1. agri benchmark Beef Training Model training workshop Part 11: Cost allocation

2. Which costs must be allocated? Total cost per unit of product (kg milk, kg beef, bu wheat) Enterprise variable and fixed cost Directly allocated Whole farm variable and fixed costs Hired labour Rented land Buildings and machinery depreciation Paid interest Overhead cost Opportunity cost (labour, land, capital) Allocated according to the share of the enterprises in: Land use / production Machinery / building use Labour use Returns Other criteria

3. Two steps of cost allocation 1. From whole farm level to enterprise level - examples Total depreciation of machinery  dairy enterprise Total pasture cost for livestock enterprises  cow calf enterprise Depreciation and maintenance of stable for cows and finishing bulls  beef finishing enterprise 2. From enterprise level to product level - examples Beef enterprise  bulls, steers, heifers; finishing groups Cow calf enterprise  calving period 1, calving period 2 Crop enterprise  wheat, barley, soybean etc. Dairy enterprise  no further allocation required (milk)

4. Allocation factors Physical allocation factors Labour hours, machinery hours Acreage used Surface of buildings, no. of places Share in weight (beef finishing) Share in total number of animals (cow calf, beef finishing) Financial allocation factors Share in returns Share in gross margin (variable cost)

5. From whole farm data to cost per kg beef (I) Allocation of whole farm data to beef enterprise data Crop & Forage Cow calfDairy Whole farm Overhead / Fixed cost Machines, buildings, labour used by the beef enterprise Beef enterprise cost and returns Beef Land used by the beef enterprise (per crop) Dairy calves and weaned calves transferred to beef enterprise ($/head) Other overhead cost

6. From whole farm data to cost per kg beef (II) Allocation of beef enterprise data to cost per kg beef Cost and returns of the beef enterprise Group I (steers) Group II (steers) Group III (steers) Group IV (heifers) Group V (heifers)  Beef returns and variable cost are already allocated to each group.  Fixed and overhead cost are allocated to each group by share in total weight produced per year.  Annual and lot-wise cost figures are recalculated in daily figures and multiplied with the number of days/year each group stays on the farm.  Groups for cost analysis are selected (for example steers, groups I-III). Annual cost are stated in $/kg beef of the weighted average groups I-III

7. How we treat variable cost per head Variable cost per head are collected lot-wise, not annual values Situation and problem The model calculates annual figures Usually a fattening period takes less or more than 365 days How to convert the lot wise input-data into annual figures? Solution The model calculates the number of days each lot and group stays in the relevant year It converts the lot wise figures into daily figures per day of fattening Finally it multiplies daily figures with the number of days in the year per lot and per group

8. ‘Refined’ and ‘simple’ cost allocation Refined cost allocation For each cost item to be allocated a separate allocation factor is calculated and inserted manually Advantage: very detailed cost allocation possible Disadvantage: time-consuming, in-transparent and subject to errors the more farms, partners and enterprises are involved Simple (semi-automatic) cost allocation Cost items are allocated to enterprises using enterprise codes for: labour (per worker’s group), land (per crop) machines and buildings (per machine and building) Overhead costs are allocated by return share

9. Enterprise allocation codes Allocation codeAllocation to beef enterprise by: 1 = Item used for all enterprisesShare of beef in total farm returns 2 = Crop and forage productionShare of beef in total farm returns 3 = Livestock production generalShare of beef in total livestock returns 4 = Cash crop production only0 % to beef 5 = Forage production onlyShare of beef in total livestock returns 6 = Dairy only0 % to beef 7 = Cow calf only0 % to beef 8 = Beef only 100 % to beef

10. How we calculate cost of production Examples for items that go 100 % to the beef enterprise: Variable cost of land only used by the beef enterprise (e.g. corn for silage) Buildings exclusively used by the beef enterprise (e.g. stable for bulls) Staff wages exclusively used by the beef enterprise (e.g. cattlemen) Examples for items that are allocated by share in returns: All fixed cost of the whole farm (e.g. accounting, office) Machinery maintenance and depreciation used for all livestock enterprises (e.g. grass mower) Maintenance and depreciation for buildings/installations used for all enterprises (e.g. machinery hall) Staff wages used for all enterprises (e.g. farm manager)

11. Calculation examples Total depreciation machinery 10.000 US$ Depreciation matrix (% of total depreciation): All enterprises35 % Crop and forage production20 % Livestock in general30 % Beef finishing only10 % Cow calf only5 % Share of beef in total returns50 % in livestock returns70 % Machinery depreciation of the beef finishing enterprise All enterprises10.000 * 35%* 50%=1.750 Crop and forage production10.000 * 20%* 50%=1.000 Livestock in general10.000 * 30%* 70%=2.100 Beef finishing only10.000 * 10%=1.000 Cow calf only10.000 * 5%* 0 %=0 Total=5.850

12. Cost changes according to return changes - changes marked in bold red 20012002 Depreciation machinery (US$)10.00010.000 Beef shares Share of beef in total returns (%)5040 Share of beef in livestock returns (%)7050 Depreciation beef All enterprises1.7501.400 Crop and forage production1.000800 Livestock in general2.1001.500 Beef finishing only1.0001.000 Cow calf only00 Total5.8504.700

13. Conclusions, questions and decisions Changes in return shares result in changes of cost level and cost structure Simple allocation is quicker, easier and more transparent than refined allocation Allocation of labour, land, machinery and buildings should be done as much as possible at input data level, for example: Pasture land should be split in pasture for cow calf and pasture for beef finishing Workers should be split into milkers (dairy) and cattlemen (beef finishing) Machines and buildings should be split as much as possible to the enterprises Is simple allocation suitable?