‘Look after the cents and the dollars will take care of themselves’
Why does a dress cost $300? Is a cotton shirt worth $75? The sticker price of that dress you’re considering or the shirt you are saving for can depend on the complexity of the design, the status of the label and whether the clothing is made overseas or domestically. What goes into the clothes you buy can sometimes make the sticker price as high as a luxury vacation or as low as a pizza and a movie. The answer is layered in the long, complex journey a garment makes in the process of creation, production, testing and shipping that brings it, finally, to the retail store. It also reflects the retailer’s overhead costs, for security, real estate, technology, etc.
Understanding how to correctly cost a garment will be the key to your company’s success. One small miscalculation can be devastating to your profit margins and could undermine the survival of your start- up business. Once you have determined the market and price bracket that your company will be in, you will have to strive to maintain the quality of styling and construction within the set price structure. For a small start- up company it is very difficult to be competitive with bigger manufacturers in moderately priced and budget clothing. Unless you are investing a few hundred thousand to start your company, the higher price category is usually the best place to start. There is a higher profit margin to the manufacturer and to the retailer in ‘betterwear’. Granted the orders will be smaller, but it is hard to find financing for large orders when you are a start-up company. Most start-ups will not be able to afford to produce large quantities at first, without borrowing money. Start with small orders. When mistakes are made it will not be too devastating to the company both financially and emotionally. You will be able to learn by your mistakes.
Major Costs
The major costs involved in manufacturing any garment are fabric, trims, labor, and operational costs. Becoming familiar with labor costs takes experience in understanding the over-all work involved in the completion of the garment. Direct labor for sewing will be negotiated with the contractor. Marking and grading may be done by one company, cutting done by another, (or in some cases) your contractor may be able to take care of all these steps in producing your product. All these costs must be calculated by the number of garments made. For smaller orders there will be a higher price to pay. The more garments sold or the bigger the order, then the labor price decreases. Other labor costs to be considered are design development, first patterns, production patterns, quality control, bookkeeping and shipping. Overhead costs or fixed costs should not be forgotten including rent, electricity, etc.
Chargebacks & Markdown Refunds One of the more controversial factors in apparel prices is retailers’ request for ‘chargebacks’ or ‘markdown’ money. Chargebacks can be demanded by a store for late deliveries or for a variety of other reasons. If too few garments sell at full price, sometimes department stores go back to the manufacturer to ask that they share in the losses from discount sales. Ironically, markdown money, or credit demanded by a retailer adds to the manufacturer’s overhead costs and may boost the original retail price of the garment. Another cost that retailers expect the manufacturer to share is the cost of advertising, promoting the product in store flyers and newspaper advertisements.
Smaller specialty stores are less likely to make such requests, but they have less buying power with the manufacturer. Markdown and chargebacks have become a very sensitive issue
and many manufacturers are refusing to do business with larger department stores because of this problem. The wise manufacturer calculates both of these into the costing of the garments
Importance of Correct Costing Incorrect costing can result in losses that will eventually bankrupt the company. If the costing for cutting, sewing, or trims is incorrect, or if the yardage has been under-calculated, then the costing for that garment will result in major losses. Costing is done before the orders are written so it can be difficult to calculate how big the order will be. Therefore, it is important that start-up companies project the size of production and the money available to produce the orders. You could be out of business in a very short time without an experienced costing person filling in the cost sheets. It is also crucial to have an accurate fabric yield and a precise production cost. Never guess your costs!
Market Research
When starting a new company, it is important to assess the market, shop your competition and find out the critical price points of similar products in the market place. To cost products too high could mean no orders and to charge too little could result in no profits. Know the three stages of costing:
- ‘Actual cost’ of production: This is more or less a fixed price and can only be reduced by modifying or changing the garment.
- Cost plus your markup percentage: Deciding on the mark-up will be determined by a couple of factors: How much do you need to make in order to make a profit? What will the market price will bear?
- Retail-selling price: Having a realistic understanding of the price structure of the market place will help when costing.
Costing for the Start-Up
A simple method of costing for start-up manufacturers is to make the price you sell to the retailer at least twice your cost. This should give you a 100% mark-up, which is a necessary profit
margin when you first begin to manufacture and have small orders. The term used for this is ‘keystoning’. However, be careful for any hidden costs. This method is not the most reliable or accurate.
