Costing and viability of an agri-business

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Explain costing and the viability of an agri-business Primary Agriculture NQF Level 3 Unit Standard No: 116237 1 Version: 01 L L e e a a r r n n e e r r G G u u i i d d e e Primary Agriculture C C o o s s t t i i n n g g a a n n d d v v i i a a b b i i l l i i t t y y o o f f a a n n a a g g r r i i - - b b u u s s i i n n e e s s s s My name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commodity: . . . . . . . . . . . . . . . . . . . . Date: . . . . . . . . . . . . . . . NQF Level: 3 US No: 116237 The availability of this product is due to the financial support of the National Department of Agriculture and the AgriSETA. Terms and conditions apply.

Transcript of Costing and viability of an agri-business

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 11

Version: 01 Version Date: July 2006

LLeeaarrnneerr GGuuiiddee PPrriimmaarryy AAggrriiccuullttuurree

CCoossttiinngg aanndd vviiaabbiilliittyy ooff aann aaggrrii--bbuussiinneessss

My name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Company: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commodity: . . . . . . . . . . . . . . . . . . . . Date: . . . . . . . . . . . . . . .

NQF Level: 3 US No: 116237

The availability of this product is due to the financial support of the National Department of Agriculture and the AgriSETA. Terms and conditions apply.

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BBeeffoorree wwee ssttaarrtt…… Dear Learner - This Learner Guide contains all the information to acquire all the knowledge and skills leading to the unit standard:

Title: Explain costing and the viability of an agri-business.

US No: 116237 NQF Level: 3 Credits: 3

The full unit standard will be handed to you by your facilitator. Please read the unit standard at your own time. Whilst reading the unit standard, make a note of your questions and aspects that you do not understand, and discuss it with your facilitator.

This unit standard is one of the building blocks in the qualifications listed below. Please mark the qualification you are currently doing:

Title ID Number NQF Level Credits Mark

National Certificate in Animal Production 49048 3 120

National Certificate in Plant Production 49052 3 120

This Learner Guide contains all the information, and more, as well as the activities that you will be expected to do during the course of your study. Please keep the activities that you have completed and include it in your Portfolio of Evidence. Your PoE will be required during your final assessment.

WWhhaatt iiss aasssseessssmmeenntt aallll aabboouutt?? You will be assessed during the course of your study. This is called formative assessment. You will also be assessed on completion of this unit standard. This is called summative assessment. Before your assessment, your assessor will discuss the unit standard with you.

Assessment takes place at different intervals of the learning process and includes various activities. Some activities will be done before the commencement of the program whilst others will be done during programme delivery and other after completion of the program.

The assessment experience should be user friendly, transparent and fair. Should you feel that you have been treated unfairly, you have the right to appeal. Please ask your facilitator about the appeals process and make your own notes.

Are you enrolled in a: Y N

Learnership?

Skills Program?

Short Course?

Please mark the learning program you are enrolled in:

Your facilitator should explain the above concepts to you.

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Your activities must be handed in from time to time on request of the facilitator for the following purposes:

The activities that follow are designed to help you gain the skills, knowledge and attitudes that you need in order to become competent in this learning module.

It is important that you complete all the activities, as directed in the learner guide and at the time indicated by the facilitator.

It is important that you ask questions and participate as much as possible in order to play an active roll in reaching competence.

When you have completed all the activities hand this in to the assessor who will mark it and guide you in areas where additional learning might be required.

You should not move on to the next step in the assessment process until this step is completed, marked and you have received feedback from the assessor.

Sources of information to complete these activities should be identified by your facilitator.

Please note that all completed activities, tasks and other items on which you were assessed must be kept in good order as it becomes part of your Portfolio of Evidence for final assessment.

EEnnjjooyy tthhiiss lleeaarrnniinngg eexxppeerriieennccee!!

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HHooww ttoo uussee tthhiiss gguuiiddee …… Throughout this guide, you will come across certain re-occurring “boxes”. These boxes each represent a certain aspect of the learning process, containing information, which would help you with the identification and understanding of these aspects. The following is a list of these boxes and what they represent:

MMyy NNootteess …… You can use this box to jot down questions you might have, words that you do not understand,

instructions given by the facilitator or explanations given by the facilitator or any other remarks that

will help you to understand the work better.

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What does it mean? Each learning field is characterized by unique terms and definitions – it is important to know and use these terms and definitions correctly. These terms and definitions are highlighted throughout the guide in this manner.

You will be requested to complete activities, which could be group activities, or individual activities. Please remember to complete the activities, as the facilitator will assess it and these will become part of your portfolio of evidence. Activities, whether group or individual activities, will be described in this box.

Examples of certain concepts or principles to help you contextualise them easier, will be shown in this box.

The following box indicates a summary of concepts that we have covered, and offers you an opportunity to ask questions to your facilitator if you are still feeling unsure of the concepts listed.

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WWhhaatt aarree wwee ggooiinngg ttoo lleeaarrnn?? What will I be able to do? .....................................................……………………… 6

Learning outcomes …………………………………………………………………………… 6

What do I need to know? .................................................…..……………………… 6

Overview…………………………………………………………………………………………. 6

Session 1 Various sources of income generation..…………….…………….. 7

Session 2 Various cost impacts.........................………………………………. 13

Session 3 Break-even budgets to calculate break-even points……..…….. 23

Session 4 Predict and focus financial outcomes of agri-business………... 32

Am I ready for my test? ........................................................... 43

Checklist for Practical assessment ........................................... 45

Paperwork to be done .............................................................. 46

Bibliography ............................................................................. 47

Terms and conditions……………………….………………………….. 48

Acknowledgements .................................................................. 48

SAQA Unit Standards

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WWhhaatt wwiillll II bbee aabbllee ttoo ddoo?? When you have achieved this unit standard, you will be able to:

Identify and budget for the various sources of income generation available to the agri-business.

Identify and budget for the various costs impacting on the agri-business. Demonstrate an understanding of the utilization of break-even budgets to

calculate break-even points. Demonstrate the utilisation of whole farm budgets to predict and focus

financial outcomes of an agri-business.

LLeeaarrnniinngg OOuuttccoommeess At the end of this learning module, you must is able to demonstrate a basic knowledge and understanding of:

Fixed and variable costs. Break-even analysis. Cash-flow budgets. Gross margin analysis. Budgeted sales. Demand driven production. The purpose and importance of: - Cash in a business, profit, correct

amount of income to be a viable business. A basic understanding of capital in agri-business.

WWhhaatt ddoo II nneeeedd ttoo kknnooww?? It is expected of the learner attempting this unit standard to demonstrate competence against the unit standard:

NQF 2 Illustrate and understand the basic layout of financial statements.

OOvveerrvviieeww In module one of agricultural qualification of NQF 2 learners was able to

enter the relevant financial information into the financial statements. In NQF 3 we focus on the ability to budget for the sources of income and

costs, to understand breakeven budgets and to be able to predict the financial outcomes of the agri-business.

A lot of information from NQF 2 will form the base for the ability to interpret at NQF 3.

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SSeessssiioonn 11

VVaarriioouuss ssoouurrcceess ooff iinnccoommee ggeenneerraattiioonn

After completing this session, you should be able to: SO 1: Identify the various sources of income generation available to the agri-business. SO 2: Identify and budget for the various costs impacting on the agri-business.

In this session we explore the following concepts:

Income sources from crops; live stock; and sundry farm activities. Marketing

11..11 IInnccoommee

Income Income is the profit, earnings or returns received.

11..22 SSoouurrcceess ooff iinnccoommee The sources of income for agri- business are very broad, but can be grouped into the following three categories:

Income from crops.

Income from livestock.

Income from sundry farm activities.

IInnccoommee ffrroomm ccrrooppss

Selling of crop - this would be the sale to a market.

