A major driver of the profitability of grazing enterprises is the cost of production. Producers typically have far more control over the cost of production than other factors such as price and, to a certain extent, the quantity of product produced as this can be subject to environmental circumstances.
In considering the cost of production, all costs associated with producing a kilogram of meat should be considered, including variable and fixed costs. Within multiple enterprise businesses, the proportion of fixed costs attributed to an enterprise must be calculated.
The MLA Cost of Production Calculator is a ‘do-it-yourself’ tool that allows enterprises to be compared to others and, importantly, for business performance to be compared from year-to-year. The next lesson will walk you through how to use the Cost of Production calculator.
As with all forms of meaningful business analysis, the output from the MLA Cost of Production Calculator is only as good as the quality of the information entered into the calculator. Maintaining good records is fundamental to being able to access the information required to effectively analyse business performance.
Variable costs
It is relatively easy to identify the direct costs of producing and selling goats. These vary with enterprise size and typically include costs for livestock health (drenches, vaccines, tags), purchased or home grown feed, livestock contract services, transport and selling expenses as well as livestock insurance.
Supplementary feeding for maintenance can be divided across all livestock enterprises in the business even if it was only fed to one enterprise on the basis that feeding that enterprise meant the other did not have to be fed. This removes bias that occurs if one enterprise is preferentially fed over another.
For example, if you had a managed goat herd that represented 50% of the farm’s DSE, then 50% of the managed goat herd’s supplementary feeding expense would go to the other livestock enterprise. This is because feeding of the goat herd made more pasture resources available to the other enterprise.
Fixed costs
Fixed costs make a significant contribution to the cost of production but are often harder to recognise and allocate and can be overlooked. These are made up of:
- Labour costs – which include both an imputed cost for owner/family labour as well as the cost of paid employees
(including salary, superannuation, bonuses and training). - Overhead costs – which include items such as rates, insurance costs, motor vehicle costs, repairs and maintenance and utility costs, such as electricity, as well as lease costs and depreciation.
There are two common methods for allocation of labour and overhead costs:
- Percentage of dry sheep equivalent (DSE) method
- Percentage of gross farm income (GFI) method.
The method used should be the most appropriate for the business. It is important to use the same from year to year so the cost of production results can be compared easily.
Percentage DSE method
The percentage of dry sheep equivalent (DSE) is the simplest method to allocate the costs associated with labour and overheads (fixed costs) for a single activity (livestock only) business. This method uses the percentage of total carrying capacity allocated to each livestock enterprise to apportion a percentage of the total farm labour and overhead cost to each enterprise.
For example, a mixed grazing operation of 3,300 breeding ewes for lamb production, 600 breeding does and 100 breeding cows would have a total carrying capacity of 7,300 DSE. The allocation of labour and overhead costs for this business is demonstrated in Table 1 below.
Percentage GFI method
The percentage gross farm income (GFI) method for allocating labour and overhead costs is best used for businesses running two or more activities (for example, cropping and livestock). This method calculates the percentage of total revenue that each enterprise contributes and apportions the total farm labour and overhead costs on this basis.
For example, a mixed cropping and livestock operation has an annual gross farm income (GFI) of $854,000. This income comes from crops (59%), meat sheep and wool (34%), goats (4%) and cattle (3%) as set out in Table 2 below.
