Apparel costing shapes whether a garment style can be produced at the right price point. Every stage, from sample development to actual production, depends on knowing the cost of materials, labor, packaging, finishing, shipping, tariffs, overhead, and markup. Designers, manufacturers, merchandisers, marketers, and retailers all rely on these figures before a product can move forward. When the cost structure is clear, it becomes easier to judge profit potential and product viability.
What Is Apparel Production Costing?
Companies are in business to make a profit and generate revenue. Profit is monetary excess acquired through the sale of merchandise after the cost to produce the product has been subtracted. Revenue is the income generated from the sale of products during a specified time frame. Designers, manufacturers, merchandisers, marketers, and retailers must determine the costs associated with saleable products. Cost is defined as the associated expenses incurred when producing a product.
Costing is the method for determining or approximating the total cost of resources and associated expenditures for a particular garment style or product. The process of costing outlines a detailed estimate of garment component costs, labor costs, packaging costs, finishing, shipping costs, tariffs if applicable, factory overhead, wholesale markup, retail markup, and list price.
Many costs are associated with manufacturing apparel. The cost of goods includes all variable and fixed costs incurred during the production of a product or garment style.
Why Apparel Costing Matters in Garment Production
Costing at various stages of a product’s development and production is important. The first stage of costing is to estimate the preliminary cost of a sample garment, followed by production costing, and lastly determining the actual costs during production. Accurately determining the cost of a garment style is essential to determine if a design can be produced at a targeted price point or within a specified price range, profit potential for a garment style, and viability of the garment style for the product line.
Shipping charges and tariffs (duty) must be included as part of the garment costing equation. Costs associated with shipping include ocean freight and inland transportation costs known as drayage.
Types of Costs in Apparel Manufacturing
Variable Costs
Variable Costs are long-term expenditures (investments) in labor, materials, and manufacturing plants. Costs fluctuate in direct proportion to the number of units produced. Variable costs may include labor for construction, garment components and materials, packaging, and freight.
Fixed Costs
Nonvariable Costs (Fixed Costs) are short-term expenditures that essentially do not change and are not affected by an increase or decrease in volume, because the investment in labor and the manufacturing plant has already been made. Costs that are not affected by an increase or decrease in the number of units produced. Nonvariable costs may include utility bills, lease payments, taxes, employee benefit expenses, and labor costs for personnel other than direct.
Manufacturing Overhead
Overhead (Manufacturing Overhead) is all costs incurred by a contractor or manufacturer for a plant to manufacture and make delivery of goods. Overhead costs may include utilities, facilities maintenance and depreciation, machine and equipment maintenance and parts, property taxes for plant, and workforce other than direct labor.
Direct Costs
Direct Costs are expenditures made to add value to the product during production. Direct Manufacturing Costs include fabric, support materials and devices, findings, thread, trim, labels, and packaging. Labor Required for Production includes cutting, shade marking and bundling, sewing, wet processing, finishing, first line supervisors, and inspectors of Quality Control.
Direct Labor Cost
Direct Labor Cost is wages for workers involved in the actual production of garment styles. Direct labor wages for line supervisors, cutters, sewers, and other employees who perform tasks to manufacture garments.
Indirect Costs
Indirect Costs are expenditures that do not specifically add value to the product during production but are necessary for the operation of the factory. Indirect costs include factory overhead, occupancy overhead, and workers that do not add value to the product during manufacturing.
Indirect Labor Cost
Indirect Labor Cost is wages of workers who are essential to running and maintaining the factory but are not involved in the actual production of the garments. Indirect wages pay for equipment repair technicians, maintenance staff, materials handlers, and security.
Costing Documents and Pricing Terms
A Bill of Materials is a comprehensive list of materials compiled to produce a prototype of one garment style. The bill of materials is created prior to sample construction and submission of bids.
A Bid Package is a document containing garment style specifications provided to potential contractors in order for them to estimate plant capacity for production, technology required to produce the garment style at the specified quality level, production cost for the garment style, production time, and delivery.
A Price Quote is a written document submitted by a contractor in response to a bid package that includes the estimated price to produce a garment style or product.
Wholesale Price is list price of a garment minus all discounts and allowances. This is the price the retailer actually pays a manufacturer for a product.
Markup and Keystone Markup
Markup is a predetermined percentage added to the wholesale price of a garment style to get the retail price. Keystone Markup is fifty percent markup.
List Price
List Price is the product’s suggested retail price.
Contribution Margin
Contribution Margin (Gross Margin Contribution) is product price minus the variable costs or cost of goods.
Gross Margin
Gross Margin (Profit Margin) is cost of manufacturing subtracted from a product’s net sales.
Apparel Costing Methods
Three common costing approaches are absorption costing, activity-based costing, and direct costing.
