CHAPTER XVI

COST OF PRODUCTION AND FARM ACCOUNTING

IN manufacturing, cost of production is one of the factors claiming the consideration of the manager. In this field, certain standardized units of costs have been worked out, and cost accounting systems fairly well developed. An era of "scientific management" has been introduced. But in the field of agriculture rare indeed has been the farmer who kept any cost accounts or had any definite idea of the cost of producing his crops. In the language of political economy the farmer is the manager or organizer in charge of the three factors of production-land, labor, and capital. He seeks that particular organization of the three factors that will give him the highest net return. Considering the possible combination of land, labor, and capital that can be made by a farmer, ranging all the way from an intensive agriculture to an extensive agriculture, it is obvious that knowledge of cost of production is a very vital factor in success. This is illustrated by the introduction of the Babcock milk test some years ago, which made possible a cost accounting against each dairy cow. The simple apparatus enabled many a farmer to weed out of his herd cows which were not earning their board, although they were giving a large quantity of milk. This is a hint, at least, that some system of cost accounting is needed to apply to the various factors of production. It is perhaps correct to say that there are now four factors of production -land, labor, capital and management or organizing ability.

The Federal Department of Agriculture and the State Experiment Stations have in recent years done a great deal in meeting the need for information on the cost of producing crops, and in devising workable schemes of cost accounting for farmers.

The most noteworthy study in costs of producing crops was that undertaken jointly by the Federal Department of Agriculture and the Agricultural Experiment Station of Minnesota. This study began in 1902, the aim being to continue it over five cycles to four years each. This continuous detailed study of actual 1 The Cost of Farm Products: Hays, W. M., and Parker, E. C., United States Department of Agriculture, Bureau of Statistics, Bul. 48, and Minnesota Experiment Station, Bul. 97, 1906.

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The Cost of Producing Minnesota Farm Products: Cooper, Thomas and Parker, E. C., United States Department of Agriculture, Bureau of Statistics, Bul. 73, and Minnesota Experiment Station, Bul. 117, 1910.

The Cost of Minnesota Dairy Products: Cooper, Thomas, United States

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farms has incidentally afforded valuable information on systems of farm management, types of farming and labor requirements. Bulletin 117 of the Minnesota Experiment Station, in this series, gave data on farm labor, horse labor, and depreciation of farm machinery. This bulletin served a very useful purpose in defining the problems involved in such cost investigations, and in establishing certain standardized units in cost analysis. In the same series, bulletin 157 shows the actual labor requirements of farm crops in terms of man- and horse-hours per acre and defined some of the principles underlying the use of man labor on the farm. Since the cost of man- and horse-labor bears a fairly constant relation to total cost of crop-production, man-hour and horse-hour labor form units of cost which can safely be used in different places and in different times, and yet remain comparable. These units can easily be translated into dollars and cents.

Five Items. In addition to the labor costs of crop production, five items of expense are usually considered, namely: (1) cost of seed, (2) cash cost of threshing, (3) interest and depreciation on machinery and special cash operating expense, (4) land rental or interest on investment in land, and (5) taxes. When rent is omitted, labor constitutes more than half the cost of producing farm crops. And, to quote Minnesota bulletin 157, "Cheap labor is not desired in the sense that low wages indicate an opportunity to lower cost of production. Such labor is often very expensive. The use of well paid labor on highly productive enterprises over an extended period of time makes for a far more prosperous industry than cheap labor."

The acre is considered the basis or standard unit, and not the yield, in studying labor requirements. The yield may be easily introduced and the acre-unit translated into a bushel-unit for purposes of comparison. Man-hour means the labor of one man for one hour. Horse-hour means the labor of one horse for one hour. Land rental is considered an item of cost because the value of the farm if invested in ordinary securities would yield an income. In some sections, such as North Dakota, this yield is reckoned at 6 per cent. In Wisconsin land rental, including taxes, is charged Department of Agriculture, Bureau of Statistics, Bul. 88, and Minnesota Experiment Station Bul. 124, 1911.

The Cost of Producing Minnesota Farm Products: Peck, F. W., Minnesota Experiment Station Bul. 145, 1915.

Labor Requirements of Crop Production: Cooper, Thomas, Peck, F. W. and Boss, Andrew, Minnesota Experiment Station, Bul. 157, 1916.

The Cost of Producing Minnesota Field Crops, 1913-1917: Peck, F. W., Minnesota Experiment Station, Bul. 179, 1918.

at 5 per cent. Some Experiment Stations give the item of rent to correspond as nearly as possible to actual cash rent paid by tenants.

Cost of Growing Grains.-Wisconsin Experiment Station at Madison carries on cost accounting work. Figures in that State in the year 1917, based on a six-years study, give the following data on cost of growing grains:

Other Cost Accounting. These costs are seen to run very close to the Iowa costs, found in Appendix to this chapter.

Referring again to the Minnesota studies (1908 to 1912, bulletin 145), we find the following summary of costs:

Average monthly cash wages paid farm laborers during the 8 crop season months, April to November,

During the 4 winter months, these counties ran as follows, respectively, $17.85; $21.20; $17.27.

The average monthly cost of board per man, same years, same counties, was $15.43; $14,17; $12.36.

Reduced to an hour basis, the average rate of wages per hour for monthly man-labor, same years, same counties, was 14.9 cents; 13.9 cents; 13.5 cents.

The average annual cost of maintaining a horse, same years, same counties, was respectively, $103.41; $99.67; $84.16. The hours worked annually by a horse averaged 1038; 1106; 976; or, on a daily basis, the average hours worked by a horse was, 3.46; 3.68; 3.25. This made the average cost of horse-labor per hour 10.1 cents, 9.01 cents, 8.63 cents, respectively.

The annual depreciation on farm machinery was estimated, and likewise the "annual value consumed" for farm machinery. Statistics were carefully gathered to determine the average depreciation. The inventory value of a machine was based on the following considerations: Number of years used, manner cared for, amount of work done, repairs during the year, present condition, and apparent future usefulness; also possible auction or exchange value of the machine. In order to charge properly machinery values con

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sumed in producing crops it was necessary to determine the acre cost of each class of machinery and distribute it to the various crops. The values consumed in farm machinery, according to these studies, are made up of depreciation, labor, and cash repairs, and interest on the average annual investment. The sum of these items for each machine divided by the number of acres on which the machine is used gives the value consumed per acre per year. For the period 1908-1912 the average annual depreciation of machinery amounted to 6.7 per cent as an average of all farms for all machines. For some of the commonly used machines the annual depreciation was as follows: grain binders, 6.5 per cent; grain drills, 5.0; corn binders, 7.97; mowers, 6.8; gang plows, 6.4; manure spreaders, 10.3; gas engines, 5.7. The annual values consumed per acre for commonly used machines were as follows: grain binders, 16.8 cents; grain drills, 7.2; corn binders, 60.4; wagons 19.5; mowers, 16.7; plows, 9.5.

The total cost per acre of producing field crops in three Minnesota counties, including seed, man- and horse-labor, twine, machinery charge, general expense, and land rental, was as follows (1908-1912):

Taking the average farm prices on December 1 for each of these 5 years, a comparison is easily made between the yields necessary to cover cost of production and the yields actually obtained:

Items of Cost for Grain Crops.-One of the most interesting features of the Minnesota reports is the distribution of cost per acre, showing the very high per cent absorbed by labor and rent. The following tables are selected from the list:

Distribution of Cost Per Acre in Dollars and in Per Cents of Minnesota Crops, 1908-1912