Upload
ankitakumar
View
220
Download
4
Embed Size (px)
Citation preview
8/18/2019 Costing of Apparel
1/33
Manufacturing Cost
8/18/2019 Costing of Apparel
2/33
What is a manufacturing
costManufacturing cost is the sum of costs ofall resources consumed in the process of
making a product. The manufacturingcost is classied into three categories:direct materials cost, direct labor cost andmanufacturing overhead (factoryoverheads).
anufacturing costs are the costs necessaryto convert ra! materials into products
8/18/2019 Costing of Apparel
3/33
anufacturing or "on#
manufacturing$
The key to understanding if a cost ismanufacturing or non#manufacturingis to think about !here in the process
the cost occurs. %f the cost occurs inthe factory !hile being produced, it isconsidered a manufacturing cost. %f
the cost occurs after the product isproduced or outside the factory, it isconsidered a non#manufacturing cost.
8/18/2019 Costing of Apparel
4/33
&roduct and &eriod 'osts
ll manufacturing costs are product costs.
*amples are ra! material, labor, factory depreciation, fuel andpackaging costs.
ll non#manufacturing costs are period costs.
( period cost is charged to e*pense in the period incurred. This typeof cost is not included !ithin the cost of goods sold on the incomestatement.
%nstead, it is typically included !ithin the selling and administrativee*penses section of the income statement).
*amples are advertising e*pense, selling e*penses, o+ce rent,sales commissions, general and administrative e*pense, o+cesupplies, o+ce depreciation, legal and research and developmentcosts.
8/18/2019 Costing of Apparel
5/33
&roduct and &eriod 'osts
-nly product costs arecategoried as direct or indirect. Thelabels of direct and indirect pertain
to the relationship a product costhas !ith a product.
/ince period costs have no
relationship !ith products, they arenever labeled as direct or indirect.
8/18/2019 Costing of Apparel
6/33
-verheads
%ndirectateria
l
%ndirect0abour
%ndirect*pens
es
-verheads
-verheads or indirect
costs are incurrednot 1ust for aparticular productunit or cost center,but for a number ofcost units or cost
centers. Therefore,they cannot beidentied with aparticular costcenter or cost unit.
8/18/2019 Costing of Apparel
7/33
'lassication -f -verheads
Classication Of Overheads Based On Function2 anufacturing -verheads2 "on#manufacturing overheads
Classication Of Overheads Based On Behavior
2 3i*ed -verheads2 4ariable -verheads2 /emi#variable -verheads
Classication Of Overheads Based On lements2 %ndirect aterials
2 %ndirect labor (Wages)
Classication Of Overheads Based On Control2 'ontrollable -verheads2 5ncontrollable -verheads
8/18/2019 Costing of Apparel
8/33
llocation and pportionment of-verheads
!llocation of overheads is the process of chargingoverhead costs to a particular department or cost center.
%t is the allotment or assignment of an overhead cost to a
particular cost unit.
%f the overhead cost is associated !ith a single departmentor cost center, the !hole amount is charged or distributedamong the units of output of that particular department.
3or e*ample, the !hole amount of repair and maintenancee*penses for a machine is charged or allocated to thatdepartment !here the machine has been installed.
8/18/2019 Costing of Apparel
9/33
llocation and pportionment of-verheads
6istribution of an overhead cost to severaldepartments or cost centers is kno!n asapportionment of overheads.
%f a given cost is common to t!o or moredepartments or cost centers, such cost should beapportioned or divided among these departmentson an e7uitable basis.
3or e*ample, the amount of factory rent should beapportioned to all the departments. rent charges tobe distributed according to the 8oor space occupiedby each department.
