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ARTICLES >> Livestock Articles

Determining Cost of Production

Posted by Bestprac on Jun 15 2009

By Chelsea Muster, Rural Directions Pty Ltd

What are the key profit drivers in your livestock business? How can profit be influenced or increased?

Why is measuring production and financial performance important? Do you know your true Cost of Production?

Understanding your true cost of production is vital in determining the level of profitability of your business, and the base price needed to be received when selling your product to make a profit. It allows you to examine where costs are incurred, and the reasons behind the costs.

Gross Margins are a useful tool for comparing different enterprise combinations, and calculate the difference between direct income and variable expenses. Cost of Production also examines a single enterprise, but takes into account overhead expenses (or fixed costs) so all business costs are included.

Cost of production can be based on a per kg, DSE, flock or hectare basis, and also can be used to determine net income when income is incorporated.

The steps incorporated into determining COP include:

1. Determine total FIXED costs

Fixed costs (or overhead costs) are those costs that do not alter regardless of the enterprise, and regardless of the amount of area being farmed (eg insurance, telephone, council rates, accounting fees etc)

2. Determine the proportion of fixed costs that can be attributed to the enterprise under consideration.

If the business manages more than one enterprise, the fixed costs need to be divided amongst the various enterprises. If there is only one enterprise, then all the fixed costs need to be attributed to the single enterprise. When dividing the fixed costs amongst enterprises, one method is to proportion the costs equal to the income generated as a percentage of total business income.

3. Determine variable costs for the enterprise

Variable costs are those that alter depending upon the enterprise, and the size of the enterprise (eg transport, sprays and chemicals, shearing, commission etc).

4. Determine TOTAL (fixed and variable) costs for the enterprise

The following table can be used to help you determine your Cost of Production.


Meat/Wool Enterprise


Year (2009)

 

a) Income derived from meat or enterprise
 

 
b) Number of kg of meat or wool produced
 
 
c) Average income/kg
(a / b) 
 
 
d) Variable costs for meat/ wool enterprise
 
 
e) Variable costs per kg meat/wool
(d / b) 
 
 
f) Total fixed costs
 
 
 g) Percentage of total fixed costs attributed to meat/wool enterprise
 
 
 h) Fixed costs for meat/wool enterprise
(f x g)
 
 
 i) Fixed costs per kg meat /wool produced
(h / b)
 
 
 j) Total cost per kg of meat/wool produced
(e + i)
 
 k) Net income per kg of meat produced
(c- j)
 

 

Cost of production calculators are also available on-line in electronic form, at http://www.mla.com.au/TopicHierarchy/InformationCentre/AnimalProduction/MLA+cost+of+production+calculator+%28lamb%29.htm

http://www.makingmorefromsheep.com.au/

Benchmark for Lamb Production

The most efficient one third of lamb producers produce lamb for between $1.56 and $2.01/kg dressed weight. The middle group of farms produces lamb for between $2.01 and $2.51/kg dressed weight, and the least efficient one third of farms produce lamb for between $2.51 and $3.34/kg dressed weight.

Do you know your cost of production, and where it sits in comparison to the industry benchmark?
 

Last changed: Feb 16 2012

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