Transcript Farm Management Chapter 10 Enterprise Budgeting © Mcgraw-Hill Companies, 2008 Chapter Outline • Enterprise Budgets • Constructing a Crop Enterprise Budget • Constructing a Livestock Enterprise Budget •

Farm Management
Chapter 10
Enterprise Budgeting
© Mcgraw-Hill Companies, 2008
Chapter Outline
• Enterprise Budgets
• Constructing a Crop Enterprise Budget
• Constructing a Livestock Enterprise
Budget
• General Comments on Enterprise
Budgets
• Interpreting and Analyzing Enterprise
Budgets
© Mcgraw-Hill Companies, 2008
Chapter Objectives
1.
2.
3.
4.
5.
Define an enterprise budget and discuss its
purpose and use
Illustrate the different sections of an enterprise
budget
Learn how to construct a crop enterprise budge
Outline additional problems and steps to consider
when constructing a livestock enterprise budget
Show how data from an enterprise budget can be
analyzed and used for computing cost of
production and break-even prices and yields
© Mcgraw-Hill Companies, 2008
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
© Mcgraw-Hill Companies, 2008
Table 10-1
Example Enterprise Budget for Watermelon
Production
(One 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
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)
© Mcgraw-Hill Companies, 2008
Table 10-2
Enterprise Budget for Wheat (One Acre)
Item
Revenue
Wheat grain
Total revenue
Operating expenses
Seed
Fertilizer: Nitrogen
Phosphorous
Potash
Pesticides
Fuel, oil, lubrication
Machinery repairs
Labor
Interest (operating expenses for 6 months)
Total operating expense
Income above variable costs
Ownership expenses
Machinery depreciation
Machinery interest
Machinery taxes & insurance
Land charge
Misc. overhead
Total ownership expenses
Total expense
Profit (return to management)
Unit
Quantity
Price
Amount
bu
50
$3.50
$175.00
$175.00
lb
lb
lb
lb
acre
acre
acre
hr
$
85
60
30
30
1
1
1
1.5
50.40
$0.29
0.33
0.29
0.25
5.75
14.50
6.40
9.00
9%
$24.65
19.80
8.70
7.50
5.75
14.50
6.40
13.50
4.54
$105.34
$69.66
acre
acre
acre
acre
acre
1
1
1
1
1
14.20
10.60
2.50
50.00
3.50
14.20
10.60
2.50
50.00
3.50
$80.80
$186.14
($11.14)
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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
© Mcgraw-Hill Companies, 2008
Table 10-3
Example Cow/Calf Budget for One Cow Unit*
Item
Unit
Revenue
Cull cow (0.10 head)
Heifer calves (0.33 head)
Steer calves (0.45 head)
Total revenue
Operating expenses
Hay
Supplement
Salt, minerals
Pasture maintenance
Veterinary & health expense
Livestock facilities repairs
Machinery & equipment
Breeding expenses
Labor
Fuel and lube
Miscellaneous
Interest (on half of operating expenses)
cwt
cwt
cwt
ton
cwt
cwt
acre
head
head
head
head
hours
head
head
$
Quantity
Price
Amount
10.50
5.20
5.50
50.00
100.00
105.00
$52.50
171.60
259.88
$483.98
1.50
1.50
0.40
2.50
1.00
1.00
1.00
1.00
5.00
1.00
1.00
146.91
60.00
10.75
8.00
35.00
7.00
8.00
16.00
5.00
8.00
11.00
10.00
10%
90.00
16.13
3.20
87.50
7.00
8.00
16.00
5.00
40.00
11.00
10.00
14.69
Total operating expense
$308.52
Income above operating expenses
$175.46
Ownership expenses
Interest on breeding herd
Livestock facilities
Depreciation & interest
Machinery & equipment
Depreciation & interest
Land charge
Total ownership expenses
Total expenses
Profit (return to management)
$
800.00
8.5%
68.00
head
1.00
10.00
10.00
head
1.00
37.50
37.50
acre
2.50
35.00
87.50
$203.00
$511.52
($27.54)
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*(1 cow unit = 1 cow, 0.04 bull, 0.9 calf, 0.12 replacement heifer)
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 =
total cost
output price
For our example wheat budget, total cost is $186.14.
Price per bushel ($)
2.75
3.00
3.25
3.50
3.75
4.00
Break-even yield (bu)
67.7
62.0
57.3
53.2
49.6
46.5
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Break-Even Price
Break-even price =
Yield (bu)
35.0
45.0
50.0
55.0
60.0
total cost
expected yield
Break-even price ($)
5.32
4.14
3.72
3.38
3.10
© Mcgraw-Hill Companies, 2008
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.
© Mcgraw-Hill Companies, 2008