Cost classification and types of production costs in agricultural production

The cost of production (works, services) represents expenses in monetary terms incurred by an enterprise while using natural resources, raw materials, supplies, fuel, energy, fixed assets, and labor in the production process.

Determining the production cost is a mandatory condition for the functioning of an enterprise and is necessary for the following purposes:

◊ calculation of profit, as correct cost calculation ensures an objective determination of the profit margin and objective tax accrual; ◊ updating the level of certain types of prices; ◊ identifying reserves for economic growth; ◊ selection of the most efficient capital investment option using the indicator of reduced costs; ◊ current analysis of production and financial activities; ◊ calculation of cost savings resulting from targeted measures.

The classification of production cost types is carried out according to various criteria: 1) depending on which object the expenses directly related to production are attributed to, the following are distinguished: ◊ total production cost of all products produced at the enterprise — the enterprise's expenses, which in total form the cost of products; ◊ cost per unit of product or work and services (c, t, ha, m2, etc.); ◊ cost per unit of gross output value, valued in comparable prices, when all costs included in the cost price are divided by the value of gross output in comparable prices produced due to these costs; 2) depending on the method used for cost calculation, the following are distinguished: ◊ planned (or projected) cost, which is calculated based on regulatory data on resource consumption and planned output, while both production cost and total (commercial) cost are planned, including planned expenses for the realization of the enterprise's marketable products; ◊ actual cost, the calculation of which is based on actual expenses and output; ◊ preliminary or expected cost, determined by the following methodology: actual output and expenses for three quarters of the reporting year are summed up with the expected output and expected expenses respectively; 3) depending on the completeness of costs included in the cost price, the following are distinguished:

o production cost, which takes into account expenses related only to product manufacturing; this type of cost is determined for all gross output; o total (commercial) cost, which is calculated for the marketable part of products, taking into account both production and sales expenses.

The cost of works and services is calculated in the same way.

Cost recovery is the inverse indicator of cost. Economically, recovery shows how much product is produced per unit of cost:

and its increase corresponds to an increase in economic efficiency.

Economically, the cost shows how many expenses are incurred per unit of product or at what cost a unit of product is produced:

and a decrease in this ratio, as a rule, corresponds to

When calculating the cost, it is necessary to consider how different types of expenses are classified and included in its composition: 1) depending on whether the expenses are directly included in the product cost, the following are distinguished: o expenses included in the cost of products (works, services); o expenses included in the cost of products (works, services), but adjusted in the established order for tax purposes; o expenses not subject to inclusion in the cost of products (works, services), for example, material aid, payment for health resort vouchers, expenses for maintaining cultural and community facilities on the enterprise's balance sheet, etc.; 2) according to their role in the production process, the expenses forming the cost are classified as follows:

◊ basic, directly related to the production of products and the execution of technological processes. They can be directly attributed to production or distributed indirectly according to an accepted methodology. For example, depreciation of tractors is a basic type of cost distributed indirectly by work objects (most often by completed work in conventional reference hectares); ◊ overhead, all of which are distributed, as these are general expenses for the organization and management of production for sectors and enterprises, or separately for crop production and livestock;

3) according to the method of inclusion in the cost price, all expenses that form it are divided into: ◊ direct, directly related to the production of specific types of products of certain crops and livestock and directly attributed to product cost (seed, feed, labor costs, etc.); ◊ indirect, which, like direct ones, are related to production, but cannot be directly attributed to specific products and are distributed proportionally to a certain base, expenses; 4) based on the fact of recording expenses in reports, the following are highlighted: ◊ explicit; ◊ implicit, a typical example of which can be the labor remuneration of the farmer, as well as his family members working on their own farm; 5) by elements — types of expenses homogeneous in economic content — the following are highlighted: ◊ labor costs; ◊ material costs (consumed circulating assets); ◊ depreciation of fixed assets (consumed fixed assets) to identify trends in cost changes, determine their size per unit of produced product, and establish its material intensity by individual types of expenses; 6) by accounting items, which can include one or more cost elements. This classification is widely used in the analysis and diagnostics of the financial and economic activity of an enterprise, and in economic calculations to identify reserves for reducing costs by specific cost items. The classification of expenses in agricultural production by items presented in Table 13.1 shows some difference in the list of items for crop production and livestock due to the specifics of the industries. The item indicates the intended purpose of each expense, for example, feed and forage supplies, which account for the largest share in livestock production costs (52.0% in 2008).

