The Ultimate Guide to Garment Costing

Though it may seem that apparel costing amounts to little more than adding up the prices of fabric, trims, and labor, that narrow view misses the full value of this practice. For clothing companies, apparel costing is a strategic tool that informs pricing, product design, and sourcing choices and affects overall profitability. The cost to produce an item not only impacts manufacturing, it influences overhead allowances, product planning, and demand projections. Even tiny upticks in cost can influence whether an item flies off the racks or languishes as unsold inventory, making garment costing one of the most powerful levers available to leadership teams in this sector.

What Is Apparel Costing?

Apparel costing is a structured method used to calculate how much it costs to produce a garment. Also known as garment costing, apparel costing can be performed using various methodologies, but they all require identifying, analyzing, and allocating the expenses involved in producing a garment.

In the apparel sector, these costs will include direct manufacturing expenses, such as fabric and sewing labor, and related costs, such as overhead, shipping, duties, and administrative expenses. By capturing all of these outlays, apparel costing helps brands better manage their profitability.

Key Takeaways

• Apparel costing adds up the direct, indirect, and commercial and post-production costs of getting finished goods to market.
• Accurate costing helps keep pricing competitive but profitable.
• For complete and accurate costing, it’s necessary to understand the scope of all related costs, including materials, labor, shipping, and overhead.
• Businesses can use varied approaches to costing, each designed to answer a specific question or to inform a specific decision.
• Costing alone doesn’t save money or mitigate risks, but it does help guide decisions in these areas.

Apparel Costing Explained

Although calculations are core to apparel costing, the power of the process lies in sourcing the expense figures, aggregating those numbers, and using the results to make better decisions. Done well, costing considers both production realities and market conditions and helps companies be more responsive to both.

Costing begins by identifying the costs to be measured in three distinct categories: direct costs, indirect costs, and commercial and post-production costs. Direct costs are tied to individual garments, so they are determined solely by the quantity used. These costs include fabric and trim, such as buttons, zippers, and tags; labor allocated per garment, like sewing; and per-unit packaging, such as polybags used to wrap a dress shirt. These costs are the easiest to track because they’re tied to specific styles or SKUs.

Indirect costs are those that aren’t tied to a single garment but still affect production costs. These include product development and sampling expenses, design team salaries, rent and utilities, marketing, and administrative overhead. These expenses are most likely to be overlooked by clothing companies, but they shouldn’t be. Without accounting for these costs, companies will likely miss identifying products that seem to be profitable but are actually just breaking even or even losing money.

Commercial and post-production costs include everything needed to get finished garments to the point of sale. This category covers bulk packaging, shipping, and storage, as well as duties, tariffs, and taxes. These costs can have a profound impact on pricing and margins.

Understanding each of these cost categories is vital, but the full value of costing comes from their aggregation; only then can apparel companies understand their actual costs and control them. Some expenses may be addressed individually, as when a company negotiates lower warehousing costs. But costing also makes it possible to look at combinations of expenses to substantiate decisions. If costing reveals that fabric and trim account for 70% of a garment’s cost, for example, leaders can explore whether changing suppliers or simplifying trims would make the item more profitable.

Why Is Garment Costing Important?

Apparel costing is essential for clothing companies because it provides a financial X-ray of each design. Without this information, decisions about pricing, sourcing, and production are just guesses. Accurate costing affirms that products are competitive in the market but still priced to be profitable. This is especially important as apparel companies face pertinent challenges, such as fashion buyers reining in their spending. More than 40% of shoppers in the US, UK, and Germany say they are spending less on clothing, footwear, and accessories than they did a year prior, according to the “State of Fashion 2025” report by the Business of Fashion podcast and McKinsey, with fashion executives surveyed saying consumer confidence and appetite to spend is their top risk to growth.

Costing also reveals which styles, collections, or product categories are driving a company’s profits. For example, costing may reveal that a popular T-shirt design delivers better margins than a formal gown, despite the gown’s much higher retail price. Armed with this information, brands can better balance their product mix, avoid pouring money into money-losing items, and focus on designs that boost their bottom lines.

Garment costing also supports financial and resource planning. Knowing the true cost of each item allows brands to set realistic budgets, forecast cash flow, and decide how much to invest in such areas as marketing, inventory, and product development. It also makes it easier to plan production volumes and inventory orders that align with projected demand.

Finally, costing can be a bulwark against risk by flagging issues—unexpectedly high material costs, excessive shipping expenses—early in the process. This makes it possible to correct problems before committing to production, thus avoiding nasty financial surprises or launching products destined to lose money.

