Farm Management Software Blog

Bonus Benefits from Farm Management Accounting

Posted by Norman Brown on Tue, Sep 20, 2011 @ 09:33 AM

In our last post we reflected on 1) what type of farm operations could profit from management accounting (M.A.), 2) who should not consider M.A., and 3) prerequisites for success in implementing M.A. We continue the discussion today by identifying 4) expected and unexpected benefits clients are achieving from M.A. 

Make marketing decisions based on reliable, comparable product costs.  Unlike conventional manufacturers and retailers, ag producers have traditionally not had the luxury of "setting" prices based on pre-determined, positive sales margins every year due to commodity market volatility.  However, the transition to marketing contracts permits producers who are confident in their costs of production/sales the opportunity to lock in a modest, but dependably-positive margin.  This strategy works better with livestock than with crops because the cost per unit (bushel, pound, etc.) of crop "finished goods" is so significantly affected by yield.

Specialize in your most profitable products.  Unless you only raise one crop or animal production segment, determining your best product mix is a critical management decision that is obscured by all the indirect costs (labor, equipment, fuel, etc.) consumed unequally by those products.  Again, crop returns are further complicated by government and crop insurance programs, varying yields and prices, secondary products and synergetic effects from crop rotations.

Benchmark owned and rented farms and facilities.  While yields, prices and returns between products are hard to predict and control from year-to-year, the internal costs of owned and rented farms and facilities can be meaningfully benchmarked and effectively managed.

"Right size" your overhead and production capacity.  Management accounting can do much more than simply determine historical product costs.  All operations are organized around recurring cost center "activities" (planting, spraying, feed preparation, trucking, shop, etc.) rather than products.  Knowing your internal cost of performing an activity will allow you to implement these strategies:

  • Cost control at a measurable, manageable and repeatable level.

  • Optimize cost center capacity to match levels of production.

  • Optimize levels of production to match cost center capacity.

  • "Sell" excess cost center capacity by providing custom services to outside entities.

  • Replace sub-optimal cost centers by outsourcing custom field operations, contract feeding, toll milling or turnkey management services.



Cost centers allocations

Simplified data entry.  Rather than attempting to split every indirect invoice between final products, users simply drop those expenses into a limited number of cost center "buckets," which are later allocated to products using "cost drivers."

Real-time financial reporting.  Management accounting adjusts the balance sheet and income statement to match the flow of raw materialswork in process and finished goods inventories and costs.

Continuous improvement.  Although it usually requires two years to fully utilize management accounting due to agriculture's long production cycles, many users find that the journey is just as beneficial as the destination.  FBS E.CLIPSE users typically begin with rough assumptions regarding how costs are created and allocated within their operations.  By regularly monitoring and tweaking allocations in the starting phase they gain a better understanding and control of the interim internal processes even as they wait for the big picture to come into focus.

FBS Systems, Inc. added activity-based management accounting to its integrated farm management suite in 2001.

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Tags: farm financial statements, Cost center allocation, farm mamanagement accounting