Horti-Business Management (2+0)

A.Cost concepts based on variable nature

i. Fixed costs or Total Fixed costs (TFC)

• The farmers have to meet some expenses irrespective of whether they are cultivating or not. These include payments towards land taxes, insurance premium, depreciation of machinery and buildings etc. The payments towards such expenditures, which are incurred even when production is not undertaken and also do not vary with the level of production is termed as Fixed costs. This (TFC) is indicated by a straight line parallel to X-axis
ii. Variable costs or Total variable costs (TVC)

• Some inputs are used only when production is undertaken and the quantity used varies with the level of production. Inputs such as seeds, fertilizers, labour, fuel for oil engines, herbicides, pesticides etc., come under this category. The payment towards such expenditures is termed as variable cost. The factor -product relationship in agriculture generally follows the law of diminishing returns and hence the variable cost curve reflects inverse ‘S’ shaped curve.
iii. Total costs (TC)

• It is the sum of TFC and TVC. TC also has inverse s-shape curve since TC is obtained by summation of TFC and TVC curves.
TC = TFC + TVC
= TFC + Px.X

Where,
X = Variable input
Px = Price of X

Total Fixed and variable costs

S. No	Total Fixed Cost	S. no.	Total Variable Cost
1	Depreciation	1	Seeds, fertilizers, pesticides, , herbicides, electricity / fuel
2	Land taxes	2	Hired machine / animal power
3	Permanent labour	3	Hired causal labour
4	Interest on long term and medium loans (in proportion to the value of the output of a particular crop / enterprise to the total revenue generated from the farm in a year)	4	Interest on crop loan
5	Interest on fixed cost (at bank lending rate for half of the duration of the crop)	5	Interest on variable cost (at bank lending rate for half of the duration of the crop)


• From the total cost, four types of unit costs are derived.
iv.Average Fixed cost (AFC)

• AFC is computed by dividing TFC by the quantity of output. AFC varies for each level of output. When output increases, AFC decreases. This is due to “spreading of fixed costs”. i.e., when production increases cost per unit decreases.
AFC = TFC/Y,

where = Y = output
• Graphically AFC is a rectangular hyperbola.
v. Average variable costs (AVC)

• AVC is computed by dividing TVC by the quantity of output (Y). AVC varies with the level of output.
  
• It is the variable cost per unit.
AVC=TVC/Y or AVC= (X.Px)/Y

vi. Average Total costs (ATC)

• ATC can be computed in two ways
(a) ATC = TC/Y, or
(b) ATC = AFC + AVC

• ATC decreases as output increases from zero, attains a minimum and increases thereafter. ATC reflects the unit cost of production.
vii. Marginal costs (MC)

• MC is defined as the change in TC, due to unit increase in output, i.e., it is the cost of producing an additional unit of output.
MC = ∆TC/∆Y

• Graphically MC is the slope of TC curve