Cost Analysis

Cost refers to the expenses incurred on productive services There are two types of costs used in farming- Fixed costs and variable costs. The sum of these two costs gives the total cost Fixed Costs: These costs are related to fixed resources and are overhead costs. They remain constant irrespective of the yields obtained Variable Costs: Change with the output level In the beginning, as the production increases variable costs rise quite rapidly but with further rise in production, variable costs do not increase proportionately with production due to economies brought about by mass production Variable costs must be less than selling price for farming to stay a going concern
B.B.A. Semester V For educational purposes only Charanya Arora

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 of production 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 at a 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 by number of output units Average variable cost is reduced initially due to increasing returns and increases in advance stage because of law of diminishing returns The AVC has an inverse relationship with average product (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 are affected only by the variable cost
B.B.A. Semester V For educational purposes only Charanya Arora

Farm Costing
Average Total Cost
This cost is arrived at by adding together average

variable 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) are

the indicators to show at what level profit will be maximum. Profit will be maximum when marginal cost is equal to marginal return (MC=MR)
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B.B.A. Semester V

Farm Costing

TOTAL VARIABLE OUTPUT COSTS UNITS Y VC 0 25 60 100 150 200 240 270 290 300 300 280 250 0 100 200 300 400 500 600 700 800 900 950 900 800

FIXED COSTS FC 200 200 200 200 200 200 200 200 200 200 200 200 200

TOTAL COSTS TC 200 300 400 500 600 700 800 900 1000 1100 1150 1100 1000

AVERAGE VARIABLE COST AVC 0 4 3.3 3 2.7 2.5 2.5 2.6 2.8 3 3.2 3.2 3.2

AVERAGE FIXED COST AFC 0 8 3.3 2 1.3 1 0.8 0.7 0.7 0.7 0.7 0.7 0.8

AVERAGE TOTAL COST ATC 0 12 6.6 5.5 4 3.5 3.3 3.3 3.5 3.7 3.9 3.9 4

MARGINAL COST MC

12 -5.4 -1.1 -1.5 -0.5 -0.2 0 0.2 0.2 0.2 0 0.1

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Scientific costing
Cost A
Actual paid out costs for owner cultivator
This cost approximates the actual expenditure

incurred in cash and kind

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Cost A Elements
1. Hired human labour : a) Male b) 2. Total bullock labour a) owned b) 3. Seeds 4. Manures 5. Fertilizers 6. Insecticides and pesticides 7. Irrigation charges 8. Land revenue, cesses and other taxes 9. Depreciation on capital assets 10. Transport and Marketing 11. Interest on working capital Female Hired

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Cost A1 for Tenant Cultivators

The rent paid by tenant to the landlord is another item of actual cost Cost A1 is the actual cost incurred by a tenant cultivator Cost A1 =All elements of Cost A except.. + rent paid by tenant

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Cost Concepts
Cost A2 is defined as the sum of Cost & (or cost A1) and the imputed value of the farmers own labour Cost B= Cost A + imputed rental value of owned land + imputed interest 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 would have 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 he would have otherwise gained This loss is considered as a Cost. It is called rental value of land The hypothetical interest that the capital invested in farm business would have earned, if invested alternatively is also considered as cost
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B.B.A. Semester V

Cost Concepts
Cost C is the total cost of production, which includes all cost items, actual as well as imputed Cost C : Cost B + imputed value of family human labour

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Measures of Farm Income

Profit at Cost A is known as Farm Business Income: The difference between gross return from sale of produce and cost A (cost A1 in case of tenant cultivator) represents the total return to the cultivator for his labour, investments and entrepreneurship 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 investments and profit Farm Investment Income = Gross returns - Cost A2

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Measures of Farm Income

Profit at Cost B is also called Family Labour Income. Cost B provides an estimate of return which correspond to the holdings own labour and profit Family labour income = Gross returns - Cost B Profit at Cost C is also called Net Income. Any surplus on the basis of cost C provides an estimate 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 of gathering the harvest Cost of production includes factor costs up to the stage of marketing 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 overall organization 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 a farm business, so that it results in a continuous maximization 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 experiences as a basis to decide which of the improved ideas and methods fit to this situations It helps him take decisions in relation to the crops to be grown, the area to be bought under or the number of livestock 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 a whole

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Farm Budgeting
Farm budgeting is a method of analyzing plans for the use of agriculture resources at the command 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, expenses and net earnings on different farms in the locality. It facilitates most efficient and economical use of resources. It serves as a valuable basis for improvements to the farm management practices.
For educational purposes only Charanya Arora