Absorption Costing
Absorption Costing (Whole Cost Method) is an estimate of the variable costs associated with garment components (materials, trims, and findings), labor for product assembly, and a fixed factory overhead rate that is calculated as a percentage of the direct labor cost. The overhead application rate is the factory overhead total divided by the direct labor cost total for a specified period of time. Absorption costing method can recover overhead costs from the production of other items due to the overhead application rate.
Activity-Based Costing
Activity-Based Costing is an estimate of all direct and indirect production expenditures required to manufacture a garment style. All costs are treated as variable in relation to the specific garment style’s needs. Activity-based costing more accurately reflects costs associated with a specific garment style than other costing methods.
Direct Costing
Direct Cost Estimate (Direct Costing or Variable Costing) is an estimate of variable costs associated with garment components (materials, trims, and findings), labor for product assembly, and factory usage. These are the only factors that determine the cost of a product. The direct costing strategy is more effective for firms that produce basic goods or those that manufacture their goods in their own factories versus using contractors or outside shops. The following nonvariable costs are calculated per unit as fixed costs as part of gross margin or as part of the percentage of the targeted gross margin: administrative and general business costs, factory overhead, design/product development costs, and marketing/promotion costs.
Apparel Costing Process
Preliminary cost estimate, production costing, and actual cost tracking form the main costing process in apparel production.
Preliminary Cost Estimate
Preliminary Cost Estimate (Precosting or Quick Costing) is calculated during the design development stage of product design. It estimates the cost of garment components (materials, trim, findings), labor, factory markup, packaging, finishing, shipping, tariff rate if applicable, and wholesale markup to determine the retail price of the garment style.
Production Costing
Production Costing (Final Cost Estimate) is calculated after the sampling stage of the product development process. It is a more detailed estimate to determine the retail price of the garment style with regard to the number of units to be produced. Production costing includes cost of garment components (materials, trim, findings), labor, factory markup, packaging and finishing, shipping and tariff rate if applicable, and wholesale markup. Final cost estimates include landed costs.
Actual Cost
Actual Cost is monitoring and calculation of real costs during the production phase to be sure they do not exceed the final cost estimate.
Shipping, Duty, and Landed Cost
Free on Board (FOB)
Free on Board (FOB) is ownership transferred from the exporter or offshore contractor when the goods are loaded onto a ship for transporting from the country of origin. Charges incurred by the exporter that are incorporated into the price of the goods include duty charges at point of export, quota charges if applicable, drayage, inland transportation from the factory to the port, and handling charges for loading goods onto the ship.
Free on Board (FOB) Destination
Free on Board (FOB) Destination is ownership transferred from the exporter or offshore contractor when the goods reach the retail store or distribution center. The goods are loaded onto a ship for transporting from the country of origin. Charges incurred by the exporter that are incorporated into the price of the goods include duty charges at point of export, quota charges if applicable, all drayage, inland transportation from the factory to the port at origin and from the destination port to the retail store or distribution center, and handling charges for loading and unloading goods during shipping.
Cost, Insurance, Freight (CIF)
Cost, Insurance, Freight (CIF) is cost of merchandise, insurance, and transportation to the port of shipment. The manufacturer or exporter is responsible for clearing and paying all of the costs, including insurance, associated with delivery of the goods to the port of shipment, not destination. Once the merchandise is loaded onto the vessel, the buyer is responsible for loss or damage to the goods, claiming the goods at the destination port, transportation costs to the distribution center, store, or warehouse, and duty tariff or tax on imported goods.
Estimated Landed Cost (ELC)
Estimated Landed Cost (ELC) is total product cost for garment components, labor, packaging, factory usage, shipping costs, and duty charges before wholesale and store markups are added.
Landed Duty Paid
Landed Duty Paid is landed value of a product plus any import duties, such as shipping, duty, delivery, insurance, and customs clearance costs. The supplier is responsible for paying landed duty.
Landed Cost
Landed Cost is overall expenditure for completed products including domestic drayage to retail stores or distribution hubs.
Cost of Goods in Apparel Production
Cost of Goods includes variable costs and fixed costs. Variable Costs may include machine parts and oil, sewing needles, cutting blades, plastic film for automated cutting, machine and equipment costs, maintenance and repair of equipment, marker paper, materials management and handling, and utilities. Fixed Costs may include depreciation of equipment and facilities, insurance, property taxes, rent, compliance regulation costs, security, general operating expenses, materials management and handling, and utilities.
Final Thoughts
Apparel production costing brings together garment component costs, labor costs, packaging, finishing, shipping costs, tariffs, overhead, and markup. The method used, whether absorption costing, activity-based costing, or direct costing, changes how those costs are treated. Preliminary cost estimates, production costing, and actual cost tracking help determine whether a style can meet the targeted price point and profit potential. When these pieces are organized clearly, costing becomes a practical guide for deciding whether a garment style is viable for the product line.