Apparel Costing Methods

Businesses can use several different approaches to costing, each one designed to answer a distinct question or to inform a particular decision. Among these costing methods are:

1. Job order costing: Job order costing defines an order or style as a “job” and then determines the cost of that job, typically tallying the costs of materials, labor, and overhead. This approach is most useful for sampling, limited editions, or bespoke garments. For example, an apparel firm that wants to determine product development costs will determine the job order cost of producing a unique prototype or sample. Job costing is also ideal for determining the retail price of one-of-a-kind gowns. This approach can be helpful for large purchases of made-to-order garments, such as an airline’s new cabin crew uniforms.
2. Standard costing: This method assumes that historical data reliably predicts what a garment should cost. For example, a denim company will perform an analysis of previous orders to understand how much fabric, trim, labor, and overhead are required to produce a single pair of jeans. That cost is the standard. Actual costs are compared to these standards, and variances are analyzed. When a retailer orders 20,000 pairs of jeans, the denim maker can quickly quote a price by multiplying the unit costs, plus margin, by 20,000. Standard costing is most valuable for repeat styles and established workflows or for budgeting and evaluation.
3. Absorption costing: Also known as full costing, this is the most thorough costing method. It incorporates all elements of costs, both fixed and variable. It even allocates a portion of fixed overhead to each unit produced. Although highly accurate, absorption costing is the most complex and time-consuming to execute. It’s also the GAAP-required method for external financial reporting and the type of costing data that investors and lenders expect to see during presentations.
4. Activity-based costing (ABC): This is a more detailed approach to costing than standard costing, which isolates costs by activity, then estimates how much of each activity will be required to produce a garment. ABC is helpful when costing complex or variable garments. For example, a garment that requires substantial embroidery would warrant a higher cost. It can also reveal inefficiencies and areas prime for cost reduction.
5. Variable costing: This costing method removes fixed expenses to call out costs that increase along with volume. The process allows leaders to determine the incremental cost of producing 15,000 units as opposed to 12,000 units, for example. Access to this kind of data makes it easier to calculate the minimum price point necessary to cover variable costs. Variable costing also allows leaders to see how much each unit’s sale contributes to profit. For example, suppose a sleepwear company sets a $50,000 monthly profit goal. A simple formula reveals how many pairs of pajamas the company must sell to meet that target:

   Unit sales required = (Fixed costs + Target profit) / Contribution per unit
   or
   ($35,000 + $50,000) / $7 = 12,143 pairs of pajamas

6. Direct costing: Although in practice many firms use the terms direct costing and variable costing interchangeably, they differ. Direct costing omits variable overhead costs, such as supply costs that increase with volume, to focus only on direct costs, such as material and labor. This approach is valuable in limited circumstances, such as when buyers want a price for a very specific style and most of the cost comes from direct materials and labor.
7. Target costing: One way to control expenses, target costing starts with the intended retail price and profit margin, then works backward to determine the maximum that can be spent to hit those targets. One potential downside is that cost constraints can restrict designers; however, it can also encourage more innovative and profitable garment designs.

Components of Apparel Costing

Manufacturing apparel is a multistep process that requires understanding and reviewing costs at every phase. The primary components of apparel costing are:

• Overhead costs: Just keeping the doors open incurs overhead costs. This category of costs includes not only manufacturing-related overhead, such as factory rent and machinery depreciation, but also overall administrative costs and indirect labor, such as management and marketing salaries.
• Material costs: Material is generally the greatest single cost in making any garment. Fabric likely represents the greatest portion of costs for a basic garment, but material costs also include trim, such as buttons, zippers, elastic, rivets, and labels.
• Labor costs: Typically, the second biggest expense is the labor required to cut, assemble, and finish a garment—often called cut, make, and trim (CMT) charges. Labor costs vary widely, depending on where the item is made, the complexity of the design, the quantity produced, and other factors.
• Wastage costs: It’s inevitable that some fabric, trim, and packing materials will go to waste, even in the most efficient operations, in the form of discarded fabric, excess material, and low-quality rejects identified during production. Those costs—also known as a wastage allowance—can add up, although the total impact fluctuates with the cut and complexity of the design. It pays to check out potential vendors because inefficient manufacturing results in more waste.
• Design costs: All costs incurred before a garment reaches production fall under the umbrella of design costs. They include creative work (such as designer fees or cost of making samples), materials used in samples, market research, support staff, software, and other overhead. Design costs vary substantially. They’re typically nominal when designing a T-shirt, for example, but are more substantial for a bespoke gown.
• Packaging and shipping costs: Boxes are the most obvious material required for shipping garments, but packaging costs also include polybags, labels, and hangtags. As with fabric, costs vary depending on the materials used. Once packaged, getting garments from the factory to a warehouse or retailer adds other costs.
• Taxes and duties: When goods move across borders, governments typically impose duty fees or tariffs and collect taxes. Duties—often a percentage of the declared value—on apparel are highly regulated and vary with fabric type, fiber content, and country of origin. Although each country is different, many charge a value-added tax (VAT) or a Goods and Services Tax (GST) at customs, based on the cost, insurance, and freight value plus duty.

What Is a Cost Sheet?

A cost sheet is a document that itemizes every element—and its cost—necessary to create a single, specific garment. It’s a simple concept, but it serves a complex purpose. Cost sheets form the foundation for pricing and profitability. They provide a common structure that all stakeholders—designers, buyers, merchandisers, sourcing managers, finance teams—can use to create a framework for comparisons, such as the costs of one style versus another or the cost of the same garment from one season to the next. A cost sheet also serves as a record of how costs were determined, which is critical for negotiations, compliance, and financial reporting.

