Feb 19, 2011

Garment CM cost estimation using SAM or SMV

In the clothing manufacturing, supplier gives final manufacturing cost to buyer prior to order confirmation. For that factory prepares cost sheet estimating costs in different cost heads. Cost heads like Fabric, Trims and Packing materials, Labor cost and Overheads.

At costing stage, supplier only get one sample of the garment and specification of fabric and trims for the reference. For raw material cost suppliers directly take price quote from fabric and trim suppliers. For labor cost it is very important to estimate as near as it will be during actual production.

The scientific method for estimating CM (Cut and make) cost of a garment involves following steps

  1. Determine SAM of the garment (refer garment SAM calculation
  2. Calculate average line efficiency and
  3. Calculate direct labor cost per minute

How to calculate the minute cost of the operator?

#1. Labor cost per minute = (Monthly salary of an operators/Total minutes available in the month) at 100% efficiency. 

But no line can perform at 100% efficiency, so labor cost per minute increases when line efficiency goes down. So correct way to calculate labor cost per minute is
#2. Labor cost per minute = Total salary of the labors in a month / Total SAM produced by those labors in that month.

Operator monthly salary is INR 5000.00
Total available capacity per month (in minute) = 26 working days*8 hours/day*60=12,480 minutes

So, per minute cost of the direct labor = 5000/12480 = 0.4006 INR at 100% efficiency

Formula for the projected labor cost per pieces
CM cost = (SAM of the garment * Minute cost of the labor)/Line efficiency(%) 
(Minute cost determined from above formula#1. If you use second formula then don't divide by line efficiency)

If Sewing SAM is 15 minutes and line perform at 50% efficiency then estimated garment make cost = 15*0.40/50% =12 INR
And Cutting SAM is 2 minutes and cutting room perform at 50% efficiency then estimated cutting cost = 2*0.40/50%=1.6 INR

So, Total estimated CM cost of the garment = (12.00+1.60) = 13.60 INR
Following above formula easily one can estimate garment CM cost and use it for the product costing.

Why do you need to consider line efficiency in CM costing?

Line output varies depending on the line efficiency. When a line performs at lower efficiency than standard (100%) line will produce less units in a day compared to what line could make at 100% efficiency. But factory spends same amount of money as salary whether line perform at 100% efficiency or less. So, per unit cost will increase when line performs at lower efficiency.

Note: For the calculation of labor cost per minute, instead of average operator salary you can take cumulative of all operators salary (monthly) and divide total amounts by total minute available to the line (total operator * total minutes per operator per month) to have more accurate value.

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