AEE301

FARM MANAGEMENT RECORDS AND ACCOUNTING

COURSE OUTLINE

1 MEANING AND SCOPE OF FARM MANAGEMENT

2 THE DECISION MAKING PROCESS

3 BASIC PRINCIPLES OF FARM MANAGEMENT

4 IMPORTANT CONCEPTS FORFARM MANAGERS

a. LAW OF DIMINISHING RETURNS

b. PRINCIPLES OF SUSTITUTION
c. FARM COSTS
d. GROSS MARGIN AND FARM PROFIT
e. OPPORTUNITY COST
f. COMPARATIVE ADVANTAGE
g. SUPPLEMEMTARY ENTERPRISE

5 GOALS OF FARMERS AND FARM MANAGERS

6DECISIONS TO BE MADE IN CARRYING OUT OF FARM BUSINESS

7 FARM PLANNING

a. DEFINITION OF FARM PLANNING

b. APRAISAL OF RESOURCES
c. PLAN FOR LAND USE
d. PLAN FOR ANIMAL PRODUCTION
e. PLAN FOR INPUT OF LABOR, POWER AND MACHINERY
f. PLAN FOR FINANCE OF THE PROGRAM
g. PLAN FOR SUPPLIES, PROCUREMENT AND MARKETING OF
PRODUCE

8 Risks AND UNCERTAINTIES IN FARMING

a. MEANING OF RISK AND UNCERTAINTIES

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b. TYPES AND SOURCES OF UNCERTAINTIES
c. ADJUSTMENTS TO RISK AND UNCERTAINTIES

9 FARM RECORDS

a. NEEDS FOR FARM RECORDS

b. TYPES OF FARM RECORDS
c. FARM INVENTORY, VALUATION AND DEPRECIATION
d. ANALYSIS AND USE OF FARM RECORDS

10 FARM BUDGETING

a. DEFINITION OF FARM BUDGETING

b. TYPES OF FARM BUDGETS
c. STEPS IN FARM BUDGETING
d. INTRO. TO INITIAL PROGRAMMING (GRAPHICAL METHOD)

11 FARM ACCOUNTING

a. BASIC PRINCIPLES OF ACCOUNTING

b. SINGLE ENTRY AND DOUBLE ENTRY ACCOUNTING
c. TRIAL BALANCE
d. FINAL ACCOUNTS

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 MEANING AND SCOPE OF FARM MANAGEMENT

FARM: Is a place where crops, animals and trees are grown and in some places
processed. *A farm is an area of land and buildings on it used for growing crops
and keeping animals. A grazing land is part of a farm. It includes all the land where
agric. operations are performed by a person where he uses labor, hired or family.
E.g. crop, animals, fish, tree and mixed farms. For animals, we can house poultry,
livestock etc.

MANAGEMENT

It is making decision about choices facing the decision-maker with the decision
based on economic analysis.

FARM MANAGEMENT

The practical aspect of applied science of agric economics, comprising the

application of physical and biological resources in keeping with the economics of
profitable resource allocation for maximizing the farmer’s net farm income OR
the science dealing with the combination and operation production factors
including land, labor and capital and the selection of the kind and amount of crops
and animal enterprises which will provide maximum and continues returns to the
farm unit.

(Define and discuss farm management)

Discussion aspects in the definition

= resources

= technology application

= skills

= organization

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= operations and implementation

= goal achieving

THE DECISION MAKING PROCESS

The decision taken is based on the set objectives. The objectives can be his own ie
if he is the owner of the farm or the objectives set by the owner if the farm
belongs to someone. The objectives need to be reviewed from time to time in
consultation with the farm manager and the owner eg the objective may be to
produce to feed a household, in this case the staple food crop is cultivated or may
be to feed an industry ie sorghum, maize etc. or fibre.

MANAGEMENT PRINCIPLES

Management involves taking decision, implementing decision, accepting the

results as a reflection of the effort the farm manager put into the system.

OPTIONS/DECISIONS OF FARM MANAGERS

1. Available information from all sources

2. Setting goal or objectives. (What should be the goal?)

GOALS /OBJECTIVES

1. Short term. 1yr.)

2. Medium term (2yr.-5yr.)
3. Long term (5yr.and above)

NB. Goals are in long term and objectives in short term. The objectives of a
farm manager should be SMART-SPECIFIC, MEASURABLE,
ACHIEVABLE, REALISTIC, TIME FRAME. Farm manager need to ask
himself:

1. What do I have to achieve

2. What resources do I have or can get.
3. What is the environment like
4. Some few calculations should be done by Farm Manager.
5. Forecasting
6. Principles (principle of management, principle of production)
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 7. Actual planning
8. Implementation (should be in faces)

BASIC PRINCIPLES OF FARM MANAGEMENT

A principle is a fundamental tool, basis of reasoning, the primary elements or

general law. The principles of management represents the fundamental law which
management practices are built. The 14 principles are:

1. Division of work(Apportion of duties)

2. Authority
3. Discipline (self-discipline, law and order)
4. Unity of command
5. Unity of direction (agreement on one goal)
6. Subordination of individual interest to the general interest of the farm.
7. Remuneration (make your workers happy by giving them good salary. you
need to be interested in people welfare)
8. Centralization
9. Scalar chain (hierarchy)
10.Order (business must be well organized . there should be some kind of
arrangement as to how things must be done)
11.Equity (treatment should be given to people of the same level equally.)
12.Stability of tenure of personnel
13.Initiative (do things on your own)
14.Espirit de corps (operation within the organization )

GOALS MANAGER

The goal depends on what the farmer has, what he can get, and what he can
make out of what he has.

