If value can be put on the farmer’s labour and unpaid family labour, the return to factor of production can be determined using the following formulae:
(i) Return to land and management = Net farm income-return to capital- unpaid family labour-operator’s labour.
(ii) Return to capital and management = Net farm income – return to land – unpaid family labour – operator’s labour.
(iii) Return to management = Net farm income – return to land – return to capital – operator’s labour – unpaid family labour.
Return to land, operator’s labour and capital can be determined separately if arbitrary changes can be made for operator management.
Net Income Statement
An example, given the following information what is the net farm income and return to the various factions?
Inventory:
1/1/81 31/12/81
N N
Sheep 144.00 100.00
Chickens 150.00 350.00
Ducks 50.00 60.00
Grains 240.00 260.00
Fertilizers 100.00 80.00
Goats 120.00 160.00
Sales:
Livestock 44.00 Chickens 150.00 Eggs 200.00
Crops:
Cotton 600.00 Groundnuts 300.00 Sorghum 400.00
Operating Costs:
Seeds 50.00 Fertilizer 150.00 Hired labour 200.00 Feeds 120.00 Fixed Costs:
Taxes 10.00
Permanent staff 300.00
Repairs on buildings 50.00
Interest on debt 60.00
Home Consumption:
Sorghum 600.00 Vegetables 50.00 Maize 42.0 Solution:
N
Total value of inventory 804.00
Total Value of inventory 31/12/81 1,010.00
Increase in inventory N1010 – 804 206.00
Total farm receipts 1,694.00
Total value of consumed products 1,070.00
Total gross income = 206 + 1694 +1070 2,970.00
Total operating Cost 520.00
Total fixed cost 450.00
Total cost of production N520 + 420 940.00
The Net Income Statement in provided in table 7.1
(a) Net farm income = Total gross income – total cost of production = N2,970 – 940 = N2,030.00
(b) If the average farm capital is 600 and the opportunity cost of using this in an alternative enterprise is 10%, the cost of using capital is therefore 10% of N600.00 = N60.00
Table 7:1: Net Income Statement for year ending 31st December, 1981.
Inputs N Outputs N
Variable Costs:
Seeds Fertilizer Hired labour Feeds
Fixed Costs Taxes
Permanent staff Repairs on buildings Interest on debt
Total cost of production
50 150 200 120 ---
520 ---
10 300
50 60 ---
420 ---
940
Sales and Receipts Livestock
Chickens Eggs Cotton Groundnut Sorghum
Home Consumed Product Sorghum
Vegetables Maize
Total Farm Receipts
44 150 200 600 300 400 ---
1,694 ---
600 50 420 ---
1070 ---
2764 Opening Inventory Closing Inventory
Sheep Chickens Ducks Grains Fertilizer Goats
144 150 50 240 100 120 ---
804
Sheep Chickens Ducks Grains Fertilizer Goats
100 350 60 260
80 160 ---
1010
--- ---
Change in inventory = 1010 – 804 = 206
Net farm income = Total Farm Receipts – total Cost of Production Change in inventory = 2764 – 940 + 206 = 2030.
Home consumed product
Total 1,744 Sorghum 600
Net Farm Income 2,030 Vegetable 50
Maize 420
---1,070
---N3774 N3,774
====== ======
Hence, return to family and operative land, labour and management is (a) – (b) = N2030 – 60 = N1970. If value of family labour is N1000, operator’s labor and management is N500 and the cost of using the land is N200, return to capital = 1970 – 1000 – 500 = 270.00
Return per Naira invested (d) 270
--- = --- = N0.45 Average capital 600
This means that 45 kobo is generated on each Naira invested on capital.
If operator’s labour is valued at N300, unpaid family labour at N1000, cost of using the land at N200, management income = 2030 – 60 – 300 – 1000 – 200
= N470.
Self Assessment Exercise I
Prepare a net income statement from the following information for Kwame’s farming operations for 1985 in Northern Ghana.
Inventory Jan. 1, 1985 Dec. 31 1985
(Cedis) (Cedis)
Tools 120.00 100.00
Millet 100.00 246.00
Cowpea 80.00 195.00
Chickens 100.00 140.00
Sheep 240.00 120.00
Fertilizer - 60.00
Sales During The Year Sheep 400.00
Chickens 460.00 Cotton 1000.00 Groundnuts 800.00
Seed 53.00
Fertilizer 166.00 Tools 30.00 Labour 346.00 Taxes 122.00 Feeds 1000.00
Record on Home Consumption:
200 Cedis worth of millet was consumed by the family.
150 Cedis worth of chicken
80 Cedis worth of vegetables were consumed by the family.
Self – Assessment Exercise 2
Prepare a Net Income Statement from the following information for Pam Bot’s farm at Vom, Pleateau State, Nigeria.
Inventory Jan. 1, 1984 Dec. 31 1984 (N)
Sheep 243.00 240.00
Chickens 213.00 213.00
Turkeys 214.00 219.00
Grains 238.25 350.00
Tools 54.00
Sheep Chickens Sweet potato Irish Potato Acha
Seed Fertilizer
Depreciation on tools
Labour Taxes
Sales During The Year 272.00
266.00 386.00 245.00 252.00
Purchases during the year
53.00 237.00 65.00 233.00
30.00
N190.00 worth of sweet potato was consumed by the family and N130.00 worth of chicken products.
* Estimated remaining life was 3 years and the salvage value was N6. Figure depreciation by straight – line method.
Calculate, the per hectare operator’s return to labour, management and capital if total cultivated land was 12 hectares.
(a) Interest on average farm capital N400.00 at 10%
---
(b) Operator’s return to labour & management ---
(c) Value of farmers labour (12 months at N80) ---
(d) Return to management ---
4.0 CONCLUSION
The net income statement gives an indication of what the farm business is worth over a cert period of time. It is a flow concept unlike the net worth statement which is a stock concept. The information from the net income statement will be used later in the units that follow for further analysis of data.