Insurance received on products – when a crop was damaged by hail or fire, the payment is considered to be an income.

Household use of products - to feed people on the farm.

Produce consumed by internal transfers - to feed livestock.

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IInnccoommee ffrroomm lliivveessttoocckk

Livestock sales - animals sold to markets.

Livestock slaughtered for home consumption.

Insurance received from livestock losses.

IInnccoommee ffrroomm ssuunnddrryy ffaarrmm aaccttiivviittiieess

Income derived from contract work with existing surplus capacity.

Bonus on turnover.

Farm products sold which is difficult to allocate or of minor importance.

Farm products sold which derive from the major source of income, e.g. eggs or milk.

Sundry income from hiring out veld.

Income from selling homegrown materials e.g. hay.

Income from eco tourism if it is a sideline.

Sundry income from a fodder crop.

The farmer selling his skills, such as survey or construction.

Sale of indigenous seed, plants etc.

From the list above it is obvious that there are many different forms of income generating on a farm. It is very important to determine the demand for various products. It is foolish to produce a vast quantity of a product if there is no demand for it. This would result in a loss of time and inputs that were invested in the product. Supplying a product depends on its demand; it is therefore possible to create the demand by following a marketing strategy.

Please complete Activity 1: Group Activity • As a group, mention all the activities on the farm that you would calculate as a cost

to your project. Remember to keep in mind these would include on-farm and off-farm activities.

• Hand in this part to your facilitator or assessor. • Discuss this in groups, and write these on a flip chart. This action would from part of

your formative assessment in class.

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11..33 MMaarrkkeettiinngg MMaarrkkeett SSuurrvveeyy

It is essential that a market survey is conducted to determine the demand of a product before investing money or time to a new project. There is always a demand for field crops (which are cash crops), but one can never determine the quantity that will be produced. A crop (e.g. cotton or maize) depends on nature. The production will be high in a “good” year and small in a “bad” year. Subsequently, the quantity produced and the demand there of will determine the price that a farmer will receive for his crop. The price of cotton is related to international markets. The price/income of produce on domestic markets (especially fresh produce markets) varies from day to day, depending on the availability and demand. If the market is flooded (e.g. tomatoes), the price for tomatoes will drop.

MMaarrkkeett ddeemmaanndd eevvaalluuaattiioonn

Marketing actually begins with the planning of the crop. It is essential that a market demand evaluation is conducted to ensure that the correct crop, size and variety are established to meet the market’s need.

There are a few methods of determining the market demand/need; they range from complex to very simple methods and it is often best leaving it to a specialist to determine the market demand. Market trends can be followed in (e.g. The Farmers Weekly, “Landbou-Weekblad” and on the radio). (Agri-commodities price trends by Hans Balyamujura are an informative column which gives a weekly overview of commodities.).

Farmers, intending to expand their operation or venturing into a new product range, should do the following:

Go to the vendors and ask them what products they need and at what price.

Use the farm’s financial and production records (over a period of time) to indicate the trends in your specific market.

Go to supply stores and markets and investigate what the demand for certain products are.

Ask farmers in the area about the demand for a certain product.

• Alternatively, the farmer can (after going through above mentioned steps) still get professional advice to ensure him/her self whether the investment is viable as there are many variables in supplying a long-term market. Misinterpretation of these variables can easily ruin a farmer.

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• He can also stipulate the activities necessary for this specific production

cycle in order to know which activities he should budget for and where he can possibly cut down on costs which would influence his budget and finally his gross income.

Please complete Activity 2: Group Activity • Complete a log table for your crop, and mark the activities you would select which

will be reflected in your budget. • Discuss how you would change this log table to fit your specific production cycle. This

would enable you to determine the income from this income source in your final budget.

LOG TABLE to monitor activities planned for crop production

Farm no/ Plot No: ____________________

Farm Manager: ___________________________________ Region _______________________________________

Item: Sept Oct. Nov.

1 Slash and Burn

2 Apply for funding

3 Sign an agreement for loan

4 Measure field

5 Take a soil sample

6 Rip (self or via service provider)

7 Plough (self/ service provider)

8 Disc (self / service provider) Total activities done/month Oct. Nov. Dec. Jan.

9 Chemical weed control

10 Manual weed control: labour costs

11 Cultivar planted

12 Planting: machine

13 Planting by hand

14 Fertiliser given costs

15 Thinning - by hand

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16 Roundup

17 Servicing of tractors

18 Purchase of spraying equipment/servicing

Total activities done/month which led to a cost to the project.

Nov. Dec. Jan. Feb. Mar. April

19 Bollworm control chemical Y/N

20 Irrigation Y/N

21 How much and when

22 Did you have rain Y/N

23 How much and when

24 Weekly scout Y/N

25 Scout with pegboard Y/N

26 Spray on threshold Y/N

27 Jassid control (Mospilan)

28 Stainer control (Fastac)

29 bollworm control chemical Y/N

30 Thioflo Y/N

31 Cruiser Y/N

32 Other chemicals cost

33 Calibration for insect control Y/N

Total activities done/month April May June July

34 Correct Picking bags purchased

35 Labour for picking

36 Transport for cotton bales Total activities done/month General

37 How many of these activities can you save money on

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Concept (SO 1) I understand this concept

Questions that I still would like to ask

The ability to identify the various income generating sources/enterprises available to the agri-business.

The demand/markets for these products/services.

The ability to determine the income from each income source.

An ability to identify and understand the various fixed costs impacting on the agri-business is demonstrated.

An ability to identify and understand the various variable costs impacting on the selected agri-enterprises is demonstrated.

The ability to source new prices for the selected cost items (per unit) is demonstrated.

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SSeessssiioonn 22

VVaarriioouuss ccoosstt iimmppaaccttss

After completing this session, you should be able to: SO 2: Identify and budget for the various costs impacting on the agri-business.

In this session we explore the following concepts:

Fixed, variable cost and contributions. Cost Centre.

How to set up a budget?

22..11 FFiixxeedd aanndd vvaarriiaabbllee ccoossttss CCoosstt CCeennttrree

Any product produced on a farm should have its own cost centre. In scheduling the importance of recording all inputs and time against a specific cost centre was made very clear.

These input costs would be recorded against the cost centre for the specific crop. When the total income for that crop is recorded it will give you the gross income or turnover for the crop. The liabilities of the same cost centre are subtracted from the gross income to give you the net income for the one specific crop.

These liabilities may imply direct costs or also indirect costs such as interest on a loan etc. This net income can now be compared against the income of other crops to determine its viability. To determine the income of each income source you must also take in consideration the fixed and variable costs.

FFiixxeedd aanndd vvaarriiaabbllee ccoossttss

Fixed costs: are that portion of total costs which are regarded as fixed and can therefore not be avoided or controlled in the short term, irrespective of the scale or intensity of production.

Variable costs: are the portion of the total costs which varies in direct proportion to the changes in the scale of the enterprise within a given production system.

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Categorise inputs as fixed or variable costs.

Variable costs Fixed costs

Casual labour Depreciation costs on machines

Livestock feed Insurance on buildings and vehicles

Veterinary Licenses

Seed and plant Regular labour

Pesticides and herbicides Telephone

Fertilizer and lime Accounting fees

Packing material Bank charges

Hired transport Stationary

Marketing costs Interest paid on capital

Insurance Hired management

Fuel, oil and lubricants Rent

Repairs and spares Conservation work

Contract work

Electricity

Please complete Activity 3. • Use the following blank table to place the fixed and variable costs involved in your

enterprise. This activity must be completed as an individual task in your learner workbook.