1. Making profit should be first goal of the farmer.

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 2. Profit maximization
3. Satisfaction goal-to keep the company or firm in business
4. Maximum utility goal

The goals are influenced by;

- The type of farm

- The caliber of farm manager
- Economic environment and social environment which the farmer operates
- Constraints the farmer and manager faces
5. Balance sheet homeostasis goal
6. Full-cost principle goal
7. Managerial goal

DECISIONS TO BE TAKEN IN CARRYING OUT A FARM BUSINESS

How do farmers make decisions and what factors affect farmers’ production
decision making.

1. What to consider when combining farms (crops/animals)

- Gross margins (how much profit you will make)
- Comparative advantage
- Complementary / supplementary enterprise
- Estimates from research
- Goal
2. Work size (how much should be produced)
- Diminishing returns
- Goal
3. How should I produce (method of production)
- Bullock
- Tractors
4. System of cultivation to be followed
- Mixed cropping
- Sole cropping
- Economics

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 - Technology
5. Where and which part of land to use. For what.
6. What kind of machine to use and at what stage of the production process
should labor be substituted by machine. (spraying, harvesting, post
harvesting)
7. The use of labor (labor availability, control over labor, cash available to pay)
8. What are the appropriate times for producing particular crop / animal.
- All at the same time
- Plant other later
- Same crops but at intervals
- Poultry animals to meet specific demands
- Stagger production
9. How much of crops and animals to consume at home. (how will this affect
the goal)
10.What are the sources of funds available to the farmer.
11.At what price to market the produces(estimate prices using, current prices,
previous prices)

SOCIAL CONSIDERATIONS IN FARMING

Farmers should obey some rules, customs, traditions and norms of the area
where they farm. They should consider the people they are working with. Eg in
some communities they have a particular day they don’t farm or how do you
handle thieves you catch on your farm

IMPORTANT CONCEPTS FOR FARM MANAGEMENT

LAW OF DIMINISHING RETURNS

The law of diminishing returns is the return gain after putting in a variable
resulting in less than the output of the previous.

PRINCIPLE OF SUBSTITUTION

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It is the replacing of one technology with another where it is possible and
applicable.

FARM COST: the payment that would have been done for any services that is
done on the field.

FIXED COST: is the cost incurred whether production is going on or not.eg

paying for land, tractor, dam, farm house.

*FIXED ASSET: that is whether we farm that year or not they are there. The
fixed cost shoot up when these are not put into use for a particular year.

*PERMANENT STAFF: whether they work or not, they need to be paid. It can
happen that labor, farm manager, supervisors don’t work but they are paid.

VARIABLE COST or OPERATIONAL COST: they are a cost that varies with
use. They increase as the operation increase.eg cost of; fertilizer, seed, fuel,
transportation.

TOTAL COST: this is the sum up of the fixed cost and the variable cost.

TC = FC + VC.

REVENUE: This is what is earned at the end of the production. Revenue /

Income is not equal to profit. Revenue is all income without considering the
cost.

GROSS MARGIN: is the total value of output minus variable cost. Total value
of output is the total revenue. Gross margin is the income from the various
enterprises. Gross margin does not take care of fixed cost.

PROFIT = TR – TC

GROSS MARGIN = TVO – VC eg

COST REVENUE
PEST CONTROL 500 TUBERS
LAND COST 3000 TUBERS
HARVESTING 500 TUBERS
STORING COST 2100 TUBERS
MARKETING COST TVO
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 TC = VC GM= TVO-VC

DARKO FARMS

POULTRY GM1 FARM PROFIT = GM1+GM2+GM3+GM4) –

F5

YAM GM2 F5 = TOTAL FIXED COST OF THE YEAR

MILLET GM3

COWPEAGM4.

 This helps us to know whether we are spending so much

 It gives an idea of which enterprise is doing well
 It also give us clear picture of the profit made and the tax to be paid.

OPPORTUNITY COST: this is foregone utility. the opportunity cost of an

enterprise is the value of the most profitable alternative that must be foregone eg
pepper 200 and maize 100, the opportunity cost of choosing maize is the price of
the pepper he has forgone which is the 200 cedis.

COMPARATIVE ADVANTAGE: if one particular country can produce a product

at lower cost is having a comparative advantage over the one that produces the
same product at a higher cost.

Eg cost of cocoa (Ghana) Togo cocoa

Ghc 10 for a ton. Ghc 12 for a ton

Comparative advantage failed.

SUPPLIMENTARY ENTERPRISE: An enterprise is any product or production of

a particular commodity. Supplementary enterprises are normally set to support the
main enterprise but can also use the surplus labour to produce to sell.

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THE GOALS OF FARMERS AND FARM MANAGEMENT.

Farmers who do not have goals see farming as a way of life. Every farmer must
have a goal. In setting goals the following must be considered.

 What do I have in hand eg land and other resources.

 Consider what you can get and where to get it.
 Consider the possibility of what you are talking about, is it feasible.
 Your ambition, your ability and any other thing that will be of help.

WHY DO YOU WANT TO SET A GOAL?

 To maximize profit
 Most farmers goals are based on subsistence
 Environment
 Constraints : the constraint could be governmental through policies
 Produce to keep an industry running.
 Producing to feed his animals.

DECISION MAKING TO ARRIVE AT AGOALIN FARMING

Decisions are taken consciously or unconsciously. How is decision taken by

farmers?

 What crop is to be produced or animal to keep or combination of crop

animal to keep; in coming to conclusion he could
1. Consider the gross margin
2. Comparative advantage
3. Complementary and supplementary enterprises
 What should be the size of the farm?
 What kind of production system should be adopted, e.g. mechanized farming
etc.
 Which part of the land should be used for which purpose?
 What to use the crop for and how to market them.

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  As when to sell eg is it immediately after harvest?
 How much is to consumed at home?

There are also certain social issues that are to be considered.

a. Norms, taboos and tradition. These will help him in setting goals and take
decisions.
b. Thieves
c. What will be your contribution to festivals, funerals, social obligations?
d. How do you go selecting your labour? Permanent or temporal.

HOW DOYOU ACHIEVE YOUR SET GOALS

- This can be achieved through planning

- For farming, we can consider farm planning.

