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Enterprise budgets

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Title:
Enterprise budgets what, how and why?
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Staff paper
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Westberry, George O
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Gainesville
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Food and Resource Economics Dept., Institute of Food and Agricultural Sciences, University of Florida
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Includes bibliographical references (p. 34).
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"August 1979."
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Staff paper (University of Florida. Food and Resource Economics Dept.) ;
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George O. Westberry.

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ENTERPRISE BUDGETS: WIAT, 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 responsibility 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 IlY?
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.
--Ilead of livestock times expected price.
Proj ected 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.




2
Income Expenses = Returns:
Returns above variable costs
1'eturns 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 manufacturer's estimates.
Records:
Useful to existing Operators.
Allocate variable expenses among enterprises.
Allocate fixed expenses among enterprises.
Allocate returns among enterprises.




3
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 opportunity 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




4
ad valiorem 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 mu.St be 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 equipment is listed and purchased price divided by 2. This figure is used in calculating 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 depreciated rapidly for tax purposes, salvage value may be greater than 10%). Interest 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 Machinery Used in COO Acres of Corn and Soybean Production,
North Florida, 1978.
Item Years Investment Fixed Costs Total Annual
Life ew Averae' Deprec h !nt./ Ze:.A/ Tax / Ins. Fixed CostsS/
$
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
l0 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
165,400 22,516 7,85 1.654 1 1,654
*Pought used at substantial saving
-" New cost divided by 2.
-2; New cost minus 10 percent salvage value divided by years life. 9/ Average investment times .095
d/ New cost times .01
e/ Average investment times .015
V New cost times .01
Total annual fixed costs is the sum of depreciation, interest, repairs, taxes and interest.




6
is donc; thercforc, a charge of 1% of new cost is allotod. 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-ofthumb" 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 productivity.
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 farm Ier put 1,100 hours on his 150 hp. tractor (according to reading taken




7
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 illustrates how increased use spreads fixed costs for this tractor, and the difference 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




8
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 contains 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 included 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.




9
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%) ton 1.2 420 504.00
Peanuts, additional (20%) ton .3 250 75.00
Total revenue 579.00
Variable costs
Seed lb. 100 .44 44.00
Fertilizer, 4-12-12 spread cwt. 5.0 5.10 25.50
Lime, spread ton 1.0 16.00 16.00
Land plaster, dry bag cwt. 6.0 1.50 9.00
Herbicide, various acre 1.0 22.52 22.52
Nematicide gal. 1.0 10.50 10.50
Insecticide, various acre 1.0 14.22 14.22
Fungicide gal. 1.25 28.75 32.34
Spraying, custom air acre 1.0 2.00 2.00
Tractor (mcd.) hr. 3.73 3.91 14.58
Tractor (small) hr. 2.54 1.98 5.03
Equipment hr. 6.25 1.39 8.69
Truck, pickup mi. 40 .07 2.80
Truck, 2-Ton mi. 20 .11 2.20
Hauling ton 1.5 4.87 7.31
Drying and cleaning ton 1.5 19.13 28.69
Peanut commission ton 1.5 1.00 1.50
Land rent acre 1.0 25.00 25.00
Allotment rent acre 1.0 100.00 100.00
Labor hr. 7.22 2.65 19.13
Interest on variable costs $ 391.05 .05 19.55
Total variable costs 410.56
Returns over variable costs 168.44
Fixed costs
Tractor (med.) hr. 15.69
Tractor (small) hr. 6.15
Truck, pickup mi. 4.00
Truck, 2-Ton mi. 2.50
Equipment hr. 41.31.
Total fixed costs 69.74
Total costs 480.30
Returns to management 98.70




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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%) ton 1.2 420 504.00
Peanuts, additional (20%) ton .3 250 75.00
Total revenue 579.00
Variable costs
Seed lb. 100 .44 44.00
Fertilizer, 4-12-12 spread cwt. 5.0 5.10 25.50
Lime, spread ton 1.0 16.00 16.00
Land plaster, dry bag cwt. 6.0 1.50 9.00
Herbicide, various acre 1.0 22.52 22.52
Nematicide gal. 1.0 ].0.50 10.50
Insecticide, various acre 1.0 14.22 14,22
Fungicide gal. 1.25 28.75 32.34
Spraying, custom air acre 1.0 2.00 2.00
Tractor (med.) hr. 3.73 3.91 14.58
Tractor (small) hr. 2.54 1.98 5.03
Equipment hr. 6.25 1.39 8.69
Truck, pickup mi. 40 .07 2.80
Truck, 2-Toa mi. 20 .11 2.20
Hauling acre 1.0 7.31 7.31
Dry and cleaning ton 1.5 19.13 28.69
Peanut commission ton 1.5 1.00 1.50
Interest on variable costs $ 246.88 .05 1.2.34
Total variable costs 259.22
Returns over variable costs 319.78
Fixed costs
Tractor (med.) 3.71 15.69
Tractor (small) 2.54 6.15
Truck, pickup 40 4.004
Truck, 2-Ton 20 2.50
Equipment 6.25 41.31
Total fixed costs 69.74
Total costs 328.96
Returns to land, allotment, labor and management 250.04




