Working in the eyewear industry has many benefits, including creativity, style, and excitement. However, budgeting is another crucial aspect to consider. Manufacturing a pair of eyeglasses involves various people and interests, making the process complex.
While you aim for high quality and affordable pricing, you also need to ensure profitability to sustain your brand and finance the next collection. It might sound complicated, but don’t worry; we’ve got you covered. Here’s your authoritative guide to understanding the pricing and cost structure in the eyewear manufacturing industry.
Eyewear Costing and Pricing Techniques
Eyewear Manufacturing Cost Sheets
Below are three cost accounting techniques used to identify, measure, and allocate costs in eyewear manufacturing.
Direct Cost Accounting
Direct cost accounting is the most basic method in manufacturing, also known as variable costing in the eyewear industry. The total manufacturing cost, product cost, or cost of goods sold is calculated by summing the total variable costs of labor and materials.
In addition, all fixed manufacturing costs, marketing, product development, and general and administrative expenses are allocated as fixed costs per pair of glasses or as a target profit margin. This strategy is highly effective for manufacturers producing basic eyewear where labor, product development, and marketing costs do not fluctuate significantly.
Integrated Cost Accounting
Absorption costing, or integrated cost accounting, not only allocates variable manufacturing expenses to each unit produced but also includes fixed manufacturing costs. This method is commonly referred to as full costing. As the name suggests, all costs involved in producing eyewear samples (including both fixed and variable costs) are absorbed into the product’s cost, helping determine the cost value.
The unique feature of this costing method is its consideration of the impact of both variable and fixed manufacturing costs on each eyewear model. The benefit here is a fairer distribution of manufacturing expenses across various designs, ensuring that low-labor products are not unfairly burdened by the indirect costs of high-labor products.
Activity-Based Costing
Eyewear Manufacturing Cost Sheets
Activity-based costing (ABC) is regarded as the most accurate yet challenging costing system. The principle it follows is that each cost-generating activity should be separately categorized and valued. Costs are then allocated to eyewear products based on how they utilize these activities. Activities can include materials management, engineering, operator training, production planning, quality control, advertising, and market research.
The challenge with this technique lies in establishing a standardized costing system that can track costs and allocate them to specific projects. To obtain accurate costing data, it’s crucial to connect the activity costs with the actual cost usage for a particular eyewear design or category.
Thus, activity-based costing uses activities as the basis for cost allocation. Department managers must now maximize these efforts directly benefiting product categories or designs to justify their expenses.
Factors Influencing Eyewear Cost Accounting
Eyewear Cost Factors
When calculating product costs, procurement specialists must consider various factors, including the cost points of raw materials, operational expenses of the business, the level of competition, and the company’s expected financial success. Buyer cost expectations also play a significant role.
The following factors determine the price of eyewear:
- Materials and Accessories Costs: This includes cutting, manufacturing, and trimming costs.
- Value-Added Services: These include printing, engraving, coating, and any special treatments.
- Eyewear Valuation: The perceived quality of the product.
- Logistics and Transportation Costs: Costs involved in shipping the eyewear to different locations.
- Profit Margins: The profitability for the manufacturing company.
These factors are dynamic and constantly changing, making them critical when calculating the cost of production materials for eyewear.
Key elements like unit measurements, minimum order quantities, trade terms agreed upon by raw material suppliers and eyewear manufacturers, and order volumes are primary factors influencing the cost of eyewear.
What Is a Cost Sheet in the Eyewear Industry?
Eyewear Manufacturing Cost Sheets
A cost sheet is used to calculate the total cost of a product or process. It is a systematic statement or format that inputs all costs. Also known as a worksheet, the relevance of a cost sheet in eyewear manufacturing is exceptionally high.
How to Create a Cost Sheet in the Eyewear Industry?
A perfect cost sheet should be straightforward yet comprehensive, providing all the necessary details related to the eyewear being produced. With eyewear technology, you can create an organized and neat cost sheet that tracks every expense and serves as both a record and reference tool.
While many businesses still use Excel for cost accounting, such as spreadsheets for pricing custom engraving, these sheets can be unclear, difficult to read, and prone to calculation errors.
Main Components of an Eyewear Cost Sheet
A cost sheet or cost statement typically has four main sections. These are:
- Initial Costs
- Factory-Related Work Costs
- Office Costs
- Total Costs
Below is an explanation of these components:
- Initial Costs: These include direct materials, direct labor, and direct expenses. They are also known as basic costs, fixed costs, or preliminary costs.
- Manufacturing or Labor Costs: This includes the cost of raw materials and factory overheads. Sometimes referred to as production cost estimation for eyewear manufacturing.
- Office Expenses: Office costs consist of manufacturing or work costs plus administrative and office overheads. The terms “office expenses” and “eyewear manufacturing” are often used interchangeably.
- Total Costs: Total cost is the sum of sales expenses plus the cost of producing goods (eyewear), also known as the “cost of sales.”
When modifying product prices during the development process, this can be particularly inconvenient. As you know, things are constantly changing, and manually re-entering everything takes a lot of effort and is prone to errors.
What Is the Cost of Manufacturing Eyewear?
Eyewear Manufacturing Cost Sheets
Cost of Manufacturing (CM) usually refers to the sewing line cost per pair of glasses. But how can you calculate the cost of manufacturing eyewear?
A crucial part of eyewear sales is calculating the Cost of Manufacturing (CM) per pair. Every eyewear sales manager should know the correct method for calculating material costs. Otherwise, factories could suffer significant losses. Today, I’ll provide a simple method for determining the Cost of Manufacturing (CM) for each pair of eyewear, as it’s very important in the eyewear retail industry.