FARM PLANNING

Is the operation of an operative programme of a farm which will ensure the

conservation of land and efficient use of other resources thereby giving the net
income for the satisfaction of the farmer. The process of planning and taking
decision is based on:

1. What to produce i.e. quantity

2. What type of animal and their management requirement
3. What equipment will be required?

The farm plan is useful because:

1. Resources are limited and they need to be managed properly.

2. It becomes a real map or quick to the farm.
3. It shows what, how and when it is to be done, the resources needed and who
is to do what.

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Plans are done far ahead and are not static and adjustment need to be done based
on extra information of knowledge and in some case data to arrive at a successful
condition. Literature review is necessary for planning or drawing plans.

WHY PLANNING?

1. We can achieve a set of goals.

2. It helps us to make effective and efficient use of resources.
3. For correct timing and systematic flow of activities, we need to do one
activity after the other.
4. We plan to reduce risks.
5. Your plan today is the basis for future and further planning
6. Help check assumptions.
7. A tool for monitoring and evaluation.
8. Help you to do appraisal for the next plan
9. For resources appraisal (labour, land, capital and entrepreneurship) i.e. their
quantity, availability, strength, external of stress.

AREAS OF PLANNING

1. LAND PLANNING

Permanent structures. (On high and hard grounds), houses, pens, roads.

Movable: crops and animals.

Where to put what, the physical characteristics of the land should be considered.
Put your pen, house and coops on solid ground and gravel or well drained land.

Two categories of farm plan

New entrant plan andOld farmer plan.

The slope and erosion, soil fertility etc. need to be considered. Land that will be
too productive for putting permanent structures. Take decision on what animal to
keep, whether traditional or non-traditional such as grasscutters, snails, bee

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keeping and why keep those animals. The purpose should be defined in your goal.
What quantity should you keep, and your threshold should be defined so that it is
not exceeded. How to keep it also necessaryINTENSIVE or EXTENSIVE.

- The resources to be used should be considered.

- Type of data to be collected should be planned.
- Plan your labour, equipment, which one should supplement what or
complement what.

Planning labour is important for the following reasons

- Not to get short of labour when the need arise

- Not to have ideal labour who do not work yet get paid. (Why do we plan
labour?)

A normal working day varies from country to country and also the task to be
performed. Six hours per day on the field and also depend on the activity e.g. an
acre which needs five days may require five laborers for six hours.

2.MARKETING PLANNING

Do you need to store for long? How you sell, what are the driving forces, what
quantity do you need to sell at what price you are anticipating to sell your produce.

THE ASPECTS OF PLANNING

1.PHYSICAL ASPECT 2.FINANCIAL ASPECT

This talks about what, how, where, This comes with cost of total labour,
when it is to be done. After all these, supervisor’s pay, managers pay etc. how
you need to add value here. many kg. Of maize per acre?

Planning also talks about how the implementation is going to take place

ACTIVITY TIME/ RESOURCE WHO IS REMARKS

PERIOD S RESPONSIBL
PHYSICAL E
AND
HUMAN
LAND 10 – 20 JAN. PEGS FARM CLEAR

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 DEMACATIO CUTLASS MANAGER WEATHER.
N ROPES RESOURCE
TAPE M. S
3
Compare your plans to your goal. Assumption: if it rained, we get money to pay
laborers. Find out if the plan will help you achieve your goal.

HOW TO COLLECT DATA ON THE FIELD

You need to know what has been happening to make projections into the future.
This data helps to plan better for the future. For work to be fast, award laborers on
contract.

Risks and uncertainties in farming

Every business is risky. The higher the level of risk the higher the profit. Most
farmers are dependent on rainfall even when it is very difficult to predict the
weather. Risk is restricted to situation where probably can be attached to
occurrence of events which influence the outcome of a decision making process.
(Ellis 1993). (What is the diff. between risk and uncertainty?).

Risk is the situation where the expected outcome is not known but the
probabilities associated with possible outcome are known from historical
frequencies. (Anaman1988)

Uncertainty is any decision or outcome which cannot be predicted precisely.

Unlike risk which can be predicted, uncertainty is the situation where it is
impossible to attach probably to occurrence of events.

CLASSIFICATIONS OF RISK

CLIMATIC RISK: rain, wind, temperature

POLITICAL ENVIRONMENT: Policies that change from time to time. the party
you support is also a part. Reduction of taxes of food due to worldwide food crises.

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SOCIAL ENVIRONMENT: social risk which are termed as socio-economic risk.
e.g. illness, death, wedding etc.

TWO CLASSES OF RISK

1. ON-FARM RISK AND UNCERTAINTIES, Pest on the field, flood.

2. OFF-FARM RISK AND UNCERTAINTIES (outside), rain leading to
moldy cereals, storage pests.

FOUR GROUPS OF CLASSIFICATION

1. Natural Hazards
2. Market Fluctuations
3. Social Risk and Uncertainties
4. State Actions and Wars

IN THREE CLASIFICATION BASED ON MANAGEMENT

1. Production and Technical Risk

2. Marketing or Price Risk
3. Financial Risk.

NATURAL AND NON-NATURAL CLASIFICATION

Flood, draught. Policy, theft, bushfire

ON-FARM AND OFF-FARM CLASSIFICATION

On-farm risk and uncertainties related to production. Resource uncertainty e.g.

labour, land, capital, some political uncertainties.

OFF-FARM UNCERTAINTIES

1. Rainfall i.e. erratic pattern and season fluctuation

2. Problem of output and input prices
3. Technical changes. Some products are not accepted
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 4. Lateness in delivery of inputs
5. Subsidies on finished products which are either input price or output price.
6. Destruction of the distribution channel.
7. The band of certain goods on the market.
8. Some superstition
9. Power failure.

