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Is That Farm/Ranch Enterprise Really Making You Money?

By   /  March 18, 2019  /  1 Comment

Allocating costs is a tool used to assist in financial and managerial decision making within your operation. Done well it can help you focus on what’s making the most profit for you.

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Thanks for this article go to UNL Beefwatch and  Austin Duerfeldt, Agricultural Systems Economist and Extension Educator at University of Nebraska, Lincoln. You can always check out UNL Beefwatch for lots of great articles about farming and ranching.

Allocating costs is a tool used to assist in financial and managerial decision making within your operation. Photo courtesy of Troy Walz.

It was 2011. I was hired as an accountant to review a farm operation and its various operations: corn, soybeans, dairy, beef, hogs, and chickens. Corn and soybean prices were setting record highs every day it seemed. The livestock markets also were doing well. For the given economic climate the farm operation review should have been relatively straightforward. Unfortunately, I found that not to be the case.

As I started in, I began noticing something odd. Livestock operations were doing stellar, but row crops were struggling compared to what I had estimated it would look like. How can this be? As I looked for answers, it did not take long to find one. I glanced over the profit and loss statements and noticed that feed expense seemed to be understated in nearly every livestock operation given their size. As it turned out, the row crop corn production was being used as feed for the livestock operation. This was a completely understandable management decision except for one factor. The expense of growing the feed was being attributed to row crop, instead of livestock.

Good Cost Allocation Helps You Make Good Decisions

While many will say, “It is all part of the same farm,” the reality is, as managers, misinformation like this can lead to poor decisions. What would have happened if, given the stellar numbers in the hog operation, the manager would have decided to build another facility and expand production? The reality might be that with a proper feed cost allocation, cutting back on production was the correct decision. Mistakes similar to this can cost operations and set back future growth and expansion for years as they try to recoup from a managerial error.

There Are Many Ways to Allocate Costs

Austin Duerfeldt is the Southeast District Agricultural Economist Extension Educator specializing in accounting, financial analysis and taxation. He was raised on a crop farm in southeast Nebraska, just miles from the original family farmstead that has been in the Duerfeldt family for over 150 years. He has an MBA with emphasis in agricultural economics and a master level tutor certificate, reflecting his love of teaching. Austin developed and implemented a new accounting system at the university farm, and designed the first university classroom dedicated to agricultural marketing strategies and theory. Austin continues to live near Falls City, where he remains active in the family farming operation. He enjoys staying current with the latest technology, woodworking projects and family time.

The goal of any allocation method is to spread the cost so that it fairly represents the actual usage. Some common allocation bases are square footage, head count, acres, hours, and electrical/water usage. The key is to find something that is easily measurable and links the expense to the operation unit. A great example might be using acres to allocate seed cost among fields.

With the farm described in the introduction, each livestock unit was being fed through rations. The rations were easily measurable in terms of pounds of grain added, and the rations had designations. The proposed solution was to keep track of rations fed to livestock, and then adjust where each livestock segment would reimburse the crop operation (dollars per unit) based on the rations. The number of dollars allocated per unit is a managerial decision each operation must make. At minimum, it should be equal to the cost of production, but it can be more.

Another essential factor to take into account: Is the expense immaterial or worth allocating? Let’s say you have a subscription to an agricultural magazine. Is it worth taking that subscription and allocating it between row crop and beef production? The answer is probably not. That would be an expense better suited to an overhead cost of the farm operation.

Note, these allocations are not necessary for income tax preparation. Allocating costs is a tool used to assist in financial and managerial decision making within your operation. As you continue running your farm or ranch, don’t underestimate the value of accurate records.

What Can You Do With This?

Even if you’re not raising row crops, Austin’s ideas on cost allocation are important to you when you’re looking at all the different enterprises that make up your operation. They can help you decide if you should expand, or pull back to be more profitable and efficient.

If, like me, accounting is not your strong suit, visit with your local extension office or Conservation District to see if they have someone who can assist you. Or ask friends and family if they have recommendations.

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  • Published: 6 months ago on March 18, 2019
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  • Last Modified: March 18, 2019 @ 2:55 pm
  • Filed Under: Money Matters

About the author

Publisher, Editor and Author

Kathy worked with the Bureau of Land Management for 12 years before founding Livestock for Landscapes in 2004. Her twelve years at the agency allowed her to pursue her goal of helping communities find ways to live profitably AND sustainably in their environment. She has been researching and working with livestock as a land management tool for over a decade. When she's not helping farmers, ranchers and land managers on-site, she writes articles, and books, and edits videos to help others turn their livestock into landscape managers.

1 Comment

  1. John Marble says:

    Allocating expenses properly to individual enterprises is an absolutely essential tool. That said, sometimes even really good data cannot over come the omnipotence of a paradigm.

    A friend of mine is involved in management at a large international agriculture company. He was tasked with rooting out the profit-eating problems related to the company’s freight division. This interest was due to the “obvious” problem of having to pay too much (internally) for freight. When he came back with the analysis and data, the President tossed it over his shoulder, laughed, and said,

    “I don’t believe the data!”

    My advice: Time to look for a new job.

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