Meaning of Agricultural Cost
Agricultural
cost according to Ibitoye and Idoko (2009) is referred to as the value of
agricultural output. That is, it is the expenses incurred by farmers in the
process of producing a farm product such as yam, maize, eggs, goats etc. It is
also known as expenses incurred in producing a particular amount f product in a
particular period. Hence one can talk of the cost of producing 10 tons of yam
in a season or 100 litres of milk per week or 100 crates of eggs per month.
Cost
of production can also be referred to as accounting cost, cost of materials
used in the production process such as labour costs, feed costs, fertilizer
costs, maintenance and repair costs, selling and administrative costs,
depreciation costs, taxes and interest payment on money borrowed.
Agricultural
economist view costs of production as embracing a considerable alternative
costs or opportunity costs. For instance, if a farmer produces only commodity A
and no B, the cost of producing A is the accounting cost plus the forgone
return on B known as economic costs.
Types of Cost
In
considering costs involved in agricultural production, Abbot and Makeham (1980)
identified five main farm costs. These are variable costs, overhead costs,
financial costs, capital costs and personal costs
1. Variable Costs
These
costs are also known as direct costs. They are the costs which vary as the size
and level of output of farm activities varies. For example, if the area under
maize production is increased by 50%, then seed, fertilizer, labour inputs etc
will also increase but may not be necessarily at the same rate. It is even possible
for input like labour not to be affected by this increase. Some farm production
may have direct influence on some of their variable costs. For example, if you
double the cattle numbers, variable costs such as feed and veterinary fees will
also double.
Variable
costs are directly associated with the level of intensity of each activity. In
a crop production activities for example, crop yield can be influenced by the
amount of money invested on variable costs like fertilizer, seeds, weeding etc.
It
is essential for farmers to identify the variable costs of his activities on the
farm such as to give him an idea of the size of the change in cost which will
occur if he expands or contract one or more of his farm activities. His
knowledge of variable costs and probably the gross income will guide the farmer
in making decision on the merit of making the change on those activities.
Examples
of farm variable costs include: seed, fertilizer, animal feed, agro-chemicals,
livestock, seasonal labour, electricity bill, fuel and oil, machines
maintenance and repairs etc.
2. Overhead Costs
Overhead
cost is also known as fixed cost of production. These costs do not vary with
the level of output, which means that they may be incurred even when production
is not undertaking. Thus a small increase or decrease in the area of crop or
number of farm animals is not likely going to affect the overhead costs of the
farm. Examples of farm overhead costs include: depreciation of plant and
equipment, interest on loan, rental payments for machinery, wages and salaries
of permanent staff, land maintenance and rent etc.
Overhead costs can be either of the following types:
Total
Overhead Costs.
Operational
Costs or Activity Overheads.
The
total overhead costs are the unavoidable costs which must be met every year.
The
total gross margin is normally the only source other than borrowing, from which
the overhead cost can be met.
The
essential components of total overhead costs include the followings: living
expenses of the farmer, wages for permanent staff, loan interest and
repayments, taxes, general repairs, insurance premium, replacement of capital
items such as plants, machinery, building etc, travel and other business
expenses.
The
operational costs are used in calculating the true profit in accounting sense.
They are overheads associated with annual operational expenses of the farm.
Therefore, such overhead expenses like repayment of loans, living expenses,
interest on loans and income tax are normally excluded in operational costs.
All
other costs considered under total overhead costs are part of operational
costs.
Some
of the costs include: wages of permanent workers, depreciation charges, operator’s
allowance, general repairs, insurance charges, telephone and other business expenses.
The
third type of overhead cost is the Activity Overheads. This type of overheads
are those costs which would not be incurred if the business operation was
terminated. Such cost includes depreciation charges on equipment.
3. Finance Costs
These
costs are associated with loan repayment and insurance costs and interest paid
on loan.
4. Capital Costs
These
costs are usually associated with costs incurred in the process of providing
capital assets used in farm production. Examples of capital costs include costs
on land clearing, land purchase, machinery, building, and plantation and
livestock establishment.
5. Personal Costs
The
living or personal costs of the farmer are normally included in the total
overhead costs. Personal costs are one of the most important and unavoidable
items in the total farm overheads. Personal costs on the farm include costs of
food items, clothing, medical expenses, school fees, costs of traveling etc.
some of these personal costs items are directly related to the level of output
of the farmer.
Importance of Cost in Agricultural Production
One
of the major motives of any farmer is profit maximization. Profit is obtained
by subtracting total cost from total revenue (Ï€ = TR - TC). It is important
therefore, for farmers to understand the nature and structure of production
costs and how they affect the decision making process.
Understanding
of cost functions also help farmers to determine the most profitable level of
production as well as the level of output in which production process depends.
Cost functions also help to determine the least cost combination (cost
minimization) that will determine maximum profit.
Cost
functions also help the farmer to determine how much variable factor to be employed
in combination with fixed factors in the production of an output for maximum
benefit.
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