8/18/2019 Costing of Apparel
10/33
9ases of apportionment
"penses Bases
3actory rent /7uare feet
&o!er ilo!att hour (W;)
%ndirect material 6irect material
%ndirect !ages 6irect !ages
direct !ages
8/18/2019 Costing of Apparel
11/33
=eneral -perating *penses
• *penditures related to the day#to#day operations of a business.=eneral and administrative e*penses
pertain to operation e*penses ratherthat to e*penses that can be directlyrelated to the production of any
goods or services. =eneral andadministrative e*penses include rent,utilities, insurance and managerial
salaries.
8/18/2019 Costing of Apparel
12/33
Target 'osting
• target cost is the allo!able amountof cost that can be incurred on aproduct and still earn the re7uired
prot from that product. %t is amarket driven cost that is computedbefore a product is produced.
• ?@#A@B of the life cycle cost isdetermined at the design phase ofthe product
• Target costing !as invented by
8/18/2019 Costing of Apparel
13/33
Target 'osting
• Target 'osting is dened as a costmanagement tool for reducing theoverall cost of a product over its
entire life#cycle !ith the help ofproduction, engineering, researchand design.
8/18/2019 Costing of Apparel
14/33
Target 'osting -b1ectives
To identify the cost at !hich theproduct must be manufactured if itFsto earn its target prot margin at itse*pected or target selling price.
To decompose the production
process and then to set cost targetsfor each product element.
8/18/2019 Costing of Apparel
15/33
Target 'osting
• T!#$T CO%T&'$
• Target costing is very much amarketing approach to costing. The'hartered %nstitute of arketingdenes marketing as:
• ‘The management process
responsible for identifying,anticipating and satisfying customerrequirements protably
8/18/2019 Costing of Apparel
16/33
Target 'osting
• %n marketing, customers rule, and marketing departmentsattempt to nd ans!ers to the follo!ing 7uestions:
• re customers homogeneous or can !e identify diGerent
segments !ithin the market$• What features does each market segment !ant in the
product$
• What price are customers !illing to pay$
• To !hat competitor products or services are customers
comparing ours$
• ;o! !ill !e advertise and distribute our products$ (Thereare costs associated !ith those activities too.)
8/18/2019 Costing of Apparel
17/33
Target 'osting
• -f course, there !ill probably be a range of products andprices, but the company cannot dictate to the market,customers or competitors. There are po!erful constraints onthe product and its price and the company has to make there7uired product, sell it at an acceptable and competitiveprice and, at the same time, make a prot. %f the prot isgoing to be ade7uate, the costs have to be su+ciently lo!.
• Therefore, instead of starting with the cost andwor(ing to the selling price by adding on thee"pected margin, target costing will start with theselling price of a particular product and wor( bac( tothe cost by removing the prot element. This meansthat the company has to nd !ays of not e*ceeding thatcost.
8/18/2019 Costing of Apparel
18/33
Target 'osting
• 3or e*ample, if a company normallye*pects a mark#up on cost of E@Band estimates that a ne! product !ill
sell successfully at a price of HCI,then the ma*imum cost ofproduction should be H?:
• 'ost J ark#up K /ellingpriceC@@B E@B CE@B
H? HL HCI
8/18/2019 Costing of Apparel
19/33
Target 'osting
• !n emphasis on the planning anddesign stage. This becomes veryimportant to the cost of the product
because if something is designedsuch that it is needlessly e*pensiveto make, it does not matter ho!
e+cient the production process is, it!ill al!ays be a struggle to makesatisfactory prots.
8/18/2019 Costing of Apparel
20/33
3actors to be considered for 6esignM planning a product:
• ;ere are some of the decisions, made at the designstage, !hich can aGect the cost of a product:
• the features of the product
• ho! to avoid Nover designO• the number of components needed
• !hether the components are standard or specialied
• the comple*ity of machining and construction
•
!here the product can be made• !hat to make in#house and !hat to sub#contract
• the 7uality of the product
• the batch sie in !hich the product can be made
8/18/2019 Costing of Apparel
21/33
Target 'osting
• ctivity#based costing can also play an important part in targetcosting. 9y understanding the cost drivers (cost causers) acompany can better control its costs.
