Cost Factors in Industry

The cost factor is a cost incurred due to an activity or item of material, equipment or personnel that incurs a cost. To know more about the cost factor industry one should analyze the whole structure and activity of any factory.

Though cost factors may differ from industry to industry, but there are a few basic factors that are almost similar in all industries and here we will consider common factors. There are external as well as internal factors affecting cost factors in the industry. Let’s consider these factors one by one to know more about its role and influence.

External factors:

Industries are mostly involved in some kind of production, it could be related to electronics and engineering or foods etc., there are many factors that affect the environment of the industry and the production.

Economic climate is one of the most influential external factors affecting cost. It includes governmental policies, fluctuation in price of raw materials, changes in foreign currency and interest rates. Factors like growth of market, quality of imported products all these also plays a significant role in cost factor of any industry. One cannot deny the role of social change as well. Changes in people’s lifestyle and expectation also affect cost factor. It is hard to control the effect of these external economic factors, but the importance and role of these factors cannot be denied.

Internal factors also play a crucial role in the productivity of an organization. Organization’s value and philosophy decides how the industry will cope with external changes.

Let’s discuss the cost factors in the perspective of garment industry.

Costing is one of the most vital factors of the prices and the important factor to consider in all important stages like purchase, production, marketing, sales. One should have good knowledge and working experience in the related field successful marketing and sales. Update knowledge about everything related to textiles, is essential to make the most economical costing. For example,

Cost factor in garment industry

Direct Cost includes:

* Material

* Labor cost

* Transport

* Commission

Indirect cost: includes:

* Overhead

* Designing

* Sample

* Pre-production

* Factory building

* Administration

Macro cost includes:

* Taxes

* Quota

* Tariffs

* Infrastructure

* Education

At this point one problem emerges it is common practice to focus on the direct cost especially wages

Most suppliers are focusing on direct cost/wage rates because:

  • it is easy to calculate
  • it is easy to avoid paying wages than the electricity bill
  • the supplier has no influence in reducing macro costs, but high influence in reducing indirect costs.

The problem is a lot of suppliers haven’t any knowledge about the relation between labor costs, direct costs, indirect costs, and macro costs.

– From designing a garment to ship the garment there are round about 100 steps to complete, but only 15% of the steps are linked to direct costs. Some suppliers don’t think about cost calculation at all

– Focusing on the market price

– Blind negotiation

– No control about cost coverage

– Workers have to pay the bill

Classification of costing methods

**Standard cost

Standard cost is the cost of producing the requested product at the requested quantity detailed to the consumed component level of both materials and cost elements such as labor, energy etc.

This can be achieved by calculation of the cost per machine hour, broken down to the smallest measurable element. For example, a Stenter machine hour cost is calculated by adding the operator hours involved, the KW hours of electricity consumed, the steam Kg used and all other consumed elements, adding to that the fixed costs, detailed by element allocated to each hour.

Costing by machine hour allows the maintenance of the consumptions independent of product and allocating the amount to each unit produced by the variable hours it consumes on that specific machine.

Costing by consumption units such as KWH of electricity Man hours by operator type, allows for simple maintenance and easy simulation of “what if” scenarios in case of element unit price fluctuations.

Proactive costing

Knowing the cost and margin of each order line before acceptance allows decision makers to confirm or reject an order price by actually knowing the accurate margin of that order before production, this leads to rejecting lines far below the variable cost, avoiding rejection of prices above variable cost but under “full average” cost and prioritizing orders by maximizing contribution per scarce resource hour. When working in an environment where capacity is available, any order which can contribute with positive margins towards covering fixed costs is acceptable, while when working at full capacity prioritizing orders creating maximum margin per machine hour is preferable.

Margin is the difference between the selling price and the variable costs, variable costs are the costs directly related to the manufacturing of the particular order, hence very often even labor cost may be considered fixed for short term analysis.