Apparel Industry Management

Apparel Industry Management 3(3+0)

Lesson 22 : Costing

Methods of Costing

Costing is the process for estimating the total resource investment required to produce and market a product. Costing includes

1. calculation of variable and nonvariable costs of materials and labor required to produce a product,
2. over- head necessary to operate the plant, and
3. general operating expense. To be effective, cost data must be specific, accurate, and timely. Inaccurate costing may cause cancellation of a style with good profit potential or allow sale and production of a style that intimately proves too costly to manufacture.

The more accurate the costing, the more accurate the business decisions and the greater the profit potential. Management uses costing to determine

1. the producibility of a style within an established price range,
2. the profit potential in a style, and
3. whether a style should be added to the line. Once a style is included in a line, specific cost information is used to plan line budgets and to establish a base for the selling price.

Costing may also be used to justify the purchase of new equipment or the expansion of production facilities. Ultimately, costing has a major effect on the success of a firm and its "bottom line.' Costing may be done by cost estimators, industrial engineers, designers, production managers, or a combination of individuals involved Aith each of the cost centers.

Product costing requires in-depth understanding of product development, materials, production processes, and plant operations. Only costs incurred in manufacturing a product are considered to be product costs. Two methods of product costing are commonly used in the apparel industry: absorption costing and direct costing. Manufacturing costs are broken down between variable manufacturing costs and non variable manufacturing costs. AD variable manufacturing costs are included in direct costing and absorption costing; but only absorption costing includes non variable manufacturing costs. Direct costing implements the economic theory of marginal analysis to assist a firm in making short-term business decisions.

1. Absorption Costing
2. Direct Costing
3. Preliminary Costing
4. Cost Estimating