Table 13.1. List of cost items in crop production and livestock farming

Cost item Crop production Livestock farming Labor remuneration with social security contributions

+ + Seed and planting material + -

Mineral and organic fertilizer + - Feed - + Raw materials for processing + + crops animals Maintenance of fixed assets + + Loss from livestock mortality - + Work and services + +

The percentage ratio of cost elements in the cost of production (works, services) represents its structure. Analysis and assessment of the cost structure for specific types of crop and livestock products allow identifying which expense items hold the largest share and may represent a reserve for cost reduction.

The largest share, especially in livestock farming, belongs to material costs. Their proportion is shown in the table below:

The producer must constantly analyze changes in price levels for acquired economic resources, prices for produced own products, and individual costs (cost of production). An economically efficient method of production is considered one that achieves the minimum cost per unit of output.

The final result is defined as the difference between sales revenue and commercial cost, which, in addition to production costs, includes costs for product sales. Among economic elements, material costs have the greatest influence on the cost level.

The "Material costs" element reflects expenses for objects of labor used in production and for payment for works and services of a production nature:

• seed and planting material of own production and purchased (excluding costs for their preparation for sowing and delivery to the place of sowing);
• feed of own production and purchased, used for feeding livestock and poultry, including working animals, excluding delivery costs;
• other agricultural products — manure, bedding, and eggs for incubation;
• mineral fertilizer, bacterial and other preparations (excluding costs for their preparation for application and delivery to the fields);
• costs for raw materials and supplies of auxiliary industrial production;
• costs for works and services of a production nature not related to the main activity (transport works for production support performed by the enterprise's transport, payment for transport services of third-party organizations for cargo transportation within enterprises);
• petroleum products for performing work and production support;
• fuel (coal, gas, firewood, etc., excluding petroleum products);
• spare parts and materials for repair, depreciation of means of labor not classified as fixed assets;
• plant protection and animal protection products, medicines, and preparations;
• payment for works on all types of repair of agricultural machinery performed by third-party organizations;
• payment for works on soil liming and control of pests of agricultural crops;
• payment for irrigation water and other services to water management organizations.

Competent accounting of material costs allows for accurately determining the cost of production and assessing the real economy of production. This cost element includes not only resources used but also the death of young animals, adult livestock being fattened, poultry, and bees (excluding losses from natural disasters or damage compensated by responsible persons), as well as natural loss of products and materials within established limits.

All material resources are written off to the cost of production excluding value-added tax. The valuation of stocks depends on their origin and purpose:

• Own resources from previous years: valued at the cost recorded on the farm's balance sheet at the beginning of the year.
• Own resources of the current year: recognized at actual or planned cost. Raw materials of own production sent for internal processing are written off during the year at actual cost, planned or internal accounting prices, with mandatory adjustment to actual cost at the end of the year.
• Purchased material resources: written off at acquisition prices, to which are added expenses for third-party services, customs duties, transportation, delivery, and storage.

Labor remuneration, depreciation, and other cost elements

The "Labor remuneration costs" item includes all types of payments to the main production personnel, including bonuses to workers and employees. This also includes the remuneration of hired and seasonal workers involved in the farm's main activity. Compulsory contributions for social needs are calculated on the amount of these expenses according to current state standards.

Depreciation of fixed assets reflects the charges for the full restoration of both owned and leased production facilities. The calculation is based on their book value and approved rates. Current legislation allows for the application of accelerated depreciation in relation to the active part of fixed assets.

The "Other expenses" element combines overhead and administrative costs that are directly included in the production cost of products or work:

• land tax and other legally established taxes and fees;
• mandatory contributions and payments to extra-budgetary funds;
• fees for maximum permissible emissions and discharges of pollutants;
• interest on bank loans (within the limits of rates established by legislation);
• expenses for staff training and retraining, as well as travel expenses;
• rental payments for individual items of fixed production assets;
• payment for communication services, amortization of intangible assets, as well as payments for inventions and rationalization proposals.