Farm Costing and Budgeting

8/22/2019 Farm Costing and Budgeting

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Charanya AroraB.B.A. Semester V For educational purposes only

Cost Analysis

Cost refers to the expenses incurred on productive services

There are two types of costs used in farming- Fixed costsand variable costs. The sum of these two costs gives thetotal cost

Fixed Costs: These costs are related to fixed resources and

are overhead costs. They remain constant irrespective ofthe yields obtained

Variable Costs: Change with the output level

In the beginning, as the production increases variablecosts rise quite rapidly but with further rise in

production, variable costs do not increaseproportionately with production due to economiesbrought about by mass production

Variable costs must be less than selling price for farmingto stay a going concern


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Farm Costing

Total Cost The total cost stands even when production is zero Once the total costs are covered, the farmer remains

indifferent to the average cost of per unit cost ofproduction

Total Profit = Gross Income Total Cost (Fixed +Variable) Average Cost

Refers to cost per unit of output It is the resultant of total cost divided by output

Average Fixed Cost Average fixed cost is a fixed cost per unit of output The total fixed cost is the same of all the levels of

production. The average fixed cost falls continuously ata decreasing rate as core output is produced


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Farm Costing

Average Variable Cost

Refers to total variable cost per unit of output-arrived at by dividing the total variable cost bynumber of output units

Average variable cost is reduced initially due toincreasing returns and increases in advance stagebecause of law of diminishing returns

The AVC has an inverse relationship with averageproduct (AP)

AP is at maximum the ATC must be at its minimum Marginal costs are related to the cost of

producing additional units of output, they areaffected only by the variable cost


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Farm Costing

Average Total Cost

This cost is arrived at by adding together averagevariable cost and average fixed cost

This cost gives idea about total expenses incurred

for producing one unit of output For finding out profit from total return it is

necessary to know the total cost of production

Profit Maximization Maximisation of returns, minimisation of costs

Marginal Cost (MC) and Marginal Returns (MR) arethe indicators to show at what level profit will bemaximum. Profit will be maximum when marginalcost is equal to marginal return (MC=MR)


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Farm Costing

TOTAL

OUTPUT

UNITS

VARIABLE

COSTS

FIXED

COSTS

TOTAL

COSTS

AVERAGE

VARIABLE

COST

AVERAGE

FIXED

COST

AVERAGE

TOTAL

COST

MARGINAL

COST

Y VC FC TC AVC AFC ATC MC

0 0 200 200 0 0 0

25 100 200 300 4 8 12 12

60 200 200 400 3.3 3.3 6.6 -5.4

100 300 200 500 3 2 5.5 -1.1

150 400 200 600 2.7 1.3 4 -1.5

200 500 200 700 2.5 1 3.5 -0.5

240 600 200 800 2.5 0.8 3.3 -0.2

270 700 200 900 2.6 0.7 3.3 0

290 800 200 1000 2.8 0.7 3.5 0.2

300 900 200 1100 3 0.7 3.7 0.2

300 950 200 1150 3.2 0.7 3.9 0.2

280 900 200 1100 3.2 0.7 3.9 0

250 800 200 1000 3.2 0.8 4 0.1


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Scientific costing

Cost A

Actual paid out costs for owner cultivator

This cost approximates the actual expenditureincurred in cash and kind


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Cost A Elements

1. Hired human labour : a) Male b) Female

2. Total bullock labour a) owned b) Hired

3. Seeds

4. Manures

5. Fertilizers

6. Insecticides and pesticides

7. Irrigation charges

8. Land revenue, cesses and other taxes

9. Depreciation on capital assets10.Transport and Marketing

11. Interest on working capital


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Cost A1 for Tenant Cultivators

The rent paid by tenant to the landlord is anotheritem of actual cost

Cost A1 is the actual cost incurred by a tenantcultivator

Cost A1 =All elements of Cost A except.. + rentpaid by tenant


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Cost Concepts

Cost A2 is defined as the sum of Cost & (or cost A1) and theimputed value of the farmers own labour

Cost B= Cost A + imputed rental value of owned land + imputedinterest on owned fixed capital

If the amount invested in purchase of land would have been

put in some other long-term enterprise or in a bank, it wouldhave yielded some returns or interest

But due to the investment of the amount in purchase of land,the farmer has to part with the returns or interest that hewould have otherwise gained

This loss is considered as a Cost. It is called rental value ofland

The hypothetical interest that the capital invested in farmbusiness would have earned, if invested alternatively is alsoconsidered as cost


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Cost Concepts

Cost C is the total cost of production, whichincludes all cost items, actual as well as imputed

Cost C : Cost B + imputed value of family humanlabour


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Measures of Farm Income

Profit at Cost A is known as Farm Business Income: Thedifference between gross return from sale of produce andcost A (cost A1 in case of tenant cultivator) represents thetotal return to the cultivator for his labour, investments andentrepreneurship effort

Farm business income= Gross returns Cost A

or Cost A1

Profit at Cost A2 is also called Farm Investment Income.

Cost A2 provides a measure of return for his investmentsand profit

Farm Investment Income = Gross returns - Cost A2


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Measures of Farm Income

Profit at Cost B is also called Family LabourIncome. Cost B provides an estimate of returnwhich correspond to the holdings own labour andprofit

Family labour income = Gross returns - Cost B

Profit at Cost C is also called Net Income. Anysurplus on the basis of cost C provides anestimate purely of profit for enterprise

Net Income = Gross returns Cost C


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Cost of Production

Cost of cultivation includes factor costs up to the stage ofgathering the harvest

Cost of production includes factor costs up to the stage ofmarketing the produce

Cost of production is to be worked out as cost per unit of area

and production i.e. per hectare and per quintal/ton

Per hectare cost of production = Total cost

-----------------------------

Area under the crop in ha.

