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Agricultural Engineering Board

Review Materials

Farm Management

Prepared by

Sharon Dell B. Paras


B.S. Applied Mathematics
M.M. Development Management

and

Fernando O. Paras Jr.


Instructor/Engineer
Agricultural Machinery Division
Institute of Agricultural Engineering

May 2003
(Reproduction with Permission Only)
PSAE Region IV – Agricultural Engineering Board Review Materials IV - 1

Farm Management
Sharon Dell B. Paras
B.S. Applied Mathematics
M.M. Development Management
and
Fernando O. Paras Jr.
Instructor/Engineer
Agricultural Machinery Division
Institute of Agricultural Engineering

I. MANAGEMENT

 The process of optimizing human, material and financial contributions for the
achievement of organizational goals.

 The art of getting things done through other people.


Managers achieve their goals by arranging for others to perform whatever tasks
may be necessary – not by performing the tasks themselves .

 Management is defined as the process of setting and achieving goals through the
execution of the management functions that utilize human, financial and material
resources.

 Process of planning, organizing leading and controlling the efforts of organizational


members and the use of all available organizational resources in order to achieve the
stated organizational goals.

 Practice of consciously and continually shaping organizations.

 The effective and efficient use of scarce resources to achieve organizational goals.

MANAGERS – People who are responsible for helping the organizations achieve their goals.

CHARACTERISTICS OF A MANAGER

1. Assumes responsibility – A manager is in charge of specific tasks and must see to it that
they are done successfully. The manager is usually evaluated on how well he/she
arranges for these tasks to be accomplished.

2.Must balance competing goals – Each manager must strike a balance between goals and
needs.

3.Conceptual thinker – Every manager must be an analytical thinker; that is he/she must be
able to think a specific, concrete problem through and come up with a feasible solution for
it.

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4.Works with and through people (subordinates, supervisors and “peers”) – The manager
works with anyone at any level in the organization who can help him/her achieve unit or
organizational goals.

5.Mediator – Disputes within a unit or organization can affect morale and productivity and may
even cause some competent employees to leave the organization. Settling disputes require
skill and tact, and a manager who is careless in handling such a problem may find that he
or she has only made it worse.

6.Politician – A manager, like a politician must use the arts of persuasion and compromise in
order to promote organizational goals.

7.Diplomat – The manager is the unofficial representative of his/her work unit at organizational
meetings and in dealing with clients, customers, contractors, government officials and
personnel of other organizations.

8.Makes difficult decisions – No organization runs smoothly all the time. Managers are the
people who are expected to come up with solutions to difficult problems and to follow
through on their decisions even when doing so, may be unpopular with some person/s.

MANAGERIAL ROLES

 Liaison – interpersonal role; act as a go-between


 Monitor – informational role; check what is going on outside the relationship
 Negotiator – decisional role; discussing and debating on certain issues

II. EFFICIENCY AND EFFECTIVENESS


A manager’s performance can be measured in two concepts: effectiveness and
efficiency.

 Efficiency – ability to get things done correctly; doing things right; an “input-output”
concept; something measurable.
- The ability to minimize the use of resources in achieving organizational
objectives.
- An efficient manager is one who achieves outputs or results that measure
up to the inputs (labor, materials and time) used to achieve them. If the
manager is able to minimize the cost of resources he/she uses to attain a
given goal, that manager is acting efficiently.

Efficiency = Output
Input

Ways of promoting efficiency:


1. Same input, more output
2. Less input, same output
3. Less input, more output

Effectiveness – ability to choose appropriate objectives or the appropriate means for


achieving a given objective; doing the right things.
- An effective manager selects the right things to get done or the right method for
getting a particular thing done.

