Costs - Careful accounting

Any farm enterprise has two categories of costs:

  • Variable costs, which can be directly attributable to the particular enterprise or product being produced.
  • Overheads (also known as fixed costs), which cannot be attributed to a single enterprise within a business, and therefore must be allocated across the whole farm.

Variable costs include feed and forage costs, veterinary costs and AI costs, and by definition will vary directly with the size of the enterprise. A good measure of whether a cost is variable is to ask if that cost will still exist or not if the particular enterprise ceases; if it should disappear, then it is likely to be regarded as variable.

Overheads usually include wages, fuel and power costs, rent, insurance costs, repairs to buildings, finance costs and depreciation.

As an example, on a farm with both a dairy cow herd and a flock of sheep producing lambs for meat, any dairy feed purchased can be attributed as a variable cost to the dairy enterprise and can be allocated on the basis of cost per litre of milk produced.

Conversely, the costs associated with running a tractor would be difficult to attribute directly to either the dairy herd or the sheep enterprise and would be considered an overhead, shared by all enterprises on the farm.

Furthermore, as a dairy herd not only produces milk but also calves, it is customary to produce separate accounts for the milking herd and any youngstock produced by it, whether retained as replacements for the milking herd or sold either as calves, or at an age before any dairy heifers enter the milking herd.

This breakdown of the costs can prove useful when making detailed analysis of each enterprise in isolation, particularly when comparing it to published results from similar enterprise types or when taking a systemic approach to analysing costs to ascertain in which areas they can be reduced. Various studies into the links between turnover, farm and herd size and costs have highlighted the correlation between profitability and the need to control overheads.

Careful accounting for the costs involved in the business will also provide essential information for predictions and analysis via cash flow forecasts and gross margin calculations.