EFFECTS OF RISK AND UNCERTAINTY

a. Breakdown the business completely.

b. Ineffective planning
c. Not achieving the goals due.
d. Low raw material supply to industries
e. Unable to pay loans and credits as a result of low yield price fluctuations.
f. Hunger and starvation to the farmer
g. It becomes disincentive for production in the following year.
h. The nations have to import more food thereby destroying the track value.
ADJUSTMENT OF RISK AND UNCERTAINTY

Since they will occur, there is the need to adjust them to either minimize the risk or
completely clear away from it.

1. DIVERSIFICATION: On the part of the farmer or manager by going into

more than one enterprise so that if one fails, the other may not fail. E.g.
maize, sorghum,cowpea on the same farm.
2. FLEXIBILITY: the plan need to be adjusted when it may not lead to our
expected goal. If you need a loan which is not forth coming, look for other
alternatives.
3. SELECT MORE RELIABLE ENTERPRISE: look for those where risk
is quiet minimal e.g. drought resistant plant, short duration crops .
4. COMBINE ANIMALS AND CROPS: if the crops fail, the crops could be
used to feed the animals.
5. Advocate for crop and animals insurance.
6. CONTRACT FOR PRICES AND COST: you can arrange for theprice
you would want to sell your products cost of inputs.

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 7. INVENTORY MANAGEMENT: you do not need to sell all your produce
at the time everybody is selling even when prizes arequiet low.
8. INFORMATION: pray to guide against risk.

There are three ways people react to risk.

a. RISK TAKING: risk taker prefers to take chance at the largest possible
profit even though he knows the hash consequences of failure.
b. RISK ADVERSE; prefers the safety of action as if the worst possible
outcome will happen knowing well the other better possible outcome. He
does not deliberately take risk.
c. RISK NEUTRAL: acts in between, he wants to stay in the middle. He
prefer the average where he does not get the best when it is good and does
not get the worst when it is bad.

Farm records.

Many farmers farm without taking records. They do not think that everything that
goes on the farm is important. Records serve as:

1. Management tool help the manager in decision making. Decision making

based on things that comes to mind which are not the best.
2. It helps the manager to know the strengths and the weaknesses of the farm. It
helps to know areas that you do well and areas that you do not well and
advancement can be made.
3. To improve performance.
4. Analyze the record to identify possible problems
5. Give information about cost, revenue, input and output quantities changes in
financial situations from different fields.
6. For reference.

FOUR MAJOR TYPES OF RECORDS

a. Inventory Records
b. Farm Accounting Record / Income and Expenditure Record
c. Production records

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 d. Supplementary or Special Records

SUPPLEMENTARY or SPECIAL RECORDS

Any record that you cannot put under any of the three above is considered
supplementary record. Though they do not fall under these three, they are
important. E.g. record on land, site plan, certificate of registration, map of the farm
or farm layout, soil test etc.

WHY SPECIAL RECORDS (IMPORTANCE)

a. For legal purposes or provide an evidence of ownership

b. For farm exhibition
c. For collateral security or guarantee for loan / credit.
d. To help do planning of the land.

PRODUCTION RECORDS

Records kept on crops, tree crops all kind of animals. We need to keep all
production. Right from day one, records should be kept according to enterprise so
that they can be separated. Each and every commodity need to have its record.
Start from the type of seed ie variety, where it is attained, germination records
through germination test, planting date, weeding date etc. the size of the farm and
the number of stand per area, quality of manure, fertilizer, how much of labour etc.

Animal Recording: when the animals were brought, how old, date, type of activity,
effect of activity, mortality, weight gain as compared to feed given, amount of
water they drink, breed, crosses sickness and diseases and the time they occur,
death records and reason etc.

INVENTORY RECORDS

It is the complete count and evaluation of all aspects of reliability on the farm at
specific time. The beginning inventory is the next of the ending inventory or
closing inventory becomes the opening inventory of the next or following year.
Dates from year to year at specific times. Records are taken on what came in and
what went out. The difference is used in calculation some aspects. Inventory talks

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about store or stock management. Movement of goods from and into your store.
Inventory has two components 1. Physical aspect 2.Financial Aspect.

WHY INVENTORY RECORDS (IMPORTANCE)

a. Gives us change in network through comparing the farm inventory over

years.
b. Helps us determine the depreciation of costs and assets and the value at time
c. It is used during our incoming statement (beginning and end inventory)
d. Enables the farmer to measure management efficiency and other
measurements.

VALUATION

In taking goods in stores, we need to do valuation. Valuation goes with

Depreciation

Valuation is putting value on an asset considering all kinds of factors. There are
five different methods in valuating assets.

a. Valuation at Selling Price Less Market Cost (Net selling Price)

SP = Cost of Item + Transaction Cost

Net selling price is the actual selling price of the item.

NSP = SP – TC

Value your items at the Net Selling price.

b. Valuation at Cost Less Depreciation

The cost of the item minus depreciation

V = COST PRICE – DEPRECIATION (depreciation takes care of the number of

years)

c. Valuation with Replacement Cost (Reproductive)

You valuate the asset by the replacement cost. It is based on what the price is on
the market.

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 d. Valuation at Market Price

It considers the price of that particular item / asset and how much will people be
willing to offer or time it is valued.

e. Valuation at Cost

The cost of the item remains the same from the day the asset was acquired .it
reduces your tax but gives you a force impression of asset valuation. in most cases
at cost less depression is commonly used.

Depreciation

It is the amount of asset that has been used over a period of time and it usually one
year. It is the slowly using up or lost of value of an asset due to age or usage. An
asset might not be used but will depreciate because of age. Economically, it is the
decline in its ability to produce income now and the future. In getting the value of
an asset, depreciation is used to get the actual value. Three methods of depreciation

1. STRAIGHT LINE METHOD

This is used in two ways; WITH SALVAGE VALUE / SCRAP VALUE and
WITHOUT SALVAGE VALUE.

