Using Cost Of Production For Decision Making

2169 words - 9 pages

Front cover
Using Cost of Production for Decision Making
"The Vegetable Industry Development Program is funded by HAL using the vegetable levy and matched funds from the Australian Government".
InnoVeg Horticulture Australia Limited

Introduction 02
What is included in cost of production? 03
Calculating cost of production 04
Changing yield and costs 05
Using cost of production to make decisions 05
Should I harvest or cut my losses? 06
Should I grow a new crop? 08
Conclusion 08

Case Study
This case study shows how calculating cost of production can be used to help vegetable growers make decisions.
Knowing your cost of production can help when making
business decisions as it provides a quick way of relating
your cost of producing a product with the price you are
going to accept for the product. The cost of production
can be calculated for any unit of production - tonnes,
cases, bunches or the whole paddock. For some crops
you might calculate cost of production for more than one
unit. For example, it may be useful to know the cost of
production of capsicums per tonne and per case as you
may be selling different units of production.
The case study describes:
• What is included in cost of production
• How to calculate cost of production
• When cost of production can be useful and why you need to be careful using cost of production
• How a grower can use cost of production to make business decisions

3 Case Study Using Cost of Production for Decision Making
What is included in cost of production?
It is very important to firstly think about what all of your costs are to grow a crop. It is useful to look at your financial records (refer to the case study, "How is our business going?") and take your total costs on the farm and ask yourself - how much of this was used for this crop? This way you are less likely to underestimate the costs. A simple calculator has been developed to help you calculate the cost of production. The first column includes your total farm costs, whilst the second column is for the costs for the particular crop you are looking at.
The costs that will be used in the calculation include:
Crop inputs
• Crop establishment - seedlings, soil preparation and amendments
• Growing costs - fertiliser, herbicides, water
• Fuel
• Labour - external
• Other costs
Post growing costs
• Harvesting - fuel and labour
• Packing
• Transport
• Other post growing costs
• A share of overheads such as rates and accounting need to be included
• The appropriate share for each crop can be worked out on an area or gross value basis
• Many people like to do it on an area basis, as this is what they relate to and how some overheads, e.g.
rates, are calculated
• However, we favour doing it on a gross value basis, as this is a more accurate...

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