E2o—Lancaster Farming, Saturday, June 4,1983
Produe
(Continued from Page E 18)
interest on indebtedness, sales of
milk, and changes in inventory
values are among those that all
would agree ought to be included in
the computations.
There is quite a bit of debate,
however, about whether the rental
value of the farm dwelling and the
opportunity costs of equity capital
and owner management ought to
be included. Of even greater
disagreement is whether to include
price appreciation or depreciation
in land values and income earned
off the farm. In all these matters,
ample room exists for honest
differences of opinion.
A THEORETICAL
CLASSIFICATION OF COSTS
It may be useful, at this point, to
develop a classification scheme for
costs to facilitate later discussion.
There is an order of immediacy of
claim, or degree of associative
certainty, between various cost
items and the production of a
particular product, in the present
case, milk. Two major categories
of costs may be delineated:
A. Unshared, or direct costs,
B. Shared joint, or indirect costs.
An example of the former would
be purchased of 16 percent dairy
ration, all of which is fed to the
milking herd. An example of the
latter would be depreciation on a
tractor that is used both to produce
a cash crop and to scrape the
manure from an exercise area
used by the milking herd.
Each of the two foregoing major
categories of costs may be further
broken down as follows;
1. Cash
2. Non-cash
a. depreciation in value of
capital assets
b. decreases in value of non
capital inventories
c. cost (value) of risk factor
inputs
Cash costs generally have the
most immediate claim on any
revenues that are generated
because they are usually con
sumed during the same accounting
period in which they are pur
chased. Cash costs are also the
easiest to observe and do not
require the use of any judgment or
assumptions as to their dollar
amounts. Some examples might
be; feed, hired labor, breeding
fees, taxes, and utilities.
Non-cash costs are shown above
in three categories. The first
category, depreciation, deals with
allocation among accounting
periods. Of course, depreciable
items such as machinery and
bindings require cash payment at
some tune, but not' necessarily
during a particular accounting
period. How much of the original
purchase price should be con
sidered a cost dunng an ac
counting period should be a func
tion of how much of the useful life
of the item is used up during the
accounting period. We know that
some of it is likely to be used up
even if the item isn’t used at all,
that more is used up if it is used
more, and less if it is used less.
Since if is highly unlikely that a
piece of equipment will be used in
exactly the same way for exactly
the same tune each accounting
period, we can only arbitrarily
include a portion of its original cost
dunng any accounting period of
interest. Conventionally, of course,
we make those allocations ac
cording to whatever depreciation
schedule has been adopted.
TAX RECORDS
Tax records are used frequently
as a convenient source of certain
information. Under federal income
tax accounting, if the sales price of
a capital asset held for one year or
more is less than its depreciated
book value, the difference is
reported as a long-term capital
loss. If the sales pnce is greater
than the depreciated book value,
the amount by which the difference
exceeds depreciation taken, if any,
lion cos Is
is reported as a long-term capital
gam. The remainder of the dif
ference between sales price and
book value is then reported as
ordinary income. Under present
tax laws, therefore, the use of
accelerated depreciation methods
are no longer a way to convert
ordinary income into capital gains.
They usually do have the effect of
postponing liability for taxes until
a later time, however, and the
accelerated cost recovery feature
of the 1981 tax law will further
accentuate that effect.
Depreciation is probably
overstated in the early years of the
life of an asset, having the effect of
overstating costs at that time.
Then, in the later years of the life
of the asset, depreciation is un
derstated, having the effect of
understating cost of production.
Thus, with respect
to any particular capital asset, it
can be seen how true cost ac
counting and cost accounting for
tax purposes may lead to different
estimates of the cost' of
production. If one could assume,
however, that there is a fairly
uniform mixture of ages of capital
assets in an industry at any given
time, and that there is a fairly
uniform flow of new and
replacement capital assets mto the
industry over time, then the in
clusion of a reasonably large
number of firms in a study should
result in net differences between
true and tax accounting costs of
minimal magnitude.
The second category of non-cash
costs given above is change in
value of non-capital inventories.
Farmers have the option of using
the accrual or cash basis for tax
accounting purposes. Most choose
the cash basis for its simplicity,
although the accrual method is
more accurate for estimating costs
during a particular accounting
period. To be completely accurate,
though impossibly complicated,
one would value all the assets m
the farm business at the beginning
and end of each accounting period.
The valuations would include land,
buildings, machinery and
equipment, livestock, farm sup
plies, feed, grains, hay, etc. Then it
would be unnecessary to estimate
depreciation separately it would
already be included in the changes
in asset values that were
calculated. It is more convenient to
use depreciation schedules for
depreciable items, and to let or
dinary and capital gams or losses
take up the slack between paper
costs and real costs, m the manner
described above, when the item is
disposed of. This is done in spiteTof
the fact that the gam or loss is
assigned to just the accounting
period m which disposal took
The ECTIBAN Tape must always
be applied with the release
slits at the bottom to allow the
insecticide to seep out.
place, when it should have been
spread over the entire period for
which the item was employed.
CONSUMABLE INVENTORIES
It is relatively easy to estimate
beginning and ending inventories
of consumable items bought or
readily saleable for cash. Over a
period of years one expects the
trends in carryover quantities of
these items to be generally level.
That is, they are neither up much
nor down much, on average. Yet,
from one year to the next, the
levels may vary a great deal.
Therefore, when an estimate of
costs is based on a single survey,
variations in inventory values
must be accounted for or a true
picture of costs for that year will
not be obtained.
For example, suppose a dairy
farmer had 5,000 bushels of corn on
hand at the beginning of a year and
only 3,000 bushels at the end of that
year. Then, if corn was worth $2.00
per bushel at the beginning of the
year and $3.00 per bushel at the end
of the year, the change in the value
of the com inventory would be
13,000x53)-(5,000x52), a loss of
$l,OOO. This loss is an additional
cost. It is additional to any com
that was purchased and additional
to the costs of any corn that was
produced on the farm during the
accounting period m question. If
the com inventory increases in
value from the beginning to the end
of the year, the increase in value
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The ECU BAN Tape may be
applied to eartags to control
horn flies and face flies.
would be used as an offset to costs,
for reasons which should now be
clear. It can be seen at this point,
that the. valuation of two parts. One
is the change in physical quan
tities, and the other is the change
in value per unit. For the sake of
accuracy, both should enter into
the calculations.
The third category of non-cash
costs, nsk factor inputs, generally
includes the farm owner’s time
and equity capital, and the tune of
other unpaid family members. One
question here is whether these are
truly costs or more properly en
terpreneurship hoping for a return.
Another question is what values to
place on each of those factors if
they are to-be incorporated into
cost of producltion estimates.
Some analysts hold that these
factors are simply worth what they
earn. That is, their cost is what
they bring into the business.
'Others hold that their costs are
what they could earn in their best
alternative use.
The question of which costs
ought to be included in com
putations of costs of production has
now been answered in part. It has
been asserted that cash costs,
some measure of depreciation, and
some measure of change in value
of inventories of consumable
producltion items, should be in
cluded. There is probably general
agreement, too, that the op
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