Variable costs Fixed costs

1. Distinguish between variable costs and fixed costs.

2. Give an example of a “fixed cost” of the farm. Why is it a fixed cost?

3. Give an example of a “variable cost” of the farm. Why is it a variable cost?

4. Give an example of a “direct cost” of the farm. Why is it a direct cost?

5. Give an example of an “indirect cost” of the farm. Why is it an indirect cost?

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In any operation the variable costs and some of the fixed costs can vary in price, thus influencing the cost to produce an item, up or down.

GGrroossss mmaarrggiinn

Take for example often the packaging for a product can range in price according to where the items are purchased. By ensuring that the most affordable cost effective items are used the cost per item can be brought down. If there are a lot of items being sold then this saving will add up to a substantial amount.

This saving will affect the profit margin in a positive manner.

It is important to consider operating expenses when determining the total farm income. Thus may include wages, salaries, administrative, research and development costs, distribution fees and management fees, but excludes interest, depreciation and taxes.

Running costs includes all the costs that enable the production process of any agri-business activity. Determine the total running costs for 1 ha (or restricted size of the production e.g. 1 pen of hens) and then multiply it with the actual size used in the annual calculated production cycle. The crop value or income that can be derived from the yield or selling of produce needs to be known.

HHooww ttoo sseett uupp aa bbuuddggeett

Firstly, set up a budget to plant 1 ha, or as big as you have available.

This is a Physical budget on fixed costs. This budget will have all costs listed to produce 1 ha of your crop e.g. potatoes. (The figures used in this budget are not exact figures for potato production, is just to illustrate the budget).

Item/Activity Cost for 1 ha

Seed R200

Ploughing R300

Planting: by hand 6 labourers @ R50 per day x 3

days.

R900

Spraying insecticides – e.g. 6 sprays for potato

tuber moth @ R120 per spray

R720 per ha

Weeding: hand hoeing @ R50 per day for 1 day

over 10 weeks for 4 workers.

R2000

Picking @ R50 per day for 2 days x 10 workers R1000

Packaging @ R3 per bag x 1000 bags R3000

• * The budget can still be expanded to fit the crop, e.g. add fertiliser, other

chemicals, etc.

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• The amounts for 1 ha are re-calculated to the appropriate field size of the

farmer e.g. 5 ha. This is called a financial budget.

Item/Activity Cost for 1 ha Cost for 5 ha

Seed R200 R1000

Ploughing R300 R1500

Planting: by hand 6 labourers @ R50

per day x 3 days.

R900 R4500

Spraying insecticides – e.g. 6 sprays

for potato tuber moth @ R120 per

spray

R720 per ha R3600

Weeding: hand hoeing @ R50 per day

for 1 day over 10 weeks for 4 workers.

R2000 R10 000

Picking @ R50 per day for 2 days x 10

workers

R1000 R5000

Packaging @ R3 per bag x 1000 bags R3000 R15 000

• Total direct costs: R40 600 • Gross Margin: Calculate the price and the yield you would get e.g. for 1000

bags of potatoes @ R10 per bag, will give the farmer R10 000 per ha, so for 5 ha, the amount would be 50 000.

• Subtract the costs from the Gross Income, (R50 000 – R40 600=R9400) • Gross Margin: R9400.

Please complete Activity 4. • In this activity, you have been provided with two templates. • The first is an example of a gross margin statement that describes the production of

potatoes under intensive irrigation. • The second template is a blank template that you need to complete. Use figures relating

to the production cycle of the crop you are involved with. • If you get stuck on a point ask the group or the facilitator to aid you. • Note: Remember this is just an exercise, you can research exact figures when you get

back to your workplace. • Before you start to fill in the blank template you need to have worked through the points

above as a group. This will help you to make sense of the blank template and it is essential for you to be able to complete the summative assessment.

• Time:- sixty minutes for the activity and thirty minutes to report back. • After having worked through the above points you need to record the fixed and variable

costs as well as the various income sources. • Ensure that you gather all the possible material and labour costs that will occur in the

production cycle for your crop and place them into the blank template provided. You are required to provide the total production cost compared to the gross margin and indicate the gross profit you could expect from your crop.

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Template 2.1, providing the Gross margin statement, for a farmer who has 400 hectares of potatoes under irrigation.

Production of potatoes under irrigation. Potatoes Yield : (ton/ha) 60 Price/ton R1500 Rand per year income Hectare Product sales 90000 Gross production value R90000 Direct expenses Seed 13 800 Fertiliser 2 877 Weed control 358 Pest control 4 493 Spraying costs- aero plane 990 Harvesting costs 400 Irrigation costs 359 Fuel costs 300 Total direct costs R23577 Variable expenses Harvest insurance 2400 Marketing costs 8625 Packaging 5000 Casual labour 3500 Transport costs from land(10km) 500 Transport costs 6500 Total Variable expenses R26525 Fixed expenses Taxes 150 Fuel 497 Depreciation and repairs 1708 Operators costs 132 Interest on irrigation equipment 1245 Interest on production costs 1658 Telephone 100 Accounting and legal fees 250 Management salaries 250 Total fixed expenses R5990 Total expenses R56092 Split margin/ expected profit per ton R33908 Break even (price/ton) R1200 Break even (yield/ha) 48 TONS

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Template 2.2. A gross margin statement for a general production cycle. Complete the template for Gross margin statement and explain what the following terms mean to your group? - Fixed, variable costs, sources of income, material costs, labour costs, direct and indirect costs.

Complete this template as an example.

Yield : (ton/ha) Price/ton Rand per year income Hectare Product sales Other sources of revenue Other sources of revenue Gross production value Direct expenses Total direct costs Variable expenses Total Variable expenses Fixed expenses Total fixed expenses Total expenses Split margin/ expected per kg/ton? Gross margin. Break even (price/ton) Break even (yield/ha)

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The budget can be narrowed down to obtain a higher gross margin as can the gross margin be enlarged by cutting down on the variable costs such as labour, cheaper packaging, less sprays by following an Integrated Pest Management system, etc. You have to find ways to cut down on costs which would preset you with a budget called a Rationalised budget. This is the budget which is most economic and suits your pocket.

The income received from your creditors should exceed the total Gross margin of all your projects or crops planted in one season and make room for variable costs. The cost of this one project should be added to the next and all costs calculated to determine Total farm cost. The total of the variable costs of each project should be added and then subtracted from the Gross income to determine the Total Gross margin.

To determine a Total Nett Profit all costs must be subtracted from the Total Gross margin and which will be reflected on your balance sheet.

Please complete Activity 5: Group Activity • You should be familiar with the terminology concerning a budget. As a group complete

this activity. The activity deals with income statements. • Go through the example that provides information on the production of potatoes under

dry land conditions (template 2.3). • In this example there are fixed, variable and foreign costs that have been omitted. As a

group identify the costs to be omitted. Report back to the bigger group. It is important that all the information is documented, as it will help you to prepare for the completion of a generic income statement (template 2.4).

• After the report back session, complete template 2.4 on any other crop or produce than potatoes. The completed generic income statement (template 2.4) must reflect the production cycle for the crop you are involved with. (Use any amounts just to complete the example).

• Once you have completed your income statement, decide whether you have made a profit or a loss. It is vital to record all information from the feed back sessions, as it will help you in the summative assessment. Then, discuss it within your groups.

