One of the most important pieces of information that can be used for managerial decision making is costs of production. Because poinsettias are a staple crop produced by many growers, it tends to be priced competitively, meaning profit margins may not be high. To increase profits, growers must either increase revenues or reduce costs. Regardless of which avenue the grower pursues, accurate cost of production information must be obtained.
Costs of production may be determined by employing a simple method of cost accounting or budgeting. The purpose of this section is to illustrate to producers a method for determining costs of production. A model firm was developed, which is representative of floricultural firms within the Climatic Zones 8. Using resources available from this model greenhouse operation, variable and overhead costs associated with producing a crop of 1000 poinsettias are estimated.
The information developed for the budgets represents the land, labor, and management resources available to a typical floricultural firm. It is intended that with the information given in this publication the grower will be able to duplicate the procedure and obtain his own set of costs of production figures. This information can be of value to the grower in making decisions of which crop to produce, how much to produce, and how much money will be required for each production period.
Description of Model Greenhouse Firm:
The investment requirements for the model firm include such items as land, buildings, machinery, and equipment. The specific items and their estimated initial costs can be found in Table 1. The number of units, cost per unit, salvage value, and useful life in terms of years are also presented. Total investment costs for the entire floricultural firm were approximately $299,200. Description of the greenhouse and the equipment is based on information from Tech. Bul. No. 269, Overhead Costs of Greenhouse Firms Differentiated By Size of Firm and Market Channel (Brumfield et. al.)
Overhead costs are incurred regardless of what crops or how many units are produced, and are difficult to allocate to any particular crop. Since they remain constant, costs per unit decrease as more plants are produced. Overhead costs include general overhead and depreciation, interest, insurance, and taxes on land, buildings, and equipment. The general overhead category is comprised of operators salary, office expenses, utilities, advertising and other fixed costs that cannot be attributed to any particular crop. All fixed costs associated with the model firm are presented in Table 2.
A rate of 12% was used to calculate interest on the capital investment. Interest on capital investment is calculated based on current market conditions. The costs of taxes and insurance were based on a percentage (2%) of the initial investment costs. Land is not a depreciable asset so depreciation was not calculated on land.
Estimated annual fixed costs for the entire operation totaled $119,945. Assuming 13,056 sq.ft. of usable bench space, annual ownership costs convert to $9.19 per sq. ft. per year.
Variable costs are fairly easy to allocate to each unit produced based on information from invoices. Variable costs are directly related to the number of units produced and increase as the number of units produced increase; however, the cost per unit remains the same except for quantity discounts.
Variable costs include both material costs and production labor. Material costs include such items as rooted cuttings, pots, growing medium, fertilizer and chemicals. Costs of individual input units will vary from producer to producer, depending on quantity discounts, method of payment, rate of fertilization, pesticide practices and other managerial decisions.
Production labor is more difficult to allocate to each unit than material costs, but can be accomplished with some record keeping. Simply note the number of people who are performing an operation and when they start and finish. Then count the number of units they complete in that time period. From this you can calculate the time per unit and multiply it by the wage rate,including benefits. This will give you the cost of that specific labor task per unit. The unallocated labor, like all of the other unallocated costs, can be included in overhead costs and allocated on a per square foot-week basis. For purposes of this report, production labor costs are $5.50 per hour.
Interest on cost of materials and production labor must be paid before plants are sold and money is collected. The interest rate is assumed to be 12%. Total variable cost per 1000 poinsettias are approximately $2,108.00 or $2.11 per plant.
Total Costs of Production:
To determine the total cost of production, total variable costs per plant are added to the total fixed costs per plant. Total variable costs are approximately $2.11 per plant. To determine overhead costs, total fixed cost per square foot is converted to a per plant basis by using formula A.
Total fixed cost per plant=
$/Sq.Ft. x [(0.038 yr. x 0.25 sq.ft.)+(0.23 yr. x 1.166 sq.ft.)].
This formula accounts for the 2 weeks (or.038yr) the plants are spaced 25 sq.ft. apart and the 12 weeks (or .23 yr) the plants are 1.166 sq.ft. (14″) apart. Using this formula and the data presented in Table 2 the total fixed cost per plant is $2.56. Thus, the total cost of producing a 6″ poinsettia is estimated to be $4.67.
Uses of Cost Information:
There are several different ways a poinsettia enterprise budget can be used by a poinsettia producer. First of all, the estimated profit can be compared with the estimated profits from other enterprises and used to select the more profitable crops and crop combinations. This is limited by the necessity to carry a broad product mix.
Enterprise budgets may also be used to determine the maximum rental rate that can be paid for land. To do this, simply prepare the enterprise budget and omit any charge for land. The resulting expected profits would indicate the maximum rent that can be paid to just break even. Breaking even in enterprise budget terms is not necessarily a bad thing. Remember that all costs are being covered, including opportunity costs. Positive expected profits may be view as a return to risk or entrepreneurial talents, and perhaps the most important use of enterprise budgets is that they help establish a minimum selling price based on production costs.