Cost analysis, or cost accounting is a system of accounting in which records of all cash and non-cash costs as well as returns. They are kept for the purpose of preparing an account to show costs of production, returns, and net profit or loss on the enterprise. Examples are labor, power, machinery use, building use, fuel, and interest charges.

1. Cost accounting method

This method is to express capital, material and labor for production, e.g. rice production, in terms of money irrespective of whether or not actual payment is made in cash.

For instance:

1. The same machine purchased on subsidy aid or at a reduced price is calculated at the same price.
2. When a son operates a tractor, the wages are calculated as an employed operator.

This method is used for accurate comparison on unified assessment. This is adopted for;

1. comparison with others for improvement and analysis of management
2. to study adaptable newly introduced machinery, and
3. development and establishment of new mechanization in the research work for the comparison of economy with that of a conventional method.

1. Depreciation

The service life of a machine is needed to estimate depreciation. Service life in turn depends on the feasibility of repairing or replacing worn parts.

The economic life of a machine is a more pertinent measure of the period of time for which depreciation should be estimated. Economic life is defined as the length of time from purchase of a machine to that point where it is more economic to replace with a second machine than to continue with the first.

As a cost, depreciation means a loss in the value of a machine due to time and use. Often, it is the largest of all costs. Machines depreciate, or have a loss of value, for several reasons, including

1. Life, 2 Wear, 3. Obsolescence. See in reference 3)

Economic Life of machine is defined in ASAE like as; The useful service life of a machine before it becomes unprofitable for its original purpose due to obsolescence or wear. (See ASAE S495)

Table 421. shows the economic life of machine in Japan. (See Table A-426. in appendix)

Table 421. Economic life (Years of Durability) of Farm Machinery

Machinery	Name of machine	Economic life (Years of Durability)
Prime mover	Motor	10
	Gasoline engine, Diesel engine	8
Riding type tractor		8
Plow & leveling equipment	Plow, Rotary, Harrow, Puddling machine,	5
Seeder, Cultivator	Manure spreader, Fertilizer & seeder, Rice transplanter, Power sprayer	5
Irrigation & Drainage equipment		8
Harvesting machine	Combine, Thresher	8
Post-harvesting machine	Milling machine, Flour machine	10
	Box for crop after harvesting	3
Processing Machine	Rush grass harvester, Straw rope machine	5
Equipment of animal husbandry	Forage harvester, Hay mower, Hay baler, Milker	5
	Self-propelled forage harvester etc.	8
Transporting Machine	Trailer, Wagon	4
	Vehicle (less than 2000 cc)	3
	Vehicle (more than 2000 cc)	5
Other farm equipment	Snow remover	4
	Machinery mainly made by steel	10
	Others	5

References: Ministry of Agriculture, Forestry & Fishery in Japan

There are two different ways mainly to calculate depreciation, as follows:

1. Straight-line depreciation (Constant amount each year)

2. Declining-balance depreciation (Constant rate each year)

 

1. Straight-line depreciation (Constant amount each year)

With the straight-line depreciation method, an equal reduction of value is used for each year over the economic life of a machine. This method can always be used to estimate costs over a specific period of time, provided the proper salvage value is used for the life of the machine.

Straight-line depreciation can be computed by the following formula:

 

D= (P - S) / L                                     Eq. 4-1

Where,

symbol	term	unit	Example
D	Annual depreciation	$/year	90
P	Purchase price	$	1,000
S	Salvage value	$	Purchase Price * 0.1 = $100
L	Economic life	year	10
L	(Durability Year)	year	10

See *fm-421b.xls*

This method is the simplest as it charges an easily calculated, constant amount each year.

Durability hours (Total service hour) will show more actual value shown in Table A-426 in appendix.

Exercise 4-2.

 

2. Declining-balance depreciation (Constant rate each year)

A uniform rate is applied each year to the remaining value of the machine at the beginning of the year. The depreciation amount is different for each year of the machine's life.

Following equations express the relationships by formulas.

 

R_i+1 = Ri * (1 - r)                  Eq. 4-2

S = P * (1 - r) **L                 Eq. 4-3

S / P = (1 - r) **L                  Eq. 4-4

Or,

P - S =P * r + P *(1-r)* r + P *(1-r)**2 * r + + P *(1-r)**(L-1)* r            Eq. 4-5

 

Where,

symbol	term	unit
Ri	Remained value of i year	$
P	Purchase price	$
S	Salvage value, normally P * 0.1	$
L	Economic life	year
r	Constant depreciation rate	in decimal

Actually constant depreciation rate r will be obtained by solving 0.1*P = P * (1 - r) **L

from Eq. 4-3. r = 1 - (S/P)**(1/L) and r = 1- 0.1**(1/L).

