Every time you’re in the field, you’re paying for equipment — whether you own it or not.
Understanding the influence of depreciation on your profitability will improve your accounting — and farm — performance.
“Few may understand what their cost of depreciation is — their true overhead,” said Shea Ferster, CPA, CA, Business Advisor with MNP’s Agricultural Services team. “We often only think in terms of payments and miss factoring in depreciation expense — the cost of using equipment.”
Machinery costs
Given the high costs of machinery, amortization — money committed to monthly debt payments — is an important tool for farmers, but it’s only one factor to consider.
“They think, ‘That tractor is paid for. It doesn’t cost me anything to use another year.’ Well it does,” said Ferster. “Most farmers are surprised at the actual cost of their equipment.”
Interest rates, operating time and repair expenses will help you understand what it costs you to operate that machine on an hourly basis.
Look at the numbers
Take the example of a 500 horsepower diesel tractor amortized over 15 years:
Equipment details
- List price: $500,000
- Purchase price: $480,000
- Estimated dealer salvage value at end of 15 years: $109,616
Ownership costs
- Interest rate: 5%
- Interest per year: $5,480.80
- Depreciation per year: $37,476.86
- Insurance and housing: 1% of average value (purchase price, plus salvage divided by two): $3,048 per year
- Estimated total ownership cost per year: $46,005.66 (assuming 400 tractor hours, this is $115.01/hour
Variable costs
- Repair: $8,064
- Fuel and lubrication: $15,787
- Labour: $6,600
- Total variable: $30,451 (assuming 400 tractor hours, this is $76.13/hour)
Considering the ownership and variable operating costs, your total estimated cost to own and operate the machine is $191.14 per hour.
When you plug your hourly cost into your farm books alongside inputs and other expenses, you will have a better understanding of when your farm can reach profitability at the end of the season.
Watch for other AG Team Advisor articles on cash and accrual accounting and including bin expenses in your taxes and cost of production.
It’s crucial to have a clear understanding of your operation’s bottom line. Business advisors specializing in farm management can help growers identify the strengths and weaknesses of their operation and develop strategies for the future. For more information on advisory services available to growers, see MNP’s Solutions to Enhance Farm Profitability and Operations.
Business Advisor
MNP