Overview of Cost Planning at Aadishwar Apparel, Indore:
There are four main areas of operation of the Firm
- Material handling Division- this division is responsible for the receipt of raw material as well as storage of finished goods. The work in progress inventory which needs finishing at a later stage is also handled at this division
- Tailoring Division- this division concerns with the intial cutting of the raw cloth into pre specified designs. The pieces to be assembled for a particular design have been cut according to the specifications. Thereafter the pieces, which require immediate processing, are sent to outsourcing units for sewing and dyeing.
- Design division- this division is responsible for suggesting the design specifications for the coming season. The designs usually are based on market surveys and retailers feedback.
- Packaging and delivery division- this division is concerned with quality checks of the finished items and their packaging. The packaging is done uniformly for various designs in cartoons, which contains 5 pieces each of various size. This division is also concerned with the delivery of these cartoons for further distribution to the wholesale dealers.
PROCESS FLOW DIAGRAM
The process starts with the procurement of raw material. It includes majorly the cloth which is procured from different suppliers across the country mainly from Surat (Gujarat), Indore (M.P.), Ludhiana (Punjab). Metals, buttons, thread etc. and other miscellaneous raw materials components are also procured at this stage. There is a store in which all this raw material is stored.
In the design stage the designer according to market requirement designs various types of products by using CAD software. These designs then are sent to the management for approvals. After the approval the process starts with precutting, in this process all the parts of the garments are cut into required design specifications. Each design is allocated a unique design number and all the various departments communicate with each other by using this particular number. After the precutting the various cloth parts are then sent for sewing. There are four main types of garments.
So accordingly the required products are then sent for dyeing. This process is of three type’s i.e. blasting, dyeing and permanent wrinkles. According to the design specifications the process is carried out. In the design the required color and type of wrinkles required are mentioned. After the dyeing the products which require embroidery are then sent to the particular department. Embroidery is the art or handicraft of decorating fabric or other materials with designs stitched in strands of thread or yarn using a needle. This process is also carried out as per the specified design requirements. After this process the products move to the next stage where materials such as metal strips, buttons, zips, pearls, beads, quills, and sequins are attached as per requirements. Then the garments are sent for ironing where after ironing they are arranged into stacks. After ironing the inspection of all garments is done for any design flaws. Once a particular lot is checked it is then sent for packaging. The packaging in done in cardboard boxes and then these finished products are products are stored in the store. This store is taken on rent by the firm.
We have divided the labor at the firm into two parts i.e. Direct Labor & Indirect Labor. Direct labor cost can be attributed directly to a single product where as the cost of indirect labor is not easily attributed to a particular product.
Indirect Labor
Salaries and wages paid to these employees and workers cannot be attributed to a particular product. These include the meal staff which is responsible for providing lunch to the workers, the supervisors& managers salary, the accountant’s and designer’s salary. These employees and workers are indirectly contributing to each product being made at the firm, thus to allocate their cost to a specific product is a challenge.
Direct Labor
Direct labor consists of workers directly involved in the production part of the garments. These are the workers who carry out various parts of the process depending on the job allocated to them. Since each of them carries out a specific process hence their cost can be attributed directly to the final products.
Direct Materials
These are the direct materials which are used in the production process and their cost is directly attributable to the final products.
Overheads
While allocating cost to final products, the main problem is the righteous allocation of overheads. Overheads consist of expenses ranging from housekeeping, rent, electricity, power to depreciation etc. These overhead costs are required for the functioning of the firm but their allocation to a single product is quite cumbersome. The company as of now allocated the overheads on the basis of no. of units produced. Now different products have different manufacturing processes thus the allocation of cost on basis of no. of units may not represent a true allocation.
Glossary:
P1 : Plain (non-embroidered) and Non-Dyed
P2 : Plain (non-embroidered) and Dyed
D1 : Designer (embroidered) and Non-Dyed
D2 : Designer (embroidered) and Dyed
Exhibit 1: Based on our interaction with personals at the accounting department, we gathered information regarding the inventory position for the last month.
EXHIBIT 1
These were the position regarding four different product designs viz. P1, P2, D1 and D2 were as given on 31st October, 2008. The beginning inventory for the month of October was given and the inventory purchased during the month was also given. Outgoing is the amount of material going out of inventory and is used for the production and also given is the closing inventory. The company did its accounting on the basis of inventory purchased during the period which amounted to Rs. 10018 for the month of October.
Exhibit 2: Company manufactured three designs in each segment having differential prices. The different designs and their selling prices have been manufactured in the month of October.
