AGRIBUSINESS AND VALUE CHAIN

MANAGEMENT

FARM MANAGEMENT
Outline……..
chapter two:
Production Resources and Management

1. Farm Resources
2. Farm Resources Valuation
2.1 Annual Revaluation Method
2.2 Straight Line Depreciation Method
2.3 Declining Balance Method
2.4 Sum-Of-Years Digit Method (SOYD)

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Farm management sep, 2020
 Learning Objective
By the end of this unit, you will be able to:

- Explain the basic factors of production.

- Mention the reward for basic factors of production..
- Differentiate fixed resources and variable
resources.
- Understand What depreciation is.
- Describe Farm Resources Valuation techniques
- Explain mechanism of calculating depreciation.
 Farm Resources

 Resources can be defined as the inputs used in the

production of those things that we desire.

 When resources are productive, they are typically called

factors of production.

Productive Resources are the resources used to make

goods and services (i.e., natural resources, human resources
and capital goods).
 Factors of production
1. Natural Resources=land and mineral deposits are the
resources supplied by nature.

 They include ores, trees, land and the other things

nature provides..

2. Human Resources = labor consist of the talents and skills of

human beings that contribute to the production of goods and
services.

3. Manufactured Resources = Capital Goods consist of

human-made materials needed to produce goods and services.
Capital goods include buildings, machinery, equipment and
tools.
4. Enterprise — entrepreneurial ability. Entrepreneurs are
people who organize other productive resources to make
goods and services.

 It often is said that a business will succeed or fail

relative to the ability of the person or entrepreneur
involved in it.
 In short Productive Resources are classified into four
categories:
 land,
 labor,
 capital and
 entrepreneurship.
 Factors of production
 1. Land:

 Land: It consists of those gifts of nature which are not

the result of human effort.

 it includes land, water, sunshine, natural forests,

minerals, wild animals and local climate.

 It is often made productive as a result of human effort.

 a farm manger should use these unique qualities of land

for proper decision making to make the farm enterprise
perform well.

Slide 7
 The specific characteristics of land

 Land doesn’t depreciate or wear out.

 Area space and location of land are immobile:

 Each farm or specific parcel of land is unique:

 Land is said to be fixed and limited in quantity

(Supply)

Slide 8
 Factors of production
2. Labor:
 Labor: The term labor describes the effort of human
beings that include hired labor, family labor and farmers'
labor.

 Labor is needed for every type of production.

 It can be more productive as a result of time and effort

devoted to training.

 The amount of labor (the labor input) used over

a particular farm or plot of land depends on the
number of individuals employed and the number
of hours worked.
Slide 9
 Factors of production

Flow
resource

Slide 10
 Factors of production 3

Capital: It presents all resources which are the result of past

human effort.

Capital should not be confused

with money since money itself
is not a productive resource.

it consists of all manmade

goods which are used in the
production of other goods.

Slide 11
Factors of production

Slide 12
 4

Entrepreneurship involves organizing and coordinating the

different farm resources (land, labor and capital) so as to get
the maximum output and profit. Slide 13
Slide 14
Slide 15
 Factors of production
 Factors of production could be fixed or variable.
 The difference between fixed and variable factors relates
to the time horizon involved.
 In economics, there are two main horizons:
 The short run and
 The long run.
 The short run is a relatively short period of time in which
the quantity of some factors of production such as
equipment’s and buildings cannot be varied.
 Such factors are called fixed factors.
 Factors of production whose quantity can be varied in the
short run are called variable factors.
Slide 16
 Factors of production

 The long run, on the other hand, is a relatively long

period which allows the variation of all factors of
production including plants and equipment’s.

Variable resources
The resources whose uses vary with the level of production
are known as variable resources.
 Volume of output directly depends on these resources.
 Costs corresponding to these resources are known as
variable costs.
 Variable resources exist both in the short run and in the
long run.
Examples: Seeds, Fertilizers, Plant protection chemicals,

Slide 17
 Factors of production

 Fixed resources in summary:

 Resources whose use remains the same regardless
of the level of production are called fixed
resources.
 Volume of output does not directly depend up on
these types of resources.
 Costs corresponding to these resources are known
as fixed costs
 Fixed resources exist only in the short run and in
the long run they are zero
 Example: machinery, farm buildings, equipment,
implements, livestock, etc.
Slide 18
Rewards for using farm resources

The reward for using

management/entreprene
ur is profit.