With Salvage Value: it assumes that the asset depreciates uniformly from day one
to the end. At the end of life of the asset. It could be sold for some money as a
scrap or worth nothing and therefore it is thrown away.

Without Salvage Value: nothing is obtained and hence thrown away. The
salvage/scrapvalue is subtracted from the cost price and then divided by the
number of period.

Depreciation with Salvage Value (DPSV) = Purchase Price – Salvage Value

Useful Life.

Depreciation without Salvage Value (DPWSV) = Purchase Price

Useful Life

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Useful Life: the period or years the equipment can serve efficiently or effectively.
The useful life must be taking into account.

ADVANTAGES

1. It is very easy to calculate

2. The annual depreciation is uniform
3. The cost of the asset is written off with a definite period.

DISADVANTAGES

It is not the best way of calculating many items especially equipment. For most
equipment, for the first two years they perform very effectively and hence
depreciate very fast but depreciation may decline in the subsequent years.

E.g. calculate the depreciation of an asset which cost $27,000 and after 7yrs;
some parts were sold at $3,700. What is the value after 3yrs?

Solution

DEPSV = CP – SV= 27000– 3700

UL 7

DEPSV = $3,328.57

0 YEARS = $27000

1ST YEAR = $27000 – 3,328.57 = 23,671.43

2ND YEAR = $23,671.43 – 3,328.57 = 20,342.86

3RD YEAR = $20,342.86 – 3,328.57 = 17,014.29

PERCENTAGE RATE OF DEPRECIATION = 100

UL

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2 A farmer bought a track to help him convey inputs and outputs to and from his
farm at $18,000 in January 2002. If he declines to use the straight line method with
a scrap value of $2500 and a useful life 8yrs. In depreciating this track, what will
be the

1. Price of the track at the end of 2009

2. What will be the depreciation schedule without a scrap value?

SOLUTION

DPS = 18000 – 2500 = 1937.50

YEAR VAULE BOOK VALUE

2002 18000 – 1937.50 16062.50
2003 16062.50 – 1937.50 14125.00
2004 14125.00 – 1937.50 12187.50
2005 12187.50 – 1937.50 10250.00
2006 10250.00 – 1937.50 8312.50
2007 8312.50 – 1937.50 6375.00
2008 6375.00 – 1937.50 4437.50
2009 4437.50 – 1937.50 2500.00

ASSUMING NO SALVAGE VALUE (SCRAP VALUE)

DPWSV =18000 = 2250.00

8.

YEAR VALUE BOOK VALUE

2002 18000 - 2250 15750
2003 15750 - 2250 13500
2004 13500 - 2250 11250
2005 11250 - 2250 9000
2006 9000 - 2250 6750

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 2007 6750 - 2250 4500
2008 4500 - 2250 2250
2009 2250 - 2250 0

DIMINISHING BALANCE METHOD

A fixed rate or percentage (%) of the price is used each year. Each year, the
remaining balance is used instead of same value.

e.g. if a farmer decides to use the DBM at 15% in depreciating the track, what will
be the price of the track at the end of the year 2009?

SOLUTION

2002 15/100 × 18000 = 2700

2003 15/100 × (18000 – 2700 = 15300) = 2295

2004 15/100 × (15300 – 2295 = 13005) = 1950.75

2005 15/100 × (13005 – 1950.75 = 11054.25) = 1658.14

2006 15/100 × (11054.25 – 1658.14 = 9396.11) = 1409.42

2007 15/100 × (9396.11 – 1409.42 = 7986.69) = 1198.00

2008 15/100 × (7986.69 – 1198 = 6788.69) = 1018.30

2009 15/100 × (6788.69 – 1018.30 = 5770.39) = 865.56

SCRAP VALUE = 5770.39 – 865.56 = 4904.83

VALUE OF DEP. = 865.56

ADVANTAGES OF DBM

1. Depreciation is higher in the 1st ,2nd ,and 3rd years which mean it assigns
higher cost in the initial years.
2. Depreciation rate is the same
3. It is more realistic for depreciating machines.
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3.SUM OF THE YEAR DIGIT METHOD

It is used to depreciate heavily in the early year.

DEP = VALUE × HIGHEST YEAR VALUE

SUM OF THE YEARS

It is used when the scrap value is not given.

With a scrap value

DEP = VALUE – SCRAP VALUE/ HIGHEST YEAR VALUE

SUM OF THE YEAR

E.G. If the farmer decides to use the sum of year digit method

b. with a scrap value.

SOLUTION

YEAR DEPRECIATION NEW VALUE

2002 18000 × 8/36 4000 14000
2003 18000 × 7/36 3500 10500
2004 18000 × 6/36 3000 7500
2005 18000 × 5/36 2500 5000
2006 18000 × 4/36 2000 3000
2007 18000 × 3/36 1500 1500
2008 18000 × 2/36 1000 500
2009 18000 × 1/36 500 0

WITH SCRAP VALUE

2002 18000 – 8/36

The value is sometimes depreciated value. Depreciation is the consumed value.

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BOOK VALUE

An asset, its price or values as recorded in the books. It may not be the actual value
of the asset. It is so because, one type of depreciation is used when tax collectors
are to be cheated or public are not to be aware of the value. Using book value in
selling assets will always result in lost.

Another method is

DEP = 2D (n – a + 1)

n(n + 1)

where D = The value of asset

a = number of years

n = useful life of asset.

Sum of all depreciation = value of asset.

WITHOUT SCRAP

DEP WITH SCRAP (straight line method)

Year

HOW DO WE SELECT THE BEST METHOD TO USE

1. Based on the purpose on which you do the depreciation

2. The type of asset or equipment
3. The method which is appropriate approximately near the best.
4. The easy to use method. The straight line method is easy to compute, easy to
understand and so commonly used. The sum of the year digit method or
declining balance given.

25
 5. In dealing with date of purchase, salvage value, useful life, cost price, book
value.

