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Indirect labour:
Labour which is not directly

engaged in production of goods
or services.
The wages paid for indirect labour
known as indirect wages.
e.g. wages of machines,
supervisors,
watchman, sweepers, timekeeper etc.
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Expenses may be direct expenses

indirect expenses.
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Direct Expenses
All expenses (other than direct
material cost or direct wages)
that are directly charged to
production are direct expenses.
It is parts of the prime cost
e.g. excise duty, royalty on
production, cost of special
drawings and designs, architects
fees or equipment for a particular
job etc.
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Indirect Expenses
Expense (other than indirect

material and indirect labour) that
are not directly charged to
production are indirect expenses.
It can be classified as
a)Factory overheads
b)Administrative overheads
c)Selling overheads
d)Distribution overheads
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a)Factory
Factory
overheads
cover
all
overheads
indirect expenses incurred

from the stage of raw materials
to finished goods.
It includes indirect material,
indirect wages and indirect
expenses
e.g. factory rent, supervisors
salary, power and fuel, heating
and lighting, depreciation of
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b) Administrative
overheads
These are expenses incurred for

running
administrative office
e.g. office rent and salaries,
printing and stationary, legal
expenses, telephone expenses
etc.
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c) Selling overheads:
These are expenses incurred for
actual sales and promotion of
sales
e.g. salaries of sales manager,
commission, traveling expenses
of salesman and promotion
expenses like advertising and
publicity,
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d) Distribution
overheads:
These are expenses concerned with
the packing and delivery of goods
to the customers
e.g. packing charges, warehouse
expenses, depreciation of delivery
van, loading charges etc.
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CLASSIFICATION OF
1.By Nature or
Elements
COST
Materials, Labour and Expenses.
2.By Functions
Production, administration selling
and
distribution.
3.As Direct and Indirect

4.By Variability
Fixed, variable and semi-variable.
5.By Controllability
Controllable costs,B.VARADARAJAN,
Uncontrollable
MBA, [M.Tech],DPM.
20
CLASSIFICATION OF
COST
6.By Normality
Normal cost, Abnormal cost
7.By Capital or Revenue

8.By Time
Historical costs, Predetermined costs
9.According to Planning and

Control
Budgeted costs, Standard Cost
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CLASSIFICATION OF
10.For Managerial
Decisions.
COST
Marginal cost,
Out of pocket costs,
Differential costs,
Sunk costs,
Imputed costs,
Opportunity cost,
Replacement cost,
Avoidable and unavoidable
cost.
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METHODS OF
1. Job costing:
It is also called specific
COSTING
order costing. It is adopted by industries

where there is no standard product and
each job or work order is different from
the others.
2. Contract costing: It is also known
as terminal costing. Basically, this
method is similar to job costing.
However, it is used where the job is big
and spread over
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a
long
period
of
time.
METHODS OF
3. Batch costing:
It is an extension of job
COSTING
costing. A batch is a group of identical

products. All the units in a particular batch are
uniform in nature and size. Hence each batch
is treated as a cost unit and costed separately.
4. Process costing: It is called continuous
costing. In certain industries, the raw material
passes through different processes before it
takes the shape of a final product. In other
words, the finished product of one process
becomes the raw material for the subsequent24
[M.Tech],DPM.
process. Process costing B.VARADARAJAN,
is used inMBA,
such
METHODS OF
COSTING
5. Unit costing: This method is also known
as single or output costing. It is suitable to
industries where production is continuous and
units are identical.
The objective of this method is to ascertain the
total cost as well as the cost per unit.
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COST SHEET
The expenses of a product
are analysed under different
heads in the form of
statement.
This statement is called cost
sheet.
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PURPOSE OF COST
SHEET
1.It provides details
of total cost under
logical
classification.
2. It provides cost per unit in difference
stages.
3. It helps in comparison and control of
cost.
4. Cost sheet is helpful in estimation of
cost for preparation of tender and
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Prime cost:
This is also called direct cost.
It is the aggregate of direct materials,
direct labour and direct expenses,
which are easily identifiable with the
product.
Work cost:
It consists of the total of all items of
expenses incurred in the manufacturing
of a product, viz., prime cost plus
factory expenses. It is also known as
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factory
cost
or
manufacturing
cost.
Cost of Production:
This includes work cost and
administration expenses.
Production is not deemed to be
complete without the managerial and
facilitating
costs.
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Cost of Sales:
It represents cost of production plus
selling and distribution cost incurred.
Thus, the cost of sales is the aggregate
of all the direct and indirect costs
connected to the goods sold.
When profit is added to the cost of
sales, sales can be found. Usually,
selling prices are fixed on the basis of
the cost of sales. It ensures that all the
costs are recovered and any desired 35
profit is also obtained.B.VARADARAJAN, MBA, [M.Tech],DPM.
The price at which the items of output

are
offered for sale is known as
tender or quotation price.

