facebook
twitter
vk
instagram
linkedin
google+
tumblr
akademia
youtube
skype
mendeley
Wiki

FEATURES OF COSTS FORMATION AND MANAGEMENT OF LARGE AGRARIAN ENTERPRISES

Автор Доклада: 
Demyanenko S.I.
Награда: 
FEATURES OF COSTS FORMATION AND MANAGEMENT OF LARGE AGRARIAN ENTERPRISES

УДК 338.436

FEATURES OF COSTS FORMATION AND MANAGEMENT OF LARGE AGRARIAN ENTERPRISES

Serhiy I. Demyanenko,
Prof., Dr. (H), Head, Department of agribusiness economics,
Kyiv National Economic University

In the article the relationships among farm sizes, farm efficiency and cost management are examined. Managing an agricultural enterprise involves much more than optimizing technical processes, and technical efficiency is only one of the many factors that contribute to enterprise performance. As farms get larger, the costs of managing and monitoring labour increase. At some point the associated costs will cancel out any technical efficiency that may be realized by further farm size growth. Different managers in different settings using different organizational forms will each find their own optimal compromise between these competing factors. Internal organization, management and motivation of the hired workers are the most critical issues for the large farms in Ukraine.
Key words: farm size, costs, income, profitability, management, cost monitoring.

        The aim of this article is investigation of dependency between sizes of agricultural enterprises, theirs efficiency and management problems. Specific feature of current stage of Ukrainian agricultural development is a mulitistructural character of agricultural entities – from small individual private farms to very large agricultural enterprises with hundreds thousands hectares of arable land under lease [1]. Distribution of agricultural enterprises in operation by agricultural land's size as of July 1, 2009 is presented in the table 1. General quantity of agricultural entities is 57154 including 49635 farms which are using agricultural land.
However, owners and managers all agricultural enterprises independently from their size want to increase incomes and profits.      
        From technical side a farm size reflects physical relationships between inputs and outputs under the assumption of constant price on agricultural products for all farms. The same time there is a direct connection between farm size and production efficiency [2,3]. It should be mentioned, farm size and farm scale are not identical conception.  
          Farm size reflects constant proportion among inputs under conditions of different levels of average total costs (ATC), inputs and outputs. Thus, farm size reflects fixed structure of inputs for a given time period.  
Farm scale reflects a general relationship among average total costs and farm size under conditions of variable of inputs structure. At the same time there is a difference between a technical farm size and market farm size. For a first case, physical relationships between inputs and outputs under conditions of constant prices for inputs and outputs are reflected. For a second case, different levels of prices and outputs are reflected. For instance, large farms can have discounts for inputs since they buy significant amounts of inputs and also have some advantages as sailors of agricultural commodities.  
                                                                                                                                  Table 1

Distribution of agricultural enterprises in operation by agricultural land's size as of July 1, 2009

Distribution of agricultural enterprises in operation by agricultural land's size as of July 1, 2009

Source: Agriculture of Ukraine. Statistical yearbook 2009. – State statistics committee of Ukraine, Kyiv, 2010, p. 51.

          The relationships between farm size and its average total costs are presented on figure 1.  For conditions of pure competition market, including agricultural land market (figure 1a), all farms in a long run reach their rational size at the point B on the curve of average total costs in the long run (ATCL) and have output О1. Under policy of market restrictions farm size will be diminished to a point A and output to О2. The same time we can observe increasing of ATC on the curve ATCL. One of reasons of ATC increasing is of inputs’ prices rising as a result of increasing of farms quantities, and, correspondingly, increasing of inputs demand.
       If agricultural land is fixed resource (figure 1b) in this case the return on land will be decreased from FG to DE and outputs from О1 to О2.  At the same time prices on output can be the same up to a quantity of output of О3 and ATC at point C, where ATC equals price. The reason for it is decreasing of land return in form of a land rent. It is direct losses for land owners. Land size diminishing is limited by output at point О3. Further decreasing of output and increasing of ATC will not give the possibility for farm to operate if prices on output will not increase. In additional to it the time period should be taken under consideration. For the short run the output can be changed without changing of farm size. It means increasing of inputs using. For the long run farm size, inputs and outputs can be changed. 

Dependence of large farm size and farm efficiency is reflected in table 2, where farms with land in use over 20,000 hectares are presented. Based on the data of table 2 we can make conclusion about dependence of farm size and their efficiency. Most efficient are farm with land in use no more than 40,000 ha. They have highest levels of income (2187 UHR per one hectare), net profit (514 UHR per one hectare), and profitability rate (23, 5 %). All farms with land use over 40,000 ha are less efficient. Farms with land use from 40,000 ha to 60,000 ha are even unprofitable. They have loss 80 UHR per hectare. Of course, many other factors except farm size influence on farm efficiency. One of most important between them is management, and particular, cost management. Managing an agricultural enterprise involves much more than optimizing technical processes, and technical efficiency is only one of the many factors that contribute to enterprise efficiency. As farms get larger, the costs of monitoring labour increase. At some point the associated costs will cancel out any technical efficiency that may be realized by further growth. Different managers in different settings using different organizational forms will each find their own optimal compromise between these competing factors [4].
Table 2