Per quintal // tonne Cost of Production

= Total cost Value of by-produce

----------------------------------------

Quantity of main produce in quintals/tonnes


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Farm Planning

Planning decisions are concerned with the overallorganization of the farm business

They are relatively long term decisions

Operational decisions are more day-to-day Farm planning is a process of making decisions

regarding the organization and operation of afarm business, so that it results in a continuousmaximization of net returns of a farm business


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Benefits of Farm Planning

It helps him to look at his situations and post experiencesas a basis to decide which of the improved ideas andmethods fit to this situations

It helps him take decisions in relation to the crops to begrown, the area to be bought under or the number oflivestock to be raised and how they are to be grown or

raised It helps him to identify the credit needs both short and long

term and its sources It helps him to identify clearly the various services and

supplies, needed for an improved plan If gives him an idea of the yield that can be reasonably

expected from each enterprise It gives him a clear idea about the returns that may be

obtained from each enterprise and from business as awhole


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Farm Budgeting

Farm budgeting is a method of analyzing plansfor the use of agriculture resources at thecommand of the decision maker It evaluates the old plan and guides the farmer to

adopt a new farm plan. Leakage and wastage in farm business are made to

known to the farmer.

It gives a comparative study of receipts, expensesand net earnings on different farms in the locality.

It facilitates most efficient and economical use ofresources.

It serves as a valuable basis for improvements tothe farm management practices.


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Types of Farm Budgeting

Partial Budgeting Full or Complete Budgeting and Planning

Partial Budgeting Partial budgeting is a method of making a comparative

study of the cost-and-return analysis resulting from achange in a part of the business organisation This change may be made through a careful selection

from among alternative methods of production orpractices

This choice is based on the opportunity cost of relative

profitability & does not affect the total farm organisationvitally This technique helps to make decisions whenever small

changes in the existing farm organisations arecontemplated


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Partial Budgeting

The following four pointsare important in setting upa partial budget:

Additional returns fromchange

Reduction in unit cost Reduction in yield, if

any

Addition in cost incurred

Thus partial budgets deal

with such changes in thefarm organisation as canincrease farm incomeswithout changing the totalfarm organisation

Debit Credit

Rs Rs

(a)Increase incosts (a)Decrease in costs

(b)Decrease in

returns (b)Increase in

returns

Gain Loss

Total Total


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Full Budgeting

It refers to making out a plan for the farm as awhole or for all decision on one enterprise

In case budgeting analysis involves completereorganization of the farm business, it is calledcomplete budgeting

Complete budgeting considers all the crops,livestock, producing method and estimated costsand returns for the farm as a whole.

It requires more time and efforts and more basicdata for accurate forecasting


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Partial budgeting Vs. Full Budgeting

Partial budgeting considers a few alternatives which do notaffect the organisation vitally, but full budgeting takes careof all the alternatives

In full budgeting, the inventory of the farm, the resourcestructure, the existing resource use & such problems asoverstocking or understocking of resources,etc. areconsidered, but in partial budgeting information withrespect to a few alternatives is considered

Partial budgeting does not indicate the break-even point asto when to start one practice & abandon another, but fullbudgeting does

The best strategy is to make use of a partial budget atdifferent stages of full budgeting


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Full Budgeting

In preparing complete plans for the farm, all thecomprehensive analysis of studying an individualcultivator's opportunities, constraints & problems is done

Steps of Full/Total/Complete Budgeting1. FARM MAP. The farm is carefully mapped out, giving itssalient features, like soil type soil-fertility & rotationsfollowed. Low-lying areas or other such features are alsoshown in the map. Then based on the previous crophistory, land-capability classification is done & is also shownin the map2. INVENTORY OF FARM RESOURCES. Every asset on thefarm, ranging from hand-tools to sources of power, etc. is

inventoried. This does not provide us with the picture of theresources as owned by a farmer, but we can also work outtheir use-patterns & their condition, i.e. whether they willhave to be replaced or whether they will be sufficient forthe new plan or some augmentation will be needed


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Full Budgeting

3. EXAMINING THE EXISTING ORGANISATION. Havingprepared an inventory of the existing resources & theiravailability, what we are interested in is their use-patternwithin the framework of the existing crop mix, whether theresources are understocked or overstocked. A careful analysisof the restrictions & weaknesses of the farm organisation ismade

4. LAYING DOWN RESTRICTIONS & PLANNING.(a)Restrictions maybe with regard to bullock-poweravailability, or in respect of putting some area under cotton, orvegetables for home-consumption, though such a change inthe cropping pattern may not be profitable.

(b)Labour-requirements, power requirements, capital needs &new equipment needed are worked out & a suitable crop mix isadopted


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Farm Efficiency Measures

One method of production is said to be moreefficient than the other when it yields a greatervaluable output per unit of a valuable input

Efficiency Measures can be categorised into

Physical efficiency measures

Land Efficiency

Labour Efficiency

Value efficiency measures (Financial Efficiency)

Ratio measures

Absolute or aggregate measures


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Land Efficiency Measures

Yield per hectare (Production Efficiency) : Theproduction efficiency of the farm as whole should beexpressed in terms of yield per hectare.

Crop yield index : It is a measure of comparison of theyield of all crops on a given farm with the average yields ofthose crops in the locality. The relationship is expressed inpercentage terms

Intensity of cropping : measures the extent of the use ofland for cropping purposes during a given year

Cross cropped area------------------------ X 100

Sown area


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Labour Efficiency

Labour efficiency can be best judged by workingout the average and Marginal Productivity oflabour in man-hours

An average productivity of labour is the outputper unit of labour input

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Farm Costing and Budgeting