ABC Apparels

ABC works on four categories of garments (Exhibit 1). These categories are classified on the basis of the level of designing incorporated in the final product. The first classification has plain (Dyed and Non-Dyed) and Designer (Dyed and Non-Dyed) products.

The firm had a strong belief that maintaining sufficient operating margin is of utmost importance as the business activities in garment industry are more vulnerable than ever. Ritesh after discussing with the accounts section came up with the hypotheses that it is very important to maintain 35% of gross margin for every product line.

ABC had about 35 years of experience in the business. Based on the experiences Mr. Ashok Kumar used to forecast the sales, worked out the unit cost and set a selling price for all the products. Ritesh was very uncomfortable with this approach from the very beginning but he appreciated the honed business skills of the father. He felt it rational to go with the present prcing scheme for last two years.

A transition came around in October 2008, when Ritesh saw a fall in demand for there exclusive non-dyed products (P1 and D1). P1 was the formal launching and flagship product of ABC. Years ago ABC entered the business with this sole product. The market recognizes the brand of ABC due to P1 in the market. D1 entered the market in late 90s, when ABC realized to diversify the product line. ABC subsequently entered the designer segment with D1.

On the other side, the sale demand for the Dyed product seems to rise continually even when the mark up price shoots up the targeted ones. Exhibit 2 shows the current mark up pricing and actual selling prices.

Ritesh was concerned to the level that he felt that something is fishy with the current pricing scheme. He immediately called upon a meeting with the head Accountant Mr. Prakash Patel. Ritesh explained him the situation and asked Patel to explain the current costing scheme to him for FY 2007.

Exhibit 3 is the current costing for the firm. Patel explains that on an average a piece of garment requires 1.1 meters of raw cloth. The cost of raw material is put up as per the actual costing involved. The calculations for raw cloth are shown in Exhibit 4.

Also, direct material is put up based on the approximate direct material used for all the products. Direct labor is calculated based on total direct labor expenses in 2007 and the anticipated production of 100,000 units. The unit cost is calculated based on these projections. Exhibit 5 shows the segmentation in direct labor and the unit costing.

Overheads are calculated based on previous experience. Overheads are considered to be 37.5% of the direct labor.

Ritesh after contemplating on more details asked Patel to provide him with the actual expenses under several heads. Ritesh was wondering why certain expenses such as Administrative cost, Designing cost and house keeping are considered as direct labor expense instead of overheads in unit cost calculations for direct labor.

Ritesh further identified various activities under the overheads. He was convinced that Administrative cost, Designing cost and house keeping are a part of overall overhead. He then allocated the relevant activity to its proper cause. Exhibit 6 shows various activities and the allocation bases. Exhibit 7 shows further details for the activity drivers.

Exhibit 8 shows the actual expenses incurred for various heads. Exhibit 9 shows the actual throughput. Further Ritesh identified the trend for the ratio of production mix for all the existing products. Exhibit 9 also shows the ratio of the output produced.

He then found out the actual direct material cost that is incurred for all the input material. Exhibit 10 shows the break up for all the products.

Ritesh then asked Patel to recalculate the unit cost for each product independently. He further suggested that the direct labor cost needs to be restructured and Administrative cost, Designing cost and house keeping to be considered as overheads. Also direct labor cost can be assigned to all the products based on their ratio in the production mix.

Exhibit 1

Exhibit 2

Exhibit 3

Exhibit 4

Exhibit 5

Exhibit 6

Exhibit 7

Exhibit 8

Exhibit 9

Exhibit 10