farm costing budgeting bool keeping

8/22/2019 Farm Costing Budgeting Bool Keeping

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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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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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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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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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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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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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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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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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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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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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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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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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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

-----------------------------

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 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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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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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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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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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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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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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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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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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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Business Transaction : It means transaction ordealing in money goods with persons, whereinsome benefit is given as well as taken

In other words, any event which involves thetransfer of money or moneys worth from oneperson to another

These transactions are cross-dealings involvingsimultaneously the receiving of a benefit by

someone and the giving of a benefit to someoneelse for an equal amount


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Book Keeping Systems

The system of book keeping means the procedureof recording transactions for the year in thebooks of accounts

There are two systems of Book-keeping ofAccountancy

Double Entry

Single Entry

Double Entry

Two entries or made for each transaction in thesame set of books


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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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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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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 output

per unit of labour input


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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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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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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 inreturns (b)Increase inreturns

Gain Loss

Total Total


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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 called

complete 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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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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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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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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Business Transaction

Business Transaction : It means transaction ordealing in money goods with persons, whereinsome benefit is given as well as taken

In other words, any event which involves the

transfer of money or moneys worth from oneperson to another

These transactions are cross-dealings involvingsimultaneously the receiving of a benefit by

someone and the giving of a benefit to someoneelse for an equal amount


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The system of book keeping means the procedureof recording transactions for the year in thebooks 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 thesame set of books


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There are certain events or financial changes involvingeither increase or decrease in value where no such businessis transacted. Even they are recorded in the books of thebusiness

Machinery, implements, livestock and buildings decrease in

value due to their use during the year. These are allrecorded in the books of business of the end of the year

The term entry means the act of writing a transaction inbooks of accounts


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Double Entry Book Keeping

Two fold aspect of a transaction Every businesstransaction necessarily involves two parties or two sides one for the giving of a benefit and the other for thereceiving of that benefit

Debit and Credit

The amount of the debit entry is equal to the amount of thecorresponding credit entry

The receiving and giving are between accounts in the sameset of books


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Single Entry System

This name is given to a system where only thepersonal Accounts of debtors and creditors arekept and impersonal accounts are ignoredaltogether

Any method of accounting which falls short ofDouble entry, whether it be a combination of noentry single entry and double entry, may becalled as the Single Entry System


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Farm Records

The farmer can avoid mistakes, misunderstandings and losses which willoccur, if he only depends upon his memory

He will get details of receipts and expenditure, the quantity of seed fed tothe livestock, the effect of prices on the farm produce etc.

He will assess the results of his years farming and to know the nature andextent 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 hisbusiness 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. theincrease 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 orperformance 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 areclaims or debts against the business

It includes item by item all the property or assets owned orpossessed for the field operations and all other cultivationaccounts, 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 whatamount of capital goes back into the business. Farm inventory is anecessary step in complete farm accounting

It reveals the changes in net worth through comparison of a farminventories taken at the beginning of the year with anotherassembled 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 islower.

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 workingassets such as machinery and breeding livestock

This method assumes that the purchase pricewas an appreciation of the value of the assets

and its value in subsequent years can bedetermined by subtracting a depreciationallowance from cost


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Valuation at cost or market price

Valuation is estimated at the cost or the marketprice whichever is lower

This method is commonly used for valuingpurchased farm supplies

No proper profits accrue and losses due to fallingprices are absorbed immediately


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Valuation at net selling price

This means the price which could probably beobtained for the asset, if marketed, less the costof marketing

This confirms most closely to the assets present

worth

This method represents the market price,provides a reasonably accurate measure of thecurrent value of the asset


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Valuation by replacement cost minusdepreciation

This method assesses value of assets at what it would costto reproduce them at present prices and under presentmethods of production

This method is best suited for long lived assets such asbuildings, particularly where wide changes in the price level

occur

This method will guard against undervaluation, but may notensure against over valuation


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Valuation by income capitalization method

This method is appropriate for farm assets whosecontribution to the income of the farm businesscan be measured and which have a long life

Value + Future Income

farm costing budgeting bool keeping

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