In order to prepare the tender the
following
items are to be analysed.
Raw materials
1.Direct labour.
2.Chargeable expenses
3.Works overhead
5. Office overhead
6. Selling
Saturday,
March 28, 2015 overhead
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Estimation of different elements

of cost has to be made.
The following are the accepted
norms:
(A) Direct material and direct
labour cost is generally
estimated on the basis of cost
per unit of preceding period,
subject to fluctuations in the
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(B) Overhead is estimated on the basis of past

experience as a percentage as given below:
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Illustration 1
Calculate Prime Cost, Factory Cost,
Cost of Production, Cost of Sales and
Profit
from the following details:
Direct Materials =Rs. 10,000
Direct Labour = Rs. 4,000
Direct Expenses = Rs. 500
Factory Expenses = Rs. 1,500
Administrative Expenses = Rs. 1,000
Selling Expenses = Rs. 300
Sales = Rs. 20,000
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Solution:
Prime Cost = Direct Materials + Direct Labour
+ Direct Expense
(Rs.14,500) = Rs. 10,000 + Rs. 4,000 + Rs.500
Works Cost = Prime Cost + Factory Expenses
(Rs.16,000) = Rs. 14,500 + Rs.1,500
Cost of Production = Works Cost +
Administrative Expenses
(Rs.17,000) = Rs. 16,000 + Rs.1,000
Total Cost = Cost of Production + Selling
Expenses
(Rs.17,300) = Rs.17,000 + Rs.300
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Profit = Sales Total Cost
Illustration 2
The following data relate to the manufacture
of a product during the month of January
Raw materials consumed Rs.80,000
Direct Wages Rs.48, 000
Machine hour worked 8,000
Machine hour rate Rs.4
Office overhead 10% of works cost
Selling overhead Rs.1.50 Per unit
Unit produced 4,000
Units sold 3,600 at Rs.50 each.
Prepare cost sheet and show (a) cost per unit
and (b) profit for the period.
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COSTS-VOLUME PROFIT AN
The analysis of three variables, viz., cost,
volume and profit.
Measure variations of costs and profit with
volume.
Helps or assists the management in profit
planning.
When volume of output increases, unit cost
of production decreases, and vice versa;
because the fixed cost remains unaffected.
When the output increases, the fixed cost per
unit decreases. Therefore, profit will be more,
when sales price remains constant.
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A small change in the volume
will affect the
The management is always

interested in knowing that
Which product or product mix is
most profitable?
What effect a change in the
volume of output will have on the
cost of production and profit? etc.
All these problems are solved with
the help of the cost-volume-profit
analysis.
46
To know the cost volume

profit relationship, a study of
the following is essential:
1.
2.
3.
4.
5.
6.
Marginal cost analysis;

Break-even analysis;
Profit volume ratio;
Profit graph;
Key factor; and
Sales mix. etc.
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SOME IMPORTANT CONCEPTS

OF COST-VOLUME-PROFIT
ANALYSIS
FIXED COST:
Those costs which are termed Period costs

or Time costs.
Do not depend on the volume of production
and sales.
Fixed cost are fixed in total but variable per
unit.
Examples:
Office rent, Factory rent, Managers salary, etc.
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i.e.,
fixed
overheads.
VARIABLE COSTS
These are the costs which increase or

decrease in proportion to the output and
sales.
Variable costs are called Product costs or
Marginal costs.
Usually they vary in direct proportion to
the output.
They include all the direct costs, i.e.,
direct material, direct wages, direct
expenses and variable overheads.
The variable costs vary in total but they
remain constant per unit Variable costs or
marginal costs are the focal point in the
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application
of
marginal
costing
as
a
CONTRIBUTION
The difference between sales and marginal
cost. It is the contribution towards fixed costs and
profit.
A very important concept as it is used to find
the profitability of products, processes,
departments and divisions.
Contribution = Selling price Marginal cost
Contribution = Fixed expenses + Profit
Contribution Fixed expenses = Profit
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CONTRIBUTION TO SALES ( C/S)

(OR)
P/V (PROFIT VOLUME) RATIO
This is the ratio of contribution to sales.
It is an important ratio analyzing the
relationship between sales and contribution.
A high P/V ratio indicates high profitability and
low P/V ratio indicates low profitability.
This ratio helps in comparison of profitability of
various products. Since high P/V ratio indicates
high profits, the objective of every organization
should be to improve or increase the P/V ratio.
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P/V Ratio can be improved by:

