Calculating Crop Costs

Calculating Crop Costs

There is no way around it: Profit = Revenue–Expenses. When we need to increase, or more commonly maintain, profit, the only way to do so is by increasing revenue or decreasing expenses. The standard reaction is to target the most obvious expenses–labor, fuel costs, plant materials or drop unprofitable crops and product lines. While that sounds simple enough, every business owner knows that actually doing this is much more difficult and time consuming than it seems. The solution–make your best guess as to which expenses can be reduced and which crops are unprofitable. Even in this day when a large number of tools are available to help analyze a business’s finances, a surprisingly large number of business owners operate from instinct and lack numbers upon which to make important decisions.

So where to start? There are a number of ways to look at a business’s expenses and crops. The simplest method, of course, is the one many folks already use. If there is money in the checkbook at the end of the year, the business made money and is doing all right. Unfortunately, the days when that was enough to run a business are limited. 

Variable Costs

The first step in cost accounting for a business is typically to divide expenses into two categories: Variable and Fixed. Variable expenses, also called direct or allocated expenses in some situations, are those that vary with the amount of crop you are growing. Variable expenses typically include pots, plugs, seed, substrate, labels, chemicals, etc. Many growers commonly do this on a per unit basis (pot, flat, basket, bunch); see Fig. 1 for an example calculation. Most of the calculations are fairly straight forward with the exception of labor. While determining the cost of a crop is most accurate if you are able to allocate labor per unit of crop, labor can be lumped with fixed expenses initially. Dividing labor costs among the various crops, species and units (i.e. 4-inch pots, Jumbo 6s, baskets) can be a daunting task and is best handled after you have gained more experience in cost accounting. 

Fixed Costs

Fixed costs are those expenses that have to be paid whether or not a crop is produced, including depreciation, insurance, marketing, management salaries, etc. One shorthand method for handling fixed costs is to calculate the amount of variable costs per unit container or bunch and multiply that number by 1.5 or 2 to yield the total cost per container or bunch. For example, the estimated total cost for a pot could be calculated as follows:

$0.896/pot (variable cost) x 1.5 = $1.344/pot (total cost)

This method is quick and easy and surprisingly accurate is some situations. Unfortunately, in most operations, however, the total amount of fixed costs need to be determined. 

Add total used each month: 
Jan. 35,000 ft2 * 44 weeks,
Feb. 22,000 ft2 * 4 weeks, etc.
Total 2,860,000 square foot weeks

Calculating overall $/ft2/wekk, using only the available
production space that is being used to produce crops.

Dollars Per ft² Week–52 Week Method

The next step is to determine how to spread the fixed costs over all the plants being produced. One method for allocating fixed costs to individual crops is called the dollars per square feet week method ($/ft²/week). The total fixed costs are divided by the total amount of useable space in the greenhouse by the number of weeks the space is used. Greenhouses that keep their spaces full and grow crops in a fast, efficient manner tend to be more profitable, which is reflected by a low $/ft²/week figure. The following are the steps for calculating the $/ft²/week method.

1. Calculate the amount of space required by each pot and the amount of time that pot is in the greenhouse.

2. In a separate calculation, divide the total amount of fixed costs by the total ft² weeks for the greenhouse, which is determined by multiplying the total amount of useable greenhouse space by the number of weeks in the year.

$335,000 ÷ (85,000 ft² x 52 weeks) = $0.0758/ft²/week

3. Next, multiply the total ft² weeks for the pot by the overall $/ft²/week for the greenhouse to yield the cost per pot:

2.222 ft² weeks x $0.0758/ft²/week = $0.168 per pot

4. Finally, add the estimated fixed cost to the variable cost to get the final cost per pot:

$0.896 (variable cost) + $0.168 (fixed cost) = $1.064/pot

Well, now we have an accurate cost per pot–right? Oh, if only it were that easy. The problem with this method is that while it is more accurate than guessing, no greenhouse operation is able to keep its space constantly filled. The above example used a mythical greenhouse in never-never land that had all of its benches filled with crops all year long. 

Dollars Per ft² Week–Estimated Space Method

So, the next step is to make the dollars per ft² week method more accurate. We do this by estimating the actual amount of space we are using in the greenhouse, which is illustrated in Fig. 2.

1. Estimate the percentage of space usage for each month and multiply by the number of weeks in the month. Finally, add all of the figures for each month together.