Example If your basic cost is $20, you will sell your garment for $40. This is ‘keystoning’ which equals a 100% mark-up. If you go back from the
$40 to the cost price of $20, that will equal a 50% gross profit margin. Understanding these basic terms will help you understand how they should be used.
Never go below 35% gross profit margin, or you will be giving the garments away! Subjective thinking will come into play sometimes when you have to take a smaller mark-up on the pricing of certain styles in order to keep a group together. Hopefully, this will make the group more saleable. Conversely, there will be times when you will mark-up a garment more than 100% to keep the garment in the correct price category. If you do reduce the profit by lowering the wholesale price of a garment, make sure that if the garment sells well and the store wants to reorder, you then adjust the price higher. If not, you may find that this garment will end up losing money for you season after season. Only compromise the cost of a garment if it is to keep a group together and you feel that removing it would harm the overall sales of the group. Your goal is to try and keep the garment at the right price point for maximum sales and profit. To do this you may have to rework the particular garment with the production pattern maker to make it fall in the right price range.
Mass Production
For manufacturers producing mass production on a large scale, the mark-up percentage is usually smaller and pricing more competitive, due to the large quantities produced. They can safely work with a 30% profit margin – you cannot! Retailers such as Forever 21, The Gap, Old Navy, Banana Republic, Limited and Ann Taylor have a price edge because they can deliver their goods directly from the factory to the public without the independent middleman. This is known as
vertical production or manufacturing.
(Discount chains such as T.J.Max, Ross or Marshall’s usually take lower profits in place of such perks as sales help, personal shoppers, carpets and fancy dressing rooms. Manufacturers often have discounted goods left in stock after the season is finished that needs to be moved rather than added to their inventory Discount chains can buy this merchandise at a low cost for sale in their stores ).
Custom Made Clothing
When costing a ‘one-off’ garment it is important to establish an hourly worth of the designer/ producer. Only when you know this can you begin to estimate the costs involved of producing a unique, one-of-a-kind, wearable piece of art.
Once you have established your hourly worth, double it and add it to all other expenses. This will give an approximate cost of the wearable art piece. If the custom- made piece has been commissioned, it is a general rule to ask for fifty percent up-front, since it is often impossible to sell to anyone but the original buyer. If you know the buyer, it may not be necessary to ask for fifty percent up front, but otherwise protect yourself from being left holding an unclaimed garment. To guarantee payment upon completion, finished pieces may be shipped either COD or Pro forma. It is a good idea to take a credit card payment before you ship. Then make sure that the payment goes through before shipping.
Computer Programs
With all the new computer programs available for managing your business, it is advisable to get a program customized to your own specifications to cover all the fixed costs of your garments. Then, the yardage, labor costs and fixed costs can be calculated, fed into the program and a correct costing made of each style. Once programmed to your specifications, these programs will calculate the gross profit margin and the net profit margins of each garment. Remember, the computer is only as good as the user, so be sure that the information programmed into the computer is correct.
Cost Sheets
To understand the cost process, start by filling in the cost sheets yourself. This will teach you a great deal about the costing process. Do not skim over this important stage of producing a garment. Often ‘designers’ are more into creating than thinking about the gross profit margins!
Costs will vary depending on the fabric selected and the amount of work involved in the design. There will be times that an adjustment will be made to the final gross margin to keep garments in the correct price range. If a garment is expensive, it should look worthy of the asking price to the consumer. When the fabric cost is high, then a simple design is advisable. When the fabric is reasonably priced, then a more complex design may be chosen.
The following should be included in a cost sheet: (See examples of cost sheets at the end of this chapter)
- Date
- Style number and design number (name
if applicable)
- Fabric description with yields, (including shipping costs)
- Linings
- Trim cost, including fusing
- Cutting
- Labor & sewing
- Packaging
- Overhead costs
- Actual cost
- Mark-up percentage
- Sales Representative percentage
- Small percentage for ‘chargebacks’ or ‘markdowns’ should be considered if selling to department stores.
With the cost sheet, include a swatch of the fabrics used, trims and a good technical flat sketch of the garment. If anything were sent out for special work e.g. fusing, pleating, embroidery, printing etc. this should be included as well.
