COST ECONOMICS OF TRACTOR AND FARM MACHINERY Farm machinery costs have a great influence on farm profit because profit depends wholly on the [Link] and annual use of farm machinery on the farm. Therefore, a detailed knowledge. of farm machinery costs is very essential for a profitable farming business. | Estimating Farm Machinery Costs: Farm machinery cost of operation is grouped into following two. main categories i.e. i): Fixed Cost/Machinery Ownership Costs (independent of use): Ownership costs are those costs that do not vary with machine use. It is also known as fixed cost, Farm machinery ownership or fixed costs are: a) Depreciation b) . Interest c) Taxes, Insurance and Housing d) Leasing ii) Machinery Operating Costs (Associated with use): Operating costs, also referred toas variable costs, change with machine use. Repair and: maintenance, fuel and lubrication, and labour are commonly considered operating costs. These costs are » @) Repair and maintenance 4) Fuel and lubrication c)’ Labor “@ Custom hire or rental ~ €) Other’ operating costs fe Tocedure for cost analysis of farm machinery: Following stepwise procedure may * followed for ‘estimating farm machinery costs:212 ‘arm Power and Machinery Management (Principles and Practices) i) List the basic data of farm machinery ii) Calculate fixed or ownership costs iii) Calculate operating or. variable costs iv) Calculate total cost of operation of machinery per hour v) Calculate cost of operation of machinery per hectare i) Ownership costs of farm machines: a) Depreciation: Depreciation is defined as the annual loss/reduction in n value of durabl assets (machines in the°present case) due to use, wear, tear, age, and obsolescenci It is an allowance for wear-and tear on equipment and machinery. It is a busine expense that reduces annual profit. It is amount of decreasing value in a caj ite asset allowed to be deducted from a business tax return, So, it is known as allocatin the expense of a resource which lasts for more than one year. Depreciable propert can be either tangible or intangible. 1 5) Tangible Depreciable Property: Purchased property one can see or touch is tangibl property e.g. livestock (purchased), machinery, buildings and improvements, fences dams, ponds, or terraces, irrigation systems and water wells, etc. One can cl depreciation on the part of a vehicle used in the business. ¢) “Intangible Depreciable Property: Purchased property that has value'that one canno "readily see or touch e.g. Computer Sofiware, Copyrights, Patents, etc. ni Thus, Vehicles, machinery, equipment, building, fences, purchased breeding livestock wells etc. are depreciable. Land is not depreciable, but some improvements to lanc (e.g. drains) are depreciable. But, the following items cannot be depreciated;'ifiz i) Property placed into service and disposed of during ‘the same. year. ii) Agricultural land used in farming ii) Inventory-Property held for resale in the normal course of business cannot be depreciated. wad 7 iv) Leased property-The value of the leased property is shownas’a'rental expense v) Raised market livestock (there is no cost to recover’ in this case). Important Depreciation , Terms Cost (Purchase Price): It is the price paid for the purchase of asset. It is also known as purchase price. 3 f I Useful life: as useful life. Number of years the asset is expected to be used inithe business is known Salvage value (SV): It is the expected market value of the asset at the end of itt useful life. : ; 1 Book value: It is the difference in asset’s original cost and accumulated depreciatioy 4), Estimation of Depreciation: Depreciation is the largest, cost of farm_ machinery by which the value of machine decreases with time irrespective of ‘its’ use. Most commonly used methods for estimation of depreciation of farm machinery’ are: in.straight Ene Method 2 Sunvoftlie- Year's Digits (SOYD) Method » Declining Balunee Method straight Line Methods This ts most commonly used method which fs easy, simple and “gulls fnclOLy for most purposes, Mt assumes that the machines are used more or less ve same extent every year and equal amounts of costs on acount of their use are charsed Wry year. Hepreciatlon Ih charged wo that the owner may have sufficient asnount at the end ev fife of machine (at the time of buying new machine to replace it), Depreciation is estimated y ising following, formuly: Annual Depreclation = (Cont = Salvage valuey/Useful life or Annual Depreciation = (Cost ~ Salvage value) ~ 2k whiere, R = is found by dividing 100% by useful life Ais the annunl straight- line percentage rate found by dividing 100% by the useful life (1o0vélusefil life), or, Alternatively D=(C-~SWL «ty (6.1) where, D = depreciation per hour, Rs./h C = Purchase cost of machine, Rs, S = Salvage value of old machine (On an average 10% of intial cost of the machine is taken, Le. S = 0.1C L = Life of machine, years H = Number of working hours of machine per year Now, putting value of S= 0,1 C in the eqn.6.1,.we get D= 09 CKL *.M) (6.2) Solved problem:'6.1 Calculate depreciation for a power wheat thresher with a cost of Rs 1,00,000, a salvage value of Rs.10,000, and a useful life of 10 years. Assume that the thresher is used for 300 hrs every year. Solution: Using -Straight. Line: Annual Depreciation = (Cost — Salvage value)/Useful life Putting values in above equation, we get; Annual Depreciation = (Rs. 1,00,000-Rs. 10,000)/10 = Rs. 9,000 Depreciation (Rs/hr) = Annual Depreciation/Number of hours of use per year Rs. 9,000/300 h Rs. 30 per h: Solved: problem -6.2 and hourly depreciation of the tractor. Solution: Given: Purchase price of tractor, C = Rs. 3,50.000 Economic life of tractor, £ = 10 years Average annual use of tractor, H = 500 hr Now, Salvage value of tractor, S= 10% of purchase price of tractor = Rs. 3,50,000 x 10/100 = Rs. 35,000 We. know, Annual Depreciation = (Cost - Salvage value/Useful life Putting values in above equation, we get Annual Depreciation = (Rs. 3,50,000-Rs. 35,000)/10 yrs Rs. 31,500! per year Also, D= 0.9 CKL * H) Putting values in above equation, we get D= 0.9 * Rs. 3,30,000(10 » 500) = Rs. 63 per hour Annual Depreciation = (Cost ~ Salvage Value) x RL/SOYD where, RL = depreciation is being computed. SOYD = sum of all the number from | through the estimated useful life. t For example for a 5 year useful life, SOYD would be 1 + 2 +3 +4 +5 = 15 and it would be 55 for a 10 year useful life. So, depreciation is highest in the first year and then declines by a constant amount i the remaining years. In this method the last remaining balance will be just equal value of the machine. A 26.45 KV power diesel tractor with a list price of Rs. 3,50,000/- has an economie life of 10 years, The tractor is expected to be used 500 hrs per year. Calculate annual remaining years of useful life as of the beginning of the year for which Sum of the Year's Digits (SOYD) Method: It is the most appropriate method in which depreciation cost is taken more heavily during the first few years and more lightly during remaining years. In this method, the depreciation is estimated by using following formula, (6.3) to salvageCost ‘Conomics of Tractor and Farm Machinery | 215 eciation for a power wheat thresher wi ae with a cost of Rs 1,00,000, a salv. 0, 000, and a useful life of 10 years. Assume that the thresher i: el using SOYD = 1424344454647484+9+ 10 = 55 No " snnual Depreciation = (Cost ~ Salvage Value) x RLISOYD using above equation, we estimate annual depreciation as given by year 1: (RS: 1,00,000 - Rs.10, 000) x 10/55 = Rs.18,181.82 pepreciation (Rs./hr) = Annual Depreciation/Numbers of hours of use Rs. 18181.82/300 h Rs. 60.60 per h similarly for 2°4 year: Year 2: (Rs. 1,00,000 — Rs.10, 000) x 9/55 = Rs.16,363.64 Depreciation (Rs./hr) = Annual Depreciation/Numbers of hours of use Rs. 16363.64/300 hrs = Rs. 54.55 per h ‘and so on for further remaining years. Declining Balance Method: In this method a fixed rate of depreciation is uséd for every year and applied to value of machine at the beginning of year. The fixed rate is applied to falance until salvage value of machine is reached. It results in higher depreciation costs during catier years of machine and lower charges in later years. It is estimated by using following formula: Annual Depreciation = (Book Value at Beginning of Year) x R (6.4) where, -R_ ~is.a constant percentage value or rate. Its value depends on useful life and the type of declining balance chosen. It js a multiple of the straight line rate. Rm ced Caleulate deprecation for a threshing machine with a cost of Rs 1,00,000. a salvage value of Rs.10,000, and a useful life of 10 years. Using Double Declining Balance We know that; Annual Depreciation = (Book Value at Beginning “of Year) x R So, using above formula we calculate depreciation as under: R= 2 x 100%/10 = 20%216 | rarm Power and Machinery Management (Principles and Practices) j Year 1: Rs. 1,00,000 x 20%= Rs.20,000 : Year 2: Rs. 80,000 x 20% = Rs.16,000 sk Year 3: Rs. 64,000 x 20% = Rs.12,800 | ‘by Interest: The farmer/owner has to borrow money or use his capital to buy a fam machine, so, the farmer has to charge the interest on capital’ investment. The ‘tate of interest will depend on opportunity cost for the capital elsewhere’ in the farm business. Normally, the existing rate of interest of banks can be safely used for estimation of inferest on the capital invested in purchase of farm machinery. Interest, is calculated by using following formula: C48) i Interest per year =——3— 79 (6.5) where, _ C = Purchase cost of machine, Rs. j S = Salvage value of old machine (On an average 10% of intial cost of the machine is taken, S = 0.1C) Rate of interest, % 0 (C+S) ss Interest per year, =A). 6.6) SC. Interest per year = 25 — (6.7) where, = numbers of working hours of machine per year ©) Taxes, Insurance & Housing: Equipments like tractors and combine harvesters are insured to avoid risks. A shed or shelter is provided to protect costly machinery from rains and hot sun which will result in lesser repairs in the farm due to proper protection of mechanical components. The machine would be more reliable in the field. The shelter (housing) provided to machinery has great variability. These costs are much lower as compared to depreciation and interest costs, but, these are considered and accordingly, 2-3% of purchase price (1.0 + 1.5 + 0.5 = 3.0%) depending upon applicability is usually taken for taxes, insurance and housing of tractor and farm machinery. d) Leasing: This is considered only when tractor or machinery is leased. } Total Ownership Cost or Fixed Cost: It is sum total of depreciation, interest, taxes, insurance and housing. z { Total Ownership Cost = Depreciation + Interest + Taxes, Insurance and Housing i iii) Estimation of Operating Costs: These costs are also called as variable costs and, include repairs & maintenance, fuel, lubricants and labour. These costs are estimated as given! below: 7 a) Repair & Maintenance Costs of Machinery: “These costs occur due to routine! and regular maintenance and repairs as a result of wear and tear and breakdowns” in the machine. Repair costs vary widely from one location to another because of type of soil, crops grown and climatic conditions. These costs are assessed/estimated | based on past .repair cost records of similar machines. Usually total accumulatedCost Economic nomics of Tractor and Farm Machinery | 217 repair costs are calculated as percent of cu, tractor total accumulated repair cost may Howevels based on practical experience rent list pri = ie list price of the machine. For a = en as 25% of its current list price. Past records we may safely assume yearly repair & maintenance cost of machine from 7.0 ii pp et Cos Fuel cost entirely depends on size of og to 7.5% of its purchase cost. Cost of fuel consumed per hour actually in ce source (tractor or engine). charged. Z ming farm operations should be Fuel Cost = Average fuel consumption (Ih) x Rate of diesel fuel (Rs./li ‘The average fuel consumption (Wh) of agricul ae Iitowing equation gricultural tractor can be estimated by using ‘Average fuel consumption (I/h) = A eet ) = (0.10 to 0.15) x maximum PTO horsepower of 9) Lubricants Costt The lubrication cost can be taken as 15% of the fuel costs of tractor. @) Labour Cost: Tractor or different machines require operators/labour to accomplish different Loa ‘on the farm. The existing labour rates may be used for cost analysis of farm machinery. This is very essential when the machine is used on custom hiring g Cost: It is sum total of repairs, fuel, lubricant and labour costs. Total Operating Cost = Repair Costs + Fuel Cost + Lubrication Cost + Labour Cost ‘total Cost of Operation of Machinery: Total cost of operation of tractor or farm machinery im total of ownership cost and operating cost of tractor/machine. This can also be expressed hip and operate the machine per hour, The graphical representation ff operation of tractor and farm machinery is given in Fig. 6.1a hat the total cost of tractor/ machinery entirely depends upon panual use (Grea in hemtares er hous). Higher the annual use lesser is average cost af operation of the machine, The actual repair cost of the tractor/machinery can be reduced jntenance and operation procedures, while ownership cost (fixed cost) by adopting proper mai oy aeePedaeed. by increasing annual use of the tractor/machinery on the farm. is