• 3or e*ample, costs could be driven do!n by increasing batch
sie, or reducing the number of components that have to behandled by stores.
• The concept of value engineering (or value analysis) can beimportant here. )alue engineering aims to reduce costs byidentifying those parts of a product or service which do
not add value + where value- is made up of both• use value /the ability of the product or service to do
what it sets out to do + its function0 and
• esteem value /the status that ownership or use confers0.
8/18/2019 Costing of Apparel
22/33
4alue ngineering:
• The concept of value engineering (or valueanalysis) can be important here.
• )alue engineering aims to reduce costs
by identifying those parts of a product orservice which do not add value + wherevalue- is made up of both
• use value /the ability of the product or
service to do what it sets out to do + itsfunction0 and
• esteem value /the status that ownershipor use confers0.
8/18/2019 Costing of Apparel
23/33
Target 'osting
• 3or e*ample, if you are sellingperfume, the design of its packagingis important. The perfume could be
held in a plain glass (or plastic)bottle, and although that !ould notdamage the use value of the product,
it !ould damage the esteem value. The company !ould be un!ise to tryto reduce costs by economiing too
much on packaging.
8/18/2019 Costing of Apparel
24/33
Target 'osting
• /imilarly, if a company is trying to reduce the costsof manufacturing a car, there might be manycomponents that could be satisfactorily replacedby cheaper or simpler ones !ithout damaging
either use or esteem values.• Tube less tyres can be replaced !ith normal tyres.
• ;o!ever, there !ill be some components that arevital to use value (perhaps elements of the
suspension system) and others !hich endo! theproduct !ith esteem value (the 7uality of the paintand the upholstery).
8/18/2019 Costing of Apparel
25/33
&roduct life cycle costing:
• s mentioned above, target costing places greatemphasis on controlling costs by good productdesign and production planning, but those upPfrontactivities also cause costs. There might be other
costs incurred after a product is sold such aswarranty costs and plant decommissioning. This is the concept of life cycle costing,
• When seeking to make a prot on a product it is
essential that the total revenue arising from theproduct e*ceeds total costs, !hether these costsare incurred before, during or after the product isproduced.
8/18/2019 Costing of Apparel
26/33
The cost phases of a product can be identied as:
1hase "amples of types of cost
2esign
8/18/2019 Costing of Apparel
27/33
&roduct life cycle cost:
• any costs !ill be linked.
• 3or e*ample, more attention todesign can reduce manufacturingand !arranty costs.
• ore attention to training can reducemachine maintenance costs.
• ore attention to !aste disposalduring manufacturing can reduceend#of life costs.
8/18/2019 Costing of Apparel
28/33
Typically, the follo!ing pattern of costs committed and costsincurred is observed:
8/18/2019 Costing of Apparel
29/33
&roduct life cycle costing:
• The diagram sho!s that by the endof the design phase appro*imately?@B of costs are committed. 3or
e*ample, the design !ill largelydictate material, labour and machinecosts.
8/18/2019 Costing of Apparel
30/33
&rime 'osts
1articulars !mount !mount
-pening /tock ***
(J) &urchases ***
(#) 'losing /tock (***)
6irect aterials'onsumed
QQQ
dd: 6irect 0abour QQQ
dd: 6irect *penses QQQ
&
8/18/2019 Costing of Apparel
31/33
'ost /heet
Cost sheet is a statement prepared toshow the various elements of costs, li(eprime cost, factory cost of production
and total cost. &t is prepared at regularintervals, for e"ample, wee(ly, monthly3uarterly, yearly.
%n some cases comparative gures of various
periods are also sho!n in the cost sheet sothat assessment can be made about theprogress of a business.
8/18/2019 Costing of Apparel
32/33
'ost /heet
1articulars !mount
6irect aterial QQ
6irect 0abour QQ
6irect *penses QQ
&
8/18/2019 Costing of Apparel
33/33
Than( 6ou
C! 1oo7a
%hrivastava