Every cost sheet needs to consider your fixed costs as portion of the calculations. Fixed costs will always be part of the cost of manufacturing a product, whether one or one thousand pieces are produced. These costs are sometimes referred to as overhead costs. They could include product development, office staff, rent, electricity etc.
It is now very easy to work from your home or small office and contract out all your stages of the production process. Most aspects of producing a line of clothing can be efficiently handled by contracting the work out to experienced contractors. From receiving the fabric, cutting and sewing, to shipping and accounting, all these areas can be controlled by you from an area the size of a desk. Of course you will have to be certain that the service providers are well established and can be trusted to perform their job well. Always investigate the references of the people who work with you and for you. Do not assume that once they are working for you that they can do the job without supervision. It is important to check the work that is in progress.
Variable Costs
These costs are the actual costs in the product, such as materials and labor. This part of costing the garment can vary depending on the costs of fabric and labor involved.
All major parts added to the costing of the product should be evaluated and re-evaluated often to
determine if any portion can be reduced in cost. Reducing the costs to produce your garments will yield higher profit margins and more efficient, finished products.
Some companies ‘load’ their cost sheets with every possible item resulting in a smaller gross profit margin. This is fine. To not load the cost sheet, and then discover missed items could be a big blow to your overall financial situation.
Importance of Recosting
For every new style and for every season, rework the cost sheet. Beware of using the same cost sheet when changing fabrication, even if using the same style. There could be hidden costs that you are unaware of when changing the fabrication such as differences in the fabric width, marker, finishing, pressing, etc.
Sales Representatives Percentages
The percentage allowed for your sales representative’s sales commission should be worked into the cost sheet after you have calculated the total garment cost and your mark- up percentage, you then add the Terms of Sales to the cost. (See Chapter 14 for the explanation of Terms of Sales) If you don’t know the value of the terms, which will need to be negotiated, then assume a flat 8% or 10% for discounting or for warehousing and for any other unforeseen costs and add to the cost sheet.
Example of the major costs involved in a cost sheet, including ‘Keystone Costing’
A blouse takes two yards of fabric
Components:
2 yards @ $4 .00 per yard…………………………$8.00
Freight for fabric @ 15 cents per yard………..$0.30 Total Fabric cost…………………………………….$8.30
Block Fusing……………………………………………$0.20
7 Buttons @ 2 cents each………………………….$0.14
1 Label@ 2 cents each……………………………..$0.02
‘Miscellaneous’ costs: ……………………………..$0.36
$9.02
‘Make’ Charges
Cutting…………………………………………………. $0.30
Sewing & Labor………………………………………$5.00
Marking & grading………………………………….$1.00
Labor cost……………………………………………..$6.30
Overheads………………………………………………$1.50
Total cost of goods……………..$16.82
Keystone:
100% Mark-up………………………………………$16.82
Total……………..$33.64
From the above total, subtract the discount for chargebacks and the sales representative’s commission. Costing, using this method, will give a margin of profit to work with when establishing your wholesale selling price. A more sophisticated method will have to be developed once the company is paying for employees and other overheads expenses not in your first cost sheet. It is also very important that you understand how to breakdown the charges in the cost sheet and to include all costs in the correct order. One miscalculation in a cost sheet can be expensive and devastating to a company. Once costing is done incorrectly, it is easy to continue on this downward path without fully understanding where you have gone wrong.
There are methods of costing generally used in the industry that will help you develop a better understanding of the intricacies of costing. Becoming familiar with these more accurate costing techniques will help you fine-tune your cost sheets and be on-top-of the important details involved with costing.
You first have to analyze the garment and decide what the market can bear, which will determine your profit margin. This part of costing is subjective and you should be familiar with the market in order to keep the product in the right price bracket. To cost too high will undermine the sale of the garment, and to under cost will undermine your profit.
Sales representatives’ commissions and the allowable discounts to the buyers are paid off the final
wholesale price. If you think it could wholesale for $32.90 and retail for around
$70.00, you would then calculate the percentage paid the sales representative and the percentage of
allowable discounts to the buyer and subtract them from your final wholesale price.