B.B.A. Semester V

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 a change in a part of the business organisation This change may be made through a careful selection from among alternative methods of production or practices This choice is based on the opportunity cost of relative profitability & does not affect the total farm organisation vitally This technique helps to make decisions whenever small changes in the existing farm organisations are contemplated
B.B.A. Semester V For educational purposes only Charanya Arora

Partial Budgeting
The following four points are important in setting up a partial budget: Additional returns from change Reduction in unit cost Reduction in yield, if any Addition in cost incurred Thus partial budgets deal with such changes in the farm organisation as can increase farm incomes without changing the total farm organisation
B.B.A. Semester V

Debit Rs Rs

Credit

(a)Increase in costs

(a)Decrease in costs

(b)Decrease in returns Gain Total

(b)Increase in returns Loss Total

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Full Budgeting
It refers to making out a plan for the farm as a whole or for all decision on one enterprise In case budgeting analysis involves complete reorganization of the farm business, it is called complete budgeting Complete budgeting considers all the crops, livestock, producing method and estimated costs and returns for the farm as a whole. It requires more time and efforts and more basic data for accurate forecasting

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Charanya Arora

Partial budgeting Vs. Full Budgeting

Partial budgeting considers a few alternatives which do not affect the organisation vitally, but full budgeting takes care of all the alternatives In full budgeting, the inventory of the farm, the resource structure, the existing resource use & such problems as overstocking or understocking of resources,etc. are considered, but in partial budgeting information with respect to a few alternatives is considered Partial budgeting does not indicate the break-even point as to when to start one practice & abandon another, but full budgeting does The best strategy is to make use of a partial budget at different stages of full budgeting

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Charanya Arora

Full Budgeting
In preparing complete plans for the farm, all the comprehensive analysis of studying an individual cultivator's opportunities, constraints & problems is done Steps of Full/Total/Complete Budgeting 1. FARM MAP. The farm is carefully mapped out, giving its salient features, like soil type soil-fertility & rotations followed. Low-lying areas or other such features are also shown in the map. Then based on the previous crop history, land-capability classification is done & is also shown in the map 2. INVENTORY OF FARM RESOURCES. Every asset on the farm, ranging from hand-tools to sources of power, etc. is inventoried. This does not provide us with the picture of the resources as owned by a farmer, but we can also work out their use-patterns & their condition, i.e. whether they will have to be replaced or whether they will be sufficient for the new plan or some augmentation will be needed
B.B.A. Semester V For educational purposes only Charanya Arora

Full Budgeting
3. EXAMINING THE EXISTING ORGANISATION. Having prepared an inventory of the existing resources & their availability, what we are interested in is their use-pattern within the framework of the existing crop mix, whether the resources are understocked or overstocked. A careful analysis of the restrictions & weaknesses of the farm organisation is made

4. LAYING DOWN RESTRICTIONS & PLANNING. (a)Restrictions maybe with regard to bullock-power availability, or in respect of putting some area under cotton, or vegetables for home-consumption, though such a change in the cropping pattern may not be profitable. (b)Labour-requirements, power requirements, capital needs & new equipment needed are worked out & a suitable crop mix is adopted

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 Business Transaction : It means transaction or dealing in money goods with persons, wherein some benefit is given as well as taken In other words, any event which involves the transfer of money or moneys worth from one person to another These transactions are cross-dealings involving simultaneously the receiving of a benefit by someone and the giving of a benefit to someone else for an equal amount

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Book Keeping Systems

The system of book keeping means the procedure of recording transactions for the year in the books of accounts There are two systems of Book-keeping of Accountancy
Double Entry
Single Entry

Double Entry
Two entries or made for each transaction in the

same set of books

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Farm Efficiency Measures

One method of production is said to be more efficient than the other when it yields a greater valuable output per unit of a valuable input Efficiency Measures can be categorised into
Physical efficiency measures

Land Efficiency Labour Efficiency

Ratio measures Absolute or aggregate measures

Value efficiency measures (Financial Efficiency)

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Land Efficiency Measures

Yield per hectare (Production Efficiency) : The production efficiency of the farm as whole should be expressed in terms of yield per hectare. Crop yield index : It is a measure of comparison of the yield of all crops on a given farm with the average yields of those crops in the locality. The relationship is expressed in percentage terms Intensity of cropping : measures the extent of the use of land 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 working out the average and Marginal Productivity of labour in man-hours An average productivity of labour is the output per unit of labour input

