How to calculate the cost of manufacturing apparel products?

Introduction

Cost plays an important role in any business as it helps the merchandiser decide on two main factors. Firstly, pricing of the product, and secondly, acceptance of the order for the product. To understand the detailed costing of apparel one must thoroughly study all the activities indulged in the process of manufacturing apparel products. 

Let us learn the methods and techniques used to calculate the manufacturing cost of apparel products effectively and dive deep into setting an adequate price for the target market that help in making the business profitable.

Factors affecting manufacturing costs

1. Type of fabric - The cost of making clothes is largely made up of fabric. The choice of fabric used affects the price of basic-styled clothing by roughly 60–70%. Knitted fabric, woven fabric, power loom fabric, yarn fabric, cotton fabric, silk fabric, and many other types of fabric are used. The following is a list of the additional factors that influence the cost of fabric.

• UOM - Measuring unit of fabric is usually meters or yards. If the fabric is knitted or woven, the fabric can be measured in Kilograms too. 
• MOQ -The smallest amount of fabric that a manufacturer can offer is known as the minimum order quantity. The vendor may charge more than usual if the order quantity is below the supplier's MOQ, which has a significant impact on garment cost.
• Incoterm used - This factor has a significant impact on fabric pricing. As the merchandiser must deal with suppliers for delivery of the fabric while importing it from other countries, it will be decided who will bear the cost of shipping and risk based on the incoterms such EXW, FOB, CIF, DDP, etc.

Cost of fabric = yarn cost+fabric manufacturing cost+dyeing cost+finishing cost

1. Trims and other accessories - Along with fabric used in the apparel, materials like buttons, zippers, threads, elastics, labels, etc., considered in garment manufacturing come under fabric trims. The quantity, quality, shape, size, and materials used in the trims affect the final cost of the garment.
2. Making Cost -If the making is done by the contractor, making cost is estimated by multiplying the total cost per hour by the number of hours it takes to make the style, then dividing by the number of units produced. The contractor's profit must be included as well.
3. Cost of logistics and shipping - Even if the fabric is imported or sourced within the country, additional logistics cost is implied for the transport of goods from the warehouse to the manufacturing unit. 
4. Organization Profit - Barring all the expenses and costs from the investment, this amount is the pay that an organization earns. This amount is required to maintain the cash flow in the business and experiment with different styles

Listed below are the two methods to calculate the cost of manufacturing

1. Based on Standard Allowed Minutes(SAM) of product making - To get an accurate cost estimate of apparel manufacturing, this is the best method. Following are the parameters required to calculate the cost of manufacturing using this method
2. Product SAM - This is the standard time consumed in the production of the garment including the allowances. The data is obtained by Time study and using synthetic data
3. Target efficiency - Target efficiency is the expected percentage for running a particular product and order volume.
4. Operating cost - Any cost for running a business (except the material cost) falls in the operating cost category. One can first calculate the monthly operational cost, followed by the daily operational cost, and finally, measure the operating cost of each machine.

The formula for calculating the cost of manufacturing using SAM

Cost of Manufacturing= (Operating Cost Per Machine Per Day *SAM)/(Target Efficiency Percentage * working Hours*60)

Table Cost Calculation of Apparel Manufacturing

Method 1: Standard Actual Time Technique

SL No.	Particulars	UOM (Unit of Measurement)	Values
1	Apparel SAM	Min	21
2	Target Efficiency	Percent	60 Percent
3	Actual Time Spent on a Product	Min	35
4	Factory Running Cost of Machine Per Day	INR	1022
5	General Operation Hours Per Day	Hours	8

By putting the above values in the formula for manufacturing cost, one can get the manufacturing cost of one piece of apparel to be INR 74.52. This amount can be multiplied by the number of products to arrive at the cost involved in the entire production session.

1. Based on Daily Production Figure - This method uses historical production data to calculate manufacturing costs. For most, this approach is comparatively an easier one than SAM. Apparel manufacturing units, from small to large, extensively apply this method for production cost analysis. Listed below are the parameters required to calculate the manufacturing cost using this method.
2. Daily production - Find out the per-day average production of a particular style of garment by using its historical production data. Now, using this, calculate that factory's per day average production
3. Operating cost per day per machine - Refer to the above explanation.
4. Human Resources - Find the number of operators and machines involved in producing the desired output.
5. Calculate the number of employees and equipment like a sewing machine required to produce the desired output.

The formula for calculating manufacturing costs using the Daily Production Method

Cost of Manufacturing: (Operating cost in a day/Total Apparels Produced in a Day)

Table of the particulars, UOM, and Value

SL No.	Particulars	Unit of Measurement	Amount/Value
1	Production in a Day	Pieces	550
2	Numbers of Machines in Operation	Numbers	40
3	Factory Cost Per Day Per Machine	INR	1022

By putting these values in the above formula, one can find the cost of manufacturing one piece of apparel to be INR 74.33

Multiply the manufacturing cost of one piece of apparel by the total number of apparel produced in the factory to arrive at the final manufacturing cost.

Key points to reduce overheads and optimize the manufacturing process

• Minimize fabric wastage using advanced tools in the cutting process and ensure accurate estimation of fabric consumption
• Maintain a good housekeeping routine to avoid fabric staining leading to an increase in raw material cost and extra manpower
• Organizing fabric storage unit regularly to avoid unnecessary damage or loss of fabric
• Organizing training sessions for professionals to upgrade their skill

Wrapping Up

Garment costing is a complicated process as it involves multiple variables with tedious calculations. Yet, it is an important task for the business. It helps in the maximum utilization of raw materials and manpower for a sustainable yet profitable manufacturing process.

At Fashinza, we believe in assimilating advanced technology with innovative ideas to help brands deliver quality products. Our AI-powered platform helps the brands connect with the expert manufacturers in the industry who ensure great support throughout the production process starting from design to delivery. With Fashinza leading the way, clients can expect hassle-free business with curated industry standards, reduced overheads, and expenses ensuring maximum profit.