farm costing and budgeting
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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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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
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Area under the crop in ha.
Per quintal // tonne Cost of Production
= Total cost Value of by-produce
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Quantity of main produce in quintals/tonnes
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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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Charanya AroraB.B.A. Semester V For educational purposes only
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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