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Charanya Arora

Farm Budgeting
Farm budgeting is a method of analyzing plans for the use of agriculture resources at the command 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, expenses and net earnings on different farms in the locality. It facilitates most efficient and economical use of resources. It serves as a valuable basis for improvements to the farm management practices.
For educational purposes only Charanya Arora

B.B.A. Semester V

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 a change in a part of the business organisation This change may be made through a careful selection from among alternative methods of production or practices This choice is based on the opportunity cost of relative profitability & does not affect the total farm organisation vitally This technique helps to make decisions whenever small changes in the existing farm organisations are contemplated
B.B.A. Semester V For educational purposes only Charanya Arora

Partial Budgeting
The following four points are important in setting up a partial budget: Additional returns from change Reduction in unit cost Reduction in yield, if any Addition in cost incurred Thus partial budgets deal with such changes in the farm organisation as can increase farm incomes without changing the total farm organisation
B.B.A. Semester V

Debit Rs Rs

Credit

(a)Increase in costs

(a)Decrease in costs

(b)Decrease in returns Gain Total

(b)Increase in returns Loss Total

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Charanya Arora

Full Budgeting
It refers to making out a plan for the farm as a whole or for all decision on one enterprise In case budgeting analysis involves complete reorganization of the farm business, it is called complete budgeting Complete budgeting considers all the crops, livestock, producing method and estimated costs and returns for the farm as a whole. It requires more time and efforts and more basic data for accurate forecasting

B.B.A. Semester V

For educational purposes only

Charanya Arora

Partial budgeting Vs. Full Budgeting

Partial budgeting considers a few alternatives which do not affect the organisation vitally, but full budgeting takes care of all the alternatives In full budgeting, the inventory of the farm, the resource structure, the existing resource use & such problems as overstocking or understocking of resources,etc. are considered, but in partial budgeting information with respect to a few alternatives is considered Partial budgeting does not indicate the break-even point as to when to start one practice & abandon another, but full budgeting does The best strategy is to make use of a partial budget at different stages of full budgeting

B.B.A. Semester V

For educational purposes only

Charanya Arora

Full Budgeting
In preparing complete plans for the farm, all the comprehensive analysis of studying an individual cultivator's opportunities, constraints & problems is done Steps of Full/Total/Complete Budgeting 1. FARM MAP. The farm is carefully mapped out, giving its salient features, like soil type soil-fertility & rotations followed. Low-lying areas or other such features are also shown in the map. Then based on the previous crop history, land-capability classification is done & is also shown in the map 2. INVENTORY OF FARM RESOURCES. Every asset on the farm, ranging from hand-tools to sources of power, etc. is inventoried. This does not provide us with the picture of the resources as owned by a farmer, but we can also work out their use-patterns & their condition, i.e. whether they will have to be replaced or whether they will be sufficient for the new plan or some augmentation will be needed
B.B.A. Semester V For educational purposes only Charanya Arora

Full Budgeting
3. EXAMINING THE EXISTING ORGANISATION. Having prepared an inventory of the existing resources & their availability, what we are interested in is their use-pattern within the framework of the existing crop mix, whether the resources are understocked or overstocked. A careful analysis of the restrictions & weaknesses of the farm organisation is made

4. LAYING DOWN RESTRICTIONS & PLANNING. (a)Restrictions maybe with regard to bullock-power availability, or in respect of putting some area under cotton, or vegetables for home-consumption, though such a change in the cropping pattern may not be profitable. (b)Labour-requirements, power requirements, capital needs & new equipment needed are worked out & a suitable crop mix is adopted

B.B.A. Semester V

For educational purposes only

Charanya Arora

Business Transaction
Business Transaction : It means transaction or dealing in money goods with persons, wherein some benefit is given as well as taken In other words, any event which involves the transfer of money or moneys worth from one person to another These transactions are cross-dealings involving simultaneously the receiving of a benefit by someone and the giving of a benefit to someone else for an equal amount

B.B.A. Semester V

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Charanya Arora

Book Keeping Systems

The system of book keeping means the procedure of recording transactions for the year in the books of accounts There are two systems of Book-keeping of Accountancy
Double Entry
Single Entry