Traditionally, cost sheets were spreadsheets. Today, they’re more likely to be generated by software and, perhaps, enhanced by AI. Cost sheets are unique to the garments they describe, so there is no single definitive format. But most cost sheets include raw materials, labor, packaging materials, wastage allowance, and shipping and duties.

Costing Sheet Example

To better understand cost sheets, let’s look at a sample that captures the cost of a light jacket.

Typically, cost sheets—such as the example shown above—are product-level tools. Large companies that have multiple styles, collections, or sales channels often produce additional, business-level cost sheets. These more expansive cost sheets include administrative overhead, sales and distribution costs, profit targets and contribution margins, consolidation across products, and scenario analysis. Historically, this information populated a spreadsheet. Today, the information often exists in accounting or ERP systems and may be extracted into reports.

Tips for Reducing Apparel Costs

Costing can spotlight inefficiencies, unexpected expenses, and other threats to the bottom line. But it can’t, by itself, decrease inefficiencies, save money, or eliminate risks. Rather, leaders must be proactive about addressing problems that the costing process reveals.

Following are six solid strategies for cutting apparel costs:

1. Control overhead: Left unchecked, overhead can erode margins. Some ways clothing companies can lower overhead include reining in payroll costs (for example, by maintaining a small core team and relying on freelancers during crunch times, or by outsourcing some functions), adopting cloud-based enterprise software, cutting office or showroom costs, or using digital design tools and samples.
2. Strengthen supplier partnerships: Start by finding the best possible partners, then assess them for quality, ability to meet production schedules, and other factors. Once a partner is in place, forge a clear and detailed manufacturing agreement. Clearly spell out payment terms, negotiate for price breaks on repeat orders, draft a thorough bill of materials to establish effective communication and collaboration, and check in regularly for updates on material deliveries and production schedules.
3. Reduce material waste: To hold waste to a reasonable level, clothing companies can design garments in a way that limits leftover fabric offcuts during production. They can analyze data to better predict demand, avoid overproduction, and produce smaller initial runs that can be scaled up as needed. It’s equally as important to choose versatile materials that can be used in multiple products, adopt recyclable or reusable packaging, and incorporate ways to deal with unsold products, such as outlet sales, resale platforms, donations, or recycling.
4. Cross-train the labor force: Options include training merchandisers in digital marketing, training customer service reps in ecommerce support, training operations staff in inventory management and data analysis, and teaching finance staff the basics of sourcing contracts and duties.
5. Integrate simpler designs: The more basic the garment, the less expensive it is to produce. Companies can also limit the amount of trim as a way to keep costs down.
6. Use software: Automating accounting tasks is one way that technology can benefit clothing companies, but other software applications can also help lower costs. ERP platforms—particularly those purpose-built for the apparel sector–offer a range of feature-specific modules that can pay off, such as inventory management to prevent overstocking; product lifecycle management to centralize design, sourcing, and production data; supply chain management to increase visibility into supplier performance, lead times, and costs; and AI-powered demand forecasting tools to align production with predicted sales.

Enhance Apparel Costing With Accounting Software

Apparel costing involves extensive calculations, but accounting software can increase accuracy and free up apparel leaders to focus on pricing, sourcing, and product planning. NetSuite Apparel ERP, together with NetSuite Project Accounting, facilitates that strategic work by automating complex revenue calculations and allocations, and supporting multiple revenue scenarios. Users can simulate different pricing strategies or seasonal price variations, to cite two examples, to examine how they would affect margins per style or collection. By treating each style as a project, apparel companies can also compare different styles or orders to gauge their individual and aggregate contribution to profitability.

NetSuite Project Accounting also allocates direct and indirect costs in line with budgets for real-time data-driven intelligence. Configurable dashboards and reporting give stakeholders personalized access to key metrics, such as resource utilization, project profitability, and project budgets vs. actuals.

Garment costing is more than numbers presented on a spreadsheet—it’s a key source of intelligence to guide an apparel brand’s strategic decisions. Accurate, detailed costing reveals hidden expenses, highlights profitable items, and exposes potential losses before production begins. Companies that embed costing into their operations don’t just price garments appropriately—they can defend their margins, develop higher-performing product lines, and take informed action. With the right costing in place, every garment can contribute to stronger profits and growth.

Apparel Costing FAQs

What is COGS for clothing?

Cost of goods sold (COGS) is an accounting term. In the clothing business, it incorporates the total cost of getting a garment ready for sale—from fabric to freight—but it excludes indirect expenses, such as marketing and administrative expenses.

How do you calculate the selling price of a garment?

Expressed as a formula, a garment’s selling price is calculated as follows:

Selling price = Cost of goods sold (COGS) + Overhead + Profit margin

Most often, clothing companies set their wholesale price at twice the COGS value—which covers all direct costs incurred to produce the garment, including materials and labor—resulting in a 50% gross margin, and 3X to 4X COGS for retail pricing.

What’s a good profit margin for retail clothing?

Healthy profit margins can range from 4% to 20%. Retail is a broad category that includes both mass-market discounters and high-end luxury brands. Profit margins are shaped by market positioning, competition, operating expenses, production costs, and business model.