EXHIBIT 2
On the basis of our interviews we understood that in each segment there were 3-5 designs. The company takes three major designs from each segment category to calculate the average selling price. Each design has its unique ID for segment identification as well as for recognizing the month of introduction of design. We calculated average selling price for each segment using the normal average method as shown in the Exhibit 2. For e.g. product segment P1 had three major designs, i.e. 1071P1/10, 1072P1/10 and 1073P1/10 having selling prices Rs. 330, Rs. 335 and Rs. 340 respectively. The average selling price hence is Rs. 335. The ID also shows the introduction month 10 i.e. October.
Exhibit 3: On the basis of our interaction with staff at the manufacturing unit, we found the cloth cost per unit for different product segments.
EXHIBIT 3
There are five sizes in each segment ranging from 32 to 40. All the sizes have different cloth requirement ranging from 1.05 m to 1.14 m per unit. The average cloth requirement per unit has been obtained by taking normal average of a set of product which comes out to be 1.1 meter per unit. A set contains same design product of each size and whole-sellers and retailer etc. are supplied in the terms of sets. The costs of different cloth are different, for e.g. P1 costs Rs. 155 per meter whereas D1 costs Rs. 168 per meter. Using average cloth per unit and cost of cloth, we found out the cloth cost per unit for different product designs.
Exhibit 4: It gives the details of number of employees involved in various tasks and also their yearly wages.
Exhibit 4
Direct Labour Costs
Based on our interaction with employees of the organization we were able to get an idea of the costs involved and we have classified those under 3 heads:
- Direct Material
- Direct Labour
- Manufacturing Overheads
Direct Material
The direct material costs are incurred on the following:
- Raw Cloth: This is the primary raw material that is used.
- Thread
- Metals & Buttons: The metal rivets in jeans and buttons in the different clothes.
- Zip
- Miscellaneous: Some of the clothes have a belt that comes along with the garment.
- Dye: Different colour dyes are used for different coloured clothes.
- Bleach: Bleach is used to give a glossy look to the clothes. Also more the dye used more is the bleach required and higher the cost.
- Price Tag
- Cartons Packs: The finished pieces are packed and stacked in cartons packs before shipment.
Direct Labour
Based on our observation at the plant, we were able to identify the tasks to which labour costs can be traced directly. Exhibit 4 gives the details of number of employees involved in various tasks and also their yearly wages. Here is the list of tasks.
- Supervision
- Receiving & Handling: 2 employees are responsible for receiving the raw materials and other inventory and storing them.
- Junior Tailors: Junior tailors are involved in cutting out cloth from the rolls required for different clothes based on the requirement.
- Senior Tailors: Senior tailors are the ones who actually cut out different pieces based on the design and stitch them.
- Dyeing: Of the four different products, 2 are plain and 2 are subjected to dyeing. A standard set of dyes are used for this purpose.
- Embroidery: Dyeing is followed by embroidery. This part of the production is outsourced.
- Metal & Buttons: Metal buttons and rivets are stitched to the clothes by a couple of employees.
- Iron: The clothes are then pressed.
- Inspection: The pieces are subjected to inspection to find any visible defects in stitching, embroidery, movement of zip runner etc.
- Packing & Shipping: The individual pieces are put in transparent covers before they are packed in cartons and shipped.
We observe from Exhibit 4 that a total of Rs. 15,36,000 is being paid out as yearly wages.
Exhibit 5: It lists down all these costs of overheads. These costs, except for maintenance cost, were estimated based on last year’s figures. The maintenance cost is estimated based on the cost for the month of October of the present year.
Exhibit 5: Manufacturing Overheads
It would be impossible to complete a job without incurring indirect costs such as Administration costs, House Keeping etc. We tried our best to find out all the sources of manufacturing overheads and the same are listed here.
- Designing: Designing costs are incurred on the coloured or dyed garments which have embroidery on them and not on the plain ones.
- Sewing m/c depreciation*: The sewing m/c is subjected to depreciation. We were able to find out when it was purchased and estimated an year-on-year depreciation.
- Dyeing machine depreciation: Similar to sewing m/c depreciation.
- General Expense: The different heads under general expenses are mentioned below.
- Electricity
- Rent
- Administration expense: Includes the salary given to 1 Accountant and 2 Managers.
- Storage: A separate warehouse has been rented for storage purposes.
- House Keeping
- Maintenance
* Note that embroidery part is outsourced and hence there is no depreciation on the machinery used for the purpose. In a few cases where the complete costing information wasn’t available, we’ve used rough estimates.