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Template 2.3

Income statement for production of potatoes under dry land farming (example)

Fixed costs/ R1000 Depreciation (facilities and equipment) 800 Interest 1500 Repairs and maintenance (facilities and equipment) 600 Taxes 200 Insurance 480 Office expenses 300 Telephone 12 Accounting 200 Travel 1000 Management salaries 600 Automotive 2000 8600 Foreign costs Training 300 Inspection by health inspector 50 Traffic fines 3 353 Variable costs Seed 1500 Advertising 120 Electricity 200 Fuel 400 Sales costs 500 Labour 1000 Fertiliser 500 Herbicides 200 Pesticides 100 Harvest insurance 60 Packaging 100 Transport costs 200 4880 Total expenses 13833 Sources of income Production sale- first grade 15000 Production sale- second grade 3000

Production sale- third grade 1000 Seed potatoes- for planting 2500 Sale of scrap machinery 50 Total income 21550 Total income – total expenses 21550-13833=

7717 Profit R7717

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2211

Version: 01 Version Date: July 2006

Template 2.4

Generic Income statement

Fixed costs/ Depreciation (facilities and equipment) Interest Repairs and maintenance (facilities and equipment)

Taxes Insurance Office expenses Telephone Accounting Travel Management salaries Automotive Foreign costs Variable costs Total expenses Sources of income Total income Total income – total expenses Profit

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2222

Version: 01 Version Date: July 2006

Concept (SO 2) I understand

this concept Questions that I still would

like to ask

An ability to identify and understand the various fixed costs impacting on the agri-business.

An ability to identify and understand the various variable costs impacting on the selected agri-enterprises.

The ability to source new prices for the selected cost items (per unit).

MMyy NNootteess …… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2233

Version: 01 Version Date: July 2006

SSeessssiioonn 33

BBrreeaakk--eevveenn bbuuddggeettss ttoo ccaallccuullaattee bbrreeaakk--eevveenn ppooiinnttss

After completing this session, you should be able to: SO 3: Demonstrate an understanding of the utilization of break-even budgets to calculate break-even points.

In this session we explore the following concepts:

Gross margin budget. Budgeted income statement. Cash flow budget viable. Budget statements.

GGrroossss mmaarrggiinn bbuuddggeett

To obtain the total gross margin, the total income of all income sources on a farm should be added together. To obtain the net farm income, the overhead costs should be subtracted from the total gross margin. These figures are important as they indicate the viability of the agri-business concerning the crop or livestock. If the expenses (fixed and variable) exceed the Gross income, the net profit will decrease and at this point in time it may become a priority to re-evaluate the production potential. At this stage the farm has reached its breakeven point as it is economically not viable to carry on farming since it is running at a loss.

Study the following gross margin budget: Cows for culling

Number Description of unit Amount Budget 42 Steers R 2000 R 84000 21 Heifers R 1500 R 31500 1 Bull R 3000 R 3000 6 Breeding cow R 2500 R 15000 2 Dry cows R 2500 R 5000 A Total income R 138 500 Variable costs Replace bull R 4000 Livestock veterinary costs R 10 000 Ear tags R 2000 low level supplementary

feeding for three months R 20000

Pasture maintenance R 5000 live stock selling costs R 7000 B Total variable costs R 48 000 A Total income –

B Total variable costs = Gross margin budget

R 90 500

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2244

Version: 01 Version Date: July 2006

Please complete Activity 6: • Page back to the example of the balance sheet provided for the potato farm (template 3.1). • To make sense out of the sheet you will have to apply what you learned in session 3. Write

down everything that you do not understand and bring the list back to the main group where the facilitator will aid you.

• Use table 5 as an example. Create your own gross margin budget and input with the figures for your own enterprise.

• At the end of the report back session, complete the blank balance sheet provided (Template 2.6 as activity 6). Use the example as a guide and ask the group and facilitator for help if you get stuck. Complete the template for the crop you are involved with. Keep notes of proceedings during the activities.

Complete the following: 1. What is an “asset” of a farm? 2. What is a “liability” of a farm? 3. What is “owner’s equity” of a farm?

Template 2.5

Potato farm- during year 2005/2006

Values presented is (x R1000)

Fixed asserts-long term 2004 2003 Farm land– 400 hectares 90 80 Plant and machinery 30 25 Buildings 20 16 Motor vehicles 10 8 Computerised equipment . 100 .80 Trade mark 10 9 Non-current receivables 10 9 Deferred taxation 8 - Deferred expenditure 6 - Total fixed asserts- long term 184.1 147. 8 Thus; R184 100.00 R147800.00 Medium term asserts Investments in stock 1.200 1 Total Medium term asserts 1.200 1 Short term asserts Cash .200 .50 Receivables .300 .200 Merchandise inventory 1.200 1.100 Inventories 1.000 .900 Taxation prepaid - - Deferred expenditure

.500 .400

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2255

Version: 01 Version Date: July 2006

Total Short term asserts 3.200 3.1 Total assets 188.5 150,9 Equity Capital and reserves Share capital and premium 56.55 52 Non distributable reserves 42.412 26 Retained earnings 14.137 13 Debentures 21.206 26 Minority interests] 7.068 13 Total equity 141.375 130 ] Liabilities Non-current liabilities Long term borrowing 14.137 7.84 Deferred taxation 10,603 3.92 Retirement benefit obligations 7.068 1.96 Deferred revenue 3.534 1.96 Total-Non-current liabilities 35.344 15.68 Current liabilities Trade and other payables 4.712 2.08 Bank overdraft 2.356 1.04 Current tax liabilities 1.178 .522 Wages and salaries 2.3562 1.04 Deferred revenue 1.1781 .522 Total- Current liabilities 11.781 5.22 Total liabilities 47.125 20.9 Total assets Total equity 141.375 130 Total liability 47.125 20.9 Total equity and liability 188.500 150.9

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2266

Version: 01 Version Date: July 2006

Template 2.6

Balance sheet for your enterprise

Fixed assets-long term 2004/2005 2005/2006

Non-concurrent assets (Long-term &

Medium term assets)

Current assets (Short term assets)

Total assets

Equity

Capital and reserves

Total equity

Liabilities:

Current liabilities

Total liabilities

Total asserts

Total equity

Total liability

Total Equity and liabilities

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2277

Version: 01 Version Date: July 2006

BBuuddggeetteedd iinnccoommee ssttaatteemmeenntt

It is very important to budget in advance to determine what the enterprise’s income will be. This budgeted income will be a guide to the profitability of the enterprise and will forecast the actual profit and/or loss.

Last years

amount % of sales This years

amount % of sales

Net sales R 300 000 100. R 250 000 100

Materials R 126 000 42. R150 000 60

labour R 85 200 28.4 R 90 000 36

contracts R 9600 3.2 R 9600 3.8

Other direct costs

R 2400 .8 R 3000 1.2

TOTAL DIRECT COSTS

R223200 74.4 R 252 600 101

GROSS PROFIT R 76 800 -(R 2 600)

OPERATING EXPENSES

Variable overheads

R 12900 4.3 R14000 5.6

Fixed overheads R 53400 17.8 R53 400 21

TOTAL OPERATING EXPENSES

R 66300 22.1 R67 000 26.9

NET PROFIT BEFORE TAXES

R 10 500 3.5 -( 69 600) -27.8

Please complete Activity 7: Group activity • As a group, explain the following diagram which illustrates the “flow of money in agri

business”. • Create your own budgeted income statement by using the table (budgeted income

statement) above as an example. • This activity will be a formative assessment and will provide the formative evidence

for the following assessment criteria: SO 3 – AC,3.2 • Time:- sixty minutes for group activity (at home) and thirty minutes report back time.

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2288

Version: 01 Version Date: July 2006

Template 2.7

Last years amount

% of sales This years amount

% of sales

Net sales Materials labour contracts Other direct costs

TOTAL DIRECT COSTS

GROSS PROFIT

OPERATING EXPENSES

Variable overheads

Fixed overheads

TOTAL OPERATING EXPENSES

NET PROFIT BEFORE TAXES

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 2299

Version: 01 Version Date: July 2006

CCaasshh ffllooww bbuuddggeett

Cash flow budget- ( ) indicates a negative balance.

A Cash Flow Budget will indicate the expected flow of cash, reflects projected figures, shows the amount money available (bank balance) and will assist the farmer to plan for periods of negative cash flow during the term of operation.

