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16 JUNE 2000 ------------------------- COST QUANDARY FACES OWNERS OF COMBINES FSGSTAFSREWFXZ VNCMDUSDHYSGA THE costs of owning and operating a combine harvester are traditionally classified

as either fixed or variable costs, writes Tom Chapman, Farm Business Adviser with accountants Grant Thornton. However, as so often happens, the reality is not as clear-cut as this. Some

costs are truly fixed, meaning they do not vary regardless of the acreage covered, insurance of the combine being a good example of this. Others are truly variable, an example being fuel

costs, which increase in a straight line as the area covered increases. The calculations become clouded when trying to deal with costs that are partially fixed and partially variable. One

example of this is depreciation. A combine will generally lose value over time even where it is not used. A combination of factors are at play here: It may be superseded by superior models,

spare parts become more difficult to acquire and perishable materials used in the combines construction will continue to age regardless of usage. As a result, demand in the marketplace, and

hence the market value of the machine, falls away, as represented by the "fixed" cost of depreciation. However, subject the same machine to a high annual workload and the rate of

depreciation will be much greater, and therefore "variable". The extent to which its value falls depends on: – Hours worked – Treatment by the operator – Service and maintenance

history – Types of crop harvested. Another cost which is both fixed and variable, and one that is often overlooked or miscalculated, is the labour cost attributable to a machine. The fixed

part is the salary or basic wage of the worker which will not vary regardless of the hectares combined. However, overtime is a variable cost, and may be directly affected by the area

covered. The simplest way to calculate the total operating cost for the combine is to enter figures into a costing sheet (Table 1). This requires some assumptions to be made, although, with

experience and careful research, such assumptions soon become very accurate. The first step is to ascertain the purchase price of the combine, the number of years it will be kept for, and

its likely market value at the end of this period. This gives the average annual depreciation for the machine during the period of ownership. In the example given (table one) the combines

value is expected to fall by £80,039 in the six years of ownership, an average of £13,340 each year. Other annual costs are also entered into the calculation, for example road tax and

insurance costs. The sum of all these gives the "fixed" costs incurred in the year. These total £14,510, or £44.64 per hectare over the 325 hectares in the example. Interest

inclusion? Interest on the capital employed has been left out of the calculations. It is a matter of some debate whether it should be included as it is often not regarded as a true fixed

cost of operation. Operating or "variable" costs are then added to the calculation. These include spares and repairs and fuel used. The labour cost should also be added here,

remembering to allocate the correct proportion of the basic wage or salary to the operation, as well as any overtime incurred. For calculation purposes, it is often simpler to allocate such

costs on a per acre or per hour basis as they are relatively easy to obtain. At this stage the total costs of the combine can be calculated on a per hectare basis. Reducing or increasing the

area will allow any economies of scale to be determined, and can be a useful tool when calculating tender levels for FBTs or contract farming agreements. For example, an additional 50

hectares may result in lower costs per hectare as the fixed costs are spread over a larger acreage (table 2). It is assumed that overtime is required to combine the additional land: One

suggestion is to carry out such calculations using a computer spreadsheet, if possible. Their versatility allows different permutations to be calculated quickly and easily, accurately

forecasting the likely financial impact on the business of various scenarios. &#42 _Working out the true cost of operating a combine is not as straightforward as it may seem.

Calculations can become clouded …_ TABLE 1 ------------------------- Combine harvester covering £ 325 hectares Purchase price after 115,000 discount Selling price after 34,961 6 years Fixed

costs: Annual depreciation 13,340 Road tax and insurance 1,170 Total annual fixed costs 14,510 Total fixed cost per hectare 44.64 Operating costs per hectare: Fuel 2.75 Spares & repairs

17.69 Labour 3.45 Total operating costs 23.89 per hectare Total costs per hectare 68.53