5.0 SUMMARY
Inputs N Outputs N In this unit you have learnt that the net farm income is the total gross farm receipts minus the total cost of production plus or minus the change in inventory. The gross farm receipt is made up the sales of farm products and the value of the home consumed products. The total cost of production is made up of variable cost and fixed cost. The variable costs are the costs incurred on variable inputs such as seeds, fertilizers and labour that are consumed during a production process. The fixed costs are costs incurred on fixed inputs such as land, buildings and fencing that are last many production processes.
The products in stock at the beginning and end of the year are valued. The difference between the two periods is called the “change in inventory”. The change in inventory may be either positive or negative depending upon whether the value in stock is greater or less at the beginning or at the end of the accounting year.
The net farm income is a measure of the return to land, labour, capital and operator’s management input. Return to one of the inputs can be obtained from the net farm income by subtracting the returns of the other inputs.
Answers to Self – Assessment Exercises Self-Assessment Exercise 1
Net Income Statement for Kwame’s Farm
Variable Costs: Sales and Receipts
Seed 53.00 Sheep 400.00
Fertilizer 166.00 Chickens 460.00
Labour 346.00 Cotton 1000.00
Feeds 1,000.00 Groundnut 800.00
Fixed Costs Tools Taxes
Total cost of production
--- 1,565.00 ---
30.00 122.00 ---
152.50 ---
1,717.50 Total Farm Receipts
--- 1,694 ---
--- 2,660.00
---
Opening Inventory Tools
Millet Cowpea Chickens Sheep Fertilizer
Total
Net Farm Income
120.00 100.00 80.00 190.00 240.00
- ---
730.00 ---
2,447.50 1,503.50
--- 3,951.00
Closing Inventory Tools
Millet Cowpea Chickens Sheep Fertilizer
Home Consumed Products Millet
Chicken Vegetables
100.00 246.00 195.00 140.00 120.00 60.00 ---
861.00
200.00 150.00 80.00 ---
430.00 ---
3,951.00 Self-Assessment Exercise 2
Net Income Statement for Pam Bot’s Farm
Inputs N Outputs N
Variable Costs:
Seed 53.00
Sales and Receipts
Sheep 271.00
Fertilizer 237.00 Chickens 266.00
Labour 233.00 Sweet Potato 386.00
Irish Potato 245.00
---
Acha 252.00
--- 1,421.00 523.00
---
---Fixed Costs
Tools 30.00
Home Consumed Products
Sweet Potato 90.00
Depreciation 65.00
--- 95.00 ---
Chicken 130.00
--- 220.00 --- Total cost of 618.00 Total Farm Receipts 1,641.00
production ---
Opening Inventory Sheep
Chickens Turkeys Grains Tools
Jan.1,1984 243.00 213.00 214.50 238.25 54.00 ---
962.75 ---
Closing Inventory Sheep
Chickens Turkeys Grains Tools
Dec. 31. 1984 240.00 213.00 219.00 350.00 46.00*
--- 1,068.00
Change in inventory – 1,068.00 – 962.75 = N95.25
Net Farm Income = Total farm Receipts – total Cost of production + Change in inventory = 1641 – 618 + 92.25 = N1115.25.
54 - 6
* Depreciation on tools = --- = 8. the value of tolls decreased only by N8.00 in
3
the year 1994. the remaining balance is (54 – 8) = N46.00
6.0 TUTOR MARKED ASSIGNMENT
1.(a) From the following information prepare a Net Income Statement for Chukwuemeka’s Farming business in Anambra State of Nigeria for the year ending March 31, 1982.
N
Farm Receipts Records: Cocoyams 324.00
Plantain 266.00
Egusi melon 300.00
Yams 858.00
Vegetables 222.00
Pigs 554.00
Cassava 250.00
Operating Costs: Manure 40.00
Pig Feeds 136.00
Fertilizer 232.00
Seeds 114.00
Hired Labour 358.00
Fixed Costs: Taxes 27.00
Depreciation 42.00
Permanent Staff 400.00 Value of House hold Consumption: Cocoyam 235.00
Plantain 100.00
Yams 496.00
Chickens 116.00
Vegetables 60.00
Cassava 150.00
Inventory of Farm Business:
April 1, 1981 March 31, 1982
Chickens 210.00 312.00
Cassava 140.00 200.00
Fertilizer 16.00 12.00
Tools 82.00 71.00
(i.) The value of Chukwuemeka’s Services for his labour and management skills was N920.00. Find the return to capital for the farm business if there was no unpaid family labour.
(ii) Chukwuemeka’s average farm capital was N2,125. Find the return per Naira invested in capital.
2. Prepare a net income statement form the following information for Adamu’s farm:
Inventory Jan. 1, 1979 Dec. 31 1979 (N)
Sheep 66.00 60.00
Chickens 6.00 6.80
Dicks 8.50 18.60
Grains 16.25 300.00
Tools*
Sheep Chickens Cotton Groundnuts Guinea corn Seeds Fertilizer Hired Labour Taxes
54.00 - -
Sales During The Year 24.00
12.00 350.00
90.00 24.00
Purchases during the year
6.00 87.00 63.00 30.00
N180.00 worth of guinea corn and N60.00 worth of vegetables were consumed by the family.
* Assume the tools are new at the beginning of the accounting year. Their estimated remaining life is 3 years, salvage value in N18.00. Calculate depreciation by the straight line method.
(b) Calculate return per Naira invested if the value of farmer’s labour and
`management is N200.00, unpaid family labour is estimated to be N283.00 and the average capital investment is N500.00