METHODS OF CONDUCTING COST STUDIES. 9 



PRESENTATION OF RESULTS FROM THE STANDPOINT OF OPPORTUNITY COST VERSUS 



OPERATING EXPENSE.! 



Practically all publications of Federal and State departments of 

 agriculture on the cost of producing farm products have very properly 

 presented the figures on the basis of opportunity or alternative cost. 

 This basis assumes some or all of certain premises as a background 

 of consideration of the cost figures. Briefly, these premises usually 

 are: 



1. That the present-day capital value of the farm plant could readily be liqui- 



dated and the money invested with an assured interest return, thereby 

 entailing the use of capital for which a charge should be made. This assump- 

 tion is reflected in the charges for the use of the land against crop enter- 

 prises, in the building and equipment charges against the various enterprises, 

 in the horse labor rate, in the man labor rate, and in the charges made against 

 capital invested in live-stock enterprises. This entails including interest 

 in all these phases as a cost and not as a part of the income to be distributed 

 as a part of the profits. 



2. That all labor is entitled to a certain credit per hour regardless of whether 



paid for in cash, in kind, or furnished gratis to the farm. 



3. That, in some instances, account shall be taken of consumption by growing 



crops of fertility other than that placed upon the land by the farmer as 

 manure or commercial fertilizer. 



4. That a charge should be made for insuring the complete farm business on the 



assumption that if the farmer does not carry commercial insurance the farm 

 business must sooner or later stand losses according to the risk. 



As contrasted with the results obtained from this basis, which are 

 called the " opportunity cost," it has been shown that individual 

 farmers are constantly confronted with the actual bills of operating 

 expense in. the operation of their farms. It is pointed out that there 

 is often no actual interest on the expense side of the farmer's ledger; 

 a very small amount of labor is paid for in cash; there is no apparent 

 decrease in yield due to consumption of fertility beyond that cared 

 for by applications of manure and fertilizer; and on many farms 

 little, if any, live-stock or crop insurance is carried. 



Those who advocate including only actual expense as a cost basis 

 emphasize the fact that on the opportunity cost basis many enter- 

 prises show a decided loss on the books, with perhaps a minus labor 

 income for the farm as a whole, and the farmer is told that he has 

 received no pay for his labor through the year and that the quality 

 of his enterprises is such as to make them undesirable in a profitable 



1 Opportunity cost is here used in the sense of alternative uses being assumed for capital, feed, and labor. 

 On this basis a land-rent charge is included in the cost of producing crops; seed is charged to the crop at 

 its market price less cost of hauling to the farm; farm-grown feed is charged to live stock at the local market 

 priceless cost of hauling to the farm; and interest is charged on the capital invested in all forms of capital 

 except circulating or working capital. 



Operating expense is here used to express the cost estimated by excluding all interest charges on capital 

 invested in land and buildings. Farm-grown feed is charged to live stock at the cost of growing the feed 

 on the farm, but all labor concerned in the enterprise, whether paid for in cash by the farmer or not, is 

 included in the expense. Seed is charged to the crop at the cost of production with the result that the only 

 item not paid for directly by the farmer is that of the operator's and the family labor that may be included 

 in the enterprise. 



56389°— 21— Bull. 994 2 



