Leather Costing
From LeatherLink Knowledge Base
Contents |
Leather Costing Guidelines
Finished Leather costing consists of the following elements:
- Semi Finished Leather Cost (based on purchase or market value)
- Cost of chemicals used
- Cost of machine operations for making the leather
- Area loss (difference between final area and initial issue area)
- Rejection loss (% of leather rejected from the initially taken amount)
- Administrative overheads
- Packing and Freight
- Insurance
- Interest charges
Semi Finished Leather Cost
If SFL (Semi Finished Leather) is purchased from market, purchase cost can be taken directly. If raw skins/hides are purchased and converted into WetBlue/EI, purchase cost + conversion cost can be taken.
In either case, depending on % of quantity of each grade obtained, the cost can vary from lot to lot.
The purchase cost includes any additional cost spent, like taxes, freights etc., for the purchase of SFL.
Chemical Cost
Chemical costs are incurred in Dyeing (Drum) section and in Finishing (Spray) section. Accurately measuring quantity of chemicals used for each batch will help to determine realistic cost of chemicals.
Machinery Cost
In smaller units and units located in clusters, cost of each operation is calculated as the market rate for doing the operation in a Job work unit.
In larger tanneries, machinery cost is added to production overheads (wages, electricity, steam, depreciation, rent expenses etc).
Area Loss
Depending on the nature of leather processed, area of leather may shrink. Since pricing is done per unit of area, it is important to consider area loss for arriving at costing of leather.
A careful calculation is essential while arriving at area loss cost, this hindered cost is almost neglected by those who failed see real time profits.
Rejection Loss
SFL cost described above does not take into account, leathers rejected at Crust or finished stage. These rejected leathers can be sold at a lower rate only. Difference between the cost incurred and rejection value assigned is added as cost to the batch costing.
Administrative Overheads
Salaries to managerial staff, business promotion expenses, travel expenses and other costs not directly attributable to an order are included in this head.
Packing charges and Freight
Packing material cost and cost of transporting the leather to the buyer is added, if the shipment terms include shipment by supplier. Generally sea or surface transport is cheaper compared to air shipment.