Example #1:
100% Mark-Up
True Profit or Net Profit Calculation
Wholesale Price…………………………………..$32.90
Subtract Discounts allowable 10%…………-$3.29 Subtract Sales commission 10%…………….-$3.29 Price after discounts and commission…….$26.32 Subtract Actual Cost of Garment………….-$16.46 True Profit or Net Profit……………………….$9.86
Gross Profit Calculation
Wholesale Price…………………………………..$32.92
Subtract Actual Cost of Garment………….-$16.46
Gross Profit………………………………………..$16.46
Example #2:
50% Mark-Up
True Profit or Net Profit Calculation
Wholesale Price…………………………………..$24.69
Subtract Discounts allowable 10%…………-$2.47 Subtract Sales commission 10%…………….-$2.47 Price after discounts and commission…….$19.75 Subtract Actual Cost of Garment………….-$16.46 True Profit or Net Profit……………………….$3.29
Gross Profit Calculation
Wholesale Price…………………………………..$24.69
Subtract Actual Cost of Garment………….-$16.46
Gross Profit………………………………………….$8.23
Your Net Profit is very sensitive to a markup below 100%. (Ref. Keystone 100% example) Cost analysis is based on 10% sales commission and 10% allowable discount.
Any ‘chargeback’ applied by the retailer after delivery of goods will wipe out your Net Profit!
You should calculate the percentage of profit and record it on every cost sheet, both the net and gross profit. This will enable you to see at a glance your profit margins. As you can see from the above calculations there is a big difference between the gross profit and the net profit. Don’t forget taxes (your net profit is your taxable income)!
Make sure your wholesale calculations consider your fixed expenses (overhead), such as rent, design,
pattern making, administration, telephone, etc.
Dilution
This is the difference between what you invoice the retailer (customer) and what you get paid from your customers. There will always be some non-paying customers, chargebacks, and returns. These are calculated into the costing of your garment as part of the chargeback calculations and are real costs. If you choose to ignore them, they could undermine your gross profit so it is necessary to keep a watchful eye on your dilutions and calculate the percentage of them at the end of the season. If your dilution costs are too high, then you should address them. Find out why you are having a dilution problem, and in which area it is most prevalent. Some areas to consider:
- Is it shipping problems?
- Is it quality control?
- Is it late shipments?
If you are selling to department store it is usual to add between 12% and 15% to the cost sheet for the inevitable discounts and charge-backs. If you sell mainly to specialty stores the percentage should be around 6 to 8 percent.
Retailer’s Mark-up
Once the retailers buy your product at its’ wholesale price, they will then add their profits and overhead costs, which are about 100% to 125% to get to their retail selling price. The blouse we costed previously, may sell in the store for around $70.99
Usually, the retailer will pay for the shipping charges, but work with your sales rep in this regard. They should tell you how the store will expect their shipment, their requirements for packaging details, and if you are responsible for these costs. Anticipate their demands and include them in your cost sheets.
Do not let the retailers dictate their price, unless you know your profit margin is workable at that price. It is important to protect your profit margin, and stay in control of your product costs. (See examples of cost sheets at the end of this chapter)
Three Rules to Follow When Costing
Price = Cost + Profit
PRICE = USUALLY DETERMINED BY MARKET PRICE AT RETAIL
As mentioned earlier, you must investigate your target market, the competition, and the wholesale and retail price ranges your garments should fit into. Once that is determined they should be kept within the chosen price range. Make sure that the quality and styling is retained. It is good to cost by starting with a retail price and work backwards.
COST = IS THE ONLY VARIABLE WHICH CAN BE CONTROLLED BY YOU!
Understanding the key elements in costing a garment will assure the gross profit margin.
PROFIT MARGIN = PRE-DETERMINED BY YOU. SHOULD NOT BE UNDERCUT
If you have a large, potential order from a department store and they want you to reduce your profit margin in order to get it, make sure it is possible to take it without losing that profit margin. Just because you get a large order, it is not necessarily in your company’s best interest. You must work out the figures before you accept orders!
Chargeback advice from the late Joel Stonefield, CPA and Chargeback Guru.
CHARGEBACKS
What are they?
