Costing Notes

Costing is a method used to determine and track expenses for products or services.
It helps in making informed business decisions by providing detailed cost insights for budgeting, cost control, and pricing strategies.
Cost accounting is a type of managerial accounting used to capture and analyze the total costs associated with producing goods or providing services.
It involves analyzing fixed, variable, operating, direct, and indirect costs.
Methods include standard costing, activity-based costing, lean accounting, and marginal costing.
Cost accounting is used for internal purposes, unlike financial accounting, which produces financial statements for external evaluation.

Efficiency and controlling costs lead to profit maximization, given the slim margins in the fashion business.
Levels and types of costs in a fashion business depend on the business model, size, complexity, and ownership.
Garment manufacturing is used as an example to understand costing.

The first step in building a budget is sales revenue, which is calculated as the number of units multiplied by the selling price.
For example, if a manufacturer sells 100 units at £10 each, the sales revenue would be $100 \times 10 = £1000$ .
Costing helps in making pricing decisions to ensure that costs are covered and a profit is made.

Fixed Costs / Variable Costs / Semi-variable Costs
- How the costs change as the level of activity changes.
Direct Costs / Indirect Costs
- Are the costs directly linked to the activity in question?

Direct Cost: A cost that can be identified with specific cost units; the effect of the cost can be measured in respect of each particular output.
Indirect Cost (or Overheads): All other elements of cost that cannot be directly measured in respect of each particular unit of output.

Direct cost is an expense that can be directly and easily traced to the production of a specific product or service.
3 main types of direct costs: Direct Material, Direct Labour, and Direct Expenses.

In the garment business, direct materials approximate 50% of garment cost (e.g., fabric, linings, thread, buttons, zips, elastic, studs, velcro, labels, packaging).
It is easy to allocate the cost of the amount of fabric as each roll has an identifiable cost (importance of fabric utilization).

Direct labor is the cost of making garments, and accounts for approximately 20% of garment cost (in UK) (e.g., lay planners & cutters, fusing press operators, sewing machine operators, press operators, packing staff).
Detailed timesheets are needed to record time spent on each job.
Different skill levels command different wage rates (e.g., lay planners are highly skilled, so paid more).
Usually calculated by time spent x hourly wage rate.

Small percentage of direct costs but still important (e.g., License cost for a copyrighted logo).
Sub-contracted work performed by another factory is still an expense incurred (e.g., Stonewashing, embroidering (on each unit)).
Remember: the total of direct material, direct labor, and direct expenses gives us the prime cost!!

Indirect costs are costs that are not directly associated with a specific project or cost objective.
They can include administration, personnel, and security costs.
Costs of running the factory = Production Overhead/Factory Overhead
- Indirect Materials – consumed in production, not part of the garment (e.g., oil, needles for machines, food for staff, cleaning materials).
- Indirect Labour – wages of factory workers who don’t produce garments (e.g., factory managers, cleaners, canteen staff, etc.).
- Indirect Expenses – factory rent & rates, insurance, heat, light, power, phone, depreciation (fixed overhead).
- Indirect Material + Indirect Labour + Indirect Expenses = Production Overhead

Total Costs = Direct Materials + Direct Labor + Direct Expenses + Indirect Materials + Indirect Labor + Indirect Expenses + Selling and Distribution Cost and Admin and Finance = Cost of Goods Sold
Where:
- Prime Cost= Direct Materials + Direct Labor + Direct Expenses
- Factory Overhead= INDIRECT MATERIALS + INDIRECT LABOR + INDIRECT EXPENSES
- PRODUCTION COST = PRIME COST + FACTORY OVERHEAD

Variable Costs – relate specifically to the product made and change in direct proportion to the number of units produced (e.g., make more shirts, need more fabric, thread, trimmings, fastenings, cutters & machinists wages).
Fixed Costs – relate to the whole business, not specific to the product made, and are the same amount regardless of the number of units produced (e.g., factory rent & rates, insurance & management salaries).
Semi-variable Costs – complex costs with a fixed and variable element (e.g., electricity standing charge & usage).

Direct/indirect and variable/fixed/semi-variable are two different ways of classifying costs and should be considered separately.
Management Accounting makes broad assumptions (e.g., heat & lighting costs are fixed) to simplify matters!

Prime Cost
- Direct Cost = Direct Material= Fabric, Trims, Cut Make & Trim Charge
- Direct Labour = lay planners & cutters, fusing press operators, sewing machine operators, press operators, packing staff.
- Direct Cost= Licence cost for a copyrighted logo
Production Overheads
- Overhead costs of running the factory = Production Overhead
- Indirect Materials - consumed in production, not part of garment e.g. oil, needles for machines, food for staff, cleaning materials
- Indirect Labour-wages of factory workers who don't produce garments e.g. factory managers, cleaners, canteen staff etc
- Indirect Expenses-factory rent & rates, insurance, heat, light, power, phone, depreciation
- Prime Cost + Production Overhead = Production Cost
Non-Production Overheads
- Costs of running the business = Non-Production Overhead
  - selling & distribution e.g. marketing staff costs, advertising & promotion costs, showroom rental, freight costs.
  - administration e.g. office staff salaries, office rental & running, machinery
  - finance e.g. interest on loans
- Non-Production Overhead + Production Cost = Total Cost