Other Types of Depreciation Method

1. Annuity Method
2. Used Adjusted Method
3. Compound Interest Method

Problems in Calculating Depreciation

1. Calculate the useful life

2. Re-conditioning machines in second hand equipment
3. Appreciating of asset

ANNUAL REVALUATION METHOD

DEP = DIFF. IN OF LAST YEAR and THIS YEAR VALUE.

In many cases it is negative because, the asset rather appreciates instead of

depreciation. This method is used to.

- Breeding livestock
- In cases where there is inflation the pric appreciate. Though depreciation
seem to be simple, but there are problems
1. Choosing the right method to be used.
2. Determining the actual useful life of the equipment.
3. Maintenance problems of equipment.
4. Problem of placing value on used assets.

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Farm accounting/financial record

INCOME AND EXPENDITURE

Any business that does not keep record is bound to be in problems and for that
matter farming. Financial records start on daily basis to avoid more information
being lost. The daily diary is used ie Activity and Expenditure on labourers. Cost
of seeds, feeding of labourers. A field notebook is usually used.

Date Activity Unit Unit price Value of Remarks

quantity price
These records must be analysed on short term intervals. Normally it is done on
weekly bases, a forth night or monthly basis. It also covers income. Credit loan
expenditure or income are all recorded. At the end of the day it is analyzed.
Expenditure and income records may be kept separately and summarized. Two
main Accounts;

a. INCOME STATEMENT

This is made up of columns, income and expenditure which are analyzed together.

Profit and Loss Account

INCOME EXPENDITURE

ItemAmountItem Amt.

Poultry 40 fuel and lubricant

90

Livestock 50 Maintenance
100

Mango 60 Feed 110

Maize 70 Fertilizer 120

Eggs 80 Depreciation 130

TOTAL 300 550

27
 Total expenditure in a summary of the daily records.

Profit / Loss before Tax = Income – Expenditure

= 300 – 550

= -250

Taxable Income = Total Revenue – Total Cost

Assuming Taxable Income = 2500 and 8% in the tax is to be paid

8/100 × 2500 = x

Profit = TR – (TC + X) =

NB no tax is paid when there is a lost. Assuming 13 is positive; the amount is

called taxableincome. There is a chart to show how much one is to pay for tax.
Let’s assure we are paying 8% on 250. = 8⁄100 × 250 = 20 (taxable income)

Profit = 250 – 20 = 230

BALANCE SHEET

A Balance Sheet also known as Net Worth Statement is a summary of all assets
and liabilities of a business, together with statement of owner’s equity. It gives
summary of financial positions of the business at a profit in time. It is also a snap-
short of the business at one point in time when it was given. The end of one end of
a balance sheet is the beginning of another. It is the picture of the business at the
time it is taken. It has two characteristics.

a. Refer to a specific date or a point in time

b. It always has three divisions (asset, liability and equity)

Every balance:

Asset = Liability + Owners Equity

Equity = Assets – Liabilities

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Liabilities = Assets – Equity

Assets are all things that the business or farm owns eg physical cash, soft wares.

Liabilities are all things the business owes to others to be paid.

Equity are the share of the business ie what becomes theirs if the business should
be liquidated. The equity either increases or decreases. It decreases when liabilities
are more than assets and vice versa.

Specific date: the date is always the last date of business. In Ghana, it is 31st
December but farmers depending on their farm business can have a different date,
March or June.

Retained earnings: profit that is re-invested in the business to increase the equity
of the owner(s)

Format of a balance sheet eg The Balance Sheet of Akrofi Company as at 30 th June

2011

AssetLiabilities

1 current asset current liabilities

2 total-current assets total-current liabilities

3 total-short term assets long term liabilities

Long term assets

4 total equity (if negative) total (if positive)

Total total

Equity is considered as a liability because the owners have lent the money as a
loan to the company i.e. the company borrows the money from the owners. (The
difference between the asset and liability is always the EQUITY).

Current Assets: they are assets that could be turn to cash within the shortest time
e.g. within 3 months e.g. the cash in the bank is current assets. Certain things in the
store, foods etc.

29
Account Receivable: money expecting from people that fall within 3 months.

Intermediate/ medium: a loan that falls due within a year or two things few fall.

Long term liability: mortgage (loan given on landed facilities to be paid within a
long term.

IMPORTANCE OF BALANCE SHEET

1. It shows whether we are making progress or not

2. Whether he is able to take care of all liabilities in a case of a sale of the
company.
3. It helps investors to take decision
4. If the company needs a credit facility, it helps the financial institution to take
decision on it.

ANASYSIS OF FARM RECORDS

Decisions are based on information and not on data. Data is raw and do not
provide any information until it is analyzed.

PRODUCTION RECORDS ANALYSIS

- Yield analysis
- Trends – movement of yield against other factors
- Land use effects
- Rainfall pattern and effects
- Input /output analysis
- Efficiency analysis-capital efficiency
- Cost ratios (operating cost ratio)
- Net returns per output of crop
- Net returns per number of people employed
- Crop yield index = CYI = Actual crop yield ×100
- Normal /Average per crop

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 - Gross ratio : capital per unit of gross income, capital rate of capital
turnovers.

Inventory record: analysis changes in inventory

Beginning inventory, end inventory, time/period, what to get more and what
less

Financial record analysis: income statement

State with the weekly, monthly, or quarterly analysis, gross margin, enterprise
comparison.

INCOME STATEMENT

- Highest income and highest expenditure

- What item contribute to high income or expenditure
- Ratios of income and expenditure
- Ratios of profit and expenditure

NET CAPITAL RATIO (NCR) = TOTAL ASSETS

TOTAL LIABILITIES
This measures the farm’s degree of financial safety or savory. If the ratio
is>1 it is very safe. (=) is the same, <1 the company is not solvent or is in
debt or bad in the immediate/short run. It has no units.

