agri benchmark Beef Training

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agri benchmark Beef Training

• Model training workshop
• Part 11 Cost allocation

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Which costs must be allocated?
Total cost per unit of product (kg milk, kg beef,
bu wheat)
Enterprise variable and fixed cost
? Directly allocated
Whole farm variable and fixed costs l Hired
labourl Rented land l Buildings and machinery
depreciationl Paid interestl Overhead
cost Opportunity cost(labour, land, capital)
Allocated according to the share of the
enterprises in l Land use / production l
Machinery / building use l Labour use l
Returns l Other criteria
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Two steps of cost allocation
1. From whole farm level to enterprise level -
examples Total depreciation of machinery ? dairy
enterprise Total pasture cost for livestock
enterprises ? cow calf enterprise Depreciation
and maintenance of stable for cows and finishing
bulls ? beef finishing enterprise 2. From
enterprise level to product level - examples Beef
enterprise ? bulls, steers, heifers finishing
groups Cow calf enterprise ? calving period 1,
calving period 2 Crop enterprise ? wheat,
barley, soybean etc. Dairy enterprise ? no
further allocation required (milk)
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Allocation factors

• Physical allocation factors
• Labour hours, machinery hours
• Acreage used
• Surface of buildings, no. of places
• Share in weight (beef finishing)
• Share in total number of animals (cow calf, beef
  finishing)

• Financial allocation factors
• Share in returns
• Share in gross margin (variable cost)

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From whole farm data to cost per kg beef
(I) Allocation of whole farm data to beef
enterprise data
Crop Forage
Whole farmOverhead / Fixed cost
Cow calf
Dairy
Beef
Machines, buildings, labour used by the beef
enterprise
Beef enterprise cost and returns
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From whole farm data to cost per kg beef
(II) Allocation of beef enterprise data to cost
per kg beef
Cost and returns of the beef enterprise
Group I(steers)
Group II(steers)
Group III(steers)
Group IV(heifers)
Group V(heifers)

• Beef returns and variable cost are already
  allocated to each group.
• Fixed and overhead cost are allocated to each
  group by share in total weight produced per year.
• Annual and lot-wise cost figures are recalculated
  in daily figures and multiplied with the number
  of days/year each group stays on the farm.
• Groups for cost analysis are selected (for
  example steers, groups I-III).

Annual cost are stated in /kg beef of the
weighted average groups I-III
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How we treat variable cost per head

• Variable cost per head
• are collected lot-wise, not annual values

• Situation and problem
• The model calculates annual figures
• Usually a fattening period takes less or more
  than 365 days
• How to convert the lot wise input-data into
  annual figures?

• Solution
• The model calculates the number of days each lot
  and group stays in the relevant year
• It converts the lot wise figures into daily
  figures per day of fattening
• Finally it multiplies daily figures with the
  number of days in the year per lot and per group

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Refined and simple cost allocation

• Refined cost allocation
• For each cost item to be allocated a separate
  allocation factor is calculated and inserted
  manually
• Advantage very detailed cost allocation possible
• Disadvantage time-consuming, in-transparent and
  subject to errors the more farms, partners and
  enterprises are involved

• Simple (semi-automatic) cost allocation
• Cost items are allocated to enterprises using
  enterprise codes for
• labour (per workers group),
• land (per crop)
• machines and buildings (per machine and building)
• Overhead costs are allocated by return share

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Enterprise allocation codes
Allocation code Allocation to beef enterprise
by 1 Item used for all enterprises Share of
beef in total farm returns 2 Crop and forage
production Share of beef in total farm returns 3
Livestock production general Share of beef in
total livestock returns 4 Cash crop production
only 0 to beef 5 Forage production
only Share of beef in total livestock returns 6
Dairy only 0 to beef 7 Cow calf only 0 to
beef 8 Beef only 100 to beef
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How we calculate cost of production

• Examples for items that go 100 to the beef
  enterprise
• Variable cost of land only used by the beef
  enterprise (e.g. corn for silage)
• Buildings exclusively used by the beef enterprise
  (e.g. stable for bulls)
• Staff wages exclusively used by the beef
  enterprise (e.g. cattlemen)

• Examples for items that are allocated by share in
  returns
• All fixed cost of the whole farm (e.g.
  accounting, office)
• Machinery maintenance and depreciation used for
  all livestock enterprises (e.g. grass mower)
• Maintenance and depreciation for
  buildings/installations used for all enterprises
  (e.g. machinery hall)
• Staff wages used for all enterprises (e.g. farm
  manager)

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Calculation examples
Total depreciation machinery10.000 US
Depreciation matrix ( of total
depreciation) All enterprises 35 Crop and
forage production 20 Livestock in general 30
Beef finishing only 10 Cow calf only 5
Share of beef in total returns 50 in livestock
returns 70
Machinery depreciation of the beef finishing
enterprise All enterprises 10.000 35
50 1.750 Crop and forage production 10.000
20 50 1.000 Livestock in general 10.000
30 70 2.100 Beef finishing only 10.000
10 1.000 Cow calf only 10.000 5 0
0 Total 5.850
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Cost changes according to return changes-
changes marked in bold red
2001 2002 Depreciation machinery
(US) 10.000 10.000 Beef shares Share of beef in
total returns () 50 40 Share of beef in
livestock returns () 70 50 Depreciation
beef All enterprises 1.750 1.400 Crop and forage
production 1.000 800 Livestock in
general 2.100 1.500 Beef finishing
only 1.000 1.000 Cow calf only 0 0 Total 5.850 4.7
00
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Conclusions, questions and decisions

• Changes in return shares result in changes of
  cost level and cost structure
• Simple allocation is quicker, easier and more
  transparent than refined allocation
• Allocation of labour, land, machinery and
  buildings should be done as much as possible at
  input data level, for example
• Pasture land should be split in pasture for cow
  calf and pasture for beef finishing
• Workers should be split into milkers (dairy) and
  cattlemen (beef finishing)
• Machines and buildings should be split as much as
  possible to the enterprises
• Is simple allocation suitable?