The Importance of Proper Costing In Textile Industry

We cannot consider the same manufacturing cost per count for all counts, opines S. Murugan

 “I don’t know what to do. Our prices are no longer competitive! I am losing orders because of my higher quotes and sometimes the profitability of some counts is not as per our costing profits!”.

I was lamenting my difficult situation to my friend who had returned from the USA. He was working as an auditor in a big company there.

“What do you think would be a better solution for your pathetic situation?”, he asked with a hint of wink.

“Mm… I wish our government would give more support to our textile industry and ban the cheaper products being imported from other countries!” I replied.

He laughed as if I had cracked a great joke. “There are two things you must understand. First, if a government decides to help any industry by giving subsidies, it is essentially putting its resources towards something that society doesn’t value. The government’s main responsibility is to facilitate and provide a suitable environment by tweaking fiscal and monetary policies for industries to operate well. The second point is purely political and not correct from an economic standpoint.”

I looked at him, confused.

“Yes! We often hear politicians or people on the news argue that international trade destroys domestic jobs or markets. But even though it may seem counter-intuitive, economists have argued for centuries that international trade is mutually beneficial. No country in recent decades has achieved sustained improvement in living standards without open trade with the rest of the world. Do you trade off quality just because the product is produced here in our country when good quality products are available at relatively cheaper prices?” he asked.

I didn’t have any answer readily available at the top of my head.

He also seemed not expecting any answer from me. He continued.

“Adam Smith, the economic guru, was onto something: Trying to be self-sufficient makes us inefficient, and this inefficiency leads to poverty. When we don’t achieve equilibrium prices and quantities for our products, we should not expect government assistance. Economists always argue that there’s no reason to bail us out. The market has spoken. It’s over! We must find ways to remain competitive through innovation.”

‘Man! He is too aggressive! Where did he learn all these things? Probably in the USA?’ I thought.

“Now, let’s address your first question about the costing method. I have seen that, except for some corporates and big companies, others are not properly following the costing procedure. Proper costing methods and cost accounting significantly improve a company’s profitability,” he said.

“OK! You check our costing and correct it if it is wrong,” I challenged him.

He immediately threw me a counter-question. “How do you calculate the price?”

“First, I calculate the raw material cost based on its realization. Then, I add the manufacturing cost by multiplying a factor, say 2, with the number of that count. This way, I can give the price to my customer over the phone immediately,” I replied proudly.

“I’m sorry! That’s where you make mistakes. Costing doesn’t work that way! You need proper costing. Taking a constant manufacturing cost per count can be misleading. If you run the same counts of a closer range for years, it may work. But with multiple counts, multiple blends, and a wider range of counts, it will not be accurate,” he explained.

“Then how do we do costing in those situations?” I asked him.

He took his laptop, searched for some time, and finally came up with a chart on the screen.

“See! This chart of manufacturing costs was prepared by me for a new mill as part of my project assignment,” he showed me the chart.

“What do you infer from the picture?”, he asked.

“Mmm. The line is not straight. And we can also understand that we cannot consider the same manufacturing cost per count for all counts.”

A flash of a smile appeared on my friend’s face. “This chart will be different for different mills. This mill is designed for an average count of 50s, and all the costs per count are based on standard productivity. That’s why the counts below the average count have a higher cost per count. This is due to the requirement of additional back processes and post-spinning machines. Accurate costing will consider these additional machines and their fixed costs in the calculation. That’s why the cost for a mill designed for an average count of 50s will always be higher than that of a mill designed for 20s count to produce 20s count. And because of all these reasons, your quotes on certain counts neither fetch orders nor match the profitability between costing and actual accounting,” he concluded.

It seemed I understood something. I decided to learn further about the perfect costing procedure.

(Murugan Santhanam is the Managing Director of Texdoc Online Solution Pvt. Ltd.)