See fm-421b.xls: get-r

Annual depreciation charge for i year will be as followings;

Di = [P * (1 - r) ** (i - 1)] * r                     Eq. 4-6

or,

Di = R_i-1 * r                                                Eq. 4-7

symbol	term	unit
Di	Depreciation charge for i year	$

Table 421b. Remaining Values of Machines Expressed as Percentages of Purchase Price for Each Year of Life

(10 yr. Life and 10% salvage value assumed for depreciation methods)

	Year
	0	1	2	3	4	5	6	7	8	9	10
Straight-line	100	91	82	73	64	55	46	37	28	19	10
Declining-balance	100	80	63	50	40	32	25	20	16	13	10

where r = 0.2057

See in fm-421b.xls, reference 3) and reference 13



Figure 421. Remaining Value

Exercise 4-3. , 4-4.

 

2. Taxes

Taxation caused by the purchase and use of machines is limited to the municipal property tax, the light car tax, the local farm machinery tax as special automobiles.

There are the registration fee, inspection fee, and the number plate fee of the tractor, but not uniform by local. The foundation for integration, strictly speaking, is considerably complicated, so it is expressed in terms or rate to initial cost. In cost calculation, approximately 0.5 % is taken into account.

Generally yearly taxation and its sum are calculated as follows.

 

AT = P * rtax                         Eq. 4-8

Where,

symbol	term	unit	Example
AT	Annual taxes	$	5
P	Initial price	$	1,000
rtax	Tax rate (0.5%)	in decimal	0.005

Exercise 4-5.

 

3. Garage(Housing or Shelter)

Housing expense will be obtained from the following equation.

AG = P * rgc                       Eq. 4-9

 

Where,

symbol	term	unit	Example
AG	Annual garage cost	$/year	56
P	Initial price	$	10,000
rgc	Garage cost rate	in decimal	0.0056

Area required for housing is calculated on full length and full width in the standards of farm machinery, considering the interval of machines (tractors and combines are 2 meters long and 1.5 meters wide, and working machines 1.4 meters long and 1.3 meters wide). This is a rough standard because of the difference up to brands even in the same model.

Garage cost rate is calculated as following.

rgc = AG / P                             Eq. 4-10

AG = AGt * (Sg / St)               Eq. 4-11

 

Where,

symbol	term	unit	Example
AG	Annual garage cost	$/year	56
AGt	Total garage cost per year	$/year	1671.6
P	Initial price	$	10,000
rgc	Garage cost rate	in decimal	0.0056
Sg	Garage space of machine	m**2	6.7
St	Total garage space of house	m**2	200.0

See Table A-423 in appendix

 

4. Insurance

Insurance is necessary against the risk of accident or disaster. In the calculation of insurance fee, it is expressed in the rate of insurance fee to initial price and generally 0.25- 0.5 % is estimated and is obtained from the following equation.

AP = P * rp                     Eq. 4-12

 

Where,

symbol	term	unit	Example
AP	Annual insurance fee	$/year	25
P	Initial price	$	10,000
rp	Premium rate	in decimal	0.0025

5. Interest

A large expense item for agricultural machinery is interest. It is a direct expense item on borrowed capital. Even if cash is paid for purchased machinery, money is tied up that might be available for use elsewhere in the business. Interest rates vary but usually will be in the range of 5 to 12 percent.

Capital interest decreases according as machinery gets old and assessment falls. Actually, however, it is convenient to know it as yearly mean interest like as depreciation.

AI = [(P + R) / 2] * ri                      Eq. 4-13

 

Where,

symbol	term	unit	Example
AI	Annual interest	$/year	275
P	Initial price	$	10,000
R	Remaining value	$	1,000
ri	Yearly interest rate	in decimal	0.05

Exercise 4-6.

6. Repairing cost

Maintenance and repair costs vary depending on (i) how to use machinery, (ii) attention an operator skill, (iii) age of the machine, (iv) service hours, and (v) service environments, naturally resulting in a difference each.

But for mechanization planning, yearly mean repair cost including economic life (years of durability) will be used. In the calculation of repair cost in mechanization plan generally overall repair cost from purchase to disuse is shown at the rate to purchase price.

AR = P * er / L                                 Eq. 4-14

RCh = P * erh                                   Eq. 4-15

symbol	term	unit	Example
AR	Annual repair cost	$/year	417
P	Initial price	$	5,000
er	Overall repair cost coefficient	in decimal	0.5
L	Economic life	year	6
RCh	Mean repair cost per hour	$/h	2.1
erh	repair cost coefficient per hour	/h	0.00042

Repair cost coefficient will show more actual value shown in Table A-426. in appendix.

See in reference 13: M-mng208.doc

 

7. Annual fixed cost (annual ownership cost)

Other ownership costs: Taxes, housing, and insurance can be estimated as percentages of the purchase price. If the actual data are not known, the following percentage can be used:

-- taxes 1.00;

-- housing 0.75;

-- insurance 0.25;

-- total 2.00% of purchase price

Total annual ownership costs: A simple estimate of total annual ownership costs is given by multiplying the purchase price of the machine by the ownership cost percentage.