Month 1 Month 2 Month 3 Beginning cash balance - R(150 000) -R(26 600) R 222 000 Cash in flows. (income)

Live stock sales R300 000 R400 000 R 00000 Insurance received on product loss

R 40 000 R 50 000 R 0000

Sale of crops R 150000 R 200 000 R 300 000 other R 20 000 R 30 000 R 50 000 Total cash R 510 000 R 680 000 R 350 000 AVAILABLE CASH R 360 000 R 653 000 R572 000 Cash out flow expenses. Casual labour R102800 R 120000 R 200 000 Feed R71800 R 80 000 R 100 000 Seed and plants R 40 000 R 50 000 R 60000 Pesticides & herbicides R 20 000 R 25 000 R 30 000 Transport R 15000 R20 000 R 25 000 Other( fixed costs) R 40000 R40 000 R 40 000 Sub total R 289600 R 325 000 R 455 000 Other cash out flows Capital purchases R 12 000 R 24 000 R 12 000 Interest paid R30 000 R27000 R 28000 Rent and shared crop paid R 25 000 R 25000 R 25000 Hired management R10 000 R 10 000 R10 000 Owners draw R 20 000 R 20 000 R20 000 Sub total R 97 000 R 106 000 R 95 000 Total cash out R 386600 R 431 000 R 550 000 Ending cash balance -(R26600) R 249 000 R 22 000

BBuuddggeett SSttaatteemmeennttss

Budget statements are often presented as two separate sheets. To simplify the process we will only use one combined statement.

Discuss the necessity of a twelve-month budget instead of an annual budget in your groups. This is applicable to agricultural businesses where income and expenses vary over the twelve months. It is also important to notice that an agricultural operation often owes money to various entities and the repayments of interest need to be budgeted for. It could happen that a loss may be budgeted for in some months.

The gross margin statement, income statement and the balance sheet provided as an example in the Learner Guide, contain sufficient data for you to complete the blank copy of the cash flow statement (Template 4.1 in the Learner Workbook.). (You can use imaginary figures to complete this exercise).

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3300

Version: 01 Version Date: July 2006

Before you start on this exercise you need to go through the example copy to get an idea of what is expected of you to fill in the blank copy and how to transfer the month end balance to the next month.

Once you have completed the blank statement you need to look for important results that are highlighted and determine whether the cash flow is positive or negative and how you could improve the flow of cash.

This section is rather confusing and complicated; ask your facilitator or group to aid you.

After completing this exercise you must link the cash flow budget and cash flow statement to the income statement.

To try and understand the different statements and allow relevant information to be fed back to the manager the following terms are often used:

The break-even point is defined as the point where sales/income equal expenses. (There where no losses or profits made). This figure is important for anyone that manages a business since the break-even point is the lowest limit of profit when setting prices and determining margins. Obviously the break-even point becomes very important when calculating a strategy for net profit.

The break-even-analysis determines the quantity you need to sell, monthly or annually, to cover your costs and make a profit.

The net farm income = gross farm income less total farm costs. If it so happens that the gross farm income equals the total costs involved in operating the farm it reached the break-even point. It is vital for the farmer to monitor this point. A farmer needs to know the quantity of units that he must produce and sell to reach the break-even point and for that achievement he uses a brake even analysis.

The brake even point can be beyond the farm’s ability. If this is the case the farmer must look for crops or means of income that require less inputs and higher returns. A farmer might even find it necessary (for his own sake) not to invest in a field but to let it lie uncultivated. This will allow the farmer to pursue crops that will generate a higher return or require fewer inputs. A farmer will use the gross margin budget to determine the break- even point for each enterprise. The budget income statement will indicate whether the farm, as a unit, will achieve break-even point.

It is possible for one individual enterprise not to achieve the break-even point while the other enterprises do. The farmer must now decide to either; end this specific enterprise or to carry on with it allowing the other “strong” enterprises to carry the loss. (The reason was that markets might change ext.).

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3311

Version: 01 Version Date: July 2006

Concept (SO 3) I understand

this concept Questions that I still would

like to ask

The ability to understand and draft a gross margin budget for each enterprise.

The ability to draft and understand a budgeted income statement for the whole farm.

The ability to draft and understand a cash flow budget for the whole farm.

An understanding of the use of break-even analysis as a management tool.

The ability to determine and apply the break-even point of each commodity as a management tool.

MMyy NNootteess …… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3322

Version: 01 Version Date: July 2006

SSeessssiioonn 44

PPrreeddiicctt aanndd ffooccuuss ffiinnaanncciiaall oouuttccoommeess ooff aaggrrii--bbuussiinneessss

After completing this session, you should be able to: SO 4: Demonstrate the utilisation of whole farm budgets to predict and focus financial outcomes of an agri-business.

In this session we explore the following concepts:

Planning for long-term profits Cash flow budget The balance sheet

PPllaannnniinngg ffoorr lloonngg tteerrmm ssuussttaaiinnaabbllee pprrooffiittss

For any business to operate and maintain an impression of direction must have very clear goals set.

In the past it was always assumed that the goal of any commercial farm was to maximise profit. This has changed into setting goals that involve planning for long-term sustainable profits. To maximise short-term profits often damaged the long-term profitability of a farm.

The various decisions farm management make regarding productive activities can be classified into three levels of increasing complexity:

The first level include decisions concerning the methods of producing with a given quantity of output, a given size and equipment on a farm. It involves the problem of what is called short-run cost minimisation.

The second level, including the determination of the most profitable quantities of products to produce on any given farm, deals with what is called short-run profit maximisation.

The third level, concerning the determination of the most profitable size and equipment to be used in the operation, relates to what is called long-run profit maximisation.

In economics, expected rates of return on investment as an additional unit of investment are made under specified conditions and over a stated period of time. A comparison of these rates with the going rate (interest) may be used to indicate the profitability of an investment. The rate of return is calculated as the rate at which the expected stream of future earnings from an investment project must be discounted to make their present value equal to the cost of the project.

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3333

Version: 01 Version Date: July 2006

As the quantity of enterprises increases, the income from it may be expected to decrease because the most profitable projects are undertaken first. Additions of enterprises will imply projects with progressively lower income. Logically, enterprises will commence as long as the marginal efficiency of each additional enterprise exceeds the interest rate. If the bank’s interest rate should increase, it would affect the existence of an enterprise as the costs of borrowing funds to propel the business will be higher. In the cash flow statement below you will find reference to enterprises. These enterprises are costly and the farm has to be productive to pay them back.

The purpose of the cash flow statement is to ease management's use of the financial resources and to assist the debtors to evaluate the company's liquidity and its ability to pay back loans.

A cash flow budget A budget that represents the flow of cash on a monthly

basis.

The cash flow statement A budget that represents the source and use of the

enterprise’s funds by operating activities, investing activities

and financing activities.

Operating activities This represents the cash received for the product and cash

paid out for costs of production.

Investing activities This represents the purchasing of new equipment or

extending the operation.

Financing activities This represents the repayment of long-term loans.

Budgeted sales refer to the volume of sales at which an acceptable return on investment is achieved.

When running an agri business it is important to strive for the maximum profit. The profit available at the end of the season, or the project period, will determine the extent of liabilities such as bank loans and over draft facilities. The profit can also be utilised (plough back) into the business by funding activities for the coming season. The return on the investment will probably be slightly higher at the end of the financial year, but with less liability the profit margin for the second year would be larger.

In order to utilise the available money for the next season, one must know how much money is needed for these activities.

