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Farm Management

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. Chapter Objectives.

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Farm Management

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  1. Farm Management Chapter 10 Enterprise Budgeting

  2. Chapter Outline • Enterprise Budgets • Constructing a Crop Enterprise Budget • Constructing a Livestock Enterprise Budget • General Comments on Enterprise Budgets • Interpreting and Analyzing Enterprise Budgets

  3. Chapter Objectives • 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

  4. 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

  5. Table 10-1Example Enterprise Budget for Watermelons (1 acre)

  6. 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)

  7. Table 10-2Enterprise Budget for Wheat (1 acre)

  8. 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

  9. Table 10-3Example Cow/Calf Budget for One Cow Unit

  10. 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

  11. 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.

  12. 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.

  13. Cost of Production total cost Cost of production = yield

  14. Break-Even Analysis Breakeven analysis calculates the yield or price of the primary revenue source at which total revenue will equal total expenses. Break-even yield and break-even prices can be computed to cover total costs or total operating costs.

  15. total cost output price Break-Even Yield to cover Total Costs = Break-Even Yield = 158.90/3.00 = 53 bu

  16. total op exp output price Break-Even Yield to cover Total Operating Costs = Break-Even Yield = 77.60/3.00 = 25.9 bu

  17. total cost expected yield Break-Even Price to cover Total Costs = Break-Even Price = 158.90/48 = $3.31 / bu

  18. total op exp expected yield Break-Even Price to cover Total Operating Costs = Break-Even Price = 77.60/48 = $1.62 / bu

  19. What if you have more than 1 source of revenue? • With enterprises having more than 1 revenue source, • you must calculate breakeven values on the primary revenue source and • decrease the total cost value by the value of the other revenue amounts.

  20. Break-Even Yield to cover = Total Costs total cost – secondary revenue output price Break-Even Yield = (250.49-50.00)/0.65 = 308 lbs

  21. Break-Even Price to cover = Total Costs total cost – secondary revenue expected yield Break-Even Price = (250.49-50.00)/350 = $0.57

  22. 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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