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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 manageniont 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




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Table 6. Estimated Returns to Various Factors of Production for Peanuts,
North Florida, 1978.
Item Unit Quant. Price Amount Your Farm
$ $
Revenue
Peanuts, quota (80%) ton 1.2 420 504.00
Peanuts, additional (20%) ton .3 250 75.00
Total revenue 579.00
Variable costs
Seed lb. 100 .44 44.00
Fertilizer, 4-12-12 spread cwt. 5.0 5.10 25.50
Lime, spread ton 1.0 16.00 16.00
Land plaster, dry bag cwt. 6.0 1.50 9.00
Herbicide, various acre 1.0 22.52 22.52
Nematicide gal. 1.0 10.50 10.50
Insecticide, various acre 1.0 14.22 14.22
Fungicide gal. 1.25 28.75 32.34
Spraying, custom air acre 1.0 2.00 2.00
Tractor (med.) hr. 3.73 3.91 14.58
Tractor (small) hr. 2.54 1.98 5.03
Equipment hr. 6.25 1.39 8.69
Truck, pickup mi. 40 .07 2.80
Truck, 2-ton mi. 20 .11 2.20
Hauling acre 1.0 7.31 7.31
Dry and cleaning ton 1.5 19.13 28.69
Peanut commission ton 1.5 1.00 1.50
Interest on variable costs $ 246.88 .05 12.34
Total variable costs 259.22
Returns to fixed costs, land, labor, allotment and mangement $319.78 Fixed costs for machinery/ 69.74
Returns to land, labor, allotment Ind management 250.04
Land charge ($700 x .09) + $4.25b- 67.25
Returns Lo labor, allotment and management 182.79
Labor (7.22 hrs. @ $2.65/hr.) 19.13
Returns to )1otmeut and management 163.66
Allotmentcl 100.00
Returns to mqnagment 63.66
Management d 25.92
Return to allotmentd/ 137.74
-/Depreciation, interest, repairs, taxes and insurance for tractors, trucks, and
other equipment.
-/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.
/ 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.




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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 management. From Table 4 it can quickly beshown that this
number would be $229.95.




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$ 98.70 . return to management 100.00 . allotment rent 25.00 ...land rent
6.25 ...interest charge on $125
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
11going 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.)
P1canut 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 production 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.




FORM 1. PRICING QUOTA PEANUTS
Variable Total Your
(ost cost cost
$/lb. $/lb. $/lb.
I. Production cost
A. Variable costs per acre divided by yield
$305.56 t 3000 lbs. .1018
B. Total costs per acre divided by yield
$375.30 t 3000 lbs. .1251
II. Return to Management Variable costs x 10% t yield
$305.56 x 10 -. 3000 .0102 .0102
II. Risk and profit charge
Variable cost x 15% t yield
$305.56 x .15 t 3000 .0153 .0153
IV. Total of above .1273 .1506
V. Expected market price
A. Quota peanuts value plus additional peanuts
value + yield
3000 ibs. x .7936 x '.21/lb = $499.97 3000 lbs. x .2064 x $.125/lb= 77.40
$577.37
$577.37 t 3000 lbs. .1924 .1924
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 -t 3000 .1976 .1976
VI. Subtract IV from V (A) $.0651 $.04,18
(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.




16
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 production capacity for more quota may pay 6.5 to 7 cents per pound; however, it
is vcl-y impot'taiiL to note that this higher rate does not cover fixed costs (depreciation, etc.).
Application of the Soybean Budget
I
A soybean budget is shown in Table 7. Note that returns are to management alone. The returns shown tells you that at $S.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 interested 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 equipment 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 Co;t, 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 bu. 1.00 12.00 12.00
Innoculant pkg. 1.00 .90 .90
Lime ton .33 16.00 5.28
Fertilizer cwt. 5.00 5.10 25.50
Herbicide lb. 3.00 4.53 13.59
Insecticide lb. 2.45 5.47 13.40
Spraying (air) acre 3.00 2.00 6.00
Tractor hr. 2.21 3.91 8.64
Truck, pickup mi. 20 .07 1.40
Truck, 2-Ton mi. 20 Il1 2.20
Combine hr. .40 9.26 3.70
Equipment hr. 2.21 1.25 2.76
Labor hr. 3.00 2.65 7.95
Land rent acre 1.0 25.00 25.00
Interest on variable costs $ 128.32 .05 6.42
Total variable costs 134.74
Returns over variable costs 30.26
Fixed costs
Tractor hr. 2.21 4.23 9.35
Truck, pickup mi. 20 .10 2.00
Truck, 2-Ton mi. 20 .125 2.50
Combine hr. .40 23.80 9.52
Equipment hr. 2.21 2.60 5.75
Total fixed costs 29.12
Total costs 163.86
Returns to management 1.14




