COST MANAGEMENT FOR AGRICULTURAL SECTOR IN INDIA

COST MANAGEMENT FOR AGRICULTURAL SECTOR IN INDIA

Agriculture is the primary source of livelihood for a major part of India’s population. India is among the 15 leading exporters of agricultural products in the world. India is the world’s largest producer of milk, pulses and spices and has world’s largest cattle herd as well as the largest are under wheat, rice, cotton, sugarcane, farmed fish, sheep and goat meet, fruits and vegetables and tea.

In recent years, cultivators are becoming more cautious about the costs and returns from agriculture in general and enterprises on the farm in particular. Government takes into account the cost of production in deciding the price policy and for declaring the minimum support prices for selected important crops. The commission which recommends the minimum support prices to Government is known as “Agricultural Cost and Price Commission”.

The cost management for agriculture is to be classified into three types:

COST A: 

It includes actual paid out costs for owner cultivator. This cost approximates the actua expenditure incurred in cash and kind and includes the items such as hired human labour, owned and hired bullock labour, seeds, manures, fertilizers, implement charges, land revenue and other taxes, irrigation charges and other miscellaneous charges.

COST B: 

It includes rental value of owned land and imputed interest on demand capital.

COST C: 

It is the total of all cost items, actuals as well as imputed.

Elements of Agricultural Cost:

It is classified into direct and indirect costs.

Direct costs includes human labour family and exchange, bullock labour owned, hired and exchange, hired charges for machinery equipment, costing material used for seeds, manures, fertilizers, pesticides etc, land revenue charges, irrigation charges and the marketing cost.

Indirect or overhead cost includes land implementation costs like farm building, fencing, wells, indirect labour, depreciation on machinery and equipment, interest and rent.

Evaluation:

The agricultural items of costs are evaluated by using different methods of depreciation of assets or by computing cost of production per unit.

Important concepts in Agricultural costing:

1] Opportunity Cost: 

It is also called as a alternative cost. Opportunity cost is the earning from the next best alternative method. The opportunity cost of a resource is the value of the product not produced or activity not carried out. Opportunity costs represent the potential benefits of an individual, investor or business misses out on when choosing one alternative over another.

2] Marginal Value Productivity: 

Marginal value product is the marginal revenue created due to an addition of one unit of resource. As the farmer adds resources, marginal value productivity of the resources eventually decrease in the enterprises receiving more and more of the resources.

Commission for Agricultural Costs and Prices:

CACP (Commission for Agricultural Costs and Prices) is a decentralized agency of the Government of India. It was established in 1965 as the Agricultural Prices Commission, and was given its present name in 1985. It is an advisory body, non-statutory attached to the Ministry of Agriculture and Farmers Welfare, Government of India.

This commission was established to recommend Minimum Support Prices (MSPs), to motivate cultivators and farmers to adopt the latest technology in order to optimize the use of resources and increase productivity.

The commission consists of a chairman, member secretary, one official member and two non-official members. The non-official members are representatives of the farming community and usually have an active association with the farming community.

Today the commission recommends MSPs for 7 cereals, 5 pulses, 7 oilseeds and 4 commercial crops.

Major Costs in managing Agricultural Business:

1] Fixed Cost:

Important Features of Fixed Costs in Agricultural Purpose:

1] It is associated with at least one fixed resource in the short term.

2] It is incurred even though no output is produced.

3] It is fixed only after the expense has been incurred.

4] It is primarily a function of time and not output.

5] It is not the relevant costs in determining the optimum level of input use.

2] Variable Cost:

Important Features of Variable Costs in Agricultural Purpose:

1] It refers to costs incurred on inputs.

2] Variable cost is exhausted in one use in the production process.

3] It changes with the levels of production.

4] If there is no production then there is no variable cost.

5] These costs are used in determining the optimum level of input use.

3] Cash and Non-cash Costs:

Cash cost is a term used in cash basis accounting that refers to the recognition of expenses as they are paid in cash. It requires current cash outlays.

Non-cash costs can be deferred to later periods for payment, because non-cash can be deferred in the decision making process.

4] Marginal Costs:

It is the cost incurred for producing additional unit of output. Marginal cost is important in farm management decision making because it must be compared to the revenue earned by setting the additional unit of output. Marginal cost and Marginal returns are the indicators to show at what level profit will be maximize. Profit will be maximum when marginal cost is equal to marginal return.

5] Average Fixed Cost:

This cost is computed by dividing fixed cost by the number of output units.

6] Average Variable Cost:

This cost is computed by dividing the total variable cost by the number of output units.

7] Average Total Cost:

This cost is computed by adding together average variable cost and average fixed cost.