Problems in Computing Costs of Providing Custom Equipment for Hire 



Farmers need the type of information outlined above if they are to 

 appraise the pricing of custom services. Direct operating costs, annual costs 

 of ownership, costs of labor, and the performance rate for the machine in 

 question must be considered in order to establish the correct charge on an 

 hourly rate. 



The charge per hour made by the farmer custom operator must return 

 to him enough money to pay for direct operating expenses, such as gas, oil, 

 and grease. In addition, a charge for labor must usually be made as the 

 costs of doing custom work off the farm include the loss of income that 

 might have been earned on the farm.'* Therefore, the rate charged should be 

 approximately in line with the earning capacity of labor when used for the 

 farm business. 



Conversely, as in custom hiring, no annual ownership costs usually 

 need to be assigned to units of power, such as tractors or trucks used in 

 doing custom work. These units usually must be maintained on the farm 

 even if custom work is not performed. But if it is necessary to buy an addi- 

 tional truck or tractor exclusively for custom work, the ownership costs 

 should be charged to the custom service. 



Liability insurance is a small but advisable expense associated with do- 

 ing off-farm work. A general policy covering personal liability for all home- 

 farm operations must be bought in order to have coverage for custom work. 

 The costs and benefits of the general policy relate to all farm operations. 

 For that reason, the cost of the general policy — the fixed ownership aspect 

 — cannot be considered as a machinery cost but rather as one of the entire 

 farm. Only that part of insurance cost which covers custom work specificially 

 is an operating cost. The amount paid for this coverage is small (about 

 SO. 50 per SIOO.OO of custom-work receipts) and it varies with the kind of 

 machine, the amount of use, and the price charged per hour. Hence the direct 

 operating cost per hour was not calculated here. But liability insurance is 

 a small expense that should be considered when doing custom work. 



In the setting of prices for services performed, the specialized custom 

 operator and the individual farmer doing limited custom work differ. This 

 is mainly because of the different cost position each occupies. A full-time 

 or specialized custom operation must cover all his fixed costs of operation, 

 such as depreciation, housing, taxes, and repairs. He must also pay for his 

 direct operating costs of fuel, materials, and labor. In addition, he must re- 

 ceive some pay for himself as manager and interest on his investment in 

 equipment. Any earnings left above these charges would be profit. An in- 

 dividual farmer, however, has only to charge a minimum price for custom 

 work equal to the direct operating costs and the extra labor expense. Any 

 returns above this minimum level of direct operating costs will represent a 

 payment toward the fixed costs already incurred and borne by the farm busi- 

 ness. Any payment toward these fixed costs, which is earned by custom work, 

 is more than would have been obtained had no custom work been done. 



4 S. B. Weeks and G. E. Frick, How to Make Money Doing Custom Work, New 

 Hampshire Agr. Ext. Serv., Ext. Cir. 303 (1951). 



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