su gs average cost of ownersl of total and average costs 0} & b. It is clear from the figures 1 Total cost Total vanable cost Total fixed cost Total cost, Rs. —» ° 0 Hectares or hourslyr ——* Fig. 6.1a: Total cost of operation of tractor and machineryAverage total cost Average fixed cost Average costs, Rs. Average variable cost 0 a q Hectares or hours per year > Fig. 6.2b: Average cost of operation of tractor and machinery Solved. problem?6.5 Calculate the cost of operation of a 35 hp tractor with following specifications: i) Cost of tractor : Rs. 3.95 lakhs ii) Interest rate 1 10% tii) Life of tractor : 10 yrs iv) Working hours/yr 1 1500 h v) Insurance, taxes & shelter : 2.5% of purchase cost vi) Fuel consumption 7 oe vii) Diesel cost 1 Rs. 35/ per litre viii) Oil consumption per hour 1 05 litre ix) Oil cost 2 Rs 180/- per litre x) Salary of driver 2 Rs. 6000/- per month xi) Repair & Maintenance charges : 7.5% of purchase cost Solution: A. Fixed Cost: i) Depreciation per year = (First cost — Salvage value)/Estimated life (yrs) Now, Salvage value = 10% of purchase price = 3,95,000 = 10/100 = Rs. 39,500 Depreciation per year = (3,95,000 — 39,500)/10 yrs = Rs. 35,550 ii) Interest per year = (C + Sy/2 x i/100 = (395000 +39500)/2 x 10/100 ill) Insurance, Taxes and Shelter @ 2.5% per year = (2.5/100) x 395000 = Rs. 9,875 Rs. 21,725e Fixed Cost = iti Total Fi 7 eal + Interest + Insurance, taxes and shelter -39,500 + Rs. 21,725 + Rs. 9,875 = Rs. 71,100 per year ow, annual use of tractor = 1500 h qnerelor therefore otal Fixed Cost (Rs/h) = Rs. 71,100/1S00 = Rs. 47.40 per h B. Operational Cost: a jy Repait and Maintenance charges @ 7.5% of purchase cost per year = (7.5/100) x 3,95,000 = Rs. 13,250 pepair and maintenance (Rs/h) = Rs, 13250/1500 h = Rs. 8.83 per h jiy Fuel Cost (Rs. per h) = 4 Wh x Rs. 35 per litre = Rs. 140 ji) Oil cost, Re/hr = 0.5 Wh x Rs. 180 per litre = Rs. 90 jy) Wages of operator Rs. 6000/- per month/30. day/month Rs. 200/- per day 8 200/8 = Rs. 25 per h Repair and Maintenance + Fuel + Oil + Wages Rs. 8.83 + Rs. 140 + Rs, 90 + Rs. 25 Rs. 263.83 per h ‘assuming 8 hrs /day worl Wages of driver, [Link] Total Operating Cost Therefore, Total Cost of Operation = Total Fixed Cost + Total Operating Cost Rs. 47.40 + Rs. 263.83 = Rs. 311.23 (Say Rs. 312) Oe uaa "4-35 hp diesel tractor is operating a 9-lyne seed-cum-fertilizer drill. The field capacity of seed drill is 0.625 hark and the tractor consumes 4 lures of diesel when operating the drill at a speed of 3.5 kin/h and oil consumed by the tractor engine G14 fire, Aesme ad the pirehase cost of (apler aad neg il ae Ex 2,50,000 ond Rs. 35,000 respectively. Other factors are: interest rate 1076, fuel cost Rs. 35/. per litre, Oil cost Rs. 120 per litre, Labour @ Rs. 25 per h, Tractor driver = Rs. 30 per h. Take annual use as 500 h, Caleulate hourly cost of operation of seed drill. Also find cost per hectare. Solution: A. Cost of Tractor Calculation of Fixed Cost i) Depreciation = (Purchase price — Salvage value)/Life (yrs) = (2,50,000 — 25,000)/10 = Rs. 22,500see rueeesy ii) Interest, Rs, per hr = ((C + S)/2 x i100} = (250,000 4 25,000)/2 x 10/100 = Rs.13,750 iit) Taxes, Insurance and Housing, Rs./hr 5% of purchase price = (2,50,000) x 2.5/100 = Rs.6,2: Total Annual Fixed Cost = Rs.22,500 + Rs. 13,750 + Rs. 6,250 = Rs. 42,500 Now, Annual use of tractor == 500 h, Therefore, Fixed Cost of Tractor (Rs./h) = Total Fixed Cost (Rs.)/Annual use (h) = Rs. 42,500/500 h = Rs, 85 per h Calculation of Operating Cost i) Repair and maintenance, Rs./h = 7.5% of purchase price = (2,50,000/500) x 7.5/100 = Rs.37.50 ii) Tractor Fuel Cost (Rs./h) = 4.0 litres x Rs. 35 per litre = Rs. 140 iii) Lubrication Cost (Rs./h) = 0.4 litre/h x Rs, 120 litre = Rs. 0.48 per h iv) Labour (driver) charges, Rs/h = Rs. 30 Total Operating Cost of Tractor Rs.37.50 + Rs.140.00 + Rs. 48.00 + Rs.30,00 Rs.255.50 per h Cost of operation of tractor = Fixed cost + Operating cost = Rs. 85.00 + Rs, 255.50 Rs, 340.50 (Say Rs. 340 per hour) izer drill: B. Cost of Seed-cum-ferti Calculation of Fixed Cost = (Purchase price Salvage value)/Life (yrs) = (35,000 - 3,500)/10 = Rs. 3,150 {(C#S)/2 x 4/100} = (35,000 + 3,500)/2 x 10/100 = Rs.1,925 i) Depreciation ii) Interest, Rs. per hr = iii) Taxes, Insurance and-Housing, Rs./hr 1.5% of purchase price = (Rs.35,000) x 2.5/100 = Rs.525 Total Annual Fixed Cost = Rs.3,150 + Rs. 1,925 + Rs. 525 = Rs. 5,600 Now, Annual use of seed-cum-fertilizer drill = 500 h Therefore,