Production cost calculation is important for farmers to ensure informed decisions that would lead to profitability. In this article we will investigate the use of the production cost per unit method to determine the profitability of your farming operations.

Track monthly production costs

The first step is to keep track of all your direct input costs when incurred. This includes all costs such as labour, feed, medicine, diesel and transport that is necessary to maintain the well-being of your animals. It may also include lease cost of land or the opportunity cost of utilising your own land for farming operations.

All the monthly production costs are cumulated.

Track monthly breeding and death numbers

In this step, the farmer records the number of animals born during the month. Any fatalities should also be recorded. This is a record of the number of calves, chicklets or lambs being born during the month including those that died.

Calculate production inventory on hand – unit and value

The production cost per month, as calculated in the first step, is allocated to the production inventory balance at the end of the month.

Suppose the farmer incurred R30,000 of expenses this month while the previous months’ costs, already allocated to stock, amounted to R270,000. The new production inventory value would add up to R300,000.

The same goes for the number of production units. Suppose the farmer produced 8 calves in a month and 70 in the previous months, then the total production units at hand are now 78.

Therefore he can make an informed decision before selling…

Calculate the production cost per unit

The farmer can now determine what his weighted average production cost per unit is, by dividing the final balance of the production inventory value by the number of production units.

For example, the closing inventory of R300,000 (as above), is divided by the total production units at hand, namely 78 calves. This gives a production cost per unit of R3,846.15 per calf.

Determine profitability before selling

It’s a new month and the farmer, for example, now wants to sell 10 calves from the 78 production inventory that is ready to be weaned at an average weight of 200 kilograms each. Suppose the market price is R30 per kilogram after transport and commission have been deducted.

The selling price per calf is therefore R6,000 (200kg x R30). The farmer already knows that he can realize a profit per calf of R2,153.85 (R6,000 minus R3,846.15). So he can make an informed decision before selling.

Adjusting of production inventory – units and value – with sales and deaths

The production inventory value and units must be adjusted for the production units sold or deaths of calves previously recorded in inventory.

In the current month, the sale and death values are being calculated based on the previous month’s unit production cost. The answer is then deducted from the production inventory’s value and production units to calculate the latest production unit costs.

For example, the 78 units are reduced by the 10 calves sold and the value of the R300,000 production inventory, is reduced by R38,461.50 (10 calves at a cost of R3,846.15 per calf).

The remaining inventory is therefore 68 (78 minus 10) calves at a value of R261,538.50 (R300,000 minus R38,461.50). The production cost per calf on hand therefore remains R3,846.15 (R261,538.50 divided by 68).

Example of the calculation of a weighted average production cost per unit:

We hope the article will assist you in growing your farming operation’s profitably by being able to calculate in advance the profitability of a pending sales transaction. This method can also be used to reduce production costs and increase production units while in return, reducing the production cost per animal to optimal levels.