Double Entry
Two entries or made for each transaction in the

same set of books

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Charanya Arora

Book Keeping Systems

There are certain events or financial changes involving either increase or decrease in value where no such business is transacted. Even they are recorded in the books of the business Machinery, implements, livestock and buildings decrease in value due to their use during the year. These are all recorded in the books of business of the end of the year The term entry means the act of writing a transaction in books of accounts

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Double Entry Book Keeping

Two fold aspect of a transaction Every business transaction necessarily involves two parties or two sides one for the giving of a benefit and the other for the receiving of that benefit Debit and Credit The amount of the debit entry is equal to the amount of the corresponding credit entry The receiving and giving are between accounts in the same set of books

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Single Entry System

This name is given to a system where only the personal Accounts of debtors and creditors are kept and impersonal accounts are ignored altogether Any method of accounting which falls short of Double entry, whether it be a combination of no entry single entry and double entry, may be called as the Single Entry System

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Farm Records

The farmer can avoid mistakes, misunderstandings and losses which will occur, if he only depends upon his memory He will get details of receipts and expenditure, the quantity of seed fed to the livestock, the effect of prices on the farm produce etc. He will assess the results of his years farming and to know the nature and extent of the profit he has to make and the losses he has sustained Cultivator will know the actual financial position of the business at the end of the year i.e. assets possessed, liabilities incurred & the net worth of his business He can compare his financial position with that of the neighbouring and competing farms and with that of his own in previous years He will have a better insight into the working of the business Cultivator will acquire business habits which will help him in taking advantage of any rise or fall in the disposal of his products The account books can be produced in support of any legal claims i.e. the increase of decrease of land rent, income-tax, litigations etc. The date on cost of production will be helpful for the purpose of obtaining loans

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Types of Farm Records

Physical Farm Records These records related to the physical aspects of the operation of farm business They do not indicate financial position or the outcome of the farm business but simply record the physical efficiency or performance of the farm

Farm Map, soil map and contour map Charts on physical efficiency Land utilization record Crop production and disposal record Livestock production and disposal record Labour records, daily work diary Machinery use records Feed records Stock / Store register Poultry records

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Types of Farm Records

Financial Farm Records These records are mainly related to the financial aspects of the operation of farm business

Farm inventory Farm cash accounts Classified farm cash accounts & annual farm business analysis Supplementary financial records Capital assets register Cash sale register Credit sale / purchase register Wage register Funds borrowed, repayment register Farm expenses Non farm income record

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Farm Inventory
An inventory is a list of assets and liabilities, which are claims or debts against the business It includes item by item all the property or assets owned or possessed for the field operations and all other cultivation accounts, receivable as well as all payable with their valuation on that date Process of taking farm inventory 1.Physical counting 2.Valuation of physical assets

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Purpose of Farm Inventory

A complete farm inventory taken at the beginning of each season, will give a list of all the assets with their values it shows what amount of capital goes back into the business. Farm inventory is a necessary step in complete farm accounting It reveals the changes in net worth through comparison of a farm inventories taken at the beginning of the year with another assembled at the end of the year. The inventory provide a basis for computing growth in net worth It enables to work out the measures of income It enables assessment of depreciation costs It helps to work out the value of last years takeover of stock and this years left over Basis of income statement net firm income cannot be calculated without inventories

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Valuation of Physical Assets

Methods of Valuation
Valuation of cost minus depreciation.
Valuation at cost or market price which ever is

lower. Valuation at net selling price Valuation by Replacement cost minus depreciation Valuation by income capitalization method

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Valuation at cost minus depreciation

This method is commonly used for such working assets such as machinery and breeding livestock This method assumes that the purchase price was an appreciation of the value of the assets and its value in subsequent years can be determined by subtracting a depreciation allowance from cost

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Valuation at cost or market price

Valuation is estimated at the cost or the market price whichever is lower This method is commonly used for valuing purchased farm supplies No proper profits accrue and losses due to falling prices are absorbed immediately

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Valuation at net selling price

This means the price which could probably be obtained for the asset, if marketed, less the cost of marketing This confirms most closely to the assets present worth This method represents the market price, provides a reasonably accurate measure of the current value of the asset

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Valuation by replacement cost minus depreciation

This method assesses value of assets at what it would cost to reproduce them at present prices and under present methods of production This method is best suited for long lived assets such as buildings, particularly where wide changes in the price level occur This method will guard against undervaluation, but may not ensure against over valuation

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Valuation by income capitalization method

This method is appropriate for farm assets whose contribution to the income of the farm business can be measured and which have a long life Value + Future Income

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Charanya Arora