How do I determine my cost of production?
The first step in determining the cost of producing your farm products is to keep good records. You will need at least a full year’s worth of income and expenses to accurately determine a cost of production. It is even better to use a rolling average of income and expenses, say a 3 year average, or a 5 year ‘olympic’ average (where the top and bottom values are eliminated). If you are confident that you have kept good detailed records of your farm income and expenses, then carry on with determining your cost of production. Otherwise, we would suggest that you develop a record-keeping system as your next step in managing your business. There are two basic types of cost to be concerned about when determining a cost of production. These are fixed (overhead) costs and variable (operating) costs. Fixed costs are those costs that you incur regardless of the level of production. These would include property taxes, mortgage payments, rent, owner salary, etc. Variable costs are costs that increase proportionally with the level of production. These would include such expenses as seed, fertilizer, feed, etc.
Often fixed expenses are incurred by more than one enterprise on the farm. For example, a tractor is likely to be used for all of the crops grown on a farm, not just for the corn or soybean enterprises. Therefore, the annual maintenance and ownership costs of the tractor should be divided between all enterprises where it is used. For these types of expenses, you should use your best judgment to determine the appropriate percentage allocation for each expense item to each enterprise. For example, if you determine that a tractor is used a total of 900 hours in a year, and 300 hours are in the corn fields, and then one third of the expenses associated with that tractor for the year should be allocated to the corn crop.
Once you have determined the appropriate allocations for your fixed expenses for each enterprise, you can assign the variable expenses to the enterprise. This will often require some detailed recordkeeping, to ensure that expenses are allocated correctly. For example, fertilizer bills should be coded according to the crop that the fertilizer was applied to, and feed bills should be coded according to the class of livestock being fed (if more than one are present on the farm).
After all of the expenses have been sorted and allocated correctly, it is then a matter of dividing the total expenses for each enterprise by the appropriate unit(s), such as per acre, per Ton, per head, per bushel, etc. An enterprise budget template can be very useful in organizing the cost of production for your various enterprises on the farm. You can develop your own templates on paper or by using a computer spreadsheet, or download one from an extension website. There are several useful budget templates to be found online. Here are a few links to some useful websites with enterprise budget templates: