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Group Title: Staff paper - University of Florida Food and Resource Economics Dept. ; 131
Title: Enterprise budgets
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00072501/00001
 Material Information
Title: Enterprise budgets what, how and why?
Series Title: Staff paper
Physical Description: 34 p. : ; 28 cm.
Language: English
Creator: Westberry, George O
Publisher: Food and Resource Economics Dept., Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville
Publication Date: 1979
 Subjects
Subject: Agriculture -- Accounting   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references (p. 34).
Statement of Responsibility: George O. Westberry.
General Note: "August 1979."
Funding: Staff paper (University of Florida. Food and Resource Economics Dept.) ;
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Bibliographic ID: UF00072501
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 22409335

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    Reference
        Page 35
Full Text




HISTORIC NOTE


The publications in this collection do
not reflect current scientific knowledge
or recommendations. These texts
represent the historic publishing
record of the Institute for Food and
Agricultural Sciences and should be
used only to trace the historic work of
the Institute and its staff. Current IFAS
research may be found on the
Electronic Data Information Source
(EDIS)

site maintained by the Florida
Cooperative Extension Service.






Copyright 2005, Board of Trustees, University
of Florida






















ENTERPRISE BUDGETS: WHAT, HOW AND WHY?


by

George 0. Westberry


Staff Paper 131


August 1979


Staff Papers are circulated without formal
review by the Food and Resource Economics
Department. Content is the sole responsi-
bility of the author.





Food and Resource Economics Department
Institute of Food and Agricultural Sciences
University of Florida
Gainesville, Florida 32611













ENTERPRISE BUDGETS: WHAT, HOW AND WIHY?


George 0. Westberry

Enterprise budgets are a prerequisite for all farm management analyses

or recommendations. Since there are so many applications of budgeting, the

problem was to pare down the material to a manageable size. Therefore,

this paper first sketches out what budgets are, what can be done with them,

and where the necessary information comes from. A series of example uses

of budgets makes up the bulk of the paper.


Budgeting Highlights

A Budget Is

A systematic Listing of Income and Expenses for a Production Period:

-- For crop and livestock enterprises (our emphasis).
-- For all enterprises on the farm.
-- For business financing.
-- For forward planning.
-- For management control.

Projected Income Comes From:

-- Expected yield times expected price.
-- Head of livestock times expected price.

Projected Expenses:

-- Variable costs; short-run expenses, vary with output.
-- Fixed costs; long-run expenses, do not vary with output.
-- As production progresses, variable costs become fixed.



GEORGE 0. WESTBERRY is Area Economist, Food and Resource Economics
Department, Institute of Food and Agricultural Sciences, University of
Florida, stationed at Agricultural Research and Education Center in
Quincy.









Income Expenses = Returns:

-- Returns above variable costs
-- Returns above total costs.
-- Returns to unpaid resources.


Decision Making From Budgets

Return Above Variable Costs:

-- Should a farmer produce? If he covers variable costs, but no
fixed costs, he produces until equipment needs replacing, but
then quits.
-- Indicates which enterprise to produce in short-run.
-- Guides input use decisions among enterprises.
-- Guides input use decisions within an enterprise.
-- Be sure what costs have been covered. Do not compare returns
above variable costs to returns above fixed and variable costs
for another enterprise.

Return Above Total Costs:

-- Indicates long-run profitability. Total costs must be covered
to stay in business.
-- Indicates relative profitability among enterprises.

Plan Annual Credit Needs

Select Enterprises To Produce; Linear Programming

Residual Analysis:

-- Rental rates; equipment, land, allotment.
-- Value of inputs; management return, labor return.
-- Land taxes.
-- Return on investment.


Where Budgets Come From

Prescribed Production Practices; Top Farmers, Research Results:

-- Useful for new farmers.
-- Determine variable costs from practices.
-- Determine fixed costs from thumb rules or machinery manufac-
turer's estimates.

Records:

-- Useful to existing operators.
-- Allocate variable expenses among enterprises.
-- Allocate fixed expenses among enterprises.
-- Allocate returns among enterprises.










Combination of Above:

-- Variable costs from prescribed practices.
-- Fixed costs from records.

Deferring a discussion of returns, let's consider some important aspects

of budgeting costs.


Variable Costs


Determining variable costs is usually straightforward. The cost is

either the purchase price of an input or its opportunity cost. Problem areas

usually are machinery and equipment operating cost, interest, labor and land

rent. No doubt the costs of operating tractors, trucks, disc harrows and

other equipment are variable costs. The problem is determining just what

the cost is per acre or per hour. We usually depend on calculations based on

engineering data tempered slightly with actual operating costs obtained from

a few farmers who keep good records.

Operating money is usually a combination of borrowed funds, funds carried

over from the previous year, or funds from the recent sale of some commodity

or service. Borrowed money is like any other purchased input, and interest is

the price paid for that money. Money drawn from the farm's bank account has

an opportunity cost.

Hired seasonal labor is hours per unit of production (acre) times the

wage rate. Full time labor probably should be a fixed cost. Family labor

may or may not be paid a cash wage, but if cash wages are not paid an oppor-

tunity cost (wage) should be charged.

Land rent is a legitimate cash expense if it is actually rented, but

owned land is a different matter. First, owned land could be charged a rent

the same as rented land or the market value times current interest rate plus








ad valorem taxes. Land costs may be moved to the fixed cost section along

with other resources. Finally, land may be considered a residual claimant or

an unpaid production resource.

Fixed Costs


Determining fixed costs is not quite so simple. Recall that fixed costs

relate to production resources that do not change in one production period;

such as tractors, plows, planters and other items whose cost must be :,'.J; l"

over a number of production periods. Depreciation spreads investment cost

or purchase price of durable resources over their productive life. Other

fixed costs are interest (opportunity cost of capital invested in resources);

repairs such as major overhauls performed during the off-season; taxes such

as ad valorem taxes which must be paid regardless of use; insurance on fixed

resources whether covered by an actual policy or borne by the owner.

Table 1 shows an example of how fixed costs are calculated using straight

line depreciation and "rule-of-thumb" charges. Note that each piece of equip-

ment is listed and purchased price divided by 2. This figure is used in cal-

culating interest and taxes. Depreciation is determined by subtracting salvage

value from purchase price and dividing by years life. Salvage value here is

taken to be 10% of new price. Years life in this case is the number of years

this particular farmer is depreciating his equipment.(when equipment is depre-

ciated rapidly for tax purposes, salvage value may be greater than 10%). In-

terest cost is average investment times 9.5% (the going rate). This is an

opportunity cost as was mentioned above. Repairs may fit either the fixed

or variable cost category depending upon the reason repairs are needed. The

feeling here is that most repairs are the result of use; thus, they belong

in the variable cost area. But, some repairs will be needed even if no work
















Table 1. Estimated Investment and Fixed Costs for
North Florida, 1978.


Machinery Used in 1CO0 Acres of Corn and Soybean Production,


Investment Fixed Costs
Item Years Investment FTotal Annual
Life New AveragZe/ Deprec.h/ !nt.S/ .Red./ Tax / Ins./ Fixed Costse/
$ $
Tractor:
150 hp. 5 30,000 15,000 5,400 1,425 300 225 300 7,650
100 hp. 7 7,200* 3,600 926 342 72 54 72 1,466
80 hp. 7 6,300 3,150 810 299 63 47 63 1,282
Hiboy-12R 5 13,500 6,750 2,430 641 135 101 135 3,442
Combine 8-R 24 ft. 7 75,000 37,500 9,643 3,562 750 563 750 15,268
Truck, 2.5 ton 10 3,000 1,500 270 143 30 23 30 496
Pickup 4WD 5 7,200 3,600 1,296 342 72 54 72 1,836
Bottom-plow, 6-18" 12 6,000 3,000 450 285 60 45 60 900
Disc harrow:
20 ft. 12 6,000 3,000 450 285 60 45 60 900
13 ft. 12 400* 200 30 19 4 3 4 60
10 ft. 12 500* 250 38 24 5 4 5 76
Chisel plow, 11 tine 12 700 350 52 33 7 5 7 104
Cultivators (2) 6R 12 3,100 1,550 233 147 31 23 31 465
Planter, 6R 10 2,000 1,000 150 95 20 15 20 300
Pan 12 3,500 1,750 263 166 35 26 35 525
Grader 12 1,000 500 75 48 10 8 10 151
165400 22,516 ,856 1.654 1,241 1,654 34,


oughtt used at substantial saving
aI New cost divided by 2.
-A New cost minus 10 percent salvage value
SAverage investment times .095
SNew cost times .01
/ Average investment times .015
f/ New cost times .01
/ Total annual fixed costs is the sum of


divided by years life.


depreciation, interest, repairs, taxes and interest.









is done; therefore, a charge of 1% of new cost is allotted. Tax cost will

vary from county to county. Here a rate of 15 mills is applied to the average

investment. Finally, the insurance charge is 1% of new cost or ten dollars

per one thousand dollars.

Many of the above charges are accurate, but some of them are "rule-of-

thumb" because data are not available to determine actual costs. At any

rate, the DIRTI five (depreciation, interest, repairs, taxes and insurance)

make up total fixed costs. Table 1 shows total annual fixed costs for each

item as well as all items. Recall that these costs occur regardless of pro-

ductivity.


Average Fixed Costs

Fixed cost per unit of production is called "average fixed cost." This

is an important part of the total cost of production because a greater amount

of production with a given set of fixed resources can reduce the average fixed

cost, thus the total cost per unit. An example of reducing or "spreading"

fixed cost is shown below using the farm and equipment depicted in Table 1.

It can be seen that annual fixed cost for this farm is $34,921 or $34.92

per acre. One way to reduce the cost per acre would be to add more acres.

This was not a feasible alternative for this farmer; so, he did custom work.

First, the big combine, his most expensive piece of equipment cost $15,268

per year no matter how much corn and beans he cut. By harvesting 1,000 acres

his average fixed cost per acre would have been $15.27. He custom harvested

some 300 acres, thus reducing average fixed cost to $11.74 per acre. Table

2 shows how the number of acres affects average fixed cost.

The big tractor may be used in another example of reducing average

fixed cost. Average number of hours used for tractors may be 600. This

farmer put 1,100 hours on his 150 hp. tractor (according to reading taken










Table 2. Average Fixed Costs with Various Acreage for Large Combine.

Acres Harvested Average Fixed Cost

1* $15,268.00
500 30.54
1,000 15.27
1,300 11.74
1,500 10.18
1,750 8.72
2,000 7.63


*Actually the cost would be the same if zero acres were harvested, but
dividing by zero gives zero; so, one was used for demonstration purposes.




directly from the tractor). The $7,650 annual fixed cost for this tractor

becomes $6.95 per hour. Again custom work reduced the average fixed cost.

Approximately 150 hours of use was devoted to custom work. Table 3 illus-

trates how increased use spreads fixed costs for this tractor, and the differ-

ence in average fixed costs for 950 hours and 1,100 hours shows how this

farmer reduced costs.




Table 3. Average Fixed Costs with Various Hours Used for Large Tractor.

Hours Used Average Fixed Cost

1 $7,650.00
400 19.12
600 12.75
950 8.05
1,100 6.95
1,200 6.37
1,500 5.10









It has been shown how various costs are determined and why certain

items are costs. Now the costs may be put into the budget format. First,

input items are listed as either variable or fixed costs. Then, number of

units times the price per unit yields the amount of that cost item (see

Table 4). When all variable costs have been listed, priced and the amount

computed, a total of variable costs should be calculated before going on to

fixed costs.

The fixed costs part of the budget is derived from information such as

that in Table 1. Fixed costs will be different for each farm and possibly

different for each year for individual farms. The price column actually con-

tains the average fixed cost for that resource. Thus, price is a misnomer,

but it still serves the purpose. A total is calculated for the fixed cost

section, and even though it is labeled "total fixed costs," it is actually a

total of the average fixed costs for each resource.

Total costs are simply the sum of the fixed and variable costs. When

total variable costs and total fixed costs are added, the bottom line on

costs per unit (acre) results.


Returns


Returns are revenue remaining after costs are deducted from total revenue.

But it does not stop there. There are returns and returns. For instance,

there are returns over variable costs, returns to labor, returns to land, or

returns to management. What returns are "to" depends upon what has been in-

cluded as costs. Resource use not charged as costs are called residual

claimants or unpaid factors of production. The example in Table 4 treats

management as the residual claimant because all other resources have been

assessed costs. In Table 5 land, allotment, labor and management are all

residual claimants.
















Table 4. Estimated Cost and Returns for One Acre of Peanuts, North Florida,
1978


Item Unit Quant. Price Amount Your Farm
$ $


Revenue
Peanuts, quota (80%)
Peanuts, additional (20%)
Total revenue

Variable costs
Seed
Fertilizer, 4-12-12 spread
Lime, spread
Land plaster, dry bag
Herbicide, various
Nematicide
Insecticide, various
Fungicide
Spraying, custom air
Tractor (mod.)
Tractor (small)
Equipment
Truck, pickup
Truck, 2-Ton
Hauling
Drying and cleaning
Peanut commission
Land rent
Allotment rent
Labor
Interest on variable costs
Total variable costs

Returns over variable costs

Fixed costs
Tractor (med.)
Tractor (small)
Truck, pickup
Truck, 2-Ton
Equipment
Total fixed costs

Total costs


lb.
cwt.
ton
cwt.
acre
gal.
acre
gal.
acre
hr.
hr.
hr.
mi.
mi.
ton
ton
ton
acre
acre
hr.
$


100
5.0
1.03
6.0
1.0
1.0
1.0
1.25
1.0
3.73
2.54
6.25
40
20
1.5
1.5
1.5
1.0
1.0
7.22
391.05


.44
5.10
16.00
1.50
22.52
10.50
14.22
28.75
2.00
3.91
1.98
1.39
.07
.11
4.87
19.13
1.00
25.00
100.00
2.65
.05


504.00
75.00
579.00


44.00
25.50
16.00
9.00
22.52
10.50
14.22
32.34
2.00
14.58
5.03
8.69
2.80
2.20
7.31
28.69
1.50
25.00
100.00
19.13
19.55
410.56

168.44


15.69
6.15
4.00
2.50
41.31
69.74

480.30


Returns to management


98.70







10





Table 5. Estimated Cost and Returns for One Acre of Peanuts, North Florida,
1978.


Item Unit Quant. Price Amount Your Farm
$ $


Revenue
Peanuts, quota (80%)
Peanuts, additional (20%)
Total revenue

Variable costs
Seed
Fertilizer, 4-12-12 spread
Lime, spread
Land plaster, dry bag
Herbicide, various
Nematicide
Insecticide, various
Fungicide
Spraying, custom air
Tractor (med.)
Tractor (small)
Equipment
Truck, pickup
Truck, 2-Toi
Hauling
Dry and cleaning
Peanut commission
Interest on variable costs
Total variable costs

Returns over variable costs


420 504.00
250 75.00
579.00


lb.
cwt.
ton
cwt.
acre
gal.
acre
gal.
acre
hr.
hr.
hr.
mi.
mi.
acre
ton
ton
$


Fixed costs
Tractor (med.)
Tractor (small)
Truck, pickup
Truck, 2-Ton
Equipment
Total fixed costs


100
5.0
1.0
6.0
1.0
1.0
1.0
1.25
1.0
3.73
2.54
6.25
40
20
1.0
1.5
1.5
246.88


.44
5.10
16.00
1.50
22.52
1.0.50
14.22
28.75
2.00
3.91
1.98
1.39
.07
.11
7.31
19.13
1.00
.05


3.71
2.54
40
20
6.25


Total costs


Returns to land, allotment, labor and management


44.00
25.50
16.00
9.00
22.52
10.50
14.22
S32.34
2.00
14.58
5.03
8.69
2.80
2.20
7.31
28.69
1.50
1.2.34
259.22

319.78


15.69
6.15
4.00'
2.50
41.31
69.74

328.96

250.04


I









Comparing Table 4 and 5 shows the importance of knowing what costs were

included when returns were calculated. In Table 4, the residual claimant is

management, and returns amount to $98.70 per acre. By eliminating land,

allotment and labor as costs in Table 5, returns increase to $250.04 per

acre (residual claimants are land, allotment, labor and management).


Returns to Factors of Production

Returns may be better understood by using Table 6 to examine returns

to various factors of production. A budget is manipulated to estimate the

value of any resource used in the enterprise. Generally, this would be used

to place a fair value on resource items not having a firm price. For example,

in Table 6 all factors of production are priced except management; thus manage-

ment becomes residual claimant and receives a return of $63.66. If management

is given a price of 10% of variable costs, allotment may become the residual

claimant and gain a return of $137.74.

Questions are often asked regarding a just wage for a son to be paid

upon entering the father's farming operation. Usually the father owns the

land and equipment (for the sake of continuing to use the peanut budget we

assume he owns the allotment also). The father also provides a wealth of

management expertise gained from years of experience. The son wants to work;

thus, the resource he owns is labor. To determine the value of his labor, a

value must be placed on all other resources leaving labor as the residual

claimant.


Other Uses of Returns

Returns are probably more often misunderstood than opportunity costs.

The misunderstanding comes from the discussion of returns without knowing

what costs have been deducted. Producers may use the term profit, and they
















Table 6. Estimated Returns to Various Factors
North Florida, 1978.


of Production for Peanuts,


Item


Revenue
Peanuts, quota (80%)
Peanuts, additional (20%)
Total revenue

Variable costs
Seed
Fertilizer, 4-12-12 spread
Lime, spread
Land plaster, dry bag
Herbicide, various
Nematicide
Insecticide, various
Fungicide
Spraying, custom air
Tractor (med.)
Tractor (small)
Equipment
Truck, pickup
Truck, 2-ton
Hauling
Dry and cleaning
Peanut commission
Interest on variable costs
Total variable costs


Unit Quant. Price Amount
$ $


ton 1.2 420 504.00
ton .3 250 75.00
579.00


lb.
cwt.
ton
cwt.
acre
gal.
acre
gal.
acre
hr.
hr.
hr.
mi.
mi.
acre
ton
ton
$


100
5.0
1.0
6.0
1.0
1.0
1.0
1.25
1.0
3.73
2.54
6.25
40
20
1.0
1.5
1.5
246.88


.44
5.10
16.00
1.50
22.52
10.50
14.22
28.75
2.00
3.91
1.98
1.39
.07
.11
7.31
19.13
1.00
.05


Your Farm


44.00
25.50
16.00
9.00
22.52
10.50
14.22
32.34
2.00
14.58
5.03
8.69
2.80
2.20
7.31
28.69
1.50
12.34
259.22


Returns to fixed costs, land, labor, allotment and management
Fixed costs for machinerya/
Returns to land, labor, allotment and management
Land charge ($700 x .09) + $4.251-b
Returns to labor, allotment and management
Labor (7.22 hrs. @ $2.65/hr.)
Returns to )llotment and management
Allotmentcl
Returns to mqnagment
Management.d/
Return to allotmentd/


$319.78
69.74
250.04
67.25
182.79
19.13
163.66
100.00
63.66
25.92
137.74


a/Depreciation, interest, repairs, taxes and insurance for tractors, trucks, and
other equipment.

b/Land charge in calculated here by placing a value of $700 per acre on the land,
and applying an interest rate of 9%. The $4.25 results from a tax value of $250
and a millage rate of 17.

C/Allotment rental rates are varied ... from $75 to $250; $100 per acre was used
simply for the sake of consistency with previous budgets.

!/Management charged a rate of 10% of variable cost.


___









may be certain that their profit from an acre of peanuts is $320 (Table 5),

while an extension economist would say his returns over variable costs were

$169 (Table 4). Quite simply returns are over whatever has been deducted

as a cost, and returns are to whatever has not been deducted as a cost.

The costs deducted and subsequent returns are important for several

reasons. First, for bragging--deduct no costs. Next, in discussing loan

needs with a lender, the returns should be over variable costs because these

are the returns available for living expenses and debt repayment. Land and

allotment would not be included unless they are actually rented. Hired

labor would also be charged here. Finally, if all costs, i.e., Table 4,

are deducted, returns are to management which is payment for crop production,

harvesting and marketing expertise as well as incentive to risk the resources

required to produce the crop.

There are a number of ways producers and/or advisors may use budgets.

Perhaps the hottest question this spring was "how much can I pay for peanut

allotment?"

There are several ways to answer the question, among them are:

(1) From Table 4 it can be seen that $100 rent plus $25
land will return $98.95 to management with 3,000
pound yield and $250 per ton price for additional
peanuts. Is that enough or too much?

(2) Using Table 5 which did not include land, allotment
and labor as variable costs, it can be seen that
returns over variable costs are $319.78. The decision
here would be, after paying for allotment, would the
remaining returns to land, labor, fixed costs and
management be enough to pay for living expenses, debt
repayment and up-keep on land and equipment.

(3) Perhaps for this purpose a better table than either 4
or 5 would show returns to land, allotment and manage-
ment. From Table 4 it can quickly be shown that this
number would be $229.95.









$ 98.70 return to management
100.00 allotment rent
25.00 land rent
6.25 interest charge on $125
$229.95

In building this budget, you would simply exclude
land and allotment rent. The decision here would
be as follows: How much do I need from each acre
of peanuts to maintain the standard of living and
financial standing I want? If that figure is $25
then land and allotment would be worth $204.95
(229.95 25 = 204.95). Of course, if the producer
desires $100 per acre, then land and allotment would
be worth only $129.95 (229.95 100 = 129.95).

(4) There will likely be a prevailing asking price, or
"going rate." This rate could be included in the
budget as a cost and see if the resulting returns
are sufficiently high. Also, using the same approach,
break-even prices could be calculated. Break-even
price equals production cost divided by yield. Using
the yields expected and best price you can get for the
allotment, determine break-even prices. Then, subtract
break-even price from expected price. Is the remaining
money enough?

(5) The most systematic approach, using break-even prices
and usual management, risk and profit charges is shown
below. (See Form 1.)

Peanut rent may be calculated using the following procedure. Keep in

mind that the numbers used are for the purpose of an example. Individuals

should use their own numbers. Also, this procedure employs the peanut pro-

duction cost budget for 1978. A yield of 3,000 pounds per acre is used.

Since we are trying to determine rental rate, allotment rent is excluded

($100 plus $5 interest). The expected market price is derived by (a) pricing

"quota peanuts" at $420 per ton or $.21 per pound and "additional peanuts"

are to be contracted, a contract price of $300 per ton or $.15 per pound is

used. This does not imply that $300 per ton is the proper contract price,

but rather it is intended to be a conservative estimate of what might be.







15



FORM 1. PRICING QUOTA PEANUTS





Variable

$/lb.


I. Production cost
A. Variable costs per acre divided by yield
$305.56 + 3000 lbs.
B. Total costs per acre divided by yield
$375.30 t 3000 lbs.


Total
cost
$/lb.


.1018


.1251


II. Return to Management
Variable costs x 10% yield
$305.56 x 10 t 3000

III. Risk and profit charge
Variable cost x 15% t yield
$305.56 x .15 t 3000


.0102 .0102



.0153 .0153

.1273 .1506


IV. Total of above


V. Expected market price
A. Quota peanuts value plus additional peanuts
value + yield
3000 Ibs. x .7936 x ?.21/lb = $499.97
3000 Ibs. x .2064 x $.125/lb= 77.40
$577.37
$577.37 t 3000 Ibs.
B. Quota peanuts value plus contract peanuts
value t yield
3000 lbs. x .7936 x .21/lb = $499.97
3000 lbs. x .0264 x .15/lb = 92.88
$592.85
$592.85 + 3000


VI. Subtract IV from V


.1924 .1924





.1976 .1976


(A) $.0651 $.0418


(B) .0703


.0470


VII. A. You can pay $.0418 per pound while covering all costs and making a
normal profit and return to management with additional peanuts
priced at $250 per ton. Variable costs and normal profit may be
gained with a rental rate of $.0651 per pound with additional
peanuts priced at $250.
B. If additional peanuts are priced at $300 per ton, total costs and
a normal return are possible with a per pound rental rate of $.0470.
Variable costs and normal return may be recovered with a rental rate
of $.0703.


Your
cost
$/lb.









In summary, a peanut producer who makes 3,000 lb. yields would be safe

paying about 4 cents per pound for peanut quota. A producer who has produc-

tion capacity for more quota may pay 6.5 to 7 cents per pound; however, it

is vc-y importLant to note that this higher rate does not cover fixed costs

(depreciation, etc.).


Application of the Soybean Budget


A soybean budget is shown in Table 7. Note that returns are to manage-

ment alone. The returns shown tells you that at $5.50 per bushel, beans are

not anything to rave about.

What if beans were $5.75? Return to management would be $8.64.

Again, it is important to recognize what is in the cost section. If a

farmer is growing beans on his own land and hiring no labor, he would be in-

terested in returns to land, labor and management. This figure would be

$35.74.


Send a Daughter to College

How about the situation where he is doing his best on his 420 acres,

but his daughter graduates from high school and heads for college? He must

earn more money. Assume that scholarships, loans, part-time jobs, etc.

reduces his financial need increases to about $3,000 per year. His equip-

ment is in pretty good shape and he figures it will last another four years.

He also figures he can handle another 75 to 100 acres unless weather puts a

kink in his plans.

How does the producer decide if it will be profitable to produce more?

How much more production will be enough?

The line of reason which the producer is likely to take forces a theory

issue. He will most likely disregard the fixed cost section of the budget,







17





Table 7. Estimated Cos;ts and Returns of Producing One Acre of Soybeans,
Florida, 1978


Item Unit Quant. Price Amount Your Farm
$ $


Revenue
Soybeans


bu. 30


5.50 165.00


Variable costs
Seed
Innoculant
Lime
Fertilizer
Herbicide
Insecticide
Spraying (air)
Tractor
Truck, pickup
Truck, 2-Ton
Combine
Equipment
Labor
Land rent
Interest on variable costs
Total variable costs

Returns over variable costs


bu.
pkg.
ton
cwt.
lb.
lb.
acre
hr.
mi.
mi.
hr.
hr.
hr.
acre
$


Fixed costs
Tractor
Truck, pickup
Truck, 2-Ton
Combine
Equipment
Total fixed costs


1.00
1.00
.33
5.00
3.00
2.45
3.00
2.21
20
20
.40
2.21
3.00
1.0
128.32


12.00
.90
16.00
5.10
4.53
5.47
2.00
3.91
.07
.11
9.26
1.25
2.65
25.00
.05


2.21 4.23
20 .10
20 .125
.40 23.80
2.21 2.60


Total costs


Returns to management


12.00
.90
5.28
25.50
13.59
13.40
6.00
8.64
1.40
2.20
3.70
S2.76
7.95
25.00
6.42
134.74

30.26


9.35
2.00
2.50
9.52
5.75
29..2

163.86

1.14









and the textbook says he is justified. Recall that fixed costs do not change

as production changes. 'hlic only question here is, should he assume no fixed

costs for the additional acres for four years?

For the additional acreage the producer will add land rent back to the

budget and take fixed costs out. Variable costs now are $126.39. If revenue

remains at $165, net return or return to fixed costs (machinery, overhead),

labor and management will be $38.61. At this rate about 78 acres would be

required to gain the added income ($3,000 i $38.61/acre = 77.7 acres).


In-Row Subsoiling

Another alternative would be to try and increase production on his

present acreage. One way to increase yield may be to employ in-row subsoil-

ing. If this practice would increase yield by 10%, his per acre returns

would be affected as follows. First, for this example, let's say the sub-

soiling is an additional land preparation cost. Actually, I would suspect

that it would replace some other practice, but for this example let's just

add it on.

Subsoiling costs
2.9 acres/hr. tractor and plow (2-row subsoiler)
tractor $3.91/hr.
plow .33/hr.
Total $4.24/hr.

$4.24/hr. z 2.9 acres/hr. = $1.46/acre
Fixed cost of subsoiling plow = $340/year
$340 420 acres = $.81/acre
Total additional cost due to subsoiling
$1.46/acre variable cost
.81/acre fixed cost
$2.31/acre total cost

His per acre cost of production in the budget is now $2.31 greater. If he

gets the 10% yield response his revenue will be $181.50 (33 bu. x $5.50/bu.).

Finally, returns to land, labor and management will be $49.93 per acre, or









$20,970.60 for the 420 acres; thus, it appears that under these circumstances

he may be better off working his own land harder.


Soybean Pest Management

Many farmers ask if they can afford to hire insect scouts and what fair

compensation is for scouting. The solution to this problem is fairly simple

and straightforward. First, determine effect on yield. In this example we

assume there was no change in yield. Next, determine change in number of

insecticide applications. In this example we accept the report of the

Jackson County IPM project and use 1.5 fewer applications. In our soybean

budget, application and material cost for three applications was $19.40.

The pest management project cooperators needed only half as much; thus,

their cost of production was $9.70 per acre less. Finally, it can be seen

that any scouting fee less than about $9 per acre would not result in added

costs under our assumptions. Other scouting benefits would be a bonus.

Enterprise Budgets from Producer Records


The best enterprise budget comes from actual records. The necessary

records may be scarce and access to them limited, but if they are available

an accurate enterprise budget for a particular situation can be developed.

Of course, producers should be encouraged to keep records and develop their

own enterprise budgets from records; as a matter of fact, that is the primary

reason why extension specialists build budgets and attempt to teach agents

about them. The bottom line is "producers knowing their costs and returns."

A farmer, agent or specialist building a budget from a producer's

records would use the same format as was previously described. Revenue

data would come from the income part of the record book or an income statement









if one is available. Even the simplest records would probably have total

volume sold, plus total dollars, and perhaps price per unit would also be

available. Any inventory of that product carried over to the next year as

well as the amount used on the farm during that year must be added to volume

sold to account for total production. For most crops the budget is for one

acre; thus, total production would be divided by number of acres grown to

obtain yield per acre.


Example: Beef Cattle Budget

The example budget (Table 8) is for a 100-cow herd with four bulls on

200 acres of improved pasture. An 85% calf crop is assumed with spring

calving. Calves will be sold in the fall when heifers are expected to weigh

400 pounds, and steers about 475 pounds. A 17% cow cull rate is used with

heifer calves saved as replacement. These production estimates are based

on top management and good cows.


Estimating Revenue

Production estimates of livestock for sale determine revenue from the

beef cattle operation. The number of cattle expected for sale multiplied

by the individual animal's weight gives the total pounds for sale. Revenue

is calculated by multiplying salable pounds by the expected price. For

example, the expected revenue from the sale of 13 cull cows weighing 1,000

pounds and selling for 35 cents per pound is calculated as follows: 13 cows x

1,000 pounds x 35C/pound = 4,450.

Revenue for each class of livestock must be calculated separately

because weight and price vary by class. The expected revenue from each type

of livestock depends on forecasted prices and production estimates. Total

revenue from the beef cattle operation is the sum expected revenues from


















Table 8. Estimated Annual Revenue and Expenses, 100-Cow Herd on 200 acres of Permanent Easture, Florida, 1978.


Item Descrintion Unit Cuant. Price Toutl
----Dollars----


I. Revenue
Cows
Heifers-
Calves
Heifers
Steers
Total Revenue

II. Cash expenses
Fertilizer

Supplemental feed

Hay-
Mineral
Vet. supplies
Semen test btlls
Misc. practices

Repairs
Raxes
Land taxes
Interest

Total cash expenses

III. Non-cash expenses
Bull depreciation
Buildings and machinery
depreciation
Total non-cash expenses

IV. Total expenses

V. Return to land, labor,
capital, and management


Cull, 1000' A $35/cut., sold in Sept. head
2 yr. old, 893' C $42/cwt., sold in Sept. head
85% calf crop
4000 3 A4/cwt., sold in Sept. head
475#6 $50/cwt., sold in Sept. head


3 cwt./acre, 4-12-12, custom applied
.50 cwt./acre N
32% Fortified molasses 3 2.5 ib/AU/day,
fed 120 days
153/AU/day, fed 120 days
40#/AU/yr., average 136 AU
Medicine, vaccine and insecticide

Dragging and moving pastures, feeding
hay, checking fences and cattle
Buildings a.d fences
Personal property on livestock

On operating capital, 7 mos. @ 9%
per annum


13 350.00 4,450
4 375.00 1,500

23 192.00 4,416
43 232.50 10,212
20,578


lbs. 200 15.00
lbs. 200 10.00

ton 17.3 111.00
ton 103.5 25.00
ton 2.72 170.00

head 4 15.00



cow 100 .50
acre 200 2.70

dollars 11,820 .05:


3,000
2,000

1,920
2,588
462
350
60

700
200
50
540

25 623
12,493


head 4 140.00 560

596
1,156

13,649


6,929


S115 AU wintered.

- Production cost $25/ton from surplus grass (including mowing, baling and hauling).









each type of livestock.

Production estimates can be based upon ranch performance in previous

years or on published estimates if records are not available. Price fore-

casts for various types of livestock are published by USDA, the Cooperative

Extension Service and various trade publications.


Estimating Cash Expenses

Production costs are tied to management practices. The first step in

estimating the cost for the enterprise is to list the production practices.

Common production practices include pasture fertilization, feeding hay,

supplement and minerals, repairing buildings and equipment and miscellaneous

practices. Next list the quantities per acre (or per cow) of individual in-

puts required to carry out each production practice.

Last year's production records are a good source of information on

quantities of inputs required. Additionally, recommendations on pasture

fertilization and animal feeding requirements can be obtained from the Co-

operative Extension Service and published reports.

Input prices are also needed to calculate expected annual cost of each

practice in the budget. The input prices can be based on last year's prices

which have been adjusted for expected changes, or prices supplied by local

dealers or on price forecasts developed by USDA and supplied by the Cooper-

ative Extension Service. The annual cost of the individual practice is

calculated by multiplying the quantity of the input required by the expected

price of the input. For example, using the fertilization program for the

example budget, the total cost is:

300 pounds (4-12-12)/acre x $5.00/hundred pounds x 200 acres = $3,000.

The total cost of the additional 50 pounds of nitrogen used is calculated

as:









50 pounds N/acre x $0.20/pounds x 200 acres = $2,000.


Non-Cash Expenses

Non-cash expenses are those costs for which no annual cash outlay is

required. The most typical non-cash expense is depreciation cost on buildings

and machinery which have more than one year's useful life. Additionally,

depreciation can be claimed on purchased livestock added to the breeding

herd. The costs can be obtained from the ranch records. Bull depreciation

and building and machinery depreciation are included in Table 8.


Total Costs and Returns to the Unpaid Factors of Production

Total costs are the sum of the annual cash costs and the non-cash costs.

The return to the unpaid factors in the example budget, land, labor manage-

ment, and the capital, is the difference between total revenue and total

costs.

The return to any one of the unpaid factors of production can be deter-

mined if charges are made for the other unpaid factors of production. For

example, a return to land can be calculated by assigning costs to capital,

labor and management and deducting these from the gross revenue along with

the other production costs.

The sample beef cattle budget above was up-dated from one published in

1977. Main differences are in improved cattle prices and decreased fertilizer

prices. The result, of course, is a substantial change in returns. The

point is that budgets should continually be updated because prices change

regularly, and so do production practices.

One of the most important points to remember about budgets is that they

are very specific. A budget developed by an extension specialist is an

estimate for an area and does not represent any given farm or production









center. It should, therefore, be understood that budgets supplied to county

agents must be localized if they are to be considered accurate.

Localizing a budget is quite simple. The only requirement is that pro-

duction levels and input levels be adjusted to the locale for which the budget

is to be used, and prices paid and received should be adjusted to reflect

local conditions.

Another important point about a budget is that it represents one point

on a production function. Since a budget represents only one point on the

production surface, movement to any other point would require another budget.


Time: Labor and Machinery Requirements


Time is the one resource which can't be bought, borrowed or stretched;

therefore, its use should be the most carefully planned of all. Peter Drucker

tells us in "The Effective Executive" that the beginning point is to know

where time goes. So, it is with budgeting. Besides knowing seed and fertil-

izer requirements one must also, or perhaps first, know labor and machinery

requirements. Table 9 is an example of the beginning point in calculating

labor and tractor time required for an enterprise. This sort of table does

not always accompany a budget, but it is a necessary step in the actual

building process.

The value of the labor requirement table should be obvious. An "old

pro" type farmer may intuitively know how many acres of corn he can plant

before time to plant peanuts and how many acres of soybeans he can get in

after peanut planting. Also, the same "old pro" may just think he knows.

The real use of this information is in putting a whole package together when

considering expanding or adding another enterprise. He can determine if

and when extra help will be needed.





















Table 9. Non-irrigated corn monthly labor, tractor and combine requirements per acre North and West
Florida, 1978

Labor Tractor Combine
Operations month month month
Times Nov. Dec. Mar. Mar. Apr. Aug. Total Nov. Dec. Mar. Mar. Apr. Total Aug. Total
Sept. Dec.*Jan.* Apr.*May* Sept.*
Oct. Oct.

Disc old stalks 1 .30 .30 .26 .26

Plow 1 .55 .55 .48 .48

Disc, apply n ma-
ticide, disc (apply
herbicide
first disc) 1 .60 .60 .52 .52

Plant 1 .38 .38 .33 .33

Cultivate 2 .72 .72 .62 .62

Harvest 1 .46 .46 .40 .40

Total .30 .55 .60 .38 .72 .46 3.01 .26 .48 .52 .33 .62 2.21 .40 .40









Labor and tractor requirements are absolute musts in linear programming.

To more fully utilize the labor requirement tables, a composite table

for all enterprise on a given farm can be made. Table 10 represents a

1,000 acre farm where 100 acres are devoted to peanuts, 300 acres to corn,

and 600 acres to soybeans. This table shows labor only, but our budgets

show labor as a function of tractor and/or combine time (1.15 times tractor

time equals labor time).

Those knowledgeable about this type of farming will recognize that, in

fact, all of the operations will not be performed as shown. Table 10 shows

three months as not using any labor (that will never happen in reality).

One month, April, requires 66.75 eight-hour days or 53.4 ten-hour days. In

reality, two men would work 1,715 hours each, but some of the work would be

shifted to other months.

The search for specifics is not complete until the prospective budget

builder knows what materials, labor and machinery are used in the production

process. He should also know how the resources are used and when they are

required.


Additional Fertilizer?


Budgets can be used to estimate the impact of proposed changes in beef

production methods on costs and returns. For example, using the budget

from Table 8, how much additional beef is needed to justify increasing the

fertilization rate? 'Should the fertilization rate be increased for the ex-

ample budget? What are the costs and added returns to justify increasing

the 4-12-12 fertilization rate to 350 pounds and the nitrogen rate to 75

pounds per acre? If the higher rates are used, the fertilizer costs will

be $6,500, an increase of $1,500. If the feeder calves are expected to pay

























Table 10. Labor requirements by month for 100 acres of peanuts, 300 acres of corn and 600 acres of soybeans.


Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total

Peanuts 85 60 86 72 129 230 60* 722

Corn 180 114 216 138 90* 165* 903

Soybeans 330 360 228 432 276 180* 1806


Total
Farm


330 265 534 530 504 129 --- 368 --- 426** 345*** 3,431


*Previous year.
**150 hours in previous year.
***All previous year.










all the increased production cost, the net returns will be increased only

if the revenue from the sale of feeder calves is increased by more than

$1,500. If the expected selling price is 49 cents per pound, then 3,061

additional pounds of beef must be sold to recover the $1,500 (3,061 = $1,500

494).

Two ways to increase the total pounds of beef sold are to increase the

percentage of calf crop or increase the average weaning weight of the calves.

Dividing the added pounds of beef by the number of calves sold (3,061 i 66)

shows that an increase in average weaning weight of 46 pounds per calf is

required to cover the added fertilizer cost. Alternatively, dividing the

added pounds of beef by the average weaning weight (3,061 t 450) shows that

seven additional calves must be sold to recover the additional $1,500 in

fertilizer expense.

Changes in the expected price of feeder calves will increase or reduce

the additional pounds of beef required to justify the additional fertilizer.

For example, if calf price is 40 cents per pound, the additional pounds of

beef required are increased to 3,750 pounds.

Cost Per Calf Weaned


The above budget shows that each calf costs about $135 if the rancher

weans a calf from each of the 100 cows. Few operators expect a 100% calf

crop. Thus, the cost per weaned calf will be higher than $135. One method

to calculate this cost is as follows:

Cost er cow
Cost per weaned calf = Pe ntge cow
Percentage calf crop weaned

The cost per weaned calf, with costs as in Table 8, and an 85% calf

crop is:









$135
$135 $159
85%

Thus, the rancher has $159 invested in the calf before any charge for labor,

land or management is added.

The cost per weaned calf for a range of calving percentages and costs

per cow are shown in Table 11. The cost per calf is located at the inter-

section of the cost per cow (along the side) and the percentage calf crop

(across the top). For example, when the annual cost per cow is $135 with an

85% calf crop, the cost per calf is $159. However, when the annual cost per

cow is $135, the cost per calf ranged from a low of $142 with a 95% calf

crop to a high of $193 with a 70% calf crop by only'l% will, in general,

reduce the calf cost by $2. At higher costs per cow, the savings for each

percentage increase in the calf weaning rate will be substantially higher.


Break-even Prices


A more informative way of evaluating the impact of an increased calf

crop is to examine the effects of the increased efficiency on the break-

even price for calves sold. For the budgeted situation, the rancher expects

to sell 29,625 pounds of beef from steers and heifers. The break-even price,

the price per pound the rancher must receive to cover all production costs,

is calculated as:
Total cull cow
Break-even = cost revenue $13,649 $5,950 $.25 per pound
price Total pounds of 29,625
calf beef sold

The break-even price does not include a charge for labor, land, investment

or management.

Break-even prices for a range of calf crop percentages sold and annual

costs per cow are shown in Table 12. The break-oven price per pound is






30
Table 11.--Production costs per weaned calf with varying herd maintenance
requirements and weaning percentages.-


Cost per cow


$115.00

$125.00

$135.00

$145.00

$155.00

$165.00


Percent calf crop weaned
95 90 85 80 75 70
-------------Dollars------------

121 128 135 144 153 164

131 139 147 156 167 179

142 150 159 169 180 193

153 161 170 181 193 207

163 172 182 194 207 221

174 183 194 206 220 236


/ Cost per weaned calf cost per cow
percentage calf crop weaned


Table 12.--Break-even prices for alternative percentages of calves sold
and annual costs per cow.-a


Annual
cost per cow Percent of calves sold
50 55 60 66 70 75

------Dollars------ ---------------------Cents----------

115 .24 .22 .20 .19 .18 .16

125 .29 .26 .24 .22 .21 .19

135 .33 .30 .28 .25 .24 .22

145 .38 .34 .32 .29 .27 .25

155 .42 .38 .35 .32 .30 .28

165 .47 .42 .39 .36 .34 .31


2'Break-even price = Total
Total
The break-even prices do
or investment cost.


cost-cull cow revenue
pounds of calf beef sold.
not include a labor, management, land


___










located at the intersection of the annual cost per cow and the percentage of

the calf crop sold. For the budgeted example where 66 calves are sold and

the cost per cow is $135, the break-even price is 25 cents per pound. To

sell 76 calves and keep 19 replacement heifers, the rancher would need to

increase the percentage of the calf crop weaned to 95%. By doing this the

break-even price is reduced to 22 cents per pound. This means that the

rancher will reduce the cost of producing a 475 pound calf by $14.25. Al-

ternatively, a 10% decrease in the percentage of the calves sold will increase

the average cost per pound to 30 cents. Clearly, the break-even price depends

on the annual cost per cow and the percentage of the calf crop sold.

Make Hay or Buy Hay?


Another management application of the cow-herd budget is the decision

as to whether to buy hay or make hay from surplus grass. The following pro-

cedure determines the highest price that could be paid for hay of equal

quality.

Assumptions:

1 103.5 tons of hay required per year.

2 $25 per ton cost for making hay (excluding growing
grass).

3 N requirement would be reduced by 25 pounds per
acre if hay were bought.

Break-even price for purchased hay = N saved lbs. x price of N/lb. + 25
hay needed (tons)

= 5000 Ibs. x $.20/lb. + 25
103.5

= $1,000 + 25
103.5 tons

= $9.66 + 25
ton









= $34.66

Notes:

1 Each one dollar change in cost of making hay from your
own grass will cause a change of one dollar per ton in
the break-even price.

2 Each one cent per pound change in price of N will result
in a $.48 per ton change in the break-even price.


Budget Summary


Budget uses are many, but the most important use may be that of giving

a producer a clear picture of what he should expect from an enterprise.

The high price of meat in the store may inspire some to raise cattle until

they see a cow budget.

There are various tools available for choosing among alternative enter-

prises, but they all require good budgets for the various enterprises. The

budget is the main ingredient in a large linear programming model as well

as a simple partial budgeting problem.

Financial needs may be determined with budgets, and lenders are impressed

when loan requests are accompanied by budgets showing the basis for the numbers

in the request. Lenders are vitally interested in repayment capacity which

may also be determined from budgets. Of course, producers are able to pro-

ject income with the budgets they have built for their operation.

Many lenders require an estimated cash flow statement. Cash flow may

be projected using enterprise budgets.

Other uses of enterprise budgets; determine break-even prices; develop

asking price for marketing; determine how much to ask or offer for tobacco

quota, peanut quota or crop land rental; decide whether to buy land and how

much to pay; decide how much to pay labor, management or any production

resource.









In conclusion, a budget can be built for any enterprise, and any enter-

prise entered or under consideration for entry as a business venture should

be pictured in an enterprise budget.









References


Abbitt, Ben, Jose Alvarez, Dan Gunter, Tim IIewitt, John Holt, John Otto
and George Westberry. A Management Handbook for County Extension
Professionals. Gainesville: Food and Resource Economics Department,
Institute of Food and Agricultural Sciences, University of Florida,
1978.

Givan, William. "Know Your Machinery Costs," Circular 703. Athens:
Georgia Cooperative Extension Service, 1978.

Greene, R.E.L. "Cost of Producing Pricipal Field Crops and Cost of Oper-
ating Selected Types of Farm Machinery, North and West Florida,"
Agricultural Economics Report 22. Gainesville: Food and Resource
Economics Department, Institute of Food.and Agricultural Sciences,
University of Florida, 1971.

Gunter, Dan L. and George 0. Westberry. "Increasing the Percentage Calf
Crop: Is It Worth It?", Proceedings of the 1977 Beef Cattle Short
Course. Gainesville: Animal Science Department, Institute of Food
Agricultural Sciences, University of Florida, 1977.

Hipp, Timothy S. "Income Potential of Alternative Crops in North Florida,"
Agricultural Economics Report 13. Gainesville: Food and Resource
Economics Department, Institute of Food and Agricultural Sciences,
University of Florida, 1970.

Leftwich, Richard H. The Price System and Resource Allocation, 4th ed.
Hinsdale, Illinois: The Dryden Press, Inc., 1970.

Sauders, Fred B., James 0. Wise, W.C. McArthur, J.R. Allison and R.J.
Amick. "Farm Machinery Costs in Georgia," Research Report 45.
Athens: University of Georgia, 1979.

Westberry, G.O., J.A. Otte, D.L. Gunter and B. Abbitt. "Budgeting Beef
Cattle Decisions," Fact Sheet 13. Gainesville: Food and Resource
Economics Department, Institute of Food and Agricultural Economics,
1977.




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