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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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)
For educational purposes only Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

incurred in cash and kind

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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
For educational purposes only Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

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

For educational purposes only

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

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)

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora

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

B.B.A. Semester V

For educational purposes only

Charanya Arora