These are uninvited guests at the apparel manufacturer’s picnic. Like ants at one’s otherwise lovely party, they ruin everything in sight. Here’s an example of how they happen and what they can do to a business, a very extreme example, but not at all unrealistic:
On October 25th,manufacturer ships $1,000 of merchandise at regular price to department store. That merchandise cost $555 to manufacture. On December 10th, store pays the $1,000 invoice, LESS:
- Damaged goods – $125.00
- Penalties for not shipping the goods in accordance with the store’s required
procedures – $145.00
- Un-authorized markdown allowance – $310.00
Net Check = $420.00 (This means a loss on the sale of $135.00!)
Cost of manufacture – $555.00 compared with the Net Check from the store of
$420.00, thus a loss of $135.00.
Is each of the above deductions preventable? SOMETIMES.
Are these deductions collectable from the store? SOMETIMES.
Are these CHARGEBACKS (now the word!) fair or reasonable? SOMETIMES.
(ALICE, WELCOME TO THE WONDERLAND OF CHARGEBACKS WHERE 2 AND 2 NEVER EQUAL 4).
Who creates them?
Generally, most department stores and more recently, mass merchandisers, are known to create unauthorized deductions (chargebacks). It is their way of doing business, which anyone selling to them must understand. Which is not to say that one must ACCEPT these stores and their sometimes nasty games, but rather one should UNDERSTAND the process and how to deal with it. Alternatively, smaller stores (specialty shops) do not usually inflict unreasonable deductions on their customers. The much smaller orders placed by these stores involve an entirely different method of doing business; Higher selling costs and distribution costs, which may exceed the problem of chargebacks!
Ways to Live with Chargebacks
- What Works…Have a line that checks at retail and which makes the store lots of money. None of them are so unwise as to kill the golden goose which….
- What Doesn’t Work…Using a factor to prevent chargebacks. Doesn’t mean a thing! They’ll
just pass through these deductions to you without argument.
- Suing the store. You can never win.
- Screaming, crying, begging for mercy
- Learn in advance the ways of each store and what you should do to comply with its traffic rules, EDI (Electronic Data Interchange) & RFID (Radio-frequency Identification) – rules, etc.
- As to buyers: Learn to argue when you can and give up when you must.
- Know what is going on in your bookkeeping operation. Expect to see every deduction. Understand what is happening with each store. Have a strong bookkeeper or outside chargeback service that will look out for you.
Joel Stonefield CPA
Garment Costing for Success
10 Point Checklist for Profitable Results
- Development cost: Whatever type of garment you manufacture there is always development. These are known as hidden costs and should not be ignored.
- First sample or prototype cost: Check the number of times the average sample is made
before the final garment is approved.
- Fabric cost for sampling: Fabric used for samples can begin to add up. Keep a record of this part of development. You may be surprised at the amount of sample yardage ordered.
- Pattern development costs: Pattern making can be more costly than realized. Keep an
account of this part of the business.
- Yield of fabric costs: Your fabric expense may be 40% to 50% of the direct cost of the garment. Making sure that you are not wasting fabric and that your markers are good and tight is going to affect the overall profitability of your business.
- Trim cost: Whether its zippers, labels, embroidery, elastic or other trims, make sure you are
aware of the correct amount each garment needs. Waste takes away your direct profit.
- Contracting or labor costs: Sewing is another part of the garment cost that is 30% to 40% and should be fixed early in determining the cost of a garment.
- Cutting costs: Before cutting can begin make sure the fabric is checked on arrival for flaws and for width variations. Chargeback the mills as soon as possible. Timing is important. In-house cutting is ideal to keep a check on wastage. Do not allow a build-up of fabric inventory.
- Production overheads: Real estate prices, electric costs, phone costs, accounting, transportation, quality control, shipping and packaging, even hangers; these are important expenses that should not be ignored.
- Quality Control: Quality of the first production sample and production itself must have continuity otherwise there will be returns. Returns equal reduction of your profits.
Items Influencing Garment Cost
If the garment cost is too high then you must review the situation. Simplification will bring the cost down. This may sound easier than it is in reality, since you have to make sure that the garment retains it originality and its appeal. Here are some suggestions that may help you bring the cost of a garment down.
- Total number of pattern pieces.