(1) Decreasing the variable cost by efficiently
utilizing material, machines and men.
(2) Selecting most profitable product mix for
production and sales.
(3) Increasing the selling price per unit.
Formula for P/V Ratio
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When two periods

profits and sales are
given, the P/V ratio is
calculated as given
below:
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BREAK EVEN ANALYSIS AND BREAK EV

Break even analysis is a method of
studying
relationship between revenue and
costs in
relation to sales volume of a
business
enterprise
A break-even analysis determines at
what
level cost and revenue are in
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equilibrium.
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BREAK EVEN POINT: Level

of activity where total sales are
just equal to total costs.
At the break even point a
business man neither earns any
profit nor incurs any loss.
Break even point is also called
No profit, no loss point or
Zero profit & zero loss point.
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Formula for calculating

break even point
Break even point (in units)
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Break even point (in Rupees)

(or)
Break even sales value
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Break even ratio:

Break even ratio is the ratio between
break-even sales and actual sales of a
business concern.
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Composite Break even point

This is the combined break even point or
overall break even point of a concern
calculated only when a business concern
makes two or more products.
The composite break-even point is
calculated by the following formula:
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Composite P/V ratio

= Individual P/V Ratio x % of each
product to
total sales
Beak even capacity or Capacity Break
even point:
This is expression of break even point as
% of capacity.
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MARGIN OF SAFETY
Margin of safety is the difference
between actual sales and break even
sales.
Margin of safety is calculated in rupees,
units or even in percentage form.
Margin of safety indicates the
value/volume of sales which directly
contribute to profit, as fixed costs have
already been recovered at break even
point.
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Margin of safety is calculated by

the
following formula:
Margin of safety ratio: Sometimes
margin of safety is expressed as a
ratio.
It is the ratio of margin of safety to
actual sales.
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Illustration 1:
Calculate Break-Even
Point from the following
particulars.
Fixed expenses Rs.
1,50,000
Variable cost per unit

10
Rs.
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Solution:
Calculation of Break-even
point:
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Illustration 2: From the following

information relating to Quick
Standard Ltd.,
you are required to find out (a) P.V.
ratio (b) Break even point (c) Profit
(d) Margin of safety
Total Fixed Costs Rs. 4,500
Total Variable cost Rs.7,500
Total sales Rs.15,000
(e) Also Calculate the Volume of
sales to earn profit of Rs.6,000.
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Solution:
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Cost/kg = DM + DL + DE + OH
Total Production
Fabric Cost Estimation

Piece Weight Formula:
1)
T- Shirt [if body & sleeve are cut in the

same diameter fabric]
{Length + Allowance + Sleeve Length + Allowance} X {Chest + Allowance}

X GSM X 2
10,0000
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2. If separate fabric used for each

body & sleeve:
a) Body Only:
(Length + Allowance) X (Chest + Allowance) X GSM X
2
10,000
b) Sleeve only [S Cutting]:

(Sleeve Length + Allowance) X (Arm hole + Sleeve Open + Allowance) X
GSM X 2
10,000
c) Sleeve only [Normal Cutting]:

(Sleeve Length + Allowance) X (Arm hole X 2 + Allowance) X GSM
X2
10,000
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3. Shorts/ Pants:
ength + Allowance) X (Front Rise + Back Rise + Allowance) X GSM X 2

10,000
4. Per Garment Fabric Cost

= Piece Weight X Per kg Fabric Weight
Fabric Cost
= Yarn Cost + Knitting or Weaving Cost + Processing Cost + Finishi
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1

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

Essential work for the efficient management.

Finds cost of various jobs or processes to compare wit

Indicates where losses / wastages are occurring so as

B.VARADARAJAN, MBA, [M.Tech],DPM.

Advance cost determination.

B.VARADARAJAN, MBA, [M.Tech],DPM.

Comparison with estimate.

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

Labour which is not directly

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

Expenses may be direct expenses

B.VARADARAJAN, MBA, [M.Tech],DPM.

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

Expense (other than indirect

B.VARADARAJAN, MBA, [M.Tech],DPM.

indirect expenses incurred

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

These are expenses incurred for

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

3.As Direct and Indirect

7.By Capital or Revenue

9.According to Planning and

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

order costing. It is adopted by industries

costing. A batch is a group of identical

B.VARADARAJAN, MBA, [M.Tech],DPM.

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

B.VARADARAJAN, MBA, [M.Tech],DPM.

The price at which the items of output

tender or quotation price.

Estimation of different elements

Saturday, March 28, 2015

B.VARADARAJAN, MBA, [M.Tech],DPM.