Concepts of Textile Manufacturing Costing
Cost can be defined as expenditure incurred to produce a given good or service in textile yarn, fabric and garment manufacturing processes. Cost is the amount to be paid for a good or service or the resources given in exchange for such good or service such as raw materials, trims, labour hours and machine usage in apparel production. In commercial terms, cost is a monetary valuation of the effort, materials, risks and opportunity costs all put together through spinning, weaving, knitting, dyeing, finishing and garment construction operations. Value is measured in terms of the usefulness of the product, and cost is measured strictly in monetary terms for accurate costing of textile and apparel products.
While cost is a very generic term, it can be classified further as prime cost, sunk cost, factory cost, direct cost, indirect cost, fixed cost, variable cost, etc. It is advisable to classify costs as it gives more information about it for efficient production planning and cost control in textile factories. In textile and apparel manufacturing, proper cost classification is essential for pricing, budgeting and profitability analysis especially in high-volume export-oriented garment industries.
Costing is essentially a technique via which we assign costs to various elements of a business such as fabric consumption, sewing operations, washing and finishing processes. It is a system of ascertaining costs for each production stage from raw fiber to finished garments. We follow certain rules and principles to guide us in ascertaining costs to ensure competitive product pricing in the global apparel market. Some examples of methods of costing for ascertaining costs are historical costing, standard costing, etc. Assigning variable costs according to activity levels is direct costing and assigning fixed costs irrespective of activity levels is known as absorption costing which is commonly practiced in textile mills and garment factories.
Usually, there are three elements involved in the concept of cost – material cost, labour cost and expenses including fabric, trims, operator wages, utility expenses and overhead costs. These three elements form the foundation of textile product costing and are essential for calculating garment FOB cost and factory profitability.
Elements of Cost
1. Material Cost
Materials used to produce the final product may be classified into direct materials and indirect materials in textile mills and garment factories.
a) Direct Materials
These are all such components or material(s) that are used to produce the final product. Direct material cost is the cost of materials entering into and becoming constituent elements of a product or saleable service like fabrics, yarns, or trims in garment production. Thus, materials which can be identified with units of output or service are known as direct materials.
Examples: Cotton, polyester, wool, silk, etc., used in production of cloth; fabrics in garments; leather in leather goods; stones in cement production; clay in bricks; steel in machines; timber in furniture; fruits in canning; glue for book binding; batteries for electronics. In apparel manufacturing, direct materials mainly include fabric, zippers, buttons, labels, threads, and other garment trims.
b) Indirect Materials
Materials used for the product other than direct materials are called indirect materials. In other words, material costs which cannot be identified with a specific product, job, or process are known as indirect materials’ costs. Indirect materials may be used in the factory, office, or selling and distribution divisions supporting overall textile and apparel production.
Examples: Consumable stores, lubricants, printing and stationery material, small tools, office stationery, advertising posters, and materials used in maintenance of plant and machinery such as sewing machine oil, cleaning supplies, and factory consumables in garment units.
2. Labour Cost
The manpower used for conversion of materials into finished products is termed as labour in textile processing and garment manufacturing operations. It may be further classified into direct labour and indirect labour depending on their involvement in yarn, fabric and apparel production.
a) Direct Labour
Labour, which plays an active and direct part in the production of a particular product, is termed as direct labour, which includes cost of wages, salaries, incentives, bonus, etc. of the employees of an undertaking working on production lines and textile processing machines. Direct labour cost can be conveniently and specifically charged to specific products such as a garment style or fabric batch. It is also called direct wages. Direct labour cost is the cost of labour directly engaged in production operations from cutting to sewing and finishing stages.
Example: Sewing operators, cutting operators and finishing workers as well as knitting machine operators, loom operators, dyeing machine operators and pressing workers.
b) Indirect Labour
It is employed to carry out tasks incidental to goods produced or services rendered without directly participating in garment or textile production. Indirect labour cost cannot be practically traced to specific units of output. It may be incurred in the factory, office, or selling and distribution divisions supporting overall production efficiency. Indirect labour cost is the remuneration paid for labour which is engaged to help production operations such as supervision, maintenance and administration.