The reward for using capital is

interest (cost of using money).

 The reward for using land is rent.

Slide 19
 Farm Resources Valuation

 Valuation is the practice of attaching

prices to a given asset like buildings,
vehicles, growing crops, and stored
products at the end of an accounting
period or at the time of sale for a
particular farm organization.
 The price shows what farm assets
worth at a particular time.
 Valuation process involves getting a
realistic measure of the current value
of the assets of the farm business.
Slide 20
 The first step in asset valuation is to list the resources
available in physical terms and,
 The second step is placing values on the assets.
 The five methods of valuation
1. Valuation at cost: This method involves entering
the actual amount invested on the asset when it was
originally acquired.
2. Valuation at market price: The market price of an
asset at the time of consideration can be taken as its
value.
3. Valuation at net selling price (PNS): Some costs such
as cost of advertisement and transportation may incur at a
time of selling an asset.
Slide 21
4. Valuation by reproductive value: An asset can be valued
at what it would cost to produce it at present prices and
under present methods of production. This method is more
useful for long-term assets and has little or no application
for short-lived assets.

5. Cost less accumulated depreciation: This method is

appropriate only for depreciable assets like machinery and
buildings. Value of the asset is set equal to the ‘book value’.
Book value is computed as the difference between the
initial cost and the accumulated depreciation of the asset
from acquisition to the time of valuation.
Slide 22
An important but difficult consideration is the rate at which
depreciation should take place.

Slide 23 of 27
 Depreciable assets are assets which:

 are expected to be used during more than

one accounting period; and

 have a limited useful life; and

 are held by an enterprise for use in the

production or supply of goods and services, for
rental to others, or for administrative
purposes and not for the purpose of sale in the
ordinary course of business.
 Depreciation is the allocation of the cost of
tangible assets, such as property, plant, and
equipment.
 Depletion is the allocation of the cost of natural
resource assets, such as oil, gas, minerals, and
timber.
 Amortization is the allocation of the cost of
intangible assets, such as patents and copyrights.
It may be used as a general term to describe the
periodic allocation of costs; in that case, it is
 Useful life OR Service Life is either
the period over which a depreciable asset is expected to be
used by the enterprise; or
the number of production or similar units expected to be
obtained from the use of the asset by the enterprise.

The residual (salvage) value is the net amount that a company

expects to obtain from disposing of an asset at the end of its
service life.
It is the expected value of the asset at the end of its service
life minus the costs of disposal, such as dismantling, removing,
and selling the asset.

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farm Management
 Methods of depreciation
A. Annual Revaluation Method
B. Straight Line Depreciation Method
C. Declining Balance Method
D. Sum-Of-Years Digit Method (SOYD)

A. Annual Revaluation Method

 The annual revaluation method is based on the resale value of the
asset in the market.

Depreciation (D) = Original Price – Resale Price of the asset to

date
B. Straight Line Depreciation Method: assumes that an asset
depreciates at a constant rate over its economic life.
where:
 D=Depreciation
𝑃 − 𝑆𝑉
 P=purchase price 𝐷=
𝑛
 SV= the salvage value
 n= use full life of the asset in years
Example, An asset costing Birr 4,000 initially has a salvage value
of Birr 400 and expected life of 10 years. For this asset the
yearly depreciation is given by [(4000 – 400)/10 = 360].The
depreciation schedule over years appears as shown in the table
below.
B. Table 1: Straight line depreciation for an asset initial cost Birr
4000 and SV Birr 400 and n=10 years

Year Depreciatio
n Remaining value at the end of the year
1 360 3640
2 360 3280
3 360 2920
4 360 2560
5 360 2200
6 360 1840
7 360 1480
8 360 1120
9 360 760
10 360 400
 C. Declining Balance Method

 The declining balance method assumes a fixed rate of depreciation

every year.