III. PROCESS OF MANAGEMENT (SEQUENTIAL


MANAGEMENT FUNCTIONS)

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1. Planning – The process of establishing goals and a suitable course of action for
achieving those goals. Managers think their actions through in advance. Their actions are
usually based on some method, plan, or logic rather than on a hunch. Plans are needed
to give the organization its goals and set up the best procedure for reaching them. Plans
permit the following:
 For the organization to set aside the resources it will need for required activities
 For the members of the organization to carry on activities consistent with the chosen
procedures, and
 For the progress toward the objectives to be monitored and measured so that
corrective action can be taken if the rate of progress is unsatisfactory

2. Organizing – The process of arranging and allocating work, authority and resources
among an organization's members so that they can achieve the organization’s goals.
Managers coordinate the human and material resources of the organization. Achieving
coordination is part of the manager’s job. Once managers have established objectives
and developed plans or programs to reach them, they must design and develop and
organization that will be able to carry out those programs successfully. Staffing
(recruitment and placement of the qualified personnel needed to do the organization’s
work) is also considered a part of the organizing function.
The organizing process can be described in a three- step procedure:
 Detail all the work that must be done to attain the organization’s goals

 Divide the total work load into activities that can logically and comfortably be
performed by one person
 Set up a mechanism to coordinate the work of organization members into a unified,
harmonious whole.

3.Staffing - Concerned with locating prospective employees to fill the job created by the
organizing process. Staffing involves the process of reviewing the credentials of the
candidates for the jobs and trying to match the job demands with applicant's abilities. It
also involves the development and implementation of a system for appraising performance
and providing feedback for performance improvement.

4.Directing - Directing is aimed at getting members of the organization to move in the


direction that will achieve its objectives. It builds a climate/environment, provides
leadership and arranges opportunity for motivation.

5.Controlling – The process of ensuring that actual activities conform to planned activities.
Managers attempt to assure that the organization is moving toward its goals. If some part
of their organization is on the wrong track, managers try to find out about it and set things
right. Controlling involves three elements :

 Establishing standards of performance.


 Measuring current performance and comparing it against the established standards.
 Taking action to correct any performance that does not meet those standards.

6.Leading – (Some books consider this as a management function) The process of directing
and influencing the task-related activities of group members or an entire organization.
Managers direct and influence subordinates. They don’t act alone, but get others to
perform essential tasks. They don’t simply give orders. By establishing the proper
atmosphere they help their subordinates to do their best.

There are four leadership styles that were identified by Rensis Likert and these are:

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a) System 1 (Exploitive Authoritative) – Managers make all work-related decisions and order
their subordinates to carry them out. Failure to meet the manager’s goals results in
threat or punishment.
b) System (Benevolent Authoritative ) – Managers still issue orders but subordinates have
some freedom to comment on these. Subordinates who meet or exceed the manager’s
goals may be rewarded.
c) System 3 (Consultative) – Managers set goals and issue general orders after discussing
them with subordinates. Rewards, rather than the threat of punishment, are used to
motivate the subordinates.

d) System (Participative) – Goals are set and the group makes work-related decisions. If
managers formally reach a decision, they do so after incorporating the suggestions and
opinions of the other group members. To motivate subordinates, managers not only use
economic rewards but also try to give their subordinates feelings of worth and importance.

IV. FARM MANAGEMENT – Study of the ways and means of organizing land, labor and
capital and the application of technical knowledge and skill in order that the farm may be
made to yield the maximum net returns. It also refers to the utilization of sound business
principles and technical knowledge in the planning and organization of a farm and the
application of skill in its operation for the purpose of attaining the largest continuous profit
of the farmer as an individual.

It is the art of applying business and scientific principles to the organization and
management of farm business enterprise for the purpose of securing the greatest
continuous profit.

A. FUNCTIONS OF FARM MANAGEMENT

1. Selecting methods and practices and training labor to be used in performing


various operations. (Management of Labor)

2. Making more-or-less short time minor adjustments in the proportion of the


factors of production and other parts of the farming program.
This function refers to the making of adjustments from day to day or from week to
week – adjustments, which should not be postponed or adjustments of relatively minor
importance. Weather conditions and unexpected price or cost changes are the causes
that commonly give rise to such problems.

