Econ Module 6 Flashcards
- Science which deals with the proper combination and operation of production factors, including land, labor, and capital, and the choice of crop and livestock enterprises to bring about a maximum and continuous return to the most elementary operating units in farming.
Farm Management
The artistic aspect includes keeping a tidy farm layout and maintaining good contact with various sources of farm inputs so that they could be arranged in adequate quantity at the proper time.
Farm Management as an art
It relates to the decision-making about specific operations on the farm and includes applying scientific principles and methodology.
Farm Management as a science
It indicates the consideration of economic efficiency so that the farmers’ goal is achieved with minimum cost and maximum returns.
Farm Management as a business
3 Major Components in the Farm Business
- Physical and biological
- Farmer and his family
- Exogenous/Institutional Component
soil, land quality, topography, climate, water availability, location
Physical and biological
family size, labor force demand, management skills, education, farm size, farmer’s attitude and goals
Farmer and his family
- policies
- infrastructure and technical assistance
- Socio-economics
Exogenous/Institutional Component
Other disciplines related to Farm Management
- Biological Science
- Physical Sciences
- Social Sciences
- Agribusiness
Study the amount of product related to the different crop varieties or animal breeds, levels and kind of fertilizer and feed ration, care of plants and animals, and other cultural and management practices.
Biological Sciences
Study the performance and nature of different construction materials, types of constructions, buildings, machinery, and equipment, and characteristics of soils, water, and other physical elements related to agriculture.
Physical Sciences
- Study the behavior of people in relation to different situations.
- Needed in dealing with farm suppliers, farm laborers, and buyers of farm products
Social Sciences
The sum total of all operations involved in the manufacture and distribution of farm supplies; production activities of the farmer and the storage, processing and distribution of farm commodities and items made from them.
Agribusiness
Functions of Management
- Planning
- Implementation
- Control
- Adjustment
Choosing a course of action.
Planning
True or False
To plan, a manager must establish goals, identify resources, and allocate the resources to competing uses.
True
Putting the plan into action
Implementation
Control is the ____ function.
feedback
It ensures that the plan is followed, and desired results are produced, and provides an early warning to make adjustments if needed.
Control
True or False
Adjustment is done if outcomes are not meeting the manager’s objectives.
True
May involve fine-tuning the technology used, or it may require changing enterprises.
Adjustment
Consists of charting the overall long-term course of the business
Strategic management
Consists of taking short-run actions that keep the business moving along that course until the destination is reached
Tactical management
True or False
Surveying the business environment is also known as internal scanning
False
It is known as external scanning
Steps in Strategic Management
- Define the mission of the business
- Formulate the goals for the farm and family
- Assess the resources available to the business (internal scanning)
- Survey the business environment (external scanning)
- Identify and select strategies that will reach goals
- Implement and refine the selected strategies
- Short description of why a business exists
- May include strictly business consideration
Mission
True or False
For family-owned and operated farms, the farm’s mission maybe only one component of the overall family mission.
True
Goals should be/have?
- written
- specific
- measurable
- timetable
True or False
Assessing resources is called “resources scanning”
False
It is called internal scanning
What are the types of resources?
- Physical resources
- Human resources
- Financial resources
Skills of the operator and other employees, likes and dislikes of individuals
Human resources
Cash, other capital and available credit
Financial resources
Land, buildings, fences, breeding livestock, machinery and equipment, established perennial crops are examples of?
Physical resources
A change may provide an ____ or a ____ and the manager must be able to react to them early.
opportunity ; threat
True or False
As the number of alternative uses for resources increases, so does the complexity of the manager’s decisions.
True
Some businesses have more potential routes for reaching their goals than others because resources are more ____
flexible
Strategic management is an ____
ongoing activity
As the number of alternative uses for resources increases, so does the complexity of the manager’s decisions.
Identifying and Selecting Strategies
- Manager must formulate action steps to implement the plan
- Manager must decide which information to collect to evaluate the success or failure of the plan
Implementing and Refining
Doing the right things in
farming
Strategic management
Doing things right in farming.
Tactical management
Characteristics of Decisions
- Importance
- Frequency
- Imminence
- Revocability
- Number of alternatives
The Decision-Making Environment in Agriculture
- Biological processes and weather
- Fixed supply of land
- Small size
- Perfect competition
Producers are price takers, both for resources bought and products sold
Perfect competition
Laws of nature place limits on manager’s decisions
Biological processes and weather
Land base is essentially fixed, making decisions about land use, sale, or acquisition critical
Fixed supply of land
Good management means the difference
between ____ or ____
earning a profit ; suffering a loss
The overall direction of the farm business is defined through?
strategic plan
True or False
Farm managers operate in an environment that differs from that of most other businesses because of certain characteristics of a typical farm.
