Record Keeping for Cost Analysis

1. Record Keeping for Cost Analysis Prepared by: L. Robert Barber, Roland Quitugua & Ilene Iriarte For: Guam Cooperative Extension Service & Guam Department of Agriculture Funding provided by: United States Department of Agriculture Natural Resources Conservation Service, Western Region Sustainable Agriculture Research and Education, Administration for Native Americans,, & Sanctuary Incorporated

2. Record Management • Financial records: to determine whether you are making or loosing money (develop enterprise budgets) and how much. • Needed for pricing (cost analysis), government program participation, and taxes. • Production records: to prove compliance (organic), maximize disaster benefits, plan activities and rotations, ensure practices being implemented and anticipate problems. • Observation information: spot problems early, note trends or capture ideas • Most basic method: Start with a daily log of what you do, use, observe, time involved (labor).

3. Accurate Record Keeping • Requires a paper trail, very difficult to do after the fact. • Need a system to generate and store information. • If you have the information recorded and stored you can later: • Determine how to cut costs • Claim maximum disaster benefits • Maximize tax benefits • “Make it a habit”

4. Record Collection Organization • 1st Step is to generate & organize your records • UOG-CES developed the FROG system • (Friendly Record Organization for Guam) • Convenient portable filling system • Contains DAILY LOG • Notes on what you do, what you used • Generate & collect production cost and sales information • Keeps records in one place • Date all entries

5. FROG System • Based on a divided plastic portfolio organized into several main categories: • Contains all materials necessary for record generation. • Sales Receipts (Income) • Crop/Enterprise Expenses (Reciepts, log: materials use, log: time used) • Whole farm costs • Daily log & recording material

6. Determining Profitability • INCOME: Income – Expenses = Profit • Production Quantity • Market Price (Selling Price) • EXPENSE: • Fixed Costs (Whole Farm & Long Term) • Variable Costs (Out of Pocket Costs & Labor)

7. Budget; Planning • Good planning is essential for increasing profits & insuring success • Key planning tool is a summary of expected costs (having a Budget) • Most important input to use in planning is past records of actual costs & returns • First time may have guess • Use past experiences and other “applicable” resources

8. Costs (Handled Differently) • Variable Costs: (Direct into Budget) • Costs that change during the production cycle • Frequently called out of pocket expenses • Ex: are labor, feed, water, marketing • Fixed Costs: (depends on life & number of enterprises) • Costs that remain the same during the production cycle • Ex: are chicken tractor canopy & tarp, vehicle, property tax

9. Costs (Handled Differently) • Variable Costs: (Direct into Budget) • Costs that change during the production cycle • Frequently called out of pocket expenses • Ex: are labor, feed, water, marketing • Fixed Costs: (depends on life & number of enterprises) • Costs that remain the same during the production cycle • Ex: are chicken tractor canopy & tarp, vehicle, property tax

10. Fixed Costs • Depreciating costs • Estimating multi-year/crop cycle costs that occur in one year but benefit the producer for many years • Ex: Truck, irrigation equipment, vehicle • If these costs are charged to one year it would look like the business is unprofitable • You can deal with this by: • Divide these costs by the number of years the item would be useful, & this value is charged for each year.

11. Depreciating Costs: Estimating Multi-Year Fixed Costs • Simplified Example: • If a truck is bought for $20,000 and will be useful for 5 years, it would have an annual cost of $4,000 • It is important to recognize these costs & set money aside for it each year; for replacement purposes $20,000 5 yrs. $4,000

12. Fixed Costs for Chicken Tractor • ITEM: Cost: In Months Monthly Cost • 8’x10’ Frame $75.00 60 $1.25 • Tarp $20.00 12 $1.67 • 2-T-Fittings $14.00 48 $0.23 • 4-Corner Fittings $14.00 48 $0.23 • 5-10’¾” Pipes $40.00 48 $0.66 • Roll tie-wire $3.50 48 $0.07 • 40ft Wire Mesh $87.60 48 $1.83 • 2-12’ 1 3/8” Pipe $21.58 60 $0.36 • 2-1” Frame Hinge $8.96 60 $0.15 • 5 Gallon bucket $5.99 24 $0.25 • 2-2”x4”12’ lumber $17.08 36 $0.47 • 1/4” -8’x4’ Plywood $35.70 36 $0.99 • ½ lb Common Nail $0.43 120 $0.00 • Labor $24.00 • TOTAL: $367.84 $8.16

13. Fixed Costs to Consider Initial Investment VS. Allocated Investment Cost per Cycle

14. Production Costs • Explore costs and their alternatives weighing their pros and cons

15. How To Calculate Profit Dozens of Eggs Sold x Sale Price per Dozen Production Costs = Profitability

16. Breakeven Price • Breakeven price is the unit price that one must obtain in the market in order to cover cost of production • To calculate breakeven price you: • Divide the cost of production by the total number of units produced

17. Breakeven Price • Ex: If it cost $100 to produce 45 dozen eggs, the breakeven price would be $2.22 per dozen of eggs $100 45 dozen $2.22 Per Dozen Eggs

18. Home Work:Cost Analysis • Due Friday before class starts • Build a chicken tractor with the intention to sell eggs produced for a profit. • Compare two systems starting with baby chicks or purchasing layers • List: fixed costs, variable costs and break even point and when can you expect to see a profit? • Be prepared to recommend and defend one system.