CHAPTER II 

 DETERMINATION OF METHOD 



THERE are two methods in use for the determination of 

 farming costs, (1) the analytical, (2) the synthetic. The 

 latter is not practised in this country, but its use is 

 advocated very warmly by its deviser, Ernst Laur, as giving 

 certain results with less labour and at less risk of error than 

 are involved in the analytical method. It consists in building 

 up from the net profit, or loss, on production to find a so- 

 called cost, cost being regarded for this purpose as the 

 figure at which the article concerned can be sold so as 

 to cover all expenses and give the same return on capital 

 as that which is represented by current rates of interest 

 on good security. Laur finds the difference between the 

 net returns, and the interest on the capital invested calcu- 

 lated at the market rate current ; this figure, expressed 

 in a percentage of the gross returns, shows by how much 

 the selling price must be increased or diminished (according 

 as to whether the net returns are less or more than the return 

 from an investment of an equal capital sum at the current 

 rate of interest) in order to give the ' cost of production ' 

 as defined above. The method may best be explained by an 

 example. 



Calculation of the Cost of Production on a Milk-producing Farm by Laur's Method 







Total capital involved 5,000 



Gross returns ........ 1,000 



Net returns ........ 200 



Average price realized for milk sold, Is. 8d. per gallon. 



Interest on 5,000 at 5 per cent 250 



Net returns ........ 200 



Difference 50 



Difference expressed in percentage of gross returns . 5 per cent. 



5 X 20d. 

 .-. Cost of production = 20d. (Is. 8d.)+ - 



100 



2ld. (ls.9d.) 