For instance, producing sports eyewear is technically the most time-consuming type of eyewear to manufacture. Since sports eyewear is often fully lined, it typically requires a specific type of lining to maintain its shape. For example, if you want a custom, more structured look, you should use a woven fusible canvas. If you’re aiming for a softer look, a woven, non-fusible medium-weight lining may be your best bet.
How to Calculate the Cost of Manufacturing (CM) for Eyewear?
Before determining the Cost of Manufacturing (CM) for any eyewear, procurement specialists should ensure the following:
- The factory’s total monthly operating costs, including rent, utilities, business costs, transportation fees, workers, and staff wages.
- A complete inventory of the machines in the factory.
- The total number of machines required to complete a task.
- The expected hourly output using the current setup (excluding alterations and rejections).
- The total number of working days per month.
- The total number of working hours per day.
Now, eyewear sales managers can easily calculate the actual cost of manufacturing eyewear using the following formula:
Per Unit Cost of Production (CM):
(Factory’s Total Monthly Expenses × Total Number of Machines Required to Complete a Product) / Total Machines × Total Working Days per Month × Total Working Hours per Day × Targeted Output per Hour
What Is the Profit Margin in Eyewear Manufacturing?
Eyewear Manufacturing Cost Sheets
If a fashion-forward entrepreneur has a genuine interest in eyewear, sufficient initial capital, and a keen business sense, they should have no fear in owning and operating a retail eyewear business. Retail eyewear businesses, like all businesses, focus on making money. One of the most critical financial calculations needed to determine how much a company can earn is the profit margin.
When several eyewear companies compete for the same set of customers, pricing strategy can become a key tactic to boost sales—as long as the profit margin is high enough to justify it.
Profit Margin:
The profit margin is the percentage of total sales that remains after subtracting costs. It is calculated using a simple formula: Sales minus Costs = Profit, and Profit divided by Sales = Profit Margin. For example, if you buy a pair of sunglasses for $70 and sell them for $100, your profit is $30 ($100 – $70). $30 divided by $100, or 30%, is the profit margin.
Markup vs. Profit Margin
Markup and profit margin are often confused. They are similar in that both represent an amount above the product cost, but the profit margin for eyewear manufacturers is based on sales, while markup is based on cost. If a pair of glasses costs $20 and the retail price is $40, the difference (i.e., $20) is a 100% markup. If you sell the glasses at this price, the profit margin would be 50%.
Cost: Fixed Costs and Variable Costs
The cost of producing a product ultimately determines the profit margin. Fixed costs, such as rent, utilities, and some salaried employees, remain constant regardless of how many products you produce. Costs that vary depending on the number of products produced, such as materials and supplies, are known as variable costs. Cutting variable costs, which impact all levels of sales, is often advised as a way to improve profit margins without raising sales prices.
Eyewear Industry Profit Margins
Industry researchers suggest that the profit margin in eyewear retail typically ranges between 4% and 13%. Markups can seem high when compared to the cost of goods sold (i.e., variable costs). However, when these expenses are factored in, the profit margins of eyewear companies are significantly reduced, requiring eyewear businesses to sell large volumes to remain profitable.
Frequently Asked Questions
1. What are the basic cost accounting techniques?
The main cost accounting methods currently available include step costing, activity-based costing, direct costing, and output costing. Each method can be used for various production and decision-making scenarios.
2. What is the ABC method of cost accounting?
ABC, or activity-based costing, is a technique that allocates indirect costs, such as wages and utilities, to goods and services. The ABC cost accounting system is built around activities, which are defined as any occasion, project, or task with a specific goal.
3. How is the cost of manufacturing eyewear calculated?
Calculating the Cost of Manufacturing (CM) for eyewear involves multiplying the factory’s total monthly expenses by the total number of machines required to complete a product, then dividing by the total number of machines, the total working days per month, the total working hours per day, and the targeted output per hour.
4. What are the main components of an eyewear manufacturing cost sheet?
The main components of an eyewear manufacturing cost sheet include initial costs, factory-related work costs, office costs, and total costs. Together, these sections form the overall manufacturing cost of eyewear.
5. What are the key factors influencing the cost of eyewear?
The key factors influencing the cost of eyewear include materials and accessories costs, value-added services, product quality, logistics and transportation costs, and profit margins. These factors can fluctuate based on market dynamics and production conditions.
6. How can a cost sheet be effectively created in the eyewear industry?
To create an effective cost sheet in the eyewear industry, it’s essential that the cost sheet is both simple and comprehensive, covering all necessary details related to production. Many businesses use modern tools and technology to create easy-to-manage cost sheets.
7. How do fixed and variable costs affect profit margins in eyewear production?
Fixed costs are those that remain constant regardless of how many products are produced, such as rent and utilities, while variable costs fluctuate with the production volume, such as materials and supplies. Reducing variable costs is often recommended as a way to improve profit margins without increasing sales prices.
8. Why is profit margin important in eyewear manufacturing?
Profit margin is crucial in eyewear manufacturing because it directly affects a company’s profitability. Higher profit margins allow businesses to sustain operations in a competitive market and provide funds for future expansion and investment.
9. What is absorption costing in eyewear manufacturing?
Absorption costing is a method of cost accounting that allocates not only variable manufacturing costs but also fixed manufacturing costs. All production costs are absorbed into the product’s cost, helping determine the total cost value.
10. How can logistics and transportation costs be effectively managed in eyewear manufacturing?
Effective management of logistics and transportation costs can be achieved by optimizing the supply chain, selecting appropriate shipping methods, and negotiating favorable terms with logistics providers. This helps reduce overall production costs and improves profit margins.
Final Thoughts
Reducing costs, preventing waste, and maximizing the use of materials and resources are key methods in eyewear pricing. By adopting the appropriate eyewear cost accounting methods, the fashion appeal and transparency of the eyewear manufacturing process can be significantly enhanced.
