USA Ag cost accounting unit allocations

Mar 27, 2016
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United States
Hi, I am new to ag cost accounting. There's two operations: growing hay & silage for sale, and buying fed cattle for packing and direct sale to wholesalers.

Hay & silage. The lowest meaningful granular level of assigning costs is entire crop absorption costing. After harvest, we apply total costs across the entire crop, creating average cost per ton produced. This method applies costs equally to hay and to silage. So, we end up with a silage unit cost greater than its retail value per ton. The makes the cost allocation somewhat meaningless as a management tool (or is it?). Selling hay is the main point of the operation, but silage is essentially a byproduct with residual value. Somehow, this blunt "peanut-butter" method of accounting at the entire-crop level seems inadequate.

Hanging beef purchases. We buy hanging carcasses (freshly killed and hung) at a set price per pound. The beef is then processed into a variety of products and sold to wholesalers and retailers. One customer might buy boxes of subprimals (to be butchered on site), another buys packages of grind (for further processing), another buys boxes of individually-wrapped cuts or packages of ground beef (i.e. cuts packaged for retail). As with hay above, the unit cost is applied at the cattle batch level, equally across all cuts. The unit is the batch (i.e. 50 head of cattle all killed and processed together). What this means is that (as with hay above), the t-bone steak gets the same cost/pound as the burger. So, at the management level, it looks like we sell burger at a loss and steaks at a disproportionate high margin.

One argument is that since we do use this business model - growing fields of crops and buying entire heads of cattle - then that is indeed our cost basis, and the best management goals are to control our margins at that level. Any system of making cost allocations at a more granular level will inevitably be arbitrary. However, in terms of evaluating pricing, and making opportunity-cost elections, this is just not very useful.

Insights please. Thanks.


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