Ex No 7

EX NO :7
Application of Cost Principles including CACP Concepts in the

Estimation of Cost of Cultivation and Cost of Production of
Agricultural Crops.
Cost
• Costs refer to the money value of effort
extended or sacrifice made in producing an
article or rendering a service or achieving a
specific purpose.
• Costs thus are the expenses incurred in
organizing and carrying out the production
process.
• Money value of all inputs used in the
production process is termed as the total cost.
Variable Cost
• Variable cost is the cost that varies with the
level of output. i.e., higher the level of output
higher will be the variable cost and vice versa.
• These include expenditure on labour, bullock,
machinery charges, seeds, manures, fertilizers,
plant protection chemicals, irrigation charges,
value of other miscellaneous inputs and
interest on working capital.
Fixed Cost
• Fixed cost is the costs that do not vary with
the level of output.
• They have to be incurred whether cultivation
has been done or not.
• It includes the value of services provided by
the fixed inputs such as land revenue, taxes,
rental value of land, depreciation on building
and machinery and interest on fixed capital.
Cost of Cultivation
• It refers to the cost of various inputs and input
services used for raising a particular crop.
• It includes all the operations from land
preparation to threshing, cleaning and taking
the product from the field to home.
• Cost of cultivation always refers to unit area
(acre or hectare).
Cost of Production
• Cost incurred in production of one unit of

output and is normally associated with
variable and fixed costs.
Procedure for estimating the cost of production
1. Estimate the total variable cost of producing the crop in a given area.
2. Work out the total fixed cost for the farm and apportion it to the
particular crop based on area and duration of the crop.
3. The sum of the total variable and fixed cost (item 1 and 2) gives the
total cost of producing the output from the given area.
4. Divide the total cost (item 3) by the total output (in kg/qtl./tonne) to
estimate the average cost of production/unit quantity.
5. If a by- product is also produced along with the main product (eg.
paddy grains and straw), deduct the value of by-product (straw) from
the total cost to get the net cost.
 The net cost is divided by the total quantity of the main product
(grain) produced to get cost of production/unit output.
6. In the case of mixed crops, the total cost of
producing crops in a given area can be apportioned
among the crops based on the value of output
obtained from each crop.
7. When inter crops are grown with main crop, the
value of output from intercrops may be deducted
from the total cost and the net cost can be worked
out or the total cost may also be apportioned among
the main crop and intercrop based on the value of
output from each crop.
Estimation of the Cost of Cultivation using
CACP concepts
• Cost of cultivation on the other hand, relates to an
accounting procedure of quantifying the costs
incurred in undertaking production per unit of land.
• Cost of production i.e. cost of producing per unit of
output helps as a benchmark of deciding upon the
support prices, procurement prices fixed for
particular production of crop outputs.
• Cost of cultivation on the other hand, is the
benchmark for fixing the scale of finance for credit
operations like crop loans etc.
Cost Concepts
• Cost A1: It includes all actual expenses in cash and kind incurred in
production by the farmer.
1. Value of human labour (hired).
2. Value of bullock labour (both hired and owned).
3. Value of machine power (both hired and owned).
4. Value of seeds (both owned and purchased).
5. Value of insecticides and pesticides
6. Value of manure (both owned and purchased)
7.Value of fertilizers
8. Depreciation on farm implements and farm buildings.
9. Irrigation charges
10. Land revenue, cess and other taxes.
11. Interest on working capital.
12. Miscellaneous expenses (electricity charges, etc)
• Cost A2 : Cost A1 + rent paid for leased in land
• Cost B1: Cost A2 + Interest on value of owned
capital assets (excluding land)
• Cost B2 : Cost B1+ rental value of owned land
• Cost C1 : Cost B1+ Imputed value of family labour
• Cost C2 : Cost B2+ Imputed value of family labour
• Cost C3 : Cost C2 + 10% of cost C2 (10% of cost C2
added to cost C2):

Income measures
• Cost of production (per unit of produce) = (Cost C3- value of by

product) / main product yield.
1. Gross Income : Value of main product + Value of by

product
2. Net Income : Gross return – Cost C3
3. Farm Business Income : Gross return – Cost A1
4. Owned Farm Business Income : Gross return – Cost A2
5. Family Labour Income : Gross return – Cost B2
6. Farm Investment Income : Net Income + Rental Value of Owned
Land + Interest on Fixed Capital

7. Returns over Variable Cost : Gross Return – Variable Cost
Problem 2
• A farmer cultivated paddy in 2 hectares of land of which 0.4 ha
was leased-in at a cost of Rs.10000 per year.
• He invested Rs. 18000 on the pump house and thrashing floor
which depreciated @ of 3 % per annum. He owned implements
worth of Rs. 800, whose depreciation was @ 8% of its value/year.
• The interest rate for long-term borrowing was 8.5% and short
term borrowing 11 %. Land revenue is Rs. 250/ha/year land cess
is Rs.100/ha/year and water charges Rs. 50/ha/year.
• His family put 20 hrs of family male hrs and 15 female family
labour days in the production process. He cultivated three crops
per year. Calculate cost of cultivation and cost of production of
paddy. Workout the various income measures of the paddy
farmer.
The expenditure per ha is given below
1. Seed: 60 Kg @ Rs. 18 per Kg.

2. Nursery Preparation: Bullock labour 8 hrs @ Rs.22.50 per hour.
Human labour for land preparation 8 hrs @ Rs.20.00 per hour.
3. Main field preparation: machine labour (Tractor) 2.3 hrs @ Rs.500.00 per hour.
Human labour 48 hrs @ Rs.17.5 per hr.
4. Transplanting: Male labor 8 no’s @ Rs. 100 per day; Female labor 35 @ Rs.60 per day
5. Fertilizers & Manure: FYM 6 tractor load @ Rs. 500 per tractor load Chemical fertilizers 500 Kg.
@ Rs. 7.50 per Kg Application of fertilizers and manure: Male Labour 2 no’s @ Rs. 100 per day.
6. Weeding: weedicide 1.25 liters @ Rs.380 per liter
2 weeding @ 30 Female labour per weeding @ Rs.30 per female labour.
7. PP measures: 1 spraying @ 0.5 lit @ Rs.180 per liter and o.5 Kg fungicide @ Rs. 600 per kg;
spraying charges: Rs.150 per spray.
8. Irrigation charges: 200 Kg of Paddy
9. Harvesting and thrashing: 3 hrs of combined harvester @ 1600 per hour
10. Yield: Grains 60 Quintals @ Rs.720 per Quintals; Straw 80 Qtls Rs. 50 per Quintal

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EX NO :7

Application of Cost Principles including CACP Concepts in the

• Cost incurred in production of one unit of

added to cost C2):

• Cost of production (per unit of produce) = (Cost C3- value of by

1. Gross Income : Value of main product + Value of by

Land + Interest on Fixed Capital

1. Seed: 60 Kg @ Rs. 18 per Kg.

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