2. Divide the total amount of fixed costs by the total estimated ft² weeks for the greenhouse:

$335,000 ÷ 2,860,000 ft² week = $0.1171/ft²/week

3. Next, multiply the total ft² weeks for the pot by the overall $/ft²/week for the greenhouse to yield the cost per pot:

2.222 ft² weeks x $0.1171/ft²/week = $0.260 per pot

4. Finally, add the estimated fixed cost to the variable cost to get the final cost per pot.

$0.896 (variable cost) + $0.260 (fixed cost) = $1.156/pot

Okay, now the cost of the pot is much more accurate. There are other ways to get the cost even more accurate but that would be a topic for another article.

Industry Averages For Dollars Per ft2 Week

Once growers calculate the $/ft²/week for their business, they usually want to know how their fixed costs compare with other businesses.

In 2005, Megan Bame completed her Masters thesis on cost accounting in the floriculture industry. During that study, she determined the $/ft²/week for wholesale and retail bedding/potted plant producers. Values are presented three different ways for useable bench and floor space: 1) using the 52 weeks method described above, 2) using the estimated space method described above, and 3) plus the amount of space allocated to overhead hanging baskets and using the 52 weeks method.

The last point addresses an issue in greenhouse production that can be difficult to resolve–hanging baskets. Some growers consider hanging baskets to occupy “free” space if they are located above benches or floor space that is filled with other crops and has already been assigned fixed costs. Other growers distribute fixed costs over all the production units, including hanging baskets. To calculate the third method, we included the space occupied by hanging baskets.

Another way to compare $/ft²/week among businesses is to look at them based on the size of the businesses. The $/ft²/week tends to vary with the size of the business with largest businesses having the lowest values. For example, larger businesses tend to have high space usage and allocate more of their fixed costs as variable costs (especially labor). Figure 3 shows an example of how to use the $/ft²/week figure and what it means to the price of a flat of impatiens. Of course, there a number of ways to manipulate the numbers to try to decrease the cost per unit. Figure 4 shows what happens when you decrease the $/ft²/week from $0.10 to $0.08, when you decrease the amount of time used to grow the crop (i.e. use larger plugs) or when you decrease the amount of space the crop takes up. 

Other Methods

While $/ft²/week is one of the most commonly used methods, the same idea can be used in other ways. Some growers use $/unit (flat, pot, basket, stem) and divide total fixed cost by number of units. Other use $/unit labor and divide total fixed cost by number of hours or dollars of labor. Either of these methods may be easier for you to use or may make more sense for your operation.

To finish, let’s go back to one of the original questions we posed in this article–how do you get started?

– Take what numbers you have and make a quick calculation, get comfortable with the process.

– Refine the process, improve your record keeping.

– Check out the following Web site for additional info: www.wtextension.utk.edu/hbin.

– Whatever you do–do something!

After you get a little more comfortable with what you are doing, try “variabilizing” as many costs as possible. In other words, take as many expenses as possible and assign them to specific crops. For example, estimate the pesticide usage that is needed for various crops and move that expense from fixed to variable.

Generally, the most important expense to “variablize” is labor. For a small operation, have each person mark a checklist at the end of the day with the amount of time they spent on each task. The smallest unit should be no more than ¼ hours or tens of hours, such as 2.5 hours on transplanting begonias and 1.5 hours on general watering.

A simple standardized checklist ensures that everyone uses the same language and makes tallying the checklist easy. For larger operations that use crew leaders, have the crew leader fill out the checklist for each person in his crew and turn that in at the end of the day. Another option is to put the checklist on a computer spreadsheet and have each person enter the number of hours directly into the spreadsheet, reducing the data entry and management time required. On the sophisticated side, computer software is available to help track labor costs.

Finally, after you have mastered a method for reviewing expenses and crops, change it around and try one of the other methods discussed above. Using a new method will give you a fresh look at your business.