3. Controlling and directing the various resources .


This may be related to the second function that if days to day adjustments are not
necessary, the problem of control and direction will be less complicated. It may be also
related to the problem of selecting methods and practices, the problem of how
operations are to be performed. This function may also be described as the control and
direction of labor involving the expert handling of the resources on the part of the
manager so that the maximum production efficiency may be obtained. . The goodwill and
cooperation of laborers should be controlled and directed in such a way as to retain this
esprit de corps.

4. Buying and selling. (Management of Capital and Management of Land)

5. Keeping records and accounts. (Farm Records and Farm Accounts)

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6. Seeing that the entire productive process proceeds smoothly from day to day
throughout the year.
Good management involves careful planning of the production processes so that they
may all move forward smoothly without delays at any point. The various interdependent
parts of the organization must be made to operate with a minimum of friction. Operations
requiring certain materials may be postponed if the manager doesn’t have the foresight to
have these materials available at the appropriate time. The use of implements, machinery,
and labor must be planned so that each operation may be performed at the proper time
and without unnecessary delays.

7. Noting tentative adjustments in the factors of production which seem desirable


because of price or market changes, savings of materials, utilization of waste or
by-products, or introduction of new methods and practices.
Changes in prices, methodology and numerous other elements tend to make major
adjustments necessary if the greatest returns are to be derived from the available
resources year after year. Decisions to change the general policy of the organization, the
enterprises and the proportion of the enterprises from year to year or for longer periods,
and making necessary adjustments fall within the scope of this function.

B. MANAGEMENT OF LABOR (First Function)

Sources of Labor
1. Family labor – farm labor mainly supplied by the family circle.
2. Hired labor- farm labor supplied from outside of the family.

Some rules for Labor Management


1. Plan a labor calendar, which will keep down the peak labor requirements. An hour’s labor
is worth much more in the rush seasons during harvest time, than at other times of the
year. Try to have the smallest possible number of jobs competing for your time during
these rush periods.
2. Don’t do slack-season work during rush seasons . Put off manure hauling, fencing, cutting
weeds in fence rows, etc. until times when there is less to do.
3. Plan rainy-day work in advance.
4. Exchange labor with neighbors.
5. Cut chore labor to a minimum.
6. Simplify and combine jobs wherever you can.
7. To save labor on livestock, self-feed everything that you can . Use large self-feeders that
can be filled once a week.
8. Use extra care in directing inexperienced labor.
9. Select laborers carefully. Fit the worker to the type of work.
10. Clearly assign tasks, train & supervise labor with job analysis.
11. Develop initiative, good will, cooperation and respect.
12. Plan day-to-day utilization of labor, make day-to-day adjustments.
13. Provide social life.
14. Keep a high-grade labor on the farm such as giving out bonuses and profit sharing.

Classification of Farm Jobs


1. Fieldwork – Fieldwork on crops should come first and must be done in clear
weather with moderately dry soil. Plowing, preparing the seedbed, and planting crops
must be done at just the right time to be most effective.

2. Outside work that can be delayed – These include tasks as hauling manure,
building fences, plowing, husking corn, ditching and tiling, cutting and hauling wood
and outside repairs to buildings.

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3. Work for rainy days – In order that no time will be wasted by downpour, indoor
work such as repairing machinery, sharpening mower sickles and oiling machinery and
harness should be kept in mind.

C. MANAGEMENT OF CAPITAL (Fourth Function)

Capital – include any goods employed in production other than land, labor, buildings and
fences. All work-stock, machinery, equipment, power engines, feed, seed, fertilizer
and other materials are included in this category.

Plans for the use of working capital


Plans for the use of working capital will avoid conflicts in the use of machinery,
equipment or work stock; they will allow a fuller utilization of these same elements; and they
will provide a scheme for the provision of various supplies and materials necessary in the
performance of operations. Detailed plans for all elements are necessary to facilitate a
smooth, forward moving program to avoid costly delays.