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3344

Version: 01 Version Date: July 2006

Please complete Activity 8:

Using the table provided in the learner workbook to create your own cash flow budget. This activity will be a formative assessment and provide the formative evidence for the following assessment criteria: SO 3 – AC 4.3 In your groups, brainstorm why it is necessary to have a twelve-month budget and not only an annual budget. This is applicable to agricultural businesses where income and expenses vary over the twelve months. It is also important to notice that an agricultural operation often owes money to various entities, and the repayments of the interest need to be budgeted for. It could happen that in some months a loss may be budgeted for.

MMyy NNootteess …… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3355

Version: 01 Version Date: July 2006

CASH BOOK - APR'05

DESCRIPTION DATE TOTAL VAT INCOME INTEREST SARS

CHEQUE NO DATE PROJECT VENDOR TOTAL

O/BALANCE 31-Mar-05

53,688.98 -

INTEREST 1-Apr-05 3.52 3.52 -

Inv 71 tractor services 15-Apr-05

684.00

84.00

600.00 -

Inv 70 Chemicals 16-Apr-05

1,337.60

164.27

1,173.33 -

-

O401 4-Apr-05 GNL SARS-PAYE Mar 05 1,224.96

O402 4-Apr-05 GNL SARS-SDL Mar 05 200.00

O403 4-Apr-05 GNL SARS-UIF Mar 05 400.00

O404 14-Apr-05 GNL Seed Purchases 5,919.68

O405 14-Apr-05 GNL Labour weeding 2,607.90

O406 15-Apr-05 GNL EM DU TOIT 4,668.68

O407 15-Apr-05 GNL A BENNETT 4,668.68

O408 18-Apr-05 GNL CLN DU TOIT 3,318.00

O409 18-Apr-05 GNL

Bojanala Platinum Distrcit Municipality (RSC levy Mar 05) 95.56

O410 20-Apr-05 GNL Planting Contractor A. 7,272.30

O411 22-Apr-05 GNL Spraying Contractor B 4,620.48

O412 29-Apr-05 GNL Harvesting Contractor C 2,307.00

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3366

Version: 01 Version Date: July 2006

O413 29-Apr-05 GNL West Area Half House (Rent May 05) 1,393.89

O414 29-Apr-05 GNL Sundries 175.00

O415 29-Apr-05 GNL Auditors 228.00

-

-

1-Apr-05 INTERNET 184.00

1-Apr-05 Service fee 122.90

1-Apr-05 Transaction charge 42.00

1-Apr-05 Admin charge 9.15

55,714.10

248.27

1,773.33

3.52

- 1-Apr-05 Government levy -

30-Apr-05 NET BANK FEE 159.30

BALANCE :- 16,096.62

AS PER B/Statement 16,096.62 39,617.48

CHEQUES NOT THROUGH BANK :-

-

Final Balance.

16,096.62

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3377

Version: 01 Version Date: July 2006

Please complete Activity 9: • Complete the following Template 2.8. Mark activities with an X - when they are

scheduled to take place • (you could adapt the months and activities to suit the crop) • Before you start on this you need to go through the example copy below, and get an

idea of what is expected of you to fill in the blank copy. It is important for you to determine how to transfer the month end balance to the next month.

• Once you have completed the input of required data into the blank statement you need to look for important results that are highlighted, such as whether the cash flow is positive or negative. Also determine whether and how you could improve the flow of cash.

• It is advisable to ask the group and the facilitator for help as this section can get confusing and complicated.

• At the end of this exercise you must be able to link the cash flow budget/ statement to the income statement. Your income will always reflect on your left, while the expenses and total expenses on the right of the cashbook. The individual expenses for each item are not shown here, only the totals. All invoices should be numbered. The bank charges, auditor fees etc. should be on the statement. The farmer should adapt the cashbook to suit his/her own situation.

Template 2.8 Activity table for crop production Item: Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. April May June July Plough Disc Seed Plant (Hand) Roundup Fertilizer LAN Labour weeding Labour spraying Early Pest control Mid-season Pest control Late-season Pest control Harvest Total:

A cash flow table can help you to distribute your cash evenly over the critical months, when a lot of cash is needed.

See the example of a cash flow statement- (brackets stand for a negative amount).

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3388

Version: 01 Version Date: July 2006

January budget February budget Cash flow from operating activities

Cash receipts from customers 1722830 1800000 1400000 1300000 Cash paid to suppliers and employees

(623081) (700000) (900000) (1000000)

Cash generated from operations

1099749 1100000 500000 300000

Interest received 22244 20000 15000 16000 Interest paid less capitalized (100950) (80000) (80000) (80000) Dividends paid (330368) (400000) (400000) (400 000) Dividends received 19020 18000 20000 18000 Taxation paid (251357) (260000) (260000) (260000) Net cash flow from operating activities

458338 380000 (205000) (406000)

Cash flows from investing activities

Increase in investments (13236) (10000) - - Movements in joint venture (518) (200) - - Proceeds on disposal of vehicles, equipment ,land and buildings

4933 6000 50000 50000

Proceeds on disposal of intangible assets

866 - - -

Decrease in non current receivables

11948 10000 20000 20000

Receipts from subsidiaries - - Additions to vehicles equipment and land and buildings

(473462) (300000) - -

Net cash outflow from investing activates

(469469) (294200) 70000 70000

Cash flows from financing activities Repayment of long term borrowings

(88718) (90000) (60000) (60000)

Net cash flow from financing activities

(88718) (90000) (60000) (60000)

Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the month

(99849) (164133) this amount was carried over from December month.

(4200) (130000)

(195000) (263982) this amount was carried over from January month

(396000) (250000)

Cash and cash equivalents at the end of the month

(263982) to be carried over to February

(134200)

(458982) to be carried over to March

646000

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 3399

Version: 01 Version Date: July 2006

Please complete Activity 10: Template 2.9 Cash flow budget /statement- (values in brackets are negative). Use the example in the Learner Guide to complete this table below. Check Template 4.1 to see which months you have already scheduled which tasks. In this activity an example of a month-to-month budget and statement for cash flow of an operation should be provided 1. Why is it important for a farmer to make a profit? How is profit determined?

Template 2.9

Cash flow table for crop production Item: Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. April May June JulyPlough Disc Seed Plant (Hand)

Roundup Fertilizer LAN Labour weeding Labour spraying Early Pest Control Mid season Pest Control Late season Pest Control Harvest Total: Cumulative (budget) Budget carried over from previous month Loan plus interest (13.5% comp.) Gross Income: Gross margin (expenditure) Net Profit (negative number in brackets)

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4400

Version: 01 Version Date: July 2006

AA bbaallaannccee sshheeeett

The balance sheet reflects the assets and liabilities at the end of a certain period or at the end of the financial year.

Assets include Non-concurrent assets and Current assets.

Non-current assets includes:

• Fixed assets (cars, equipment and loans receivable).

Current Assets include:

• all debtors (people owing your business money)

• loans receivable

• taxation and

• cash in the bank.

The sum of the non-current assets and current assets will give a total asset value.

To determine the net asset value, you must subtract the liabilities from the total asset value.

If you are a member of a close corporation the net asset value is used to calculate the distributable amount for a member.

Liabilities

Non-Current liabilities is any money that the business owes e.g. to other members of the business or loans.

Current liabilities include taxation and creditors. The sum of the Non-Current liabilities and current liabilities implies the Member’s interest and reserve. To determine the distributable reserve you must deduct the money invested (paid in advance) in the business from the Member’s interest and reserve.

A balance sheet always reflects the previous years’ Total member’s interest.

