4-4. Summary of Accounting Methods and its Standard

Table 4-4. Accounting Method and its Standard

Item		Accounting methods
		Cost accounting (Operation cost)	Expense accounting
Fixed costs (Ownership cost)
	Depreciation	Yearly mean depreciation D= (P - S) / L	Machine cost should be actual price without subsidize.
	Garage (Housing) cost	Annual garage cost AG = P * rgc	Annual garage cost In planning stage, cost accounting method will be used.
	Capital interest	Yearly mean interest AI = [(P + R) / 2] * ri	Actual expenses should be accounted. In planning stage, cost accounting method will be used.
	Taxes	Annual taxes AT = P * rtax
	Insurance	Annual insurance fee AP = P * rp
	Repairing cost	Yearly mean repair cost AR = P * er / L Mean repair cost per hour RCh = P * erh	Repair cost should be actual cost in a year. In planning stage, cost accounting method will be used.
	Annual fixed cost	Annual fixed cost AFC = P * raf	In planning stage, cost accounting method will be used.
Variable cost
	Fuel cost	Fuel cost per hour = Fuel consumption per hour * Fuel price	Actual expenses should be accounted. In planning stage, cost accounting method will be used.
	Lubricant cost	30% of Fuel cost
Labor cost		Wage per hour of Operator, or assistant worker.	Actual expenses should be accounted. Family labor will be omitted.
Management cost		Management cost will include administration cost, meeting fee, training fee of operator and so on. In planning stage, 10 to 20% of hire charge will be used normally.
Custom cost (Contract fee) (Hiring fee)		Custom cost is the amount paid for hiring equipment and operator services to perform a certain task. Custom costs normally include a charge for the operation of the basic machine, and may or may not include supplemental labor and equipment for such tasks as seed or fertilizer to the field, etc. Charges may be determined on the basis of area, time, transport distance or quantity of crop processed.
Lease cost (Contract or Rental)		A lease is a contract for the use of machinery for an agreed period of time in return for periodic payments. Ownership remains with the lessor. The lessee acquires the right of temporary possession and use.

 

We will discuss the total cost of a farm work comparing with custom charge of it in this chapter. And economical evaluation of the farm work system will be done in chapter 5.

For the economic analysis of farm work, it is most important to estimate the annual cost per hectare. Annual cost per hectare of a machine or of a farm work will be obtained as follows.

1. Annual (total) cost

ATC = AFC + AVC                 Eq. 4-24

Where,

symbol	term	unit
ATC	Annual (total) cost	$/year
AFC	Annual (total) fixed cost	$/year
AVC	Annual (total) variable cost	$/year

Sample

1. Land preparation: AFC = 1,350 $, AVCa = 61 $/ha

Annual Operation Area (ha/year)	Annual Fixed Cost ($/year)	Annual Variable Cost ($/year)	Annual Total Cost ($/year)
Aa	AFC	AVC	ATC
0.5	1,350	30	1,380
1	1,350	61	1,411
2	1,350	122	1,472
3	1,350	183	1,533
4	1,350	244	1,594
5	1,350	305	1,655
6	1,350	366	1,716
7	1,350	426	1,776
8	1,350	487	1,837
9	1,350	548	1,898
10	1,350	609	1,959



Fig. 451A Annual Total Cost vs. Annual operation area

See fm-451p.xls total-cost-1

2. Annual cost per hectare

ACa = ATC / Aa                                         Eq. 4-25

ACa = AFC / Aa + AVC / Aa                     Eq. 4-26

ACa = AFC / Aa + AVCa                           Eq. 4-27

Where,

symbol	term	unit
ACa	Annual cost per hectare	$/ha
Aa	Annual operation area	ha/year
AVCa	Annual variable cost per ha	$/ha

Annual variable cost per ha (AVCa) is independent from Annual operation area (Aa), therefore it is constant when Aa is changed.

Sample: 1. Land preparation: AFC = 1,350 $/year, AVCa = 61 $/ha, Custom charge = 300$/ha

Annual operation area (ha)	Fixed cost per ha ($/ha)	Variable cost per ha ($/ha)	Cost per ha ($/ha)
Aa	AFCa	AVCa	ACa
0.5	2,700	61	2,761
1	1,350	61	1,411
2	675	61	736
3	450	61	511
4	338	61	398
5	270	61	331
6	225	61	286
7	193	61	254
8	169	61	230
9	150	61	211
10	135	61	196



Fig.452 Annual cost per ha ($/ha) vs. annual operation area (ha)

See fm-451p.xls cost-ha-1

Exercise 4-10. , 4-11.