Adjustments in working capital


The farm manager cannot expect that a detailed plan made in advance can serve as a
production guide for the year. Weather condition will hasten some operations and postpone
others, causing conflicts in the use of machinery and equipment and changing the time when
materials need to be available for use. Changes in prices may make some necessary
adjustments in the feeding of livestock; that is, more feed may have to be acquired, rations
may have to be cut down, or one class of livestock may have to be fed heavily at the
expense of another.

The adjustments should be made in favor of the enterprise which has the greater
positive effect on total profits, or in favor of the operation which adds most to total returns
for the farm as a whole.

Supervision of the working capital


The operator’s objective in supervising the use of working capital is to prevent wastes
in the use of seed, fertilizer, feed and other materials and to prevent abuse and rough handling
of machinery, equipment and work stock. In case of materials, any amounts wasted are direct
losses and tend to lower efficiency by increasing the input per unit of output, since any amount
wasted must be considered as attributable to the productive processes When the values of feed
and fertilizer used each year are high, even a small waste is important. Supervision of working
capital is a function or a responsibility closely allied to that of labor supervision. In this case,
supervision is directed at efficiency in the use of capital goods, rather than at the efficiency in
the use of time and labor. Each class of working capital should be kept under detailed
surveillance at all times and in all productive purposes, so that maximum efficiency in its use is
obtained.

D. MANAGEMENT OF LAND (Fourth Function)


Farmers are prone to exploit not only their land but also their water resources
beyond the point at which these resources make their maximum contribution to the net
income of the farm. Such exploitation, intentional or otherwise, if continued long
enough, inevitably leads to partial or complete destruction of the productive power of the
land and water. Thus, it of great importance to thoroughly understand the principles
involved in the conservation of such resources. (Use Soil and Water Conservation
Engineering by Schwab as reference)

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E. FUNDAMENTAL FACTORS RESPONSIBLE FOR FARMERS’
SUCCESS
1.Selection of the right farm for the type and system of farming to fit the farm including the
decision on whether to buy or rent the farm.
2.Proper sizes of farm business will efficiently utilize the available labor, power, machinery
equipment and capital.
3.The relative importance of diversified enterprises will promote full use of the farm resources
and business stability, including adjustments necessary to meet prospective changes in the
market.
4.The supply of adequate capital and the utilization of credit.
5.A study of the best layout of the farm into fields or farmstead.
6.Proper provisions of buildings, equipment, irrigation and other farm requirements.
7.The importance given to conservation.
8.Importance of keeping adequate records to insure a reliable source of information for
planning.

9. Proper attention to the marketing of produce and the purchase of farm supplies.
10. Day to day decisions that has to be made in the farm.

F. CLASSES OF RISKS IN AGRICULTURE


1. Those resulting from natural factors such as extreme weather conditions, fire, flood,
earthquakes, and pests and diseases.
2. Those arising from human factors such as carelessness, incompetence, dishonesty, theft,
and political disturbances.
3. Those arising from unpredictability of the market conditions.

Methods of Reducing Risks


1. Insurance
2. Diversification
3. Future contract – selling the product at current on agreed price delivering them in some
future time.
4. Flexibility – ease with which the organization of production can be changed.
5. Liquidity – the maintenance of balance of money or assets that can be readily converted
into cash.

G. INVENTORY FARM RECORDS AND FARM ACCOUNTING SYSTEM


(Fifth Function)

Farm Planning and Budgeting

Use of Farm Plans


1. Serve as a yardstick for performance and accomplishment.
2. Serve as a guide or reminder on the schedule of activities.
3. Provide a basis for evaluation and improvement
4. Serve as central facilitating aid.

Operational steps in planning:


1. Taking stacks of resources.
2. Review and analysis of alternatives.
3. Deciding on alternatives and fitting them into one plan.
4. Summarizing the resources requirements and output expectation.

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Elements in Complete Planning and Budgeting
1. Personnel organization
2. Calendar of operation
3. Schedule of labor requirements
4. Schedule of supplies required
5. Schedule of expected production and income
6. Summary budget and test of success

H. FARM RECORDS (Fifth Function)

Uses of farm records


1. Provide data for farm planning and budgeting.
2. Aid to credit, insurance, taxes and in preparing reports.
3. Give data for group action on local or national programs.
4. Provide information useful in property valuation.