 Since the value of the asset is greater at the beginning,

if the rate is applied the amount of depreciation is also
greater at the beginning and less at the end.
 The salvage value is not subtracted from the initial cost.
 Considering rate of depreciation to be 20% annually,
schedule of depreciation using the declining balance
method is shown in the table below. (Next slide)

1
 C. Declining Balance Method

 Table 2: Depreciation of an asset using declining balance method

(Cost Birr 4000, SV Birr 400 & n=10 years)

Year Remaining value at the end of the

Depreciation year
1 20% of 4000 = 800 3,200
2 20% of 3200 = 640 2,560
3 20% of 2560 = 512 2,048
4 20% of 2048 = 409.60 1,638.40
5 20% of 1638.4 = 327.68 1,310.72
6 20% of 1310.72 = 262.14 1,048.58
7 20% of 1048.58 = 209.72 838.86
8 20% of 838.86 = 167.77 671.09
9 20% of 671.09 = 134.22 536.87
1
10 20% of 536.86 = 107.37 429.50
 D. Sum-Of-Years Digit Method (SOYD)

Annual depreciation is given by multiplying cost less salvage

value (i.e., salvage value is the estimated residual value of a
depreciable asset or property at the end of its useful life)
by the fraction of remaining useful life (RL) to sum-of-years
digit (SOYD).

RL
Annual depreciation = Cost − Salvage value ∗
SOYD
n(n + 1)
SOYD =
2
o Table 3: Depreciation of an asset using the sum-of-years-
digits method (Cost Birr 4000, SV Birr 400 & n=10 years)

Year Annual Depreciation Remaining balance

1 10/55 (4000-400) = 654.55 3345.45
2 9/55 (4000-400) = 589.09 2756.36
3 8/55 (4000-400) = 523.64 2232.73
4 7/55 (4000-400) = 458.18 1774.55
5 6/55 (4000-400) = 392.73 1381.82
6 5/55 (4000-400) = 327.27 1054.55
7 4/55 (4000-400) = 261.82 792.73
8 3/55 (4000-400) = 196.36 596.36
9 2/55 (4000-400) = 130.91 465.45
10 1/55 (4000-400) = 65.45 400.00
Outline……..
Chapter three:. Analysis of Farm Records and Accounts

3.1 Farm Records and Accounts

3.2 Measures of Financial Success and Capital Position

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Farm management March, 2019
 Learning Objective
By the end of this unit, you will be able to:

- Explain the concept of Farm Records and Accounts

- Mention some farm records a farmer is expected to
keep on his/her farm.
 Meaning of Farm Records

• Is the information recording process on the day-

to-day operations of a particular farm.

• are the written records or documents of various

activities carried out on the farm on a daily basis.

• From the daily records, the weekly summaries are

prepared and the weekly summary provides
information for the monthly and subsequently yearly
summaries.
All daily activities include;
 performance of crops and livestock (Number of
livestock kept and Crop cultivated)
 symptoms of diseases observed,
 Utilization of farm inputs,
 Equipment procured., Seed planted,
 Quantity harvested and
 Cultural activities carried out must be recorded in the
farm record book.
A good farm record system should:
 Provide necessary, accurate and updated
information;
 Be legible, readily accessible and user-
friendly; and
 Be flexible enough to provide information
in a variety of ways
 Be readily understood and audited.
 Why Should We Keep Good Records?
1. Measure profit and assess financial status/condition of the farm &
make necessary adjustments.

2. Provide data for business analysis (farm planning and budgeting)

3. To determine resource requirements, and examine farm resources

commitments, including possibilities for credit and borrowings, credit
repayments(to qualify for loan)

4. Measure the profitability of individual enterprises

5. For better decision making (assist in the analysis of new

investments)

6. To file (prepare) income tax returns

 Types of Farm Records
• There are many ways of presenting farm records and
accounts.

• The method adopted varies from individuals and type of

business organization.

• groups of farm records;

1. Inventory records

2. Production records

3. Income and expenditure records and;

4. Miscellaneous records.
Types of Farm Records
5. Income or Receipts Records:

6. Home Consumption Record:

7. The Crop and Livestock Expenses Record

8. Farm Labor Record:

9. Durable asset Dépréciation Record

1o Net Farm Profit Record