Leave a Reply

More From Plant Culture...
Mike McGroarty, owner of Mike’s Backyard Nursery

July 29, 2015

Backyard Success: Mike McGroarty Educates Aspiring Growers

Mike’s Backyard Nursery sits on a long, narrow, 5-acre property located in Perry, Ohio. There, customers can find a variety of flowering shrubs available, all in 2-quart pots, and all for sale for $5.97 each. Owner Mike McGroarty, a lifelong resident of Perry, says the town has a lot of plant nurseries, including 100 wholesale growers within a 10-mile radius of his house. That doesn’t discourage McGroarty, because he knows that while there are a lot of nurseries in his area, no one else is doing what he is doing. McGroarty has learned about plants — and marketing them to his audience — through decades of experience. He has never hesitated to pass along his knowledge to other growers looking to start their own backyard operations, and has created an entire program to educate aspiring growers. McGroarty Likes To Practice What He Preaches McGroarty’s operation serves as the laboratory for […]

Read More

July 29, 2015

2015 Spring Crops Report: Rain Soaks Spring Sales

Rain, rain and more rain. That was the story this spring for the large majority of growers across the U.S. And where it wasn’t too wet, it was too dry. Drought conditions cut sales in the West and Southwest. But it wasn’t all bad. Eighty-nine percent of respondents to Greenhouse Grower’s 2015 Spring Crops Survey declared the season a success, despite its challenges. They said beautiful weather in April and excited consumers who were ready to spend got the season going early, but then cool temps and rainy weekends throughout May and June caused confusion over when and how much to plant. Of the 189 respondents to Greenhouse Grower’s 2015 Spring Recap Survey, 53 percent identified themselves as grower-retailers, 34 percent were wholesale growers and 13 percent said they were young plant growers. Most responses came from the Midwest (27 percent), Northeast (18 percent) and Southeast (16 percent), but also […]

Read More

July 29, 2015

Dümmen Orange Continues To Strengthen Standards With MPS Certification

MPS recognized Dümmen Orange during an unofficial ceremony at Cultivate’15 for its continued dedication to ensuring sustainability in the floriculture industry. Through its deep understanding of environmental impact and the importance of sustainable operations, Dümmen Orange has implemented production best practices within its facilities to meet or exceed MPS standards on environmental and agricultural practices, as well as social responsibility. “Nowadays, consumers are not only interested in the visible and tangible characteristics of the products they buy, they also are concerned with how products are made,” says Carl Kroon, General Manager of the Dümmen Orange farm Las Mercedes in El Salvador. “Dümmen Orange is deeply rooted in our commitment to our people, our values and our planet. The MPS certification helps us to make it visible to our customers that our production methods respect our workers and the environment.” Setting A High Standard Dümmen Orange has taken a wide range […]

Read More
Latest Stories
Mike McGroarty, owner of Mike’s Backyard Nursery

July 29, 2015

Backyard Success: Mike McGroarty Educates Aspiring Grow…

Mike’s Backyard Nursery sits on a long, narrow, 5-acre property located in Perry, Ohio. There, customers can find a variety of flowering shrubs available, all in 2-quart pots, and all for sale for $5.97 each. Owner Mike McGroarty, a lifelong resident of Perry, says the town has a lot of plant nurseries, including 100 wholesale growers within a 10-mile radius of his house. That doesn’t discourage McGroarty, because he knows that while there are a lot of nurseries in his area, no one else is doing what he is doing. McGroarty has learned about plants — and marketing them to his audience — through decades of experience. He has never hesitated to pass along his knowledge to other growers looking to start their own backyard operations, and has created an entire program to educate aspiring growers. McGroarty Likes To Practice What He Preaches McGroarty’s operation serves as the laboratory for […]

Read More
cannabis, marijuana plant

June 27, 2015

Concern Grows Over Unregulated Pesticide Use On Cannabi…

As most growers know well, the federal government regulates all insecticides, fungicides, herbicides and other commercial chemicals used on agricultural crops. Therein lies the problem with use of chemicals on cannabis crops – so far, the feds want nothing to do with legalized marijuana. According to “Concern Grows Over Unregulated Pesticide Use On Cannabis,” a June 17 article on the National Public Radio (NPR) network by Agribusiness Reporter Luke Runyon, the lack of regulated chemicals for cannabis has left growers to experiment on their own. “In the absence of any direction the subject of pesticide use on the crop has just devolved to whatever people think is working or they think is appropriate,” said Colorado State University Entomologist Whitney Cranshaw in the NPR report. “Sometimes they’ve used some things that are appropriate, sometimes unsafe.” Denver officials held tens of thousands of marijuana plants earlier this year due to safety concerns, but […]

