How to calculate the cost of manufacturing for a garment?

 A. Introduction

In garment manufacturing industries, calculating of accurate Cost of Manufacturing (CM) is a bit complex work. Because we have to refer too many details to arrive CM. Most of the companies having their own method to arrive CM value. This is a bit multifaceted to understand and explain. Nowadays buyer wants open costing sheet with all cost breakup and they verifying all the cost. They raising queries if any deviation in cost breakup including our profit marge. In this circumstance, we have to adopt accurate and common CM calculating methods. So that, we can have our common standard to arrive at accurate CM and the same could explain to our buyer. When the organization did not follow the standard method to calculate CM, then it will create some subsequent issues.

i.e.

a) Underquoting

b) Higher quoting

c) Fluctuation in quoting 

d) Not added current overhead increased

f)  No clear tacking about how did calculate  

g) Couldn’t able to explain logically

h) insecure trust and loyal with customer

 B. What is the boundary of negotiation?   

The garment manufacturing industry is surrounded by a lot of competitors to serve customers. Being a buyer, the looking product in less price with good quality. The consumer or the buyer doesn’t want to pay extra money to the product value.

 “Until they think the seller has more margin,

Most of the consumer don’t quit their negotiation."                                                            

If the buyer thinks the sheller has a more margined price, their negotiation will not end. Same way if the buyer understood that you had quoted a reasonable price then they will proceed with purchases. In most cases, buyers accept quoted cost when it is understood about reasonable margin in the price quoted.   

C. What is the cost of manufacturing?

How much spending on manufacturing the product is called the cost of manufacturing (CM). Cost manufacturing will be varied based on its workmanship. We would not keep it as a common value variable style. Here, we have understood exactly the cost of manufacturing, and how it is different from others cost. Few examples for easy understanding, Raw Materials Cost (RMC) is only the cost of raw materials which is arrived from the cost of materials used. Labor Cost (LC) is the only cost of labor that is calculated from wages of direct and indirect labor. Product Cost (PC) is including development, raw materials, manufacturing cost, finishing, transportation, etc. Shelling Cost or Shelling price is including profit margin with product cost.            

D. What is the cost of overhead?

Before we look into CM calculation methods, we must have to understand the cost of overhead. It a key input to arrive at the cost of manufacturing. The simple definition for overhead is that “Expenditure per head.”

E. What are the costs included in the overhead cost?

Being a company, there will be lost of ongoing expenses i.e. Labor wages, rental, electricity charge, water charge, telephone bill, insurance, service charge, medical charge, welfare charge, maintenance charge, legal fees, advisement, transportation, travel charge, taxes, interest on debit, return of investment, Profit margin, so on. and Overhead is not included capital investment and raw materials cost.

Formular for overhead expenditure calculation

Overhead per day = (Avg. Expenditure)/ (Working day x Manpower) ---- (a)

Let we assume below example,  

a)       Factory name is “A”

b)      No of manpower (sewing) = 1200

c)       Total working minutes = 8 hours x 60 minute = 480 minutes

d)      Average expenditure per month = $ 5,40,000 USD

e)      Average working days per month = 25 days

 Apply in formula => (a)

Overhead per day  = $ 5,40,000 / (25 x 1200)

                                     = $ 5,40,000 / 30,000

Overhead per day = $ 18------------------------------------------------------- (a’)

Cost per minute formula,               

Cost per minute  = Overhead per day/working minutes ------------- (b)

Apply in formula => (b)

Cost per minutes = $ 18 / 480 minute

Cost per minutes = 0.0375 $/minute -------------------------------------- (b’)

Note: This is actual breakeven cost per minute. Also called actual cost per minute or SMV.   

F. Method of CM calculation

Many methods are existing to calculate the CM, but we refer to only a few easy and accurate methods. The CM is calculated by Costing IE who prepared to cost operation bulletin. the same will be submitted to costing-merchandiser, Costing merchandiser review, and update into the costing sheet along with another cost. Some cases used the traditional method of CM calculation where the costing IE system is not established. This method also widely used in garment industries even nowadays. Some of the marketing heads, CEO, Directors, and top management using the traditional methods to verify the CM accuracy.  

3 impotent methods to calculate the CM,  

1. Calculate CM with SMV

2. Calculates CM with Productivity

3. Calculate in the traditional system

Here, whatever method we use above, the CM will be the same. But the possibilities in error occurrence are not the same. Method 2 and 3 will be more chances to miss the parameters.

G. Calculate CM with SMV

Well established company is following the method to calculate the CM. SMV is calculated by IE and the same is considered for CM calculation. Still, most of the companies keeping as overhead as confidential. Because the overhead cost is not a stable factor. It is kept-on changing followed by current factors.

