Calculate Cost of Manufacturing Apparel Products

How to Calculate Cost of Manufacturing Apparel Products

---

Estimating correct manufacturing cost is essential for a successful business. You might be preparing garment cost sheet and need to find manufacturing cost per garment. But don't know exactly how to do it and don't have full confidence calculating the same. Don't worry. Read this post and learn the basic method of determining Cost of Manufacturing (CM) of apparel products.

Cost of manufacturing can be defined as the cost incurred by the factory to run the factory making garments. Factory running cost includes direct labor cost and manufacturing overhead. Here manufacturing overheads are indirect workers wages, staff salary, power and fuel cost, repair and maintenance cost, factory rent, administration cost etc. This cost is also known as operating cost. Cost of Manufacturing is determined for per unit garment.

There are two ways to find Cost of Manufacturing (CM) for a particular style/order. 

1.  Based on Standard Time (SAM) of the product
2.  Based on Daily Production Average

1. CM Calculation Based on Standard Time (SAM) of Product Making

To get better accuracy in cost estimation one should prefer this procedure. But to many small size companies no such resources available to measure product SAM and data for the following parameters. Following parameters are essential for cost calculation in this method.

1. Product SAM: Standard time of the garment. Standard time of a garment is measured by using Time Study and using synthetic data. 
2. Target Efficiency:  Target efficiency percentage is at what % you are expecting running a specific product and order quantity. 
3. Operating Cost per day/machine - Operating cost is factory running cost. Operating costs are all cost incurred to run the business other than material cost. Calculate monthly operating cost and then calculate daily operating cost. Calculate per machine operating cost.

Formula:
Cost of Manufacturing = (Operating cost per day per machine* SAM)/(Target Efficiency% * Working hours * 60)

In the following table an example is shown for calculating manufacturing cost using SAM and Daily Production figure. 

In the  above example, garment SAM is 21 minute, target efficiency 60%. So, actual time would be 35 minute to make a garment. Factory works 8 hours in a day and operating cost per day per machine is Rs. 1022.

Cost of manufacturing is Rs. 74.52

Also Read: How Factory Overheads is Calculated in a Garment Export Business

2. CM Calculation Based on Daily Production Figure

This method is widely used by garment manufacturing factories. Cost of Manufacturing  calculation is done based on historical production data. This is an easier method compared to above one.

Information needed to find Cost of Manufacturing

1. Daily production: Find average daily production of a particular style (garment) based on earlier (historical) production figures. Calculate daily average production of the factory. 
2. Manpower involved in production: How many sewing machines or sewing operators are utilized to produce above quantity. 
3. Operating cost per day/machine: As explained above.

Formula
Cost of Manufacturing = (Operating cost per Day / Total garments to be produced per day)

See the example method -2 in the above table. In the example, daily product is 550 pieces. 40 operators worked to produce these pieces. Operating cost per machine is Rs. 1022 per day. 

So cost of manufacturing is Rs. 74.33

P.S. Data used in the above examples are hypothetical.


Also read: Actual Garment Production Cost -the way factory calculates it.

Calculate Production Target and Worker’s Bonus on Initial Days of Production Start

How to Calculate Production Target and Worker’s Bonus on Initial Days of Production Start?

---

Question

---

Many of my orders are of 5,000- 22,000 pieces per style. My sewing line's output is around 1,200 pieces per day. So styles are finished within 1 -2 weeks and need to change style. In the first week of loading a style operators are not familiar with style and they learn in this period. So the time measurement is not correct to be a reference. Then in second week reference can be measured accurately but almost the styles get finished.

How can I set the target and bonus more adequate in this situation? Bonus amount should be attractive to workers and also fair to factory. Workers work on hourly wage.

---

Answer

---

The problem raised in this question is a fact of garment manufacturing factories. When a new style is loaded to a line, operators learn on initials day and produce less. That is one of the reasons for low production compared to pick production or average daily production. 

In this article I will explain how you can set production target and operator bonus effectively even on the initial days of the production start.

Setting Production Target

You might already know the formula that is used to calculate daily production target of a style. If don’t know here it is.

Production Target per day = (Number of operators X Working hours per day X 60 X Line Efficiency%)/ (Product SAM)

There are two problems in using this formula calculating production target on the learning stage.

1. You wouldn't know actual line efficiency – as efficiency will build up day by day up to pick efficiency level. And without past data you can’t assess what would be the efficiency of day 1, day 2 or day 3.
2. Product SAM - assuming that you are not using Predetermined Motion Time System (PMTS) for measuring product SAM. Production capacity is estimated based on time study of the production line. This has been indicated in the question.

The only solution of this problem is that you have to develop database for line efficiency at the learning stage. This period is called as learning curve. Develop learning curve of your lines (style wise, order wise) by studying styles. Measure the trend - how production build up happen and reach to pick production day by day at the learning stage. Once you have enough data on efficiency build up (learning curve) you can make target plan for the future orders. Learning curve may vary depending on order quantity and style difficulty level.

Learning curve (Efficiency% Vs Days) of a typical garment factory for one style is shown in the following Fig. In this learning curve day wise efficiency build up is shown.

Figure: Learning Curve

Similarly develop database for standard time for your styles by using Time Study method.

Now you have both data to calculate production target even at the learning stage. Practice it and write me if find any issue in using the above method.

How to Set Worker Bonus?

You can set workers performance bonus at the learning stage for individual worker or/and for the group without much difficulty. It is the similar method that you use calculating bonus amount on the normal production days. The difference is - in this period the target efficiency% for becoming eligible for earning bonus to be kept lower than normal production. Design day wise target efficiency based on your learning curve. You can keep the bonus amount per point increment of efficiency same. Or slightly more to motivate your operators working harder.