Steps in taking Farm inventory


1. List down all farm property.
2. Put value on each item.
3. List all farm debts and receivables.
4. Summarize the information for farm analysis purpose.

Methods of valuation of inventory


1. Original cost – actual purchase cost.
2. Normal market value – estimated average selling price over a number of years.
3. Present market value.
4. Original cost less depreciation.

Example of Summary budget:

SEASONS
Wet Dry Both
Receipts 22,069 27,090 49,167
Cash Expenses
Fertilizer 840 1,148 1,988
Insecticides 873 701 1,474
Weedicides 70 76 146
Seeds 880 880 1,768
Gasoline 65 65 130
Oil 22 22 44
Hired Labor 3,446 3,630 7,176
Permanent Labor 1,800 1,800 3,600
Irrigation Fee 281 393 674
Repairs 50 50 100
SUB-TOTAL (c) 8,765

Non-cash Expenses
Land Rental 4,872 5,040 6,192
Harvester thresher share 3,377 4,507 7,884
Depreciation 848 848 4,696
SUB-TOTAL (nc)
Total Expenses (ST c + nc) 17,424 10,395 19,492
Net Farm Income (Rec -TE) 7,930 36,592

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Sample Form of a Farm Record:


INVENTORY DATE AS OF May 1, 2002

ASSETS LIABILITIES AND NETWORTH


Current Assets 45,000 Current Liabilities
Cash on Hand 175,000 Accounts Payable (in 1 year) 119,000
Cash in Bank 43,000 Taxes payable 75,000
Acc’ts Receivable 48,000 Total Current Liablities
Feed Supplies on Hand 50,000
Stored Crops Long Term Liabilites
Total current Assets Notes payable (due next yr) 200,000
Balance of mortage 100,000
Fixed Assets Total long term Liabilities
Land 300,000
Farm Buildings 150,000 Net worth
Machinery, Equipment 100,000 Capital 200,000
Work Livestock & Breeding 55,000 Net Income 85,000
Total Fixed Assets Total Net Worth

TOTAL ASSETS TOTAL LIAB & NET WORTH

Financial Analysis:

a) Liquidity/Solvency ratios

Current Ratio = Current Assets


Current Liabilities

{For every PhP1.00 of current liabilities, there is a PhP(Current Ratio) of assets to pay for the
liabilities}

(IDEAL CURRENT RATIO => 2:1)

b) Quick/Acid-Test Ratio = Current Assets-Inventories


Current Liabilities

(IDEAL QUICK RATIO => 1:1)

c) Net Working Capital = Current Assets – Current Liabilities

(Amount of funds available for payment anytime)

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SOME TERMS IN FARM MANAGEMENT

