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Chapter 5: The Concept of Gross Margin

You can make the Accounts show, how earnings were in the different productions. Which branches were good, and which were not?

 

 

 

The results shown in the accounts are historical. You cannot correct earlier errors and make last year's result nicer, but you can learn from your errors, so that you are not repeating them (without knowing it). For the farmer as a manager, it is important to use the accounts to unveil errors and defects and to get an impression of which results, you can expect later.

 

The farmer's first task is to make a systematically evaluation of improvement in all kinds of existing production. If a result is not satisfying, then how can it be improved? Often, you can improve the result considerably without larger investments. If for example you find, that the pigs' fodder consumption is too large compared to their growth, you should start solving this problem. This is a good reason for making notes on fodder consumption and the animals' pregnancy.

 

If you want to know the efficiency in the single productions, you must make an analysis, especially of costs. The costs are divided into two main groups

 

By distribution the Variable Costs, you can calculate how much every kind of production yielded to cover the common, fixed costs. This yield is called Gross Margin.

 

In its simplest form a gross margin is a measure of gross output less variable costs and could be made up of two figures, i.e.:

 

1 hectare of potatoes

 

Output

800000

- Variable Costs

-300000

= Gross Margin

500000

 

A gross margin derived from such figures is rather limited for planning and budgeting. You can add details like in this example:

 

1 hectare of potatoes

 

Output: Sales 33 t/ha

800000

Variable Costs:

 

seed

-108000

fertilizer

-77000

pesticides

-30000

contract labour

-55000

other costs

-30000

Total variable costs

-300000

= Gross Margin

500000

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With the Gross Margin calculation, you would like to know:

 

- then you must divide the income and costs in a more thorough way and show physical units:

 

1 hectare of potatoes

 

Output

 

16 t/ha for processing, 36000 Rb/t

575000

10 t/ha for stock feed, 5000 Rb/t

50000

3 t/ha for wages, 25000 Rb/t

75000

4 t/ha reserved for seed, 25000 Rb/t

100000

Total Output

800000

Variable Costs:

 

seed 2,8 tonnes/ha

-108000

Fertilizer

 

5 tonnes manure

-7000

200 kg N

-22000

250 kg P205

-30000

250 kg K20

-18000

Pesticides

 

herbicide 2,5 I/ha

-8000

3 x fungicide 3 I/ha

-18000

desiccant 4 I/ha

-4000

Contract labour, 100 hours

-55000

Other costs

 

bags

-20000

l levy

-10000

Total variable costs

-300000

= Gross Margin

500000

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The example is based on Mogens Abildgaard: Accounting for Individual Farms, TA-CIS project, Agroconsult, Moscow, 1995, Page 37-39.

 

 

Variable costs

 

 

Fixed costs

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