Transcript Farm Management - Texas A&M University

Farm Management
Chapter 10
Enterprise Budgeting
Chapter Outline
• Enterprise Budgets
• Constructing a Crop Enterprise Budget
• Constructing a Livestock Enterprise
Budget
• General Comments on Enterprise
Budgets
• Interpreting and Analyzing Enterprise
Budgets
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Chapter Objectives
1.
2.
3.
4.
5.
To define an enterprise budget and discuss its
purpose and use
To illustrate the different sections of an enterprise
budget
To learn how to construct a crop enterprise budge
To outline additional problems and steps to
consider when constructing a livestock enterprise
budget
To show how data from an enterprise budget can
be analyzed and used for computing cost of
production and break-even prices and yields
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Enterprise Budgets
• An enterprise budget provides an estimate
of potential revenue, expenses, and profit
for a single enterprise
• Each type of crop or livestock is an
enterprise
• The base unit for crops is usually one acre
• The base unit for livestock may be one
head or some other convenient size
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Table 10-1
Example Enterprise Budget for Watermelons
(1 acre)
Item
Value per acre
Revenue
250 cwt @ $5.50 per cwt
Variable Costs
Seed
Fertilizer
Chemicals
Machinery expense
Custom Spray
Harvesting and Hauling
Labor
Interest @ 10% for 6 months
Total variable cost
Income above variable cost
Fixed Costs
Machinery depreciation, interest, taxes, and insurance
Land charge
Total fixed costs
Total costs
Estimated Profit (return to management)
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$1,375.00
$80.00
95.50
97.75
35.15
8.00
500.00
320.00
56.82
$1,193.22
$181.78
$62.00
100.00
$162.00
$1,355.22
$19.78
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Constructing a Crop Enterprise Budget
• Revenue: all cash and noncash revenue
from the crop
• Operating or variable expenses: all costs
that would be incurred only if the crop is
produced
• Ownership or fixed expenses: costs that
must be paid even if no crop is produced
• Profit: represents a return to all resources
that were not charged in the budget (usually
management)
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Table 10-2
Enterprise Budget for Wheat (1 acre)
Item
Unit
Quantity
Price
Amount
bu
48
$3.00
$144.00
Revenue
Wheat grain
Total revenue
$144.00
Operating expenses
Seed
lb
75
$0.20
$15.00
Fertilizer: N
lb
60
0.15
9.00
P2O5
lb
30
0.20
6.00
K2O
lb
30
0.15
4.50
Chemicals
acre
1
7.50
7.50
Fuel, oil, lubrication
acre
1
9.50
9.50
Machinery repairs
acre
1
6.40
6.40
Labor
hr
2
8.00
16.00
Interest (operating expenses for 6 months)
$
36.95
10%
Total operating expense
3.70
$77.60
Income above variable costs
$66.40
Ownership expenses
Machinery depreciation
acre
1
14.20
14.20
Machinery interest
acre
1
10.60
10.60
Machinery taxes & insurance
acre
1
2.50
2.50
Land charge
acre
1
50.00
50.00
Misc. overhead
acre
1
4.00
4.00
Total ownership expenses
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$81.30
Total expense
$158.90
Profit (return to management)
$(14.90)
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Constructing a Livestock Enterprise Budget
• The unit may be one head, one cow unit
for cattle, one litter for swine, or 100 birds
for poultry
• Several enterprise budgets can be
constructed for different sizes of the same
enterprise, such as 30 head, 50 head, and
so on to reflect economies of size
• The time period is usually one year but
may be longer in some cases
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Table 10-3
Example Cow/Calf Budget for One Cow Unit
(1 cow unit = 1 cow, 0.04 bull, 0.9 calf, 0.12 replacement heifer)
Item
Unit
Quantity
Price
Revenue
Cull cow (0.10 head)
Heifer calves (0.33 head)
Steer calves (0.45 head)
Total revenue
Operating expenses
Hay
Grain & supplement
Salt, minerals
Pasture maintenance
Veterinary & health expense
Livestock facilities
Machinery & equipment
Breeding expenses
Labor
Miscellaneous
Interest (on half of operating expenses)
cwt
cwt
cwt
ton
cwt
cwt
acre
head
head
head
head
hours
head
$
10.00
5.20
5.50
50.00
80.00
88.00
$50.00
137.28
217.80
$405.08
1.50
8.00
0.40
3.00
1.00
1.00
1.00
1.00
5.00
1.00
119.45
60.00
7.00
6.00
7.50
10.00
8.00
5.00
5.00
6.00
10.00
10%
90.00
56.00
2.40
22.50
10.00
8.00
5.00
5.00
30.00
10.00
11.95
Total operating expense
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Amount
$250.85
Ownership expenses
Interest on breeding herd
$
Livestock facilities
Depreciation & interest
750.00
10%
75.00
head
1.00
10.00
10.00
Machinery & equipment
Depreciation & interest
head
1.00
6.50
6.50
Land charge
acre
3.00
35.00
105.00
Total ownership expenses
Total expenses
Profit (return to management)
$196.50
$447.35
($42.27)
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General Comments on Enterprise Budgets
• Economic principles of MVP=MIC and
least-cost combinations should be
considered when selecting input levels
• Third-party budgets should be used with
caution as they may not reflect conditions
on a particular farm
• Past farm records or state data can
provide information for enterprise budgets
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Prices and Yields
The appropriate price and yield data
used in an enterprise budget will depend
on its use. A budget to be used for
next year’s planning will require the
best estimate of next year’s price and
yield. Budgets used for long-run planning
require estimates of average prices and
yields over the long run.
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Interpreting and Analyzing
Enterprise Budgets
An economic enterprise budget includes
information on opportunity costs of
labor, capital, land and perhaps management.
The profit (or loss) is what remains after
covering all expenses, including opportunity
costs. A projected economic profit of zero
means labor, land, and capital are earning
exactly their opportunity costs.
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Cost of Production
Cost of production =
total cost
yield
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Break-Even Analysis
The data in an enterprise budget can
be used to do a break-even analysis.
Break-even yield and break-even prices
can be computed.
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Break-Even Yield
Break-even yield =
Price per biushel ($)
2.50
2.75
3.00
3.25
3.50
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total cost
output price
Break-even yield (bu)
63.6
57.8
53.0
48.9
45.4
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Break-Even Price
Break-even price =
Yield (bu)
36.0
42.0
48.0
54.0
60.0
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total cost
expected yield
Break-even price ($)
4.41
3.78
3.31
2.94
2.65
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Summary
Enterprise budgets organize projected
income and expenses for a single
enterprise. Most enterprise budgets
are economic budgets and will
include opportunity costs in addition
to cash costs and depreciation. Enterprise
budgets can be used to compare the
profitability of different enterprises and are
useful for developing a whole-farm plan.
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