 Farming- refers to the cultivation of land with or without the benefit of sound business,
technical knowledge and skills.
 Personnel management- concerned with an effective recruitment, selection, placement
development, maintenance and utilization of manpower to obtain optimum efficiency of
labor.
 Material management- includes duties performed by purchasing, material supervision as
inventory controls, inspection of materials and salvage operations.
 Financial management- involves planning the procurement and utilization of funds and
controlling the financial operations to insure effective utilization of funds.
 Production management- deals with the planning, direction and control and decision
making necessary for carrying out the production processes.
 Marketing management- is the planning, directing and controlling of the entire
marketing activities of the farm, including the formation of marketing objectives, policies,
programs and strategies for product development.
 Farm planning- the process by which a farm manager looks ahead to the future and
contemplates alternative courses of action for the farm.
 Budgeting- the process of determining requirements, allocating of resources and
estimating the returns for the different activities of the farm.
 Complete Planning and Budgeting - takes the whole farm as the subject for decisions.
It considers all expenses and returns so that the figure indicates the performance of the
entire farm.
 Partial Planning and budgeting - takes part of the farm as the subject for decision. It
considers the expenses and returns of the parts of the farm under consideration so that the
net returns (or loss) indicate only the profitability associated with change envisioned rather
than the whole farm.
 Extensive Farming - pertains to farming activities utilizing fixed outlay of labor and
capital to an increasing area of land.
 Intensive Farming - a method of farming which utilizes an increasing amount of labor
and capital to the same area of land.
 Compact Farming - a system of grouping continuous land holding for the purpose of
operating as one farmstead, resources for production are pooled together from among the
other member.
 Credit- is the transaction between two parties in which one (creditor) supplies money,
goods and services and other securities on the basis of a promise that payment by the
other (debtor) would be due at a specified time.
 Agricultural credit- includes all loans and/or advances granted to borrowers to finance
activities relating to agriculture and the processing, marketing, storage, and distribution of
products.
 Balance sheet or Farm inventory- statement of what an enterprise owns and what it
owes as of a particular date.
 Farm Economics/Agricultural Economics – concerned with the farmer as a member of
society, deals with the farms as a group and determines the principles governing not only
the farm business but also the general welfare on a national and international level.
 Marginal Cost - the additional cost that a producer incurs in making one additional unit of
output.
 Diversified Farming - type of farming, which engages in the production of several main
products/crops.
 Break- even Point - a point at which a specific volume of sales with which a firm neither
makes nor loses money. Above this point, a firm begins to show a profit, below it, a loss.
Break-even analysis is used to compute the approximate profit or loss that will be
experienced at various levels of production.
 Multiple Cropping - is the raising of several crops from the same area of land.

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 Elasticity of Demand - is the ratio of the percentage change in quantity demanded to
the percentage change in price. ED = QD/QP.
 Marginal Land - refers to the grade of land whose productive capacity is only enough to
recover its cost of production.
 Farm Budget – a projection of the cash inflow and outflow of a farm to estimate the
incremental net benefit over the life of the project.
 Efficiency of Production - refers to the relationship of the output to input.
 Inflation - is the rise in the amount of money in circulation beyond the legitimate needs of
the business so as to cause a reduction in the value of money and increases the price level.
 Depreciation Cost - is the cost outlay of the firm for the wear and tear of machines,
buildings, and implements. It is a part of the total fixed cost of the business.
 Hedging - is the technique of buying and selling that minimizes risk due to price
fluctuation.
 Opportunity Cost/ Alternative Cost - the value of the productive resources used in
producing one good, such as automobile, instead of another such as tractor. The cost of an
automobile is the value of other things that cannot be produced because of resource
limitations at a given time.
 Unearned Increment (Income) - consists of income received in advanced for which
goods/services will be provided in the future.
 Law of Diminishing Return - the economic principle which states that successive
portions of quantities of variable factors of production is other factor of production which is
fixed will result in diminishing marginal productivity, at least after some points.
 Comparative Advantage - the special ability of a resources to provide/produce one
product or service relatively more cheaply than the other products or services.
 Marginal Product - an additional product realized from additional investment or
expenditure of the business.
 Discount Rate - the interest that a commercial bank pay when it borrows from a central
bank, using government paper or bond as security. The discount rate is one of the tools of
monetary policy when central bank authorities are trying to prevent inflation.
 Economics - a special science concerned chiefly with the description and analysis of
production, distribution and consumption.
 Cooperative - an organization owned collectively by members who share its profits and
benefits.
 Corporation - a group of people who gets a charter granting, as a body, certain legal
rights and liabilities of a single individual.
 Tariff - the tax imposed by the government on imported goods.
 Common Stock - capital stock in excess of the value of the assets of the issuing
corporation.
 Excise Tax - tax levied directly upon classes of goods produced within a country.
 Preferred Stock - a stock that entitles the holders to a preferential treatment as to
dividend as well as to the distribution of assets in case the issuing corporation liquidates.
 Price - the exchange value of goods or services measured in terms of money.
 Revenue - is the income derived from the sale of goods.
 Tax - fund collected by the government to finance its activities.
 Securities - written or printed certificates giving their lawful holders a right to demand
and receive property or payment.
 Sinking Fund - a fund set aside periodically before dividends are declared for the purpose
of retiring the bond at maturity.
 Complementary Enterprise - when a transfer of resources to one product and an
increase in the production of it are accompanied by increase in the production of the other.
 Competitive Enterprise - an increase in the production of one makes a reduction in the
other, given a particular level of resources.
 Supplementary Enterprise - if production of one can be increased without increasing or
decreasing production of the other.
 Balance of Trade - when exports equal imports.

