Cost, Costing and Price Concepts:
Cots are defined as expenditure incurred to manufacture a product or to carry out a process or to render a service. Modern business enterprise is vibrant in nature which has to function in an atmosphere of high competition and risk. In another article, I have presented 7 key principles of apparel costing but here presented the main classification of cost or costing process.
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| Fig: Cost or costing in textile and apparel business |
Classification of Cost in Export Import Business:
There are thirteen types of cost which are presented out in the below:
- Fixed cost,
- Replacement cost,
- Imputed cost,
- Variable cost,
- Semi-variable cost,
- Research cost,
- Step cost,
- Conversion cost,
- Development cost,
- Shutdown cost,
- Policy cost,
- Sunk cost,
- Differential cost.
All the above types of cost have explained in the following:
1. Fixed cost:
It is that type of cost which remains constant and does not vary within a period of time and ranges of activity in spite of fluctuation in textile and apparel production is termed as fixed cost. Fixed costs are rent, insurance charge, staff salary etc. it is also considered as period costs.
2. Replacement cost:
The cost which can be replaced by the management as a replacement of the existing costs is known as replacement cost. Replacement costs are textile and apparel machinery replacement over a certain period of time. It may be 10 years.
3. Imputed cost:
It is that type of cost which does not involve in any cash outlay is known as imputed cost. It is not included in cost accounts but are important for taking into consideration while management decision. Imputed costs are interest on internally generated fund, salary of the proprietor etc.
4. Variable cost:
The cost which varies directly in proportion to every increase or decrease in the volume of output or textile and apparel production is known as variable cost. Variable costs are labor wages, labor cost, power etc.
5. Semi-variable cost:
It does not vary proportionally but simultaneously cannot remain stationary at all the times is known as semi-variable cost. These are telephone charges, service and repairs etc.
6. Research cost:
Research cost incurred for searching new or improved product such as new application of products or materials or improved methods. Examples of this costs are courier charge, sample charge etc.
7. Step cost:
Step cost which remains fixed over a range of activity and then jump to a new level as activity changes. Steps cost are rental cost of delivery vehicles.
8. Conversion cost:
The cost of transforming direct material into a finished product exclusive of direct material cost is known as conversion cost. It is normally takes as the aggregate of the cost of direct labor, direct expense and factory overhead. Converting yarn into fabric and garment is the perfect example for this type of cost.
9. Development cost:
The cost of the methods or process which begins with the implementation of the decision to produce a new or improved product or to employ a new or improved methods and ends with the commencements of formal production of that product or by that method. Examples of development costs are sampling charge, product development cost etc.
10. Shutdown cost:
A manufacturer rendering service may have to suspend its operation for a period of time on account of some temporary difficulties like raw material shortage, labor shortage, strikes etc. though no work is done during this period but certain fixed costs such as rent, salary, insurance etc. have to be incurred.
11. Policy cost:
The cost of formulating the policy, directing the organization and controlling the operation of an undertaking which is not directly related to apparel or textile production, sales and distribution activity. Examples of this type of costs are special training for the employees, ISO 9000 implementation etc.
12. Sunk cost:
Suck cost which has been created by a decision that was made in the past and cannot be changed by any decision that will be made in the future. It is also known as past cost. Examples of sunk costs are investment in building, plant, textile machineries etc.
13. Differential cost:
The difference in total cost between two alternative choices is known as differential cost.