AFC = AD + AT + AG + AP + AI + AR               Eq. 4-16

RAF = RD + RT + RG + RP + RI + RR               Eq. 4-17

AFC = P * raf                                                        Eq. 4-18

AFC = P * RAF / 100                                            Eq. 4-19

 

Where,

symbol	term	unit
AFC	Annual fixed costs	$/year
AD	Annual depreciation	$/year
AT	Annual taxes	$/year
AG	Annual garage cost	$/year
AP	Annual insurance fee	$/year
AI	Annual interest	$/year
AR	Annual repairing cost	$/year
RAF	Annual fixed cost rate	%
RD	Annual depreciation rate	%
RT	Annual taxes rate	%
RG	Annual garage cost rate	%
RP	Annual insurance rate	%
RI	Annual interest rate	%
RR	Annual repairing cost rate	%
P	Initial price	$
raf	Annual fixed cost rate	in decimal

(See reference-7 ASAE-P496: ASAE-SD.htm)

Example: Table 427 and fm-427.xls

Exercise 4-7.

Table 427. Annual fixed cost rate

			Annual fixed cost rate (%)
Name of machine	Years of durability*	Annual fixed cost rate	Depreciation	Repair cost	Garage cost (housing)	Capital interest, Tax, and Insurance fee
symbol	L	RAF	RD	RR	RG	RI+RT+RP
	Year	%	%	%	%	%
Riding type tractor	8	24.6	12.50	7.00	1.5	3.55
Bottom plow	5	33.1	20.00	4.00	5.5	3.55
Rotary	5	33.8	20.00	6.25	4.0	3.55
Disk harrow	5	32.6	20.00	4.00	5.0	3.55
Teeth harrow	5	31.1	20.00	2.00	5.5	3.55
Sub-soiler	5	28.6	20.00	2.00	3.0	3.55
Trencher	5	30.6	20.00	5.00	2.0	3.55
Roller	5	30.6	20.00	1.00	6.0	3.55
Culti-packer	5	30.6	20.00	1.00	6.0	3.55
Puddling machine	5	30.2	20.00	1.67	5.0	3.55
Manure-spreader	5	28.7	20.00	3.10	2.0	3.55
Lime-sower	5	31.1	20.00	2.00	5.5	3.55
Broad-caster	5	29.1	20.00	2.00	3.5	3.55
Drill-seeder	5	29.6	20.00	4.00	2.0	3.55
Rice-transplanter	5	35.4	20.00	8.33	3.5	3.55
Power sprayer	5	29.6	20.00	4.00	2.0	3.55
Power duster	5	29.6	20.00	4.00	2.0	3.55
Speed sprayer	5	29.3	20.00	3.78	2.0	3.55
Head-feeding type Combine	5	30.1	20.00	5.00	1.5	3.55
Standard-type Combine	8	22.6	12.50	5.00	1.5	3.55
Forage-harvester	5	31.1	20.00	4.00	3.5	3.55
Self-propelled type forage harvester	8	22.1	12.50	4.00	2.0	3.55
Potato harvester	5	32.1	20.00	5.00	3.5	3.55
Self-propelled type potato harvester	8	23.1	12.50	5.00	2.0	3.55
Beat harvester	5	31.1	20.00	4.00	3.5	3.55
Self-propelled type beat harvester	8	22.1	12.50	4.00	2.0	3.55
Trailer	4	33.6	25.00	2.00	3.0	3.55
Truck	5	30.1	20.00	5.00	1.5	3.55

* Ministry of Agriculture

Remarks: Annual fixed cost rate of each items are average base on Japanese condition.

(for upland work see ASAE-D497: ASAE-SD.xls asd497-5)

 

8. Calculation of Annual fixed cost

1. Fuel

Fuel cost is the cost of average fuel consumption for tractors or machinery. Annual average fuel requirements for tractors or machinery may be used in calculating overall machinery costs for a particular enterprise. However, in determining the cost for a particular operation such as plowing, the fuel requirement should be based on the actual power required.

Estimate fuel consumption is shown in Table A-431 in appendix.

Average annual fuel consumption for a specific make and model tractor can be approximated from the Nebraska Tractor Test Data.

(See reference-7 ASAE-P496: ASAE-SD.htm)

Exercise 4-9.

2. Lubrication

There are two ways to consider regarding lubricant cost.

(1) One is to measure actual engine oil, and grease to be fed when at work, and calculate of lubricant cost actually.

(2) The other is to calculate fuel costs including lubricant, engine oil, and grease collectively multiplying given rate. Cost calculation method can be use 30 % of fuel cost.

3. Repairs

See 4-2-6.

4. Labor cost

The cost of labor (wage) varies with region or location. For owner-operators, labor cost should be determined from alternative opportunities for use of time. For hired operators, a constant hourly rate is appropriate. In no instance should the charge be less than a typical, community labor rate.

5. Material cost

Material cost (Seed, Fertilizer, Chemicals etc.) is calculated from actual price of the material consumed in farm work.

6. Total variable cost