USA Farm taxes question regarding Schedule F

[marlowdog1990]

The IRS Schedule F makes things really complicated for farmer’s who purchase stocker animals to raise and butcher and then sell them directly to consumers. I'm having trouble guiding a client on best accounting practices.

When declaring the sales of purchased livestock and the subsequent cost of that livestock, it’s simple when they sell a quarter or half cow. However, it feels next to impossible to calculate the cost by animal when they retain individual cuts of meat for sale at market. What is the best accounting process for declaring an accurate purchase cost related to your income when it comes to individual cuts of meat?

They track all Purchased Livestock for Resale in an asset account. The purchase cost of each animal is subsequently converted to an expense account once the butchered animal is sold. But that doesn't work well when you get down to individual cuts.

 

[DrStrangeLove]

Could you treat the butchering of each cow like direct labor in a manufacturing operation, and add it to the cost of goods sold? I don't know agricultural/farm accounting. But if I think of the ranching (raising of the cattle) and the butchering as separate lines of business, the ranching operation sells the cow to the butchering operation as its direct materials. The butchering itself gets added in as direct labor and manufacturing overhead. You could use the market price of cattle to butchers/slaughterhouses as a transfer price between the lines of business, so as not to distort the choice of sell versus butcher. Then treat the sale of half-/quarter-cow versus full butchering as a sell-or-process-further decision. That should keep the cost tracking neat.

 

[marlowdog1990]

The biggest issue is identifying how much of the initial cost of the livestock to declare if only part of the animal is sold. So they pay sell half plus a handful of individual cuts (flank steak, ground beef, etc) but those individual cuts are hard to track by animal. Here are the lines in question on the Schedule F:

I'm thinking that this is how we'll work it out - mostly based on the just a percentage of animals that sold based on total inventory. It's still a little nebulous as how to track it.

 

[DrStrangeLove]

After reading your PDF, I would say this:

The Raised Livestock account is used to capitalize the costs associated with raising the livestock, much like you would construct a building. So feed costs, etc., get capitalized into it like inventoriable costs elsewhere. Purchased Livestock would capitalize the purchase price, just like a retailer valuing inventory with a purchase. You could do it by specific animal (difficult) or in batches of animals you treat as interchangeable units (easier) and use an average or FIFO inventory cost method to value. (I don't know if LIFO is an option, but it might be.)

Slaughtering and butchering into halves/quarters have associated costs in materials and labor. So when you slaughter the stock, you treat it like you're batch processing a set of inventory units, and you make the usual entries a manufacturer would make: DR Work in Process/CR Purchased Livestock to move them out of the yard and into the slaughtering process. Accrue the cost of direct labor into the cost of the batch. Accrue the expected overhead into the batch. That gets you to Half Carcasses and Quarter Carcasses as inventory accounts. Any quarters or halves you further butcher into prime or other cuts, you do the same process; it's another step in the cost chain. That will get you to your final costs regardless of what portion of animals/carcasses/cuts you manufacture.

Your diagram appears to average all costs together and assign them pro rata by an aggregate measure. That ignores the fact that finished cuts take more labor to produce, and hence should have more cost assigned to them. It also means you need to separate your revenues by the product group you're selling (Sales -- Quarters and Sales -- Halves separate from Sales -- Finished Cuts), since they have different amounts of cost drivers going into each type of product. Otherwise you risk mispricing your products and making poor decisions about how much of each product to produce.

Your Schedule F cost basis would then be equal to your cost of goods sold over all products, which would be easy to get from your statements, especially if your income statement shows the different COGS components by product type. Yeah, cost accounting requires a lot of tracking and allocating of costs, that's true. But accurate cost tracking is what protects you from mispricing.