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4411

Version: 01 Version Date: July 2006

An example is given below:

Assets Notes 2005 (R) 2004 ® Non-current assets Fixed assets 2 10.349 7.252 Current assets 128,450 115.790 Trade and other receivables - 74.373 Taxation 1.500 1.500 Cash and cash equivalents 126.950 39.917 Total assets: 138,799 123.042 Member’s interest and liabilities Member’s interest and reserves 6.221 4.407 Members interest 3 100 100 Distributable reserve 6.121 4.307 Non-current liabilities 4 100.511 109.524 Members’ loans

Current liabilities 32.067 9,111 Taxation 810 1.500 Trade and other payables 31.257 7.611

Total members’ interest and liabilities: 138,799 123,042

You should have a good comprehension of all the important terminology to do with budgeting and balance sheet, and be able to interpret and understand a balance sheet.

Please complete Activity 11: Complete after a discussion in groups Explain to your group what the different terminologies means in a balance sheet. See if you can explain to each other how the assets are calculated and what you understand under Non-current and Current liabilities.

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4422

Version: 01 Version Date: July 2006

Concept (SO 4) I understand this concept

Questions that I still would like to ask

The business goals with specific reference to profit maximisation in a business is explained.

Return on investment is explained.

The utilization of the cash-flow statement to provide an indication of financial outcomes and input to managerial decisions is demonstrated.

The break-even analysis is utilised.

The gross margin analysis technique is utilised.

MMyy NNootteess …… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4433

Version: 01 Version Date: July 2006

AAmm II rreeaaddyy ffoorr mmyy tteesstt?? Check your plan carefully to make sure that you prepare in good time. You have to be found competent by a qualified assessor to be declared

competent. Inform the assessor if you have any special needs or requirements

before the agreed date for the test to be completed. You might, for example, require an interpreter to translate the questions to your mother tongue, or you might need to take this test orally.

Use this worksheet to help you prepare for the test. These are examples of possible questions that might appear in the test. All the information you need was taught in the classroom and can be found in the learner guide that you received.

1. I am sure of this and understand it well 2. I am unsure of this and need to ask the Facilitator or Assessor to explain what it means

Questions 1. I am sure 2. I am unsure

1. What is “stock”?

2. Why do farms have stock?

3. What types of stock does the farm keep where you are performing your practical duties?

4. Why do farms keep “records”?

5. What types of financial records do farms keep?

6. What do farms need to compile financial records for?

7. What financial records do farms compile and what is each record’s purpose.

8. If you received a salary of R1000.00 per month before deductions and work 5 days a month as a casual waiter at R25.00 a shift, what is your monthly income?

9. If the farm where you work has an average income of R4000.00 a month every second month, what is the annual income of the farm?

10. What “materials” does the farm often buy?

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4444

Version: 01 Version Date: July 2006

11. Choose one of these materials. What is the price of one of this material per unit?

12. What “labour” does the farm require?

13. What is the price of an average farm worker’s labour daily?

14. If the farm needs 58 of the material units that you chose and have to employ 10 farm workers for 26 days to finish a job, what will it cost the farm.

15. If the farm has an income of R5000.00 a month for 8 months of the year and it has a total expense of R68000.00 for the year, is the farm making a profit or a loss? Explain your answer and give the value of the profit or loss.

16. The farm is showing a loss of R80 000.00 a year. The farm has the following expenses in the year: Wages: R50 000 Utilities: R30 000 Annual Christmas Party: R 5 000 Agro-chemicals: R20 000 Staff meals: R10 000 Vehicle maintenance: R 5 000 Tools: R 8 000

a. If you had to make strategic decisions to cut

costs, what would you cut and why?

MMyy NNootteess …… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4455

Version: 01 Version Date: July 2006

CChheecckklliisstt ffoorr pprraaccttiiccaall aasssseessssmmeenntt …… Use the checklist below to help you prepare for the part of the practical assessment when you are observed on the attitudes and attributes that you need to have to be found competent for this learning module.

Observations Answer Yes or No

Motivate your Answer (Give examples, reasons, etc.)

Can you identify problems and deficiencies correctly?

Are you able to work well in a team?

Do you work in an organised and systematic way while performing all tasks and tests?

Are you able to collect the correct and appropriate information and / or samples as per the instructions and procedures that you were taught?

Are you able to communicate your knowledge orally and in writing, in such a way that you show what knowledge you have gained?

Can you base your tasks and answers on scientific knowledge that you have learnt?

Are you able to show and perform the tasks required correctly?

Are you able to link the knowledge, skills and attitudes that you have learnt in this module of learning to specific duties in your job or in the community where you live?

The assessor will complete a checklist that gives details of the points that are checked and assessed by the assessor.

The assessor will write commentary and feedback on that checklist. They will discuss all commentary and feedback with you.

You will be asked to give your own feedback and to sign this document. It will be placed together with this completed guide in a file as part

of you portfolio of evidence. The assessor will give you feedback on the test and guide you if there are

areas in which you still need further development.

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4466

Version: 01 Version Date: July 2006

PPaappeerrwwoorrkk ttoo bbee ddoonnee …… Please assist the assessor by filling in this form and then sign as instructed.

Learner Information Form

Unit Standard 116237

Program Date(s)

Assessment Date(s)

Surname

First Name

Learner ID / SETA Registration Number

Job / Role Title

Home Language

Gender: Male: Female:

Race: African: Coloured: Indian/Asian: White:

Employment: Permanent: Non-permanent:

Disabled Yes: No:

Date of Birth

ID Number

Contact Telephone Numbers

Email Address

Postal Address

Signature:

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4477

Version: 01 Version Date: July 2006

BBiibblliiooggrraapphhyy BBooookkss::

Encarta Encyclopaedia Standard Edition 2004 extracts on:

• Fixed costs

• Variable costs

• Owners equity

• Budget

Encyclopaedia Britannica 2004 deluxe edition CD

• Break even budget

• Gross margin budgets

• Cash flow budgets: adapted from Cotton SA, Skills Training Programmes.

• Break even analysis

Act no 36 of 1947- fertilizer, feed and medication

Hazardous substances Act no 15

Foodstuffs, cosmetics and disinfectants act no 54

Elementary record book for farmers

Guidelines for the monitoring irradiated foodstuffs in South Africa

Occupational Health and safety act

Labour relations act of 1995

WWoorrlldd WWiiddee WWeebb::

nda.agric.za

hrcapacity.co.za

businessknowhow.com

sba.gov

Inselele Training cc.

[email protected]

Explain costing and the viability of an agri-business

Primary Agriculture NQF Level 3 Unit Standard No: 116237 4488

Version: 01 Version Date: July 2006

TTeerrmmss && CCoonnddiittiioonnss This material was developed with public funding and for that reason this material is available at no charge from the AgriSETA website (www.agriseta.co.za).

Users are free to produce and adapt this material to the maximum benefit of the learner.

No user is allowed to sell this material whatsoever.

AAcckknnoowwlleeddggeemmeennttss

PPrroojjeecctt MMaannaaggeemmeenntt::

M H Chalken Consulting

IMPETUS Consulting and Skills Development

DDoonnoorrss::

Boland College

Weskus College

AAuutthheennttiiccaattoorr::

Ms A Bennett

TTeecchhnniiccaall EEddiittiinngg::

Mr R H Meinhardt

LLaanngguuaaggee EEddiittiinngg::

Mr D Erasmus

OOBBEE FFoorrmmaattttiinngg::

Ms P Prinsloo

DDeessiiggnn::

Didacsa Design SA (Pty) Ltd

LLaayyoouutt::

Ms A. du Plessis Ms N Matloa

All qualifications and unit standards registered on the National Qualifications Framework are public property. Thus the only payment that can be made for them is for service and reproduction. It is illegal to sell this material for profit. If the material is reproduced or quoted, the South African Qualifications Authority (SAQA) should be acknowledged as the source.