 

1. Annual fixed cost per ha

AFCa = AFC / Aa                                              Eq. 4-28

AFCa = SUM (Pi * RAF / (Aa * 100))             Eq. 4-29

where,

symbol	term	unit
AFCa	Annual fixed cost per ha	Yen/ha or $/ha
Pi	Initial price	Yen or $
RAF	Annual fixed cost rate	%
AFC	Annual (total) fixed cost	$/year
Aa	Annual operation area	ha

2. Annual variable cost per ha

AVCa = AVC / Aa                                                     Eq. 4-30

AVCa = VCa1 + VCa2 + VCa3 +   + VCan             Eq. 4-31

Annual variable cost per ha is summation of variable cost per ha of each farm work.

 

3. Annual cost per hour

 

ACh = ATC / Ha                                 Eq. 4-32

ACh = AFCh + AVCh                         Eq. 4-33

where,

symbol	term	unit
ACh	Annual cost per hour	$/h
Ha	Annual operation hour	h/year
AFCh	Annual fixed cost per hour	$
AVCh	Annual variable cost per hour	%

 

1. ( Annual fixed cost per hour )

( AFCh = AFC / Ha                                         Eq. 4-34 )

( AFCh = (Pi * RAF) / (Ha * 100)                 Eq. 4-35 )

where,

symbol	term	unit
AFCh	Annual fixed cost per hour	$/h
Pi	Initial price	$
RAF	Annual fixed cost rate	%
Ha	Annual operation hour	h/year
AFC	Annual (total) fixed cost	$/year

 

2. Annual variable cost per hour

AVCh = AVC / Ha                                                   Eq. 4-36

Annual variable cost per hour (AVCh) is independent from Annual operation hour (Ha), therefore it is constant when Ha is changed.

AVCh = VCh1 + VCh2 + VCh3 + + VChn             Eq. 4-37

Annual variable cost per hour is summation of variable cost per hour of each farm work.

 

 

Service charge or farm work fee by machine will be decided as not higher than custom charge by manual so that farmer (user) will get profit by hiring machine.

Break-even Point: The point at which the line of cost intersects the line of earnings drawn against the quantity of production (or the quantity of sales). {JIS Z8121: Reference 17}

If the quantity of production or the quantity of sales is larger than the break-even point, the earnings are larger than the cost, and if the former is smaller, the result is reversed. In other words, this point is the turning point of loss and gain.

1. Break-even point or Cross point of income and expense

Break-even point or Cross point of custom charge and machinery cost is an important key-point for decision of service charge actually.

Custom charge is shown as Yen/ha ($/ha) or Yen/h ($/h). Therefore, Custom charge per hectare will be obtained by even point to machinery cost per hectare.

Machinery cost per hectare decreases when annual operation area of the machine increases normally. So, break-even point of area is calculated as follows.

AFC + AVCa * Abp = CC * Abp                 Eq. 4-38

or

CC = AVCa + AFC / Abp                             Eq. 4-39

Abp = AFC / (CC - AVCa)                          Eq. 4-40

where,

symbol	term	unit
Abp	Break-even point of area	ha/year
AFC	Annual fixed cost	$/year
CC	Custom charge	$/ha
AVCa	Variable cost per ha	$/ha
Sbp	Break-even point of sales	$

Sbp = AFC * CC / (CC - AVCa)

 

Example: Break-even point

How many hectares, Abp (ha), do you at least need to justify ownership of a head feed combine if the custom charge (CC) is 1800 $ per ha, assuming the fixed cost (AFC) is 4,500 $, the variable cost per ha (AVCa) is 267 $?

Abp = 4,500 / (1,800 - 267) = 4500 / 1533 = 2.9 (ha)

1. Annual cost & custom charge vs. annual operation area

Aa	ATC = AFC + AVCa * Aa	TCC = CC * Aa
Annual operation area	Annual cost	Total Custom charge
(ha)	($)	($)
1	4,767	1,800
2	5,033	3,600
3	5,300	5,400
4	5,567	7,200
5	5,833	9,000
10	7,167	18,000



Fig. 461a Annual cost & custom charge vs. annual operation area

See *fm-461.xls*

 

2. Annual cost & custom charge per ha vs. annual operation area

Aa:	ACa=AFC/Aa+AVCa	CC
Annual operation area	Annual cost per ha	Custom charge
ha	$/ha	$/ha
1	4,767	1,800
2	2,517	1,800
3	1,767	1,800
4	1,392	1,800
5	1,167	1,800
10	717	1,800



Fig. 461b Annual cost & custom charge per ha vs. annual operation area

Exercise 4-12. and 4-13.

2. Pay-back period or year

See 5-4-1. Recovery of the capital

 

Timeliness is the Ability to perform an activity at such a time that crop return is optimized considering quantity and quality of product.

Timeliness coefficient is defined like as; A factor used to estimated the reduction in crop return (quantity and quality) due to lack of timeliness in performing an activity.

(See ASAE S495 and ASAE D497: ASAE-SD.htm)

Delays in planting can reduce yields. Delays in harvest can reduce both quantity and quality of production. These losses are called timeliness losses. See in reference 3

 

Exercise 4-8.

Exercise 4-13. .

2004/6/14