17 November 2000

HOW TO COMPARE COSTS OF CULTIVATING ON YOUR FARM

accountants Grant Thornton reviews the alternatives

THE number and variety of cultivators available seem to increase almost daily, and so the desire to try different establishment techniques is hard to resist. Although it is acknowledged that having more than one system on the farm will almost certainly push up overall costs, it is difficult to determine the figure precisely.

The biggest problem is that the machines are not stand-alone items. Costs are interwoven with each other, making it difficult to allocate them accurately. For example, take the apparently simple task of calculating the cost of operating a power harrow. There are several costs to consider:

&#8226 The power harrow

&#8226 The tractor

&#8226 The operator

The power harrow itself is relatively straightforward. Costs include depreciation, spares and repairs, and insurance.

Depreciation is usually a non-cash item until the implement is sold. What it reflects is the fall in value of the power harrow through the year. For example, if it was worth £7,000 at the start of the season, it may be worth only £5,800 at the end of the season. Therefore, £1,200 of costs should be allocated against the crops established using the power harrow.

Likewise, with spares and repairs, a simple record of the spare parts needed and any work carried out, often kept on the farm computer, will allow costs to be apportioned.

Insurance costs may be a little trickier to determine because policies often pool all machinery together. The easiest method may be to work out the power harrows value as a percentage of total machinery value and multiply it by the premium paid. For example, if the power harrow is worth £7,000, the total machinery is worth £200,000 and the annual premium is £3,000, then the power harrow insurance is approximately £105.

Tractor costs are a lot more difficult to allocate because the machine may be used throughout the year on many different tasks. However, annual costs such as depreciation, spares and repairs, tax and insurance can be allocated based on the total hours worked by the tractor in the year. Multiplying this hourly figure by the time spent power harrowing will give a total cost for the operation.

Fuel calculation

Fuel usage by each tractor is fairly easy to record, simply by having a meter fitted to the diesel tank along with a notebook to record the amounts, although no allowance is made for different operations giving different fuel consumption figures. Alternatively, standard fuel consumption figures may be used.

Labour is also difficult to apportion to individual operations. Employees wages have to be paid regardless of the job they are actually doing. Again, the most accurate method is to divide total labour costs in the year by the number of hours worked (records of hours worked should be kept anyway, to ensure compliance with the Working Time Regulations). The cost per hour can then be allocated to each operation.

It is debatable whether interest costs, based on the capital invested in the machinery, should be included. On balance, it is probably correct to include it in the calculations as this capital has an opportunity cost. For example, if a business carried an overdraft at 8% per annum, selling a power harrow worth £7,000 would effectively save £560 in interest payments each year. Equally, continuing to own the power harrow must effectively cost this amount in interest in the year.

Once all the information is collected, it is possible to combine it using a machinery costing sheet to work out cost per hour or per acre (table 1).

Such information can then be used to calculate the true cost of growing individual crops, allowing more accurate cropping decisions to be made.

Technique comparison

This method of calculating costs can be applied to any operation, so could be used to compare various cultivation techniques to assess the least costly to the business. It can also be used to assess the cost of a second pass. In this case, only marginal costs will be incurred, such as fuel, and a little wear and tear. In such cases, the cost of an additional pass may be much cheaper than expected and, if it improves yield or reduces the need for chemicals, may easily be justified. &#42

Cultivation cost –

power harrow

Hours worked 365

Workrate (acres/hour) 2.15

Allocated costs (£):

Power harrow 2180

Tractor 3095

Labour 2514

Total 7789

Total per hour 21.34

Total per acre 9.93

Calculating the cost of cultivating land

Tractor Power harrow Labour

Hours worked 1200 365 2250

Capital value (£) 22,000 7000 n/a

Annual costs (£):

Depreciation 3960 1200

Spares & repairs 1920 315

Insurance 330 105

Tax 45 0

Fuel 2160 0

Interest @ 8% 1760 560

Total 10,175 2180 15,500

Total costs per hour 8.48 5.97 6.89