APPAREL EXPORTS 32 APPAREL April 2011 Costing Export After a detailed evaluation of the difference between export costing and pricing, Vasant Kothari gives an insight into the export price calculation methods. These nuances are likely to benefit apparel manufacturers/exporters in the long run. n the apparel industry, the most popular method to calculate the export price of any product is the Cost-Plus Method. e Cost-Plus Method of calculation requires a costing sheet so that it enables the exporter or manufacturer to check that every expense has been covered while arriving at the selling price. It also enables him to provide a detailed record of the terms that have been quoted to the foreign buyer.
Transcript
AppArel exports
32 APPAREL April 2011
CostingExport After a detailed evaluation of the difference
between export costing and pricing, Vasant Kothari gives an insight into the export price calculation methods. These nuances are likely to benefit apparel manufacturers/exporters in the long run.
n the apparel industry, the most popular method to calculate the export price of any product is the Cost-Plus Method.
The Cost-Plus Method of calculation requires a costing sheet so that it enables the exporter or manufacturer to check that every expense has been covered while arriving at the selling price. It also enables him to provide a detailed record of the terms that have been quoted to the foreign buyer.
APPAREL April 2011 33
• Packing–Thecostofpackingfor overseas shipment will vary according to the product, destination and means of transportation. The manufacturer must include reasonable provision for this.
• Labels–Thesemayhavetobeprinted in a foreign language, perhaps containing information not included in the labels used within the exporter's country. Also, from the sales point of view, they must be suitable to the foreign consumer. The selling price of the product must include sufficient allowance for these extra labeling costs.
The iTems covered by The exporT cosTing sheeT are:• Unitcostofproduct–Thestarting
point in export pricing is the production cost per unit of the product. This would be the variable cost plus fixed cost or overhead. In case of a garment, normally it is done for 1.03 to 1.05 pieces by considering 3-5% wastages.
• Profit–Oncetheproductcostiscalculated, the exporter needs to include profit margin into the
Margin will depend on costs, export objectives,
the circuMstances prevailing in the
target Market and intended pricing
strategy.
calculation. Margin will depend on costs, export objectives, the circumstances prevailing in the target market and intended pricing strategy. However, an exporter can also add extra allowance for profit, in order to cover the risk involved in selling abroad. In today’s competitive world, the garment industry takes a profit of 6-10%.
• Agent'scommissionabroad– This is usually calculated on a percentage basis. In case of a garment, this could be the Buying House commission.
• Marking–Asmallcostisinvolvedinstenciling an identification mark on each package for export and should be considered while calculating the costing for export.
• Pre-ShipmentInspection–Inthegarment industry, it is mandatory that the goods must be inspected before they leave the exporter's premises. Buyers could ask for an independent third-party inspection too. In certain cases, the exporter needs to include these inspection fees as part of export costs.
• LoadingCharges–Oncethegoodsare packed and inspected for export, the next step is to load the goods onto the means of transportation that is to be used to move the goods to the airport or harbour. In the case of Ex Works, the seller is only responsible for placing the cargo at the buyer's disposal at a convenient point in the factory or warehouse. If the seller is loading
AppArel exports
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the goods, then he needs to cost the loading of the goods onto the truck to be supplied by the buyer as part of the Ex Works cost.
• Freighttoseaboard–Thecostoftransporting the goods from the inland town or city to the seaport for shipment abroad.
• Unloadingcharge–Thereisacharge for unloading goods from railway cars or trucks. This cost will be incurred when the goods arrive at the seaport. There may also be unloading and loading costs incurred if goods are moved from one transport medium (e.g. truck) to another (e.g. rail) somewhere along the inland freight component and such costs must also be taken into consideration.
• Terminals–Thesearehandling,wharfage and harbour dues that must be paid by the exporter to the wharfage company. The exporter needs to account for his fees in thecostingexercise.Similarcostsare incurred at airports but these services are provided by the airline in question and are included in the air freight costs and are usually not accounted separately.
• Longorheavyloadcharge–Iftheshipment is exceptionally long or heavy, extra charge may be incurred.
• Consulardocuments–Thesedocuments can be quite expensive, particularly in the case of exports to LatinAmericancountries.Initially,theexporter may wish to quote a price in dollars plus the cost of consular
documents to the foreign buyer. If not, he must make adequate provision in the price to cover their cost.
• Othercharges–Herespaceisleftfor the inclusion of unexpected additional expenses such as the cost of overseas telegrams or telephone calls or extra storage charges.
• Oceanfreight–Thisinvolvesthecostof shipping the goods by sea to the foreign port. The cost may be quoted by the ocean carrier in local currency orUSdollars.
• Freightforwarder'sfee-Iftheexporterusestheservicesof‘FreightForwarder’fordocumentationandbook the shipping space required, an allowance must be made for the fee involved. The amount of these fees can be obtained in advance from the forwarder or shipping agent.
• Financingcharges–Untilpaymentis received, the export firm will have part of its working capital tied up in export merchandise. Even if no credit is given, it will have to wait until the goods are shipped or delivered before payment is made. If credit is given to the foreign customer, it may have to wait an additional 60, 90 or 180 days for payment. The selling price should include an amount to cover the cost of this working capital.
If the exporter intends to discount at its bank a time draft that has been accepted by the foreign importer, so that the exporter can obtain his money sooner, then allowance must be made in the export price for bank discount charges.
• Exportcreditsinsurance–Theexporter may buy insurance or ‘factoring’ on its credit sales abroad. Therefore, allowance should be made for it.
• Marineinsurance–Theexporterwill want to insure against financial loss from all possible risks, including damage to the goods or theft, while they are being shipped abroad. Usually,oceanshipsareinsuredfor 110% of their total cost to cover anticipated profit and the interest
cost of working capital tied up in the shipment.
• Foreignexchangeconversion–Theforeign buyer will usually ask for apricequotationinUSdollarsoreven in Euros, Yen or some other currency. Therefore, the price in the exporter's local currency must be converted to a price into the required foreign currency.
Care must be taken to use the correct exchange rate. The exporter may wish to eliminate the risk of an exchange loss by selling the foreign currency to a bank on a forward basis,
in exchange for local currency. The cost of this bank service, which provides the exporter with a pre-determined, fixed rate of exchange for its foreign currency, should be included in the export price quoted to the foreign importer.
desTinaTion-wise cosTingEach costing stage identifies the different delivery terms, which will affect exporter’s responsibilities and risks in the transaction. At each stage of pricing, costs and quoted price for buyer will increase. Below is a summary of the export costing process by the four most common Incoterms.
cosT facTors of exporT-imporT goods In order to calculate export costing, it is important to understand the major costing points during the movement of the cargo from the seller to the buyer.
Here, it necessary to consider all the costingpointse.g.forFOBsummationall cost till point 7 should be done in the costing sheet at the same time, whileforDDPcostingall14pointsshould be taken into consideration.