- Total number of notches
- 3. Total number of steps involved in construction methods
- Type of seam finishes
- Length of stitch
- Fusing
- Hemming
- Type of buttonholes
- Details involved to complete the garment
- Fusing
- Pressing
- Handling
- Fabrication
- Cost of fabric
- Folding
- Packing
- Shipping
- Inspection
- Sales commission
- Buying direct from mill (This can be problem for small companies)
- Using a fabric rep
- Shipping of fabric
- Number of yards per garment
- Ease of handling, silk, velvet, matching plaids, spreading, shrinkage under steam iron, pre- shrinking, etc.
- Color: – dye lots, problem of fading in store windows, washing instructions, etc. Swimwear manufacturers have to test garments when finished.
- Size of the cutting tickets will also affect the final cost of the garment.
- Contracting
- In-house or outside contractor
- Grading
- Marking
- Cutting and spreading
- Construction Costs
- Sewing
- Inspection
- Pick and Packaging
- Shipping
- Larger lots (outside contractors’ costs go down when you have 300 garments
or more). Smaller businesses usually have to shop for contractors who
specialize in smaller lots.
- Grading costs are computed on the number of the pattern pieces.
- Pattern Stage Examples that may help cut costs.
- Collar and collar-stand in one piece
- Front button placket all in one and tucked and stitched
- Elimination of yoke:
Front yoke cut in one with the back
Cuffs, pockets, tabs, extensions, facings, etc., cut in one with the garment.
Special detail with sleeve using budget cuff and no placket Straight hems
Economy of style lines
Elimination of darts, seams, waistline seams, etc.
- Simplification of construction
- One-piece collar instead of two
- Cap of sleeve set in armhole first, then side seam and underarm seam sewn all in one.
- Budget cuffs
- Placket all in one with front, using the tuck method.
Quality
- Continuous binding of sleeve placket
- Binding instead of facings
- Less fusing
- Press on embroidery
- Fewer stitches per inch
More complicated designs can be seen in ‘Better’ priced lines, along with more expensive qualities of fabrics and trims, construction of garment, linings and fusing. Most important, a better fitting garment should be evident in the higher-price range
- Details of seams: French, flat felled, slot, topstitching, corded seams, open welt
seams, more stitches per inch etc.
- Details of better fitting garment: More seams and darts, inner construction and linings. Bigger seams, bigger hems equal more fabric usage, which in turn equals a more expensive garment.
(The final selling price has nothing to do with the worth value of the garment. It is ‘Perceived Price Value’ that you have to consider! This is the niche market that you have so carefully considered to enter. Remember you are not only creating beautiful clothes, you also need to make a profit or you are wasting your time and your money.)
Sample – Style Cost Sheet
Sample – Cost Sheet
| Design: 7485 Sub-Design: 1 | Line: | ||||
| Section: FA S Fabric | BRIC Description | Item Used for | Qty Req’d | Price/ Unit | Variable Cost |
| 1 F100 | STRINGTWILL | 2.030 | 10.450 | 21.2140 | |
| 1 ZTAF | ACETATE TAFFETA | .280 | 1.150 | .3220 | |
21.536
Section: TRIM
S Trim
1 BTN BUTTON 30L BUTTON J3108 3.000 .070 .2100
.2100
| Miscellaneous Costs: | ID/ | Item | Calc | ||
| Description | Item # | Type | Factor | ||
| Trim Allowance | TRMALL | Calc | 10.000 | .0210 | .0210 |
| Section: SENDOUT | |||||
| Process Description 10 BLOCK Fusing Labor | U | LB | Add-On .64 | UOM 1.000 | .6400 |
| 20 PIECE FUSING LABOR | U | LB | .05 | 1.000 | .0500 |
Section: LABOR
Process Description
| 10 Cutting | U | LB | 2.00 | 1.000 | 2.0000 |
| 20 Sewing Labor | U | LB | 25.00 | 1.000 | 25.0000 |
| 30 Misc | U | MI | 1.00 | 1.000 | 1.0000 |
Section: MISCELLANEOUS
Selling Price, Net Profit & Marginal Income Analysis
| Wholesale Price: $112.127 | Gross Margin %: | 55.000 | Net Margin %: | 55.000 |
| Total Cost: $50.457 | Total Gross Cost: | $50.457 | Total Net Cost: | $50.457 |