Two Costs, One Critical Calculation

September 30, 2015 02:28 AM
Two Costs, One Critical Calculation

Separate variable and fixed costs to assess bottom-line results

To determine contribution margin, it’s essential for farmers to distinguish between variable and fixed costs, explains Paul Neiffer, principal at CliftonLarsonAllen. 

The information below details line items that should factor into each expense category. 

Variable costs should be deducted to arrive at contribution margin. On the other hand, fixed costs should not be included in the calculation. 

Be sure to read Neiffer’s "Contribution Margin: A Key Financial Metric" to learn how contribution margin calculations help producers make smart business decisions.

Variable Costs

  • Cash rents excluding crop share rents
  • Seed
  • Fertilizer, chemicals and other direct application costs
  • Fuel and oil
  • Repairs based on crop production
  • Labor costs, but only those extra expenses required as a result of picking up extra land. If farmers already have sufficient labor to farm the ground and do not require additional labor, none should be deducted.
  • Crop insurance, excluding property and casualty insurance unless they are based on acres
  • Interest on operating lines of credit
  • Any other direct costs related to production, including certain general and administrative costs

Fixed Costs

  • Depreciation
  • Interest on long-term debt
  • Labor costs that are fixed, as in the case of farmers with two hired hands who can farm all current ground plus any new ground
  • Insurance
  • Management costs such as lifestyle expenditures
  • Most general and administrative costs


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