SOUTH AFRICAN QUALIFICATIONS AUTHORITY

REGISTERED UNIT STANDARD:

Explain costing and the viability of an agri-business

SAQA US ID UNIT STANDARD TITLE

116237 Explain costing and the viability of an agri-business

SGB NAME REGISTERING PROVIDER

SGB Primary Agriculture

FIELD SUBFIELD

Field 01 - Agriculture and Nature Conservation Primary Agriculture

ABET BAND UNIT STANDARD TYPE NQF LEVEL CREDITS

Undefined Regular Level 3 3

REGISTRATION STATUS

REGISTRATION START DATE

REGISTRATION END DATE

SAQA DECISION NUMBER

Registered 2004-10-13 2007-10-13 SAQA 0156/04

PURPOSE OF THE UNIT STANDARD

The learner achieving this unit standard will be able to do a proper costing and understand the viability of an agri-business. In addition the learner will be well positioned to extend their learning and practices into other areas of compiling an integrated budget. The agri-business owner will benefit from this in the sense that he/she would know at what volume of sales he/she would make a profit. Learners will understand the importance of the application of business principles in agricultural production with specific reference to finances in an agri-business. They will be able to operate farming practices as businesses and will gain the knowledge and skills to move from a subsistence orientation to an economic orientation in agriculture. Farmers will gain the knowledge and skills to access mainstream agriculture through a business-orientated approach to agriculture.

LEARNING ASSUMED TO BE IN PLACE AND RECOGNITION OF PRIOR LEARNING

It is assumed that a learner attempting this unit standard will demonstrate competence against the unit standards or equivalent: • NQF 2: Illustrate and understand the basic layout of financial statements.

UNIT STANDARD RANGE

Whilst range statements have been defined generically to include as wide a set of alternatives as possible, all range statements should be interpreted within the specific context of application. Range statements are neither comprehensive nor necessarily appropriate to all contexts. Alternatives

must however be comparable in scope and complexity. These are only as a general guide to scope and complexity of what is required.

UNIT STANDARD OUTCOME HEADER

N/A

Specific Outcomes and Assessment Criteria:

SPECIFIC OUTCOME 1

Identify the various sources of income generation available to the agri-business.

OUTCOME RANGE

Income sources refer to both on-farm and off-farm income sources.

ASSESSMENT CRITERIA

ASSESSMENT CRITERION 1

The ability to identify the various income generation sources/enterprises available to the agri-business is demonstrated.

ASSESSMENT CRITERION 2

The demand/markets for these products/services are demonstrated.

ASSESSMENT CRITERION 3

The ability to determine the income for each income source is demonstrated.

SPECIFIC OUTCOME 2

Identify and budget for the various costs impacting on the agri-business.

OUTCOME RANGE

Fixed, variable cost and contributions.

ASSESSMENT CRITERIA

ASSESSMENT CRITERION 1

An ability to identify and understand the various fixed costs impacting on the agri-business is demonstrated.

ASSESSMENT CRITERION 2

An ability to identify and understand the various variable costs impacting on the selected agri-enterprises is demonstrated.

ASSESSMENT CRITERION 3

The ability to source new prices for the selected cost items (per unit) is demonstrated.

SPECIFIC OUTCOME 3

Demonstrate an understanding of the utilization of break-even budgets to calculate break-even points.

OUTCOME RANGE

Gross margin budgets, income statements, break-even budgets, and cash-flow budgets

ASSESSMENT CRITERIA

ASSESSMENT CRITERION 1

The ability to understand and draft a gross margin budget for each enterprise is demonstrated.

ASSESSMENT CRITERION 2

The ability to draft and understand a budgeted income statement for the whole farm is demonstrated.

ASSESSMENT CRITERION 3

The ability to draft and understand the a cash-flow budget for the whole farm is demonstrated.

ASSESSMENT CRITERION 4

An understanding of the use of break-even analysis as a management tool is demonstrated.

ASSESSMENT CRITERION 5

The ability to determine and apply the break-even point of each commodity as a management tool is demonstrated.

SPECIFIC OUTCOME 4

Demonstrate the utilisation of whole farm budgets to predict and focus financial outcomes of an agri-business.

OUTCOME RANGE

Budgeted sales refer to the volume of sales at which an acceptable return on investment is achieved.

ASSESSMENT CRITERIA

ASSESSMENT CRITERION 1

The business goals with specific reference to profit maximisation in a business is explained.

ASSESSMENT CRITERION 2

Return on investment is explained.

ASSESSMENT CRITERION 3

The utilization of the cash-flow statement to provide an indication of financial outcomes and input to managerial decisions is demonstrated.

ASSESSMENT CRITERION 4

The break-even analysis is utilised.

ASSESSMENT CRITERION 5

The gross margin analysis technique is utilised.

UNIT STANDARD ACCREDITATION AND MODERATION OPTIONS

The assessment of qualifying learners against this standard should meet the requirements of established assessment principles. It will be necessary to develop assessment activities and tools, which are appropriate to the contexts in which the qualifying learners are working. These activities and tools may include an appropriate

combination of self-assessment and peer assessment, formative and summative assessment, portfolios and observations etc. The assessment should ensure that all the specific outcomes, critical cross-field outcomes and essential embedded knowledge are assessed. The specific outcomes must be assessed through observation of performance. Supporting evidence should be used to prove competence of specific outcomes only when they are not clearly seen in the actual performance. Essential embedded knowledge must be assessed in its own right, through oral or written evidence and cannot be assessed only by being observed. The specific outcomes and essential embedded knowledge must be assessed in relation to each other. If a qualifying learner is able to explain the essential embedded knowledge but is unable to perform the specific outcomes, they should not be assessed as competent. Similarly, if a qualifying learner is able to perform the specific outcomes but is unable to explain or justify their performance in terms of the essential embedded knowledge, then thy should not be assessed as competent. Evidence of the specified critical cross-field outcomes should be found both in performance and in the essential embedded knowledge. Performance of specific outcomes must actively affirm target groups of qualifying learners, not unfairly discriminate against them. Qualifying learners should be able to justify their performance in terms of these values. • Anyone assessing a learner against this unit standard must be registered as an assessor with the relevant ETQA. • Any institution offering learning that will enable achievement of this unit standard or assessing this unit standard must be accredited as a provider with the relevant ETQA. • Moderation of assessment will be overseen by the relevant ETQA according to the moderation guidelines in the relevant qualification and the agreed ETQA procedures.

UNIT STANDARD ESSENTIAL EMBEDDED KNOWLEDGE

The person is able to demonstrate a basic knowledge of: • Fixed and variable costs. • Break-even analysis. • Cash-flow budgets. • Gross margin analysis. • Budgeted sales. • Demand driven production. • The purpose and importance of: - Cash in a business. - Profit. - Correct amount of income to be a viable business. - A basic understanding of capital in agri-business.

UNIT STANDARD DEVELOPMENTAL OUTCOME

N/A

UNIT STANDARD LINKAGES

N/A

Critical Cross-field Outcomes (CCFO):

UNIT STANDARD CCFO IDENTIFYING

Problem solving relates to all specific outcomes.

UNIT STANDARD CCFO ORGANIZING

Self-organisation and management relates to all specific outcomes.

UNIT STANDARD CCFO COLLECTING

Information evaluation relates to all specific outcomes.

UNIT STANDARD CCFO SCIENCE

Use science and technology relates to all specific outcomes.

UNIT STANDARD CCFO DEMONSTRATING

Inter-relatedness of systems relates to all specific outcomes.

UNIT STANDARD CCFO CONTRIBUTING

Self-development relates to all specific outcomes.

UNIT STANDARD ASSESSOR CRITERIA

N/A

UNIT STANDARD NOTES

N/A

All qualifications and unit standards registered on the National Qualifications Framework are public property. Thus the only payment that can be made for them is for service and reproduction. It is illegal to sell this material for profit. If the material is reproduced or quoted, the South African Qualifications Authority (SAQA) should be acknowledged as the source.