Apparel Industry Management

Apparel Industry Management 3(3+0)

Lesson 21 : Costing

Manufacturing Costs

The cost accounting system is usually organized by cost centers so that unit costs for each process can be determined. Manufacturing costs include all the expenses that are incurred in producing a finished product. These costs are summarized as 'cost of goods manufactured" on the income statement. Manufacturing costs are subdivided into three basic areas:

1. raw materials,
2. direct labor, and
3. factory overhead.

Raw materials, such as fabric, thread, trim, and findings, are direct variable costs. Direct labor costs in most sewing plants include wages of first line supervisors and employees that work on an incentive, piece rate, or an hourly wage basis such as cutters, sewers, and finishers.

Factory overhead consists of both variable and non-variable indirect manufacturing costs. Factory overhead costs are unique to each plant but they generally are subdivided into (1) indirect labor, (2) factory occupancy costs, and (3) other overhead. Indirect labor consists of service personnel, quality control, material handlers, mechanics and maintenance workers, industrial engineers, and security. The work of these individuals is essential to efficient production of a product line but none of them works directly with the product. Non-variable factory occupancy costs include rent, depreciation, insurance, property taxes, and security. Examples of variable factory costs are machine parts and repairs, marker paper, and needles. Other overhead costs include materials management, machinery and equipment costs, and cost of compliance with regulations.

General operating expenses or administrative overhead are indirect costs that include the costs of operating the general offices and departments that are not directly involved with the operation of the factory but are essential to the operation of the firm. Cost centers that may be considered part of administrative overhead are the accounting department, computer programming, management information systems, secretarial and clerical staff, personnel office, design and merchandising, marketing and sales, and management salaries.