Examples: Wages of a storekeeper, salaries of office staff and sales representatives, directors’ fees, security guards, cleaning staff, etc. Clerical and managerial staff, sales clerks, distribution employees are also included in the orbit of indirect labour along with production supervisors, quality inspectors and maintenance technicians.
3. Expenses
a) Direct Expenses
These are expenses which can be directly allocated to a particular job, product, or unit of service such as a specific garment order or fabric lot. These expenses can be directly identified with a unit of output, job, process, or operation within textile wet processing or apparel manufacturing. They are specifically incurred for a job, or unit or process and in no way connected with other jobs or processes. Direct expenses are also known as chargeable expenses in production costing systems.
Examples: Hire charges paid to some special machinery required for a particular contract, cost of designs and development or mold incurred in manufacturing, hire charges of special plant used for a job, royalty on products, cost of special patterns, designs or plans for a particular job or work order such as embroidery design development, washing sample development and special finishing process cost.
b) Indirect Expenses
These are expenses other than direct material and labour, which cannot be directly identified with units of output, job, process, or operation in textile mills or garment factories. They are incurred in common and can be apportioned to various cost centers or cost units proportionately on some basis through overhead allocation methods.
Examples: Factory rent, lighting, insurance, depreciation, bank charges, advertising, office and administration expenses, selling and distribution expenses including compliance cost, utility bills and factory maintenance expenses.
4. Overheads
The aggregate of indirect material cost, indirect labour cost, and indirect expenses is termed as overheads in textile mills and garment manufacturing units. Thus, all indirect costs are overheads that cannot be directly traced to a specific fabric batch or garment style.
So,
Overhead = Indirect materials + Indirect labour + Indirect expenses
They may be classified broadly into three types:
a) Factory or Manufacturing Overheads
These are indirect costs incurred inside a factory or works during spinning, weaving, knitting, dyeing, finishing and sewing operations. For example, factory supplies such as oil, consumable stores, lubricants used in textile machines, indirect labour such as factory manager’s salary, timekeeper’s salary, etc., and indirect expenses such as factory rent, factory lighting, factory insurance, etc. in production units.
These may be variable or fixed. Variable overheads are related to the volume of production such as power consumption in knitting or sewing lines. Fixed overheads are related to time regardless of production quantity. Power and fuel are examples of variable overheads whereas rent, insurance, rates, and taxes, salaries of supervision are examples of fixed overheads. Overheads are allocated, apportioned, and absorbed by products on an equitable basis to calculate accurate fabric and garment production cost.
b) Office and Administrative Overheads
These are indirect costs incurred in the general and administrative office of textile mills, buying houses or garment factories. For example, stationery, cleaning materials etc. would be indirect materials, salaries of office staff, merchandisers and directors’ fees would be indirect labour, and rent, insurance, lighting, etc., of the office would be indirect expenses related to administrative operations.
c) Selling and Distribution Overheads
These are indirect costs incurred with respect to the selling and distribution of goods and services such as finished garments, fabrics or textile products. Examples are indirect materials such as packing materials, printing and stationery materials used for shipment and documentation, indirect labour such as salaries of sales staff and sales manager, incentives, etc., and indirect expenses such as advertising expenses, insurance, godown rent, etc. including export documentation and logistics handling costs.
Components of Total Cost
1. Prime Cost
Prime cost is the sum of direct material costs, direct labour costs, and direct expenses directly associated with a specific textile product or garment order. It is also known as Basic, First or Flat Cost.
2. Factory Cost
This comprises Prime Cost and factory or works overheads, which include costs of indirect material, indirect labour and indirect factory expenses incurred during textile processing and garment production stages. This cost is also known as Works Cost, Production Cost or Manufacturing Cost.
3. Cost of Production
This cost includes Factory Cost and office and administration overheads required to manage textile manufacturing operations efficiently.
4. Total Cost
This is the sum of the Cost of Production and selling and distribution overheads including marketing, logistics and export handling costs in the apparel industry.