True
Written statements or collection of facts and figures on a subject for a definite purpose
Farm records
____ are distinguishing features of accounts
money values
Written financial statement which are integral parts of a well-organized farm record
Farm accounts
Types of farm records and accounts based on form
- single entry form
- double entry form
- Kept by most Filipino farmers
- Each transaction is entered into only one account which supplies specific information regarding the business’ operations
Single entry form
- Used in standard business accounting
- Rules and procedures are well-established
Double entry form
Types of farm records based on functionality
- Financial records
- Physical records
Types of financial records
- farm income records
- farm expense records
Types of physical records
- farm maps
- crop records
- livestock records
- other specialized records
- These are used to evaluate the financial performance of an individual enterprise or the whole farm.
- Used for cash flow analysis.
- Include the primary cash transactions like income and expenses of the farm business.
Financial records
- Tey complement the financial records and are essential to answer questions about technical relationships and resource allocation.
- They show the quantities of inputs used and outputs obtained.
- They also indicate the timing and methods of operation
Physical records
Give a record of the location, size of the farm, soil types, land use, and possibly, past soil treatments
farm maps
Show inputs used and output realized
crop records
True or False
Livestock records include feeds records, production records, etc.
True
machine logbooks, labor records, pest and disease control records, marketing records, rental records, etc.
other specialized records
- Often referred to as the property list
- A detailed list of all properties with values assigned to them both at the beginning and end of the accounting period
farm inventory
Common Methods of Asset
Valuation
- original cost or market value
- normal market value
- present market value
- net selling price
- imputed value
- original cost less depreciation
- replacement cost less depreciation
- income capitalization
- uses current or actual purchase price.
- This method is most appropriate for items with short life span
original cost or market value
used for purchased items that do not change value within a year
normal market value
A good example of normal market value is ____
value of land
applied for items consumed in the farm at the time the inventory is taken
present market value
used for farm products sold or about to be sold or commodities primarily held for sale using net selling price computed as selling price minus marketing cost
net selling price
used for items that do not have market values, but certain values are assigned to them to estimate their contributions to the enterprise
imputed value
- This method can be used for farm buildings, farm machinery, tools and equipment, and purchased breeding stocks.
- Each year the item’s value is reduced by the amount of depreciation for that year.
original cost less depreciation
This is used for properties whose values considerably change from year to year.
replacement cost less depreciation
this is based on the theory that the purchase of a property is, in reality the purchase of future income
income capitalization
what is the formula for income capitalization?
ICV = V0 + Rn/(1+i)^n
decrease in value of durable properties or working assets due to normal wear & tear, aging and technical obsolescence, and effect of the elements
depreciation
True or False
land can be depreciated
False
Land = not depreciated
the number of years that you expect to use the asset in your business
Useful Life (Life Span) –
all costs paid for the asset, including price, taxes, delivery and installation fees, expenses to get the asset into use
Cost (Acquisition Cost)
expected market value of the asset at the end of the assigned useful life
Salvage Value (Scrap Value)
the asset’s original cost less accumulated depreciation
Book Value
the asset’s total depreciation over its useful life
Cost - Salvage Value
3 methods of calculating
depreciation
- straight line method
- declining balance method
- sum-of-the-years digits method
this is the simplest method to use and works well for items that are used continuously
Straight-line method
Straight-line method formula
annual depreciation = acquisition cost - scrap value/life span
is a way of chargingdepreciation that tends to conform to the decline in resale value
declining balance method
declining balance method formula
annual depreciation = book value x depreciation rate
- This method avoids an undistributed balance at the end of the life span of the property.
- If it is desired that depreciation expense must be distributed such that more value is charged during the early years of use than in later periods, then this method is recommended.
Sum-of-the-year’s-digits method
Sum-of-the-year’s-digits method formula
annual depreciation = (acquisition cost - scrap value) x life span/sum of the year’s digits of the life span
process of considering what crops to grow, in what quantity, and in what order, what building, labor, and power to be acquired
Farm Planning
the process of estimating farm inputs or
expenses and allocating resources to different activities in the plan, and estimating outputs or production, and net returns.
Farm Budgeting
True or False
Main purpose of farm budgeting is to compare the profitability of different kinds of enterprises.