WORKING CAPITAL RATIO = SUM OF INTERMEDIATE (working and

current asset)

SUM OF WORKING LIABILITIES AND

CURRENT LIAB

This measures the degree of financial safety over an immediate period of time.

LEVERAGE RATIO = TOTAL LIABILITIES= 1

TOTAL ASSETS NCR

31
It measures the fraction of the total assets that is taken by the total liabilities. It
gives the total proportion of the total farm assets that can be used to pay all farm
debts and obligations. Leverage ratio under 0.5 is considered healthy for a farm. If
the LR is one or more the farm is theoretically bankrupt or broke since the total
liability exceeds total assets.

COMPUTERS IN AGRIC FARM MANAGEMENT

a. Use in performing many operations

b. Store data and information
c. Analyze data
d. Retrieve information
e. Word processing
f. Interaction (communication)
g. Basic programmes- word, excel etc.

IN FARM BUSINESS

- All recordings/storage of data

- Pay roll management being spreadsheets.
- Physical and financial record keeping
- Power point presentation for information dissemination
- Linear programming.

BUDGETING

The plan is not complete without a budget. Budgeting is part of a plan. Budgeting
is a monetary expressing of a plan in terms of receipts, expenses and net income. It
is a method of estimating costs return and profit of an enterprise or refers to a well-
knit programme of farm activities and methods to be adopted by a farm to achieve
his objective. Changes in techniques, prices and inputs need a major adjustment in
agriculture operations, or mechanical vehicle for calculating profits.

32
IMPORTANCE OF BUDGETING

Based on assumptions the price will not change.

- It helps in projecting future costs and predicts expected returns from

production.
- To guide farmers in closing between farm enterprises mostly to fulfill the
objective of the farm
- It helps the consultant and the manager in taking decisions
- A farm plan without a budget is not complete.

TYPES OF BUDGETING

a. Complete budgeting c. Break even budgeting

b. Partial budgeting d. Creep budgeting.

COMPLETE BUDGETING

The whole farm system. So all expenses and receipts likely to be incurred are
concluded. It is a sum of series of partial budgets. It is a statement of objectives,
strategies, expenses and revenues involve in the completion of a complete plan
pertaining to a single farm. Complete re-organisation of the farm is called for
and an elaborate plan drawn up regarding the crops, livestock, methods of
cultivation, cost and benefit. Complete budgeting is required for:

- When there’s a change in technology and methods of production.

- When the size of the farm has change drastically.
- For people now coming in to the business ie new entrants.

PARTIAL BUDGETING

It is a marginal analysis technique as it only looks at changes in cost and receipts

and also net farm income likely to result from changes in farming system. It may
be used to close a plan out of a series of plans or modified plans. It makes use of

33
stage two of production function.(4 basic questions to ask under production
function what new cost will be incurred, what farmer costs will be saved, what new
income will arise).

Additional cost: cost that do not exist at the current time with the current plan.

Reduced revenue: the existing revenue that will be lost as a result of the new plan.

Additional revenue: revenues that were not in existence but will emerge as a
result of the new adoption.

Reduced cost: current costs that will no longer occur due to adaption of new plan.

BREAK EVEN

It used when there is a considerable doubt about the level of important variable
such as a yield or prices. Not too sure of what the outcome will be eg the purchase
of new machine, if you are able make the minimum you become satisfied.

STEPS IN BUDGETING

1. Determine farming goal and farmers preferences.

2. List all the farm resources available to the farmer.
3. Determine which of the resources are currently being used.
4. List the gross production to what is produced and consumed
5. Prepare a statement of income and expenditure, based on the current
utilization of the farm resources, personal labour etc.
6. Analyze input-output relationships based on efficiency of machine, labour,
comparatively the standards available on the farm in the area number of
seeds to be planted per acre.
7. Diagnose weaknesses – structural and operational weaknesses
8. Supervise the implementation of the programmed under the plan.
9. Evaluate the results to help you plan better for the future.

Budget is a mental exercise and at the end of the year, you need to compare your
budget with the actual figure eg make a plan budget for two enterprise from 14
34
 acres sorghum and 8 acres cowpea. Tractor was used in ploughing at GHC25 per
acre.

- List the activities

- Provide estimated cost
- Show estimated value
- Calculate the gross margins and profit
- Cash flow
- Short term, medium term, long term.

CASH FLOW BUDGETS

A cash flow chart is supply a month by month or quarter by quarter comparison of

the expected cash income and expected cash expenses. It is the expected income
and expected expenditure of the business. (It gives a continuous feedback; it helps
to plan future activities)

IMPORTANCE OF CASH FLOW BUDGETS

a. Preparing to cope with cash crisis c. help choose between alternative farm
plans
b. Arranging loans d. planning farm development project
f. Comparing actual against budgeted results.

PERIOD OPERATION INCOME EXPENDITURE BALANCE

FLOW OUT FLOW

Analysis of cash flow

PERIO ACTUA ESTIMAT DIFFEREN ACTUAL ESTIMAT DIF REMAR

D L ED CE EXPENS ED F. KS
INCOM INCOME ES EXPENSE
E S

35
EXAMPLE.

Millet Farm Plan

Goal: 120 bags of millet to sell to buy a car

Resources: 30 acres of land, tractor, warehouse, GHC8000

Expected yield: 8 bags per acre

Plan with 18 acres

ACTIVITY UNIT QUANTITY UNIT PRICE. TOTAL

GHC.
Ploughing Acre 18 20 360
Harrowing Acre 18 10 180
Sowing Acre 90 3 270
1st weeding Mandate 162 04 648
1st fertilizer 36 3 108
2nd weeding 162 4 648
Pest control 6 12 72
3rd weeding 162 4 648
2nd fertilizer 36 3 108
harvesting 54 3 162
transport Trip 12 15 180
Post harvest Bag 120 3 360
handling
Treatment and 120 2 240
storage
Marketing 120 35 420
Total 4404

Seeds Bowls 126 25 315

Cutlass Pieces 6 6 36
Hoe Pieces 10 3 30
Chemical Liter 9 6 54
Sprayer Pieces 2 50 100
Fert. 15:15:15 Bag 36 36 1296
Ammonia Bag 36 27 972
Sacks Pieces 130 1 130
36
 TOTAL 2933

Total (grand total) (2009) = 7337

At the end of the first year

Inflation (prices) increased by15%

For (2010) 15/100 × 7337 = 1100.55 + 7337

= 8437.55

(2011) 12% (8438) = 9450

Income

50 bags sold 55 = 2750

40 bags sold 65 = 2600

30 bags sold 70 = 3780

+24 = 54 bags.