Dependence of large farm size (over 20,000 hectares) and farm efficiency

Dependence of large farm size (over 20,000 hectares) and farm efficiency

Source: own presentation based on statistical form 50 agr.: State statistics committee of Ukraine, Kyiv, 2010.
      Internal organization, management and motivation of the hired workers are the most critical issues for large farms in Ukraine. The first task in this direction is creating the system of management that would be adequate to the new economic conditions. In order to create effective management the system of costs monitoring should be developed. The main task of this system is to provide necessary information for decision-making process. Transition to a market economy secured more latitude in managing enterprises, which stipulated the emergence and development of costs monitoring system. This system allows solving a number of important issues concerning management improvement.  On the basis of this system the methods of planning, controlling and motivation has being established.  Planning includes budgeting and, first of all, development of the production budgets; controlling provides cost control and input-output flows control; motivation is dealing with advance and final payments to the hired workers [4].
      The most important issue is to determine what to produce and the optimal combination of outputs to ensure the maximum profit. In the framework of costs monitoring system it is possible to plan total production costs and the cost of one unit of output, make forecasts of market prices and calculate profitability rate. Costs monitoring consists in calculating the cost of production on the basis of predicted inputs prices. Simultaneously, one should allow for resource potential of an enterprise, land fertility, technology use, techniques of crop production and possible sources of their improvements, accessible channels of distribution and budgets. Subdivisions’ budgets can have different structure. For agricultural enterprises it is expedient to work out annual budgets with all details being reported on a monthly basis. There is also a necessity to elaborate production budgets.
     A distinct division of responsibilities within the enterprise facilitates decision-making process and makes it easier to set and follow the goals of the enterprise. This is achieved sales volumes. One should also take into consideration the dynamics of exchange rates as an important factor contributing to the development of prices for pesticides, fuel, mineral fertilizers and others. Profitability rate and profit per unit of output are calculated for each kind of output and show whether a particular kind of output is worth producing.
     Enterprise’s administrative staff sets objectives for the internal subdivisions with a help of by budgeting and differentiating the functions of different subdivisions. In setting the budgets they use the classification of costs into variable and fixed, take into consideration the norms (production norms, norms of fuel, forage and seeds consumption, etc.). One should also allow for economic norms such depreciation rate, rent payments, etc. As a rule, budgets of agricultural enterprises contain information on all costs incurred in production.
       Annual budgets of the subdivisions allow to effectively controlling over their activity by comparing the planned (contained in the budget) and actual indicators. For this purpose they usually employ “standard-cost” method. Standards (quantities and the cost of inputs required to produce a unit of output) lie at the heart of this method. Another method – “direct-cost” – provides for budgeting of and controlling over costs with direct and indirect costs being clearly specified and variable costs per unit of output being determined.  
        Budget calculations and final indicators of annual budget execution are important in elaborating policies regulating internal economic relations and in choosing instruments of labor motivation.
       Thus, the system of costs monitoring is a reliable and important source of information for making administrative decisions in the course of enterprise’s production process. An introduction of this system is of a special importance for re-structured collective agricultural enterprises.
     The second and not necessarily the least important issue to be solved are to estimate a break-even point. For this purpose the costs monitoring system provides for classification of total costs into variable and fixed costs. To develop price strategy of the enterprise one could employ the approach referred to as CVP-analysis (cost, volume, profit), in the course of which the relationship between the cost and profit is determined for various production volumes.
        Different trends in the development of input and output prices require that efficiency of additional costs and, consequently, output expansion be estimated. These calculations are similar to those performed in CVP-analysis.
Thus, the system of costs monitoring plays an important role in developing a strategy of large agricultural enterprises under market conditions, that is, in substantiating management decisions. It also plays an important role in establishing efficient management.

References:

  • 1. KUHN A., DEMYANENKO S. (2004): Enshuring competition on the Market for Lease Land in Ukraine: in von Cramon-Taubadel S., Demyanenko S., Kuhn A. Ukrainian agriculture: Crisis and Recovery, Sharker Verlag, pp. 81-88.
  • 2. GALUSHKO, V., DEMYANENKO, S., BRÜMMER, B. (2003): Farm Efficiency and Productivity Growth in Ukrainian Agriculture, Institute for Economic Research and Policy Consulting, Working Paper No. 20, pp. 24.
  • 3. Demyanenko. S., von Cramon-Taubadel S. (2004): The organizational forms and Performance of Agricultural Enterprises in Ukraine: What conclesions can be Drawn?: in von Cramon-Taubadel S., Demyanenko S., Kuhn A. Ukrainian agriculture: Crisis and Recovery, Sharker Verlag, pp. 89-96.
  • 4.  LISCHKA G. (2004): Farm Management Challenges in Ukrainian Agriculture: in von Cramon-Taubadel S., Demyanenko S., Kuhn A. Ukrainian agriculture: Crisis and Recovery, Sharker Verlag, pp. 125-136.
     
0
Your rating: None
PARTNERS
 
 
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
image
Would you like to know all the news about GISAP project and be up to date of all news from GISAP? Register for free news right now and you will be receiving them on your e-mail right away as soon as they are published on GISAP portal.