Formula,

CM = SMV x Cost per minute / planned efficiency ----------- (c)

 We assume,

·         Style description: Men’s Long sleeve shirt

·         SMV = 24.5 minute (sewing + other)

·         Planned average efficiency = 70 %

·         Cost per minute = 0.0375 $

 

Let we apply into the equation => (c),

 CM = 24.5 mint x 0.0375 $ / 70 %

CM = 0.91875 / 0.7 = > 1.3125

CM = 1.31 $ ------------------------ (c’)

Note: The cost of manufacturing is 131 $, Round up process will be higher side, ON TOP THIS, MARGIN IS ADDED. After that updated in the costing sheet.

 H. Calculates CM with Productivity

Early-stage in garment industries doesn’t have IE and well-established systems. In this circumstance, the details cross checked with the production manager. This is oral communication. Followed by that CM cost is calculated. Here, the possibility for incorrect input is high. Some cases production team provide higher side to make happy the management, actually that might not happen on the floor. So this method could follow o cross-check the CM. Not suggested maintaining accuracy in CM.     

 Formula,

CM = Cost per head / Pieces per manpower ------------- (d)

 We assume,

·         Style description: Men’s Long sleeve shirt

·         Planned average output = 549 pcs

·         Planned average manpower = 40  

·         Pieces per manpower = 549 / 40 => 13.73

 Let we apply into the equation => (d),

CM = 18$ / 13.73

CM = 1.31099$

CM = 1.31 $ ------------------------ (d’)

 Note: The cost of manufacturing is 131 $, Round up process will be higher side, ON TOP THIS, MARGIN IS ADDED. After that updated in the costing sheet. Possibilities of error occurrence is Hight. Because the CM is arrived from productive.  It is a ratio of manpower and production. If any parameters got changed then CM may not be accurate. The CM accuracy is ~ 75 to 85%  

I. Calculate in the traditional system

This is similar to the above method of calculating CM, here manpower not considered. Just considered output per the line. When we took the big picture without look deep details, then there may not happen practically. So this method of calculation could be used for cross-checking the CM.

 Formula,

CM = Line cost / Avg output -------------------- (e)

 We assume,

·         Style description: Men’s Long sleeve shirt

·         Planned average output = 550 pcs

·         Line cost per day = $ 720.5

 Let we apply into the equation => (e),

CM = 720.5$ / 550

CM = 1.31$

CM = 1.31 $ ------------------------ (e’)

 Note: The cost of manufacturing is 131 $, Round up process will be higher side, ON TOP THIS, MARGIN IS ADDED. After that updated in the costing sheet. Possibilities of error occurrence is Hight. Because the CM arrives from production.  It is a ratio of manpower and production. If any parameters got changed then CM may not be accurate. The CM accuracy is ~ 75 to 80%

 J. How to calculate pieces rate for a process (or) operator rate  

Using pieces rate employees is restricted by some buyers. Considering the quality and product safety, pieces rate is not suggested in garment industries. Even though somewhere it is not avoidable. If we considered the pcs rat operator is coming and sitting on our machine and sewing, we have to consider on his wages to arrive pcs rate.  

 Pcs Rate = (Average wages/480 x SMV) ------- (f)  

 For example,

·         Process = Attach sleeve to the body

·         Machine = 5 thread overlock

·         SMV = 0.69

·         Average wages of operator = $ 5

·         Working minute = 480

 Apply in the formula

Pcs rate = $ 5 / 480 x 0.69

Pcs rate = $ 0.00718

Pcs rate = $ 0.007 ---------------------------------- (f’)

Above $ 0.007 can be considered as pc rate for sleeve attaching process. This is an example.

 Note: If all process doing with pcs rat operators, condition [Sum of PCS rate for all process < CM of the style] should be followed to avoid over quoting of pcs rate.

 k. How to calculate pieces rate for a full garment sewing

Sometimes we give the cut panel to outside for only sewing process, this called as full garment pcs work.

·         Average wages per day = $ 5

·         SMV = 24.5

·         Working minutes = 480

·         Planned efficiency = 70%  

 Garment sewing rate = [wages per day / (480 x SMV ) / Efficiency] ------------------ (g)

 Apply in the formula

Pcs rate = $ 5 / 480 x 24.5 / 70%

Pcs rate = $ 0.3646

Pcs rate = $ 0.37 ---------------------------------- (f’)

 L. Other CM rate calculation

Same way cutting, finishing and other rates are calculated. based on the circumstance appropriate method should be used to arrive CM.

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