The total expenditure consisting of material, labour and expenses can further be analysed as under:
Prime Cost = Direct materials + Direct Labour + Direct expenses
Works Cost (Factory) = Prime Cost + Factory overhead
Cost of Production = Factory Cost + Administration overhead
Total Cost (Cost of sales) = Cost of production + Selling and distribution overhead which ultimately determines garment FOB price and business profitability.
Wages and Salary Concepts
1. CTC (Cost to Company)
CTC i.e. cost to company is different from the employee’s in-hand salary in textile mills, apparel factories and merchandising offices. CTC is the total expenditure by a company towards an employee which includes components such as basic salary, special allowances, HRA, employee provident fund, etc. along with statutory benefits and factory-related compensation.
2. Gross Salary
The salary amount calculated before deduction of taxes or any other deduction is the gross salary for textile engineers, operators, supervisors and administrative staff. Gross salary includes the basic pay, dividends or bonus, or any other differentials such as production incentives in garment manufacturing units.
3. Net Salary
This is also the take-home salary after deducting TDS or any other deductions as per company norms applicable to textile and apparel industry employees.
4. Basic Salary
Basic salary is the base income of an employee, comprising of 35-50 % of the total salary depending on factory wage structure and company policy. It is a fixed amount that is paid prior to any deductions or increases due to bonus, overtime, or allowance in garment factories or textile production units.
Elements of Wages and Salary
1. Allowances (DA)
Dearness allowance is a certain percentage of the basic salary paid to employees, aimed at mitigating the impact of inflation especially for factory workers and production staff.
2. Rent Allowance (HRA)
A house rent allowance is that component of the salary which is paid to employees for meeting the cost of renting a home near industrial zones or factory locations. Some companies, who provide accommodations, are not liable to pay any HRA to textile production employees.
3. Conveyance Allowance
Conveyance allowance, also known as transport allowance offered by employers to compensate employees’ travel expenses from residence to garment factory or textile mill premises either paying by cash or by providing the appropriate transportation facility such as factory bus service.
4. Travel Allowance
Offered by employers to their employees to cover travel expenses when he or she is on leave from work or on official factory visits, buyer meetings or production audits.
5. Medical Allowance
This is a fixed allowance paid to the employees of an organization to meet their medical expenditure not covered by ESIC or factory medical support programs.
6. EPF (Employee Provident Fund)
This is a contribution by the employee to the provident fund governed by the Employees Provident Fund Organisation or similar national retirement benefit systems. The employer also makes a similar contribution on behalf of the employees for their retirement in textile and apparel sector organizations.
7. Bonus
A bonus is a reward, paid to an employee for their good work in the organisation such as achieving production targets or maintaining quality standards in garment factories. The basic objective of a bonus is to share the profits earned by the organisation amongst its employees including operators and production teams.
8. Incentive
This is a reward given for work performed by workers in addition to normal wages or salary based on efficiency, output level or line performance in apparel production. Different schemes are implemented to motivate workers for boosting production levels and reducing defects.
9. Overtime Payment
Payment made to workers for working beyond routine working hours as per government rules during peak shipment schedules or urgent buyer orders.
10. Fringe Benefits / Perquisites
Perquisites, also referred to as fringe benefits, are benefits that some employees enjoy because of their official position such as factory managers, merchandisers or senior textile engineers. These are generally non-cash benefits given in addition to the cash salary. Some examples of perquisites include provision of car for personal use, rent-free accommodation, payment of premium on personal accident policy, etc. as part of executive compensation in textile organizations.
11. ESIC
As per the provisions of the Factories Act, if a factory falls under a certain criteria, then the employer is required to avail ESIC scheme for its employees working in textile mills or garment factories. Both the employers and employees have to contribute as per the rules and employees are covered for availing medical facilities as prescribed therein during employment.
12. Gratuity
Gratuity is a lumpsum benefit paid by employers to those employees who are retiring from the organization after long-term service in textile or apparel companies. This is only payable to those who have completed 5 or more years with the company as per applicable labour law regulations.
Conclusion
Cost and costing are fundamental concepts in textile and apparel manufacturing. Understanding material cost, labour cost, expenses and overheads helps manufacturers determine accurate product costing, improve operational efficiency and make better pricing decisions. A structured costing system ultimately supports profitability and sustainable business growth in the textile sector.