True
Types of farm planning and
budgeting
- Enterprise budgeting
- Whole-farm planning and budgeting
- Partial budgeting
- Cash flow budgeting
presents estimates or projections of receipts (income), expenses (costs), and profits in the production of agricultural products
Enterprise budgeting
a summary of the production to be carried out on the entire farm and the resources needed to do it.
Whole-farm Planning and Budgeting
- used to assess the economic viability of component technology.
- used to test the profitability of some farm practices which may affect various parts of the farm business but does not call for a complete farm reorganization
Partial Budgeting
- a summary of a farm’s projected cash inflows and cash outflows associated with a particular farm plan, over a given period of time
- Its purpose is to estimate the amount and timing of future borrowing needs and demonstrate the farm’s ability to repay debts in a timely fashion
Cash Flow Budgeting
Types of Farm Business Analysis
- Measures of Capital Position
- Measures of Profitability
- Measures of Efficiency
Tool for Measuring Capital Position
Balance Sheet
The Balance Sheet Equation
assets = liabilities + owner’s equity or net worth
The Balance Sheet Ratio Formula
- Current ratio =
- Net worth ratio =
- Net capital ratio =
- debt-equity ratio =
- CA/CL
- (NW/TA) x 100
- TA/TL
- TL/NW
Types of Balance Sheet based on Asset Valuation
- Market Basis BS
- Cost Basis BS
- Assets are valued at current market value less selling cost
- more accurate measure of current financial health and collateral available for loans, so often used by lenders
Market Basis BS
- Assets are valued at purchase cost minus depreciation
- More conservative estimate of financial condition, particularly during periods of inflation
- Can misrepresent the true value of the business- more useful for measuring financial progress over time without considering the effects of inflation
Cost Basis BS
One of the most common methods of determining profitability
Cost and Return Analysis
Cost and return analysis is sometimes termed as?
farm income analysis
Classification of Farm Returns
- cash returns
- non-cash returns
for value of farm products sold
cash returns
products used at home, given away, or
products paid in kind for harvesting the produce
non-cash returns
Classification of Costs According to the manner in which they are incurred
- cash cost
- non-cash cost
- actual money has been paid
- also referred to as “out of pocket” costs
- also known as explicit cost
cash cost
no direct cash outlays, also known as
implicit or imputed cost like unpaid family labor and payment in kind for harvesting the produce
non-cash cost
Classification of Costs According to the level of output
- variable cost
- fixed cost
costs that vary directly with the level of
output , not incurred if nothing is produced.
variable cost
committed cost and do not vary during the production process
fixed cost
Types of Measures of Profitability
- gross margin or return above variable cost
- net farm income
- return above cash cost
- operator’s labor income
- return on capital
- percent return on capital
- net profit - cost ratio
- represents the value of production left to the farmer after deducting the Total Variable Cost (TVC) which include materials, labor, and power cost
- It is the relevant profit calculation for short-run decisions.
Gross Margin or Return Above Variable Cost
(RAVC) =
Total Farm Income – Total Variable Cost
- also known as the return above all cost
- represents the amount the farmer gets from his capital, labor and management after paying all operating expenses.
- It is more applicable to market-oriented farms
Net Farm Income
(NFI) =
Total Farm Income – Total Farm Expenses
represents the value of production left for the farmer after paid-out cost
Return Above Cash Cost
(RACC) =
Total Farm Income –Total Cash Cost
this measures the amount of cash the farmer gets for his labor and management after paying both operating expenses and the imputed interest for the use of capital or investment
Operator’s Labor Income
OLI =
Net Farm Income (NFI) - Interest on Average Inventory
the amount of cash the farmer gets after paying the operating expenses and the estimated value of the operator’s labor and management
Return on Capital
(ROC) =
NFI – Value of Operator’s Labor and Management
represents the rate of return on capital invested expressed in percentage.
Percent Return on Capital
(%ROC) =
(Return on Capital/Average Capital Investment) x 100
- Determines the rate of return to the farmers
- amount earned by the farmer for every peso spent on production
Net Profit – Cost Ratio
Net Profit – Cost Ratio =
Net Farm Income / Total Cost
expressed either in monetary values or
some rate or percentage relating to capital use
Economic efficiency
Types of Measures of Efficiency
- Physical (crop or livestock) efficiency
- Economic efficiency
True or False
Rate of capital turnover = value of farm production/total capital
used
True
Types of physical efficiency
- Yield per hectare
- Yield per tree
- Crop yield index
- Livestock efficiency or yield per animal unit
- Labor efficiency
