How to calculate profit margin in apparel costing?

Question: How do we calculate margins in apparel costing? ... asked by Shazadi

OCS's Answer:

On apparel manufacturer's point of view, Profit margin is part of FOB . FOB is apparel manufacturer's selling price.

Your question can be answered from two different angles, which are -

  1. How to find profit margin after sales of garments?
  2. How much margin to be added to garment cost to determine garment FOB?

Here is my explanation on both questions.

1. How to find profit margin after sales of garments?

Standard costing (FOB) formula for any manufactured product (garment) is as following.

Manufacturer's Price (FOB) = Manufacturing cost + Operating expenses + Profit

Where manufacturing costs includes raw material costs, direct and indirect labour cost and overheads. And operating expenses includes administrative overhead like operating general office and departments that are not directly involved with the product manufacturing but essential to the operation of the firm.

So, from the above equation if you have details of the others item, you can calculate the profit margin.
Profit = Total Sales - (Manufacturing cost + Operating expenses)

2. How much margin to be added to total garment cost to determine garment FOB?

During costing manufacturers add a certain percentage to its total cost (manufacturing cost and operating expenses) as margin. This margin may vary from 10-20%. This percentage amount depends on the negotiation of final FOB with the buyers. That means when buyer has a fixed target FOB for an order and you have to meet that target to grab an order your profit margin% may go up or down than your desired margin% based varying cost of material and labour.

In another case, manufacturers generally show less margin% in the final costing sheet. But a certain part of the margin is kept hidden in material costing, labour cost and overhead costing. Thus they can maintain cumulative margin.

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