www.ebbemunk.dkBookkeeping and Farm Economics

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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^­

• Variable Costs: Costs, that are directly connected with the size of production and will disappear, if you stop the production. Foodstuff and fertilizers are typical examples of variable costs.
• Fixed Costs: Other costs are partly variable or fixed costs, and will only to a certain degree depend on production and management

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.:

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

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

• Is the level of fertilizer correct?
• Is the price of seed per tonne too low?
• Why is this farmer's cost for fungicides higher than other farmers?

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

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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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