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 Balance of Payment - when dollars received equal dollars paid.
 Balance Budget - when a firm breaks even in income and expenses.
 Closed Shop - an establishment in which the employer by agreement hires only union
members in good standing.
 Dividend - payment made for company's stockholders.
 Interest - payment for the use of capital.
 Open Shop - an establishment in which eligibility for employment and retention on the
payroll are not determined by membership or non-membership in a labor union.
 Extractive Industry - an industry which pertains to the withdrawal of product from an
origin by extraction with the provision for reproduction (e.g. juice from pineapple).
 Devaluation - when peso becomes cheaper compared to foreign currency.
 Exchange Rate - prices of dollars in terms of peso.
 Depression - an economic state which is characterized by sickening business.
 Capital Goods - pertains to the produced goods used to produce other goods.

Definition of Terms:

Basic Economics for Agricultural Engineers

 Assets - economic resources (things of value) owned by a business, which are expected to
benefit future operations. “Current” assets consist of cash and items expected to be
converted into cash within a reasonably short period, usually one year. “Fixed” assets are
durable items of relatively long life that are used by the enterprise for production of goods
and services.
 Book value of an asset - the value of the asset after subtracting depreciation; the
depreciated value of an asset as reflected in the company’s books; also called carrying value.
 Border price - the unit price of a traded good at a country’s border. For exports, the FOB
price; for imports, the CIF price.
 Cash flow - also called net benefit; in project analysis, the amount remaining after all
outflows are subtracted from all inflows.
 CIF (cost, insurance, and freight) - the landed cost of an import on the dock or other
entry point in the receiving country. Includes cost of international freight and insurance and
often includes cost of unloading onto the dock. Excludes any charges after the import
touches the dock and excludes all domestic tariffs and taxes or fees.
 Creditworthiness - the ability of an individual, firm or nation to meet its debt service
obligations. For a firm, a judgment about creditworthiness is often formed on the basis of
one or another financial ratio.
 Cropping intensity - total cultivated area on a farm divided by the total cropland. Often
reported as a percentage.
 Cropping pattern - the area devoted to, and the sequence of, crops produced by a farmer
or in a region.
 Dividend - income distributed to shareholders of an enterprise.
 Domestic resource cost - the cost in domestic currency required to earn a unit of foreign
exchange through a proposed budget.
 Duty - a tax levied on an import.
 Embargo - a complete prohibition against the import or export of a commodity.
 Farm budget - in farm investment analysis, a projection of the inflow and outflow of a farm
to estimate the incremental net benefit over the life of a project.
 Farm gate - the boundary of a farm.
 Farm gate price - price a farmer receives for his product or pays for inputs at the boundary
of the farm - that is, the price without any transport to a market or other marketing service;
most commonly applied to outputs.
 FOB (free on board) prices - the price of an export loaded in the ship or other conveyance
that will carry it to foreign buyers.