18
and the textbook says he is justified. Recall that fixed costs do not change as production changes. 'llice 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 subsoiling. 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 subsoiling 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 $.24i/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




19
$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 Po st Manpg~ment
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. T1he 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 necessaryrecords 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




20
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.
Examle: 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 3Stt/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 Pasture, Florida, 1978.
Item Descriotion Unit (uant. Price Total
---- Dollars---I. Revenue
Cows Cull, 1000# A $35/cwt., sold in Sept. head 13 350.00 4,450
Heifers 2 yr. old, 893# C $42/cwt., sold in Sept. head 4 375.00 1,500
Calves 85% calf crop
Heifers 4000 @ A$S/cwt., sold in Sept. head 23 192.00 4,416
Steers 475# @ $50/cwt., sold in Sept. head 43 232.50 10,212
Total Revenue 20,578
II. Cash expenses
Fertilizer 3 cwt./acre, 4-12-12, custom applied lbs. 200 15.00 3,000
.50 cwt./acre N lbs. 200 10.00 2,000
Supplemental feed/ 32% Fortified molasses 3 2.5 lb/AU/day,
fed 120 days ton 17.3 111.00 1,920
Hay/ 150/AU/day, fed 120 days ton 103.5 25.00 2,588
Mineral 409/AU/yr., average 136 AU ton 2.72 170.00 462
Vet. supplies Medicine, vaccine and insecticide 350
Semen test bills head 4 15.00 60
Misc. practices Dragging and moving pastures, feeding
hay, checking fences and cattle 700
Repairs Buildings an.d fences 200
Raxes Personal property on livestock cow 100 .50 50
Land taxes acre 200 2.70 540
Interest On operating capital, 7 mos. @ 9%
per annum dollars 11,820 .0525 623
Total cash expenses 12,493
III. Non-cash expenses
Bull depreciation head 4 140.00 560
Buildings and machinery
depreciation 596
Total non-cash expenses 1,156
IV. Total expenses 13,649
V. Return to land, labor,
capital, and management 6,929
S115 AU wintered.
SProduction cost $25/ton from surplus grass (including mowing, baling and hauling).




2 2
each type of livestock.
Pi-oduction estimates can be based upon ranch performance in prcvious years or on published estimates if records are not available. Price forecasts 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 inputs 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 Cooperative 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 Cooperative 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:




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50 pounds N/acre x $0.20/pounds x 200 acres =$2,000.
Non-Cash Expeonses
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 management, 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 determined 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




24
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 production 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 fertilizer 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. A,.g. Total Nov. Dec. Mar. Mar. Apr. Total Aug. Total
Sept. Dec.*Jan.* Apr.*lay* Sept.*
Oct. Oct.
Disc old stalks 1 .30 .30 .26 .26
Plow 1 .55 .55 .48 .48
Disc, apply n maticide, 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




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Labor and tractor requirements are absolute musts in linear programing.
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 example 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. Aor. May June July Aug. Sent. 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.




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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 49 ).
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 per weaned calf Cost__ cow
Percentage calf crop weaned
The cost per weaned calf, with costs as in Table 8, and an 85% calf crop is:




29
$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 intersection 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 breakeven 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




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Table ll.--Production costs per weaned calf with varying herd maintenance requirements and weaning percentages.-/
Cost per cow Percent calf crop weaned
95 90 85 80 75 70
------------- Dollars----------$115.00 121 128 135 144 153 164
$125.00 131 139 147 156 167 179
$135.00 142 150 159 169 180 193
$145.00 153 161 170 181 193 207
$155.00 163 172 182 194 207 221
$165.00 174 183 194 206 220 236
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 cost-cull cow revenue Total pounds of calf beef sold. The break-even prices do not include a labor, management, land
or investment cost.




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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 arc 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. Alternatively, 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 procedure 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 neede (toTns)
= 5000 lbs. x $.20/lb. + 25 103.5
: $1,000 + 25
103.5 tons
: $9.66 + 25
ton




32
=$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 enterprises, 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 project 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.




33
In conclusion, a budget can be built for any enterprise, and any enterprise entered or under consideration for entry as a business venture should be pictured in an enterprise budget.




34
References
Abbitt, Ben, .Jose Alvarez, Dan Gunter, Tim Hewitt, John lolt, 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 Operating 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.