Total Income = 9130

Expenditure = 7337

Profit = 133

Expenditure and yield is yield per acre averagely 8 bags against

18 acre = 144 instead of 120 120/24

Planning is done based on assumption eg eight days. 2 times weeding instead of 3

times.

DECISION MAKING PROCESS

The decision taken must undergo certain processes. The most important in farm
management is the decision making. Decision making requires time, experience,
information and knowledge can improve both the speed and soundness of the

37
decision process. Whether good or bad decision making is a function of time. Time
is used in controlling, organizing and evaluating.

HOW DO MANAGERS TAKE DECISION

- Set objective for himself. It could be from the owner’s and subsequent years
be reviewed. It must be SMART (SIMPLE, MEARSURABLE,
ACHIEVABLE, REALISTIC, TIME BOUND).
a. What do we want to achieve
b. What resources are available
c. Forecasting and planning
d. Analysis,post-harvest situations, profitability etc.
- Plan to pursue the objectives
- Takes decision on implementation of the plan
- Appraisal – spend time to appraise, and appraise at different time.

Introduction to linear programming (graphical method)

It is used in farm planning. It is so much sophisticated that it can be done

manually. It is a planning tool for management. It helps the farmer to take decision
on what to cultivate, hoe to cultivate them. Limited resources exist and linear
programming helps in combining scarce resources for maximum yield. Operations
research is the application of mathematics and other sciences in solving problem.

Linear programming may be defined as the maximization or minimization of a

linear function of a number of variables which are subject to restriction expressed
in the form of linear inequality. It helps to maximize profit and minimize cost. It is
a mathematics based on Matrix, Algebra, similar to programming planning. It
offers an elegant theoretical solution to certain farm problems given certain
assumptions.

ELEMENTS OF LINEAR PROGRAMMING

38
 - Production possibilities of the farm eg 5 acres of land for cultivation of 2
crops
1,4 2,3 3,2 4,1 5,0.
- The resources need to be put into consideration eg sorghum, groundnut, and
maize. Their resource needs are not the same and hence different in output.
- Gross margin e.g. groundnut 250bag/ha. Net return/revenue.
- Resource constraints.

MATRIX FORM

A non-negative constraints equations are used.

A input + B input ≤ constraint

C input + D input ≤ constraint

E input + F input – G input ≤ constraint.

A set of linear constraints and a set of non-negative conditions

❑
Max A = ∑ ❑aij × j ≤ bi × j ≥ 0
❑

I = 1, 2, 3, ……..m , j, 1, 2……n.

ADVANTAGES

1. Solve complex problems easily.

2. Computers can be used

DISADVANTAGES

1. It needs the presentation of planning data in a that needs special skills

2. The advantages are removed by the inadequacy of data available
3. Its assumption of linearity, ie that however many units of an activity are
included in the plan, unit cost and returns are constant is often wrong.

39
METHODS OF SOLVING LINEAR PROGRAMMING

1. Graphical method
2. Vector method : more than two variables
3. Simplex method: more than two variables.

Linear programming is based on some assumptions

a. Proportionality Assumption: implies that the objective function to be

maximized is proportional to the activity.
b. Additivity Assumption: indicates that Gross Product terms are not
admissible. Hence there are no interactions between any of the activities
c. Divisibility Assumption: implies that the units of activities are divided into
fractional levels so that non-integer values for decision variables can be
used.
d. Certainty Assumption: indicates that inputs and output prices, production
coefficients are known with certainty.

Example

A dietician wants to design a certain breakfast for some patients. The menu is to
include two items A and B. suppose each once of A provides 2 units of vitamin
C and 2 units of iron and each once of B provides 1 unit of vitamin C and 2
units of iron. Suppose the cost of A = GHC 40 and the cost of B = GHC 30 per
ounce. If the breakfast menu must provide at least eight (8) units of vitamin C
and 10 units of Iron,

(1) How many ounce of each order is to be provided in order to meet the iron
and vitamin C requirements for the least cost?
(2) What will this breakfast cost?

SOLUTION

A = 2 units of vitamin C and 2 units of Iron (x) (using equation method)

B = 1 unit of vitamin C and 2 units of Iron (y)

Vit. C = 2x + 1y
40
Iron = 2x + 2y

Cost = 40x + 30y (minimum cost)

At least 8 units’ vitamin C and at least 10 units of Iron

Therefore 2x + 1y ≥ 8

If y = 0

Then 2x + 1 (0) = 8

x= 4

If x = 0

2(0) + y = 8

Y = 8 (4, 8) coordinates

For equation (2) 2x + 2y = 10

If x = 0

2(10) + 2y = 10

y=5

If y = 0

2x + 2(0) = 10

x=5 (5,5)

Coordinates (4,0) , (0,8)

(0,5) , (5,0)

Solving equation (1) and equation (2) simultaneously

2x + 1y ≥ 8 (1)

2x + 2y ≥ 10 (2)

eqn. (2) – eqn.(1)

41
2x + 2 = 8

2x = 6

x=3

Putting x = 3 and y = 2 into cost

= 40x + 30y

= 40(3) + 30(2)

= 120 + 60 = 180

Minimum cost = GHC 180.

42