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PSAE Region IV – Agricultural Engineering Board Review Materials IV - 13
 FOB shipping point - the seller will place the merchandise “free on board” on any means of
transport, and the buyer must pay transportation charges from that point. In most
merchandise transactions involving wholesalers or manufacturers, the buyer bears the
transportation cost. Sometimes however, the seller prepays the freight and adds this to the
amount billed to the buyer.
 FOB destination - the seller agrees to bear the freight costs of a merchandise. If the seller
prepays the carrier, the agreed terms have been met, and no action is required of the buyer
than to pay the agreed purchase price of the goods. If the seller does not prepay the freight,
the buyer will pay the carrier and deducts this payment from the amount owed the seller
when making payment for the merchandise purchased.
 Grace period - in credit transactions, a period during which a borrower need not repay
principal and, sometimes, interest.
 Import substitute - an output of a project that replaces goods or services that would have
been imported without the project.
 Interest - a payment for the use of money, generally stated as a percentage of the amount
(principal) borrowed.
 Simple interest - the interest paid in one period.
 Compound interest - is the interest paid not only on the amount borrowed but also on the
interest earned in previous periods.
 Liquidity - the readiness by which an asset can be converted into cash; the ability to pay
debts as become due.
 Long run - a time period so long that all factors of production can be varied; i.e. there are
no fixed costs anymore, all variable costs.
 Marketing margin - the difference between the price that consumers pay for the final
production and the price received by the producers for the raw product; the difference
between the price a buyer pays for a good or service and the price at which he sells that
good or service. In general, equal to the cost of providing marketing services needed in a
relatively competitive market.
 Multiple cropping - growing more than one crop on the same area in a year.
 Mark-up pricing - price is determined by adding some fixed percentage to the unit cost;
most commonly found in the retail trades (groceries, furniture, clothing, jewelry, etc.) where
the retailer adds predetermined but different mark-ups to various goods he carries.
 Point of first sale - the location where the first sale transaction takes place for a product.
 Quotas - In reference to foreign trade policy, a quota is a limitation on the quantity of an
item that may be imported. Quotas restrict the amount of a commodity consumers can
purchase and thus, force consumers to pay a higher price. This action forces consumers to
switch to less desirable substitute commodities, while domestic producers of substitute
commodities expand their output under the quota protection, using resources drawn from
more efficient industries.
 With respect to economic efficiency, quotas are much more harmful than tariffs in general.
With tariffs, the domestic price can never exceed that of the world price by more than the
tax. With a quota, any increase in domestic demand must cause the domestic price to rise
because the amount of imports cannot be increased. Thus, there is no limit to the difference
that can exist between the domestic and world price of the commodity.
 Short run - a time period where one or more of the factors of
production are fixed.
 Solvency - having enough money to pay debts as they fall due.
 Tariffs - a duty or tax imposed on an import or an export; a schedule of charges of a
business, especially of a public utility. If an importing country imposes a tariff, this tax is
partially passed on to consumers in the form of a price increase for the commodity.
Depending on the demand and supply for the commodity, part of the tax is paid by the
consumers in the importing country in terms of higher prices, and part is absorbed by the
exporting country in terms of a lower world price.
 Value added - the amount of economic value generated by the activity carried on within
each production unit in the economy.

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PSAE Region IV – Agricultural Engineering Board Review Materials IV - 14
 Domestic value added - refers to the value added by local or domestic activities to
components imported from abroad.
 Value added tax - an indirect tax (also known as ad valorem tax) levied at the time of each
exchange of goods and services from primary production to consumption, generally stated as
a proportion of the value added at each stage of production.

VI. References
PSAE BOARD EXAM REVIEW NOTES, 1994. CEAT, UPLB.
Buckett, M. 1988. An Introduction to Farm Organization and Management.
Reagan Press Oxford, England.
Castle, E., Becker, A., Smith, F. 1972. Farm Business Management 2 Ed.,
”Decision Making Process”. Mac Millan Publishing Co., Inc. New York.
Forster, G.W. 1953. Farm Organization and Management 3rd ed. Prentice
Hall Inc. New York.
Hopkins, J. A., Murray, W.G. 1953. Elements of Farm Management, 4th
Ed. Prentice Hall, New York.
Malone, C.C. 1958. Decision Making and Management for Farm and
Homes. Iowa State Coll Press.
Paras, Sharon Dell, B. 1999, Lecture Notes in MGT 201 (Organization and
Management). IDMG, CPAf, UPLB.
Paras, Sharon Dell, B. 2000, Paper in DM 299 Seminar Series. IDMG, CPAf,
UPLB.
Turner, J., Taylor, M. 1989. Applied Farm Management. BSP Professional
Books. Oxford, England.

Farm Management