# Calculating Your Milk Production Costs and Using the Results to Manage Your Expenses

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3 Worksheet No. 2. Example Your Farm 1. Total Schedule F Expenses \$111,306 (Schedule F, line 35) 2. Change 1 in Accounts Payable \$ 1, Change 1 in Prepaid Expenses \$ 1, Total Allocated Costs \$111,649 (On this worksheet, add lines 1 and 2, then subtract line 3) 5. Total Interest Paid \$ 8,470 (Add Schedule F lines 23a and 23b) 6. Wages and Benefits Paid \$ 12,682 (Only those reported on Schedule F; to obtain this value add Schedule F lines 17, 24, and 25) 7. Depreciation Claimed \$ 15,346 (Schedule F line 16 minus Depr. claimed on livestock) 8. Total Basic Costs \$ 75,151 (On this worksheet, line 4 minus lines 5, 6, and 7) 9. Basic Cost per CWT EQ \$ 6.70 (On this worksheet, line 8 divided by line 8 on Worksheet No. 1) 1 Change equals the ending amount minus the beginning amount. Chart No. 1, from a study of 928 farms belonging to the Lakeshore and Fox Valley Farm Management Associations, shows that 150 farms had basic costs of production per CWT EQ in the \$7.01 to \$7.50 range and that 55 percent of the farms in this study had basic costs of \$7.50 or less. Another example: 29 farms had basic costs in the \$9.51 to \$10.00 range and 95 percent of farms had basis costs of \$10.00 or less. Chart No. 1 3

4 Number of Farms <\$4.00 Number of Farms in Various Basic Cost Ranges and the Cumulative Percentage \$5.00 \$6.00 \$7.00 \$8.00 \$9.00 \$10.00 \$11.00 \$12.00 Basis Cost of Production per CWT EQ Average = \$7.41 >\$ % 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00%.00% Frequency Cumulative % After you calculate your basic cost per CWT EQ, compare it to (mark it on) Chart No. 1. This will show you how your basic costs compares to the other farms in this study. A reasonable goal for basic cost per CWT EQ is \$7.00 or less. This goal is based on a milk price of about \$13.00 and average dairy-crop farm mix of land (3 acres per cow) and capital (owning most of your own tillage, planting, and harvesting equipment). If your basic farm costs are above \$7.00 per CWT EQ, you should place some effort into cost containment. Comparing Your Schedule F Expenses to Averages Effective cost containment requires direction and focus of your financial management resources. One way to obtain direction is to compare your farm s costs to an average farm s costs. The 1995 average costs, by category, are shown in Table 1. The 928 dairy farms used to calculate these averages had a combined total of more than 70,000 cows and produced more that 1.3 billion pounds of milk. These averages were calculated by dividing the total income on each farm by the US average milk price for 1995 (\$12.86) to obtain the farm s CWT 4

9 Endnotes: 1 Agricultural economist specializing in farm management in the Center for Dairy Profitability, Cooperative- Extension, University of Wisconsin-Madison. 2 Caution: If you have changes in accounts payable or prepaid expenses, you will need to adjust the appropriate categories to reflect those changes. Example: you had an increase in the amount due at the feed mill of \$5,000. The feed expense you entered on your Schedule F would not have included that \$5,000. Therefore, in order to get the correct answer for the category Feed Purchased per CWT EQ, you will need to add that \$5,000 to the amount on the Feed Purchased line before dividing by the CWT EQ value calculated above. 9

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