Cost accounting is considered as one of the most important tools in management, and its knowledge can serve as a great help to the heart of an industrial unit. It can be said that determining the actual cost in a dairy farm is a huge step in system management.
The actual cost is a very important tool available to the management so that managers could be able to calculate the actual cost of products and apply their control over material costs, labor costs and other production costs.
We tried to make you familiar with this knowledge in a brief article in a simple language
What is an Industrial Accounting (Cost Accounting)?
Industrial accounting is a branch of accounting science and is responsible for gathering information about elements of cost and also calculating the actual cost of products and services. It describes methods for reducing the cost of production by analyzing reports and examining production methods. A manager of an industrial complex would have difficulties for deciding whether to increase production or to make other decisions and how to make decisions if he doesn’t have access to accurate and precise reports of cost elements. This knowledge can depict the macro view of the production sector very well.
A familiar example
On a day, a number of inoculations, calving, tests, and etc. occur in a dairy farm, and at the same time, a lot of materials are purchased and consumed, and eventually there are people who are paid periodically (monthly / daily). The question is whether the total costs spent last month was profitable or not? The only knowledge that can answer this question is the Cost Accounting.
In fact, it can be said that the actual cost converts everything in a dairy farm to a single base unit (i.e., money) and all the activities and consumed materials can be measured with the help of this unit.
Definition of Actual Cost in a simple word
What are the products in a dairy farm? Milk and calf
What is a non-productive livestock? A livestock that can’t produce dairy products is called a non-productive livestock. All livestock categories are considered to be non-productive before heifers becoming pregnant.
What is a productive livestock? A livestock that can produce dairy products is called a productive livestock. A pregnant heifer of more than 7 months old and all other livestock categories after this stage are considered to be a productive livestock.
What is the cost? Cost means paying to a cost center (e.g., salary payment).
What is the cost center? It is a defined area, machine, or person to whom costs are allocated. (e.g., a milker or a dairy farm laborer)
How many types of costs do we have? We have two types of costs: 1. Direct Costs. 2. Indirect Costs
What is the direct cost? It is the cost directly used to produce the products. For example: buying livestock feed
What is the indirect cost? It is the cost that is not directly used to produce a product, but it’s necessary for producing the product. Such as the costs related to electricity bills or salary of the guardians in a dairy farm
How many types of direct costs do we have? Two types: ۱- Labor Costs, 2-Materials Costs
Example of the direct labor costs: Salary of milker worker (labor cost for dairy cattle).
Example of the direct material costs: Dairy cattle ration.
What is an overhead? The labor and indirect materials are called overhead. Example: Guardian’s salary or buying a dining table.
What is the growth cost? The cost which is spent on the growth of non-productive livestock is called growth cost. This kind of cost includes the total cost of labor, materials and overhead spent during the growth period of livestock.
What is the milk cost? All labor, material and overhead costs that do not accrue to growth are allotted to milk and are considered as milk cost.
What is a livestock group? Livestock is divided into different groups based on age or livestock state and the costs are allocated to them based on their group. In production, these groups are called herd composition with the difference that there are fewer groups in herd composition than production.
What is the livestock day (Translation of the Persian term “Damrooz”)? The number of days a livestock spends in a livestock group is called livestock day.
Example: During a one-month period, livestock No. 2507 has spent 7 days in a non-pregnant heifers group and the rest of the days in the pregnant heifers group. This example shows that the livestock No. 2507 should be charged with the pregnant heifers for 7 days and non-pregnant heifers for the remainder days. These costs relates to labor, materials and overhead.
What is the deployment cost? The cost that is paid for preparing livestock is considered as deployment cost. This cost is in two types: 1. The costs related to birth of the livestock. 2. The costs related to purchase of the livestock.
What is the issue price (or initial price) of livestock? It is the price of the livestock at the birth time. This price is obtained in two ways: 1. Deployment cost of the purchased livestock. 2. The total of livestock deployment costs and livestock growth costs.
What is depreciation? Half of the initial price of the livestock is deducted from the initial value of the livestock within a time period (depreciation time). For example, a livestock bought at a price of 3 million tomans and has a depreciation of 1.5 million tomans. If we assume that the length of the depreciation is 3 years, this livestock has an annual depreciation of 500,000 tomans.
How many types of profits do we have? Profit is in two forms: 1- Cash profit (fund balances or bank account balances) 2- Increase in assets (Growth or increase of herd).
What is the cost of a stop? The cost due to a stop in production in a dairy farm is called the cost of stop. This cost has been considered less due to being intangible, but it is necessary to identify it in a dairy farm and remove it.
The cost of heifer stop: the cost due to lack of on time conversion of heifers to the productive livestock. In production, it is also called the delay in heifers’ pregnancy.
Example: If we consider a heifer is 14 months old at inoculation time, it normally will become productive at age of 23 months old and, if this duration time increases, it is considered as heifer stop cost.
The cost of cow stop: The cost of lack of on time pregnancy, which in production means a long duration between two calving. If the duration between two calving is more than normal, it is considered as cow stop cost.
The cost of milk Stop: This cost is related to early drying of dairy cattle before calving. Suppose that the dry period is normally 60 days. So, if this period changes to 70 days, there will be 10 days of milk stop.
What is a great yield? If we reverse any of the stop items, they will be converted to yield. For example, if the dry period reaches 50 days, we will have a great yield for 10 days.
The described concepts are visually depicted in the following figure.