Read More
Great-spangledFritillary

June 16, 2015

The Butterfly Effect: Insect’s Wings Key To Azalea Poll…

A researcher from North Carolina State University (NC State) has found that in the case of the flame azalea (Rhododendron calendulaceum), all pollinators are not created equal. In fact, due to the flower’s unique reproductive structure, butterflies — and specifically, their wings — are the key to pollination. The flame azalea is commonly found in the Appalachian Mountains, ranging from as far north as New York to Georgia in the south. Like most azaleas, the flowers are large, and have an unusual structure: both the anther (male) and stigma (female) parts are very elongated and separated from one another. NC State biologist Mary Jane Epps was interested in how the azalea’s flower structure affected its pollination. “In order for a plant to reproduce, a pollinator — usually an insect — has to spread the pollen from the anther to the stigma,” Epps says. “In the case of the flame azalea, […]

Read More
Bee on a Sedum

March 17, 2015

4 Key Pollinator Research Projects To Be Funded By Hort…

The Horticultural Research Institute will grant $125,000 in financial support for four key projects as part of the Horticultural Industry Bee & Pollinator Stewardship Initiative. The Initiative has three primary goals. First, to convene a task force to develop a bee and pollinator stewardship program, including creation of best management practices for plant production. Second, to identify and fund research that will help answer key science questions and fill gaps needed to design and refine the stewardship program. Third, to seek to positively position the horticultural community and its customers by collaborating with other compatible groups interested in augmenting pollinator habitat and protection.

Read More

March 11, 2015

Pollinator Initiative Promotes Bee-Friendly Talking Poi…

AmericanHort and the Society of American Florists are working tirelessly with the ornamental industry's Pollinator Stewardship Initiative on a number of new projects.

Read More

February 11, 2015

Infusion Technology Boosts Seed Performance, Study Sugg…

Seven-year-old wheat seed germination can increase by as much as 83 percent, according to a Vital Force Technology Study that looks at the effects of energy infusion technology on plant vitality.

Read More

February 3, 2015

American Floral Endowment Accepting Research Pre-Propos…

If you are pursuing a floriculture research project, now is the time to apply for funding through the American Floral Endowment. Research pre-proposal applications for 2015-2016 funding are due to AFE by June 1, 2015.

Read More

January 27, 2015

Marijuana’s Trajectory And Ascent To Horticultural Cr…

Marijuana growing is poised for change as growers and researchers focus on improving production practices.

Read More

December 9, 2014

Greenhouse Production: Two Years Of Basics & Beyond…

Greenhouse Grower's Basics & Beyond articles cover some of the latest news and research going on in greenhouse production. Here are article links for the last two years.

Read More
GrowIt! App Wins Gold At Design100 2014 US Mobile & App Design Awards

November 24, 2014

GrowIt! App Wins Gold At Design100 2014 US Mobile &…

The social garden app GrowIt! takes the Gold Winner award at the design100 2014 Mobile & App Design Awards.

Read More

November 10, 2014

The Perennial Farm Joins HGTV HOME Plant Collection

The Perennial Farm joins the HGTV HOME Plant Collection growers' network for 2015.

Read More
AmericanHort

November 4, 2014

AmericanHort Publishes Revised American Standard For Nu…

AmericanHort announces the revised American Standard for Nursery Stock (ANSI Z60.1) is now available for industry use. The Standard reflects the consensus of the industry regarding how nursery stock — living plants other than annuals — should be specified and sold within the trade.

Read More

September 26, 2014

Master The Art Of Watering

Watering is elemental to healthy plants, but one of the hardest concepts for new employees to master in the greenhouse. Recommend these tips to start them off right.

Read More

September 16, 2014

Ball FloraPlant’s Las Limas Facility Provides Gro…

Ball FloraPlant’s Las Limas farm in Esteli, Nicaragua, is one year away from full production, but sales and quality from the two-year-old facility are right on track.

Read More
Erysimum 'Cheers' from Darwin Perennials

September 15, 2014

Darwin Perennials Takes Production Offshore In Bogota, …

With its recent purchase of a farm in Colombia, Darwin Perennials is ready to amp up supply of its perennial genetics, to provide growers with tried-and-true varieties and comprehensive production specifications.

Read More

July 23, 2014

Plan Now To Prevent Bract Edge Burn On Poinsettias

Reduce fertilizer and water, and allow your poinsettias to develop slowly during the final four weeks of production to avoid bract edge burn.

Read More

July 11, 2014

Growing Your Crops Above Their Base Temperature

Lowering temperature set points in the greenhouse may help you combat rising heating costs.

Read More

May 1, 2014

Growers Report Nutritional Problems On Geraniums

In recent weeks, several growers have contacted Michigan State University Specialists about leaf discoloration on geraniums, especially the purpling of lower leaves.

Read More