Ok. I’ve got to react to a recent story in Farm Journal Top Producer, entitled “Simple and Easy,” which emphasizes the importance of knowing cost of production and margins (with which I heartily agree), but then proceeds to dispense fatally-flawed advice on how to go about doing this.
I believe there are at least four glaring accounting leaps of faith and logic gaps in the article and linked “Profit & Cost Calculator” in the following article:
http://www.agweb.com/TopProducer/Article.aspx?id=155400
Before I comment, I’d like to hear from our readers. Do you agree with the “simple and easy” solution prescribed by Top Producer? If not, where are they going astray?
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In an effort to start a discussion, I will make a comment, realizing that the first to do so usually doesn't have a chance in these kind of forums.
ReplyDeleteFrom a technical point Sales, General and Administrative (SG&A) and Finance expense are not a Cost of Production. Princpal payments should not be included in the cost of production whereas interest expense is a little more questionable. Typically, interest would be included in Other Expense deducted after the Operating Margin has been determined. Living expenses should be seperate as well.
It appears Roger Schlitter is using a fairly broad defination for Cost of Production. He may be confusing this with a defination of cash flow.
However, if this exercise helps producers move a step closer in their sophistication towards better financial management and analysis, I can accept it. It is a journey after all and not everyone needs to reach the end. Full implementation takes a change in mind set from how we in agriculture have traditionally approached the concept.
I did notice that when I populated the Profit and Cost Calculator with my data, there were some snags and glitches in the spread sheet formulas and links.
Ron
Good start, Ron. SG&A and Interest contribute to the bottom line but they are "period costs" that occur independent of production activity.
ReplyDeleteThere are at least two more holes in this cost of production methodology that most farmers should readily recognize. Here are some hints from the story:
“You need to know every dime you spent last year … payments, interest, whatever. Don’t worry about classifications. Divide the total by number of bushels sold, and that’s your cost per bushel."
What are they?