AEC 201- FARM MANAGEMENT, PRODUCTION AND

RESOURCE ECONOMICS (1+1)

Practical Manual cum Record

Mrs. S. SAKUNTHALADEVI
Mr. T. KATHIROLI

DEPARTMENT OF AGRICULTURAL ECONOMICS

SRS INSTITUTE OF AGRICULTURE AND TECHNOLOGY
(Affiliated to Tamil Nadu Agricultural University, Coimbatore-3)
Vedasandur, Dindigul District – 624 710

2022
 SRS INSTITUTE OF AGRICULTURE AND TECHNOLOGY
(Affiliated to Tamil Nadu Agricultural University, Coimbatore-3)
Vedasandur, Dindigul – 624 710

CERTIFICATE

Certified that this is the bonafide record of work done by Thiru /

Selvi………………………………….I.D.No.…………………of II B.Sc.(Hons)

Agriculture for fulfilling the course AEC 201 Farm Management, Production

and Resource Economics (1+1) during the III Semester of the year 2022.

Internal Examiner External Examiner

 Contents

Date of Signature
Ex. Date Title of the Exercise
No Submission & Remarks
Preparation of Farm Layout and
1
Estimation of Cost of Fencing of a farm
Computation of depreciation and cost of
2 farm assets: Valuation of assets by
different methods
Application of equi - marginal returns /
3 opportunity cost principle in allocation of
farm resources
Determination of most profitable level of
4
inputs use in a farm production process
Determination of Least-Cost
5
Combination (LCC) of inputs
Selection of most profitable enterprise
6
combination
Application of cost principles including
CACP concepts in the estimation of cost
7
of cultivation and cost of production of
agricultural crops.
Estimation of cost of cultivation and cost
8 of production of perennial crops /
horticultural crops
Estimation of cost and returns of
9
livestock products.
10 Preparation of Farm Plan and Budget

Farm Records and Accounts:

11 Usefulness, types of farm records– farm
production records-farm financial records
12 Preparation of Cash Flow Statement

Preparation and Analysis of Net worth

13
Statement and Profit and Loss statement
14 Estimation of Break – even analysis.

Graphical solution to Linear

15
Programming problem
Collection and analysis of data on various
16
resources in India
Ex. No.: 01 Preparation of Farm Layout and Estimation of Cost of Fencing of a Farm
Date:

Farm layout means the physical arrangement of fields and other permanent structures such
as buildings, roads, channels etc. Farm layout has direct relationship with cost and efficiency in use
of machineries, man power, animal power, irrigation and drainage and in turn affects the profit.
Hence, there is a need for good farm layout. Good farm layout should ensure;

1. Optimum size of fields to suit the cropping pattern.

2. Minimum area under buildings, roads and irrigation channels.
3. Easy access to all fields and buildings.
4. Uniformity of soil in each field or within a block.
5. Efficient and economic irrigation structures.
An efficient layout is one which fits well with the enterprise and crop rotation leading to the
saving of time, energy and money and efficient operation of the farm business.

Points to be considered for farm layout

1. Topography of the land
While dividing the whole area into different segments (or) fields, adequate care should be
taken such that lands with uniform level are brought under a single category (or) block. On a sloppy
land, the layout should be planned with the object of checking (or) reducing soil erosion and water
run-off.
2. Location, size and shape of the field
The fields with uniform soil type should be brought under major block. If there is any
problem soil like saline, alkaline, low fertility, prior identification would facilitate the problem soil
under single block. This would help in adoption of suitable reclamation.

The location of cultivable plots should allow an easy accessibility and movement of farm
produces in farm and movement of farm operators. Depending upon the availability of land, extent
of mechanization, soil type and fertility, irrigation facilities, size and shape of the fields vary.
However, it is always desirable to have small number of large sized fields, to achieve maximum
utilization. As far as possible the field should be uniform in size with rectangular shape.

3. Purpose of farming
Before any farm layout is designed, the decision-maker should clearly define the purpose
for which farming is carried out. It may be for research (or) commercial farm/ orchards/seed
multiplication plots/demonstration plots etc.
4. Type of enterprises

An enterprise may be specialized (or) diversified, single (or) mixed enterprise etc. If mixed
enterprise is planned, a layout should have a provision to accommodate the necessary infrastructural
facilities like farm buildings, grazing lands etc.
5. Sources of Irrigation
The irrigation source may be surface (or) ground water. While designing farm layout and
construction of irrigation structures, the water supply and its potential has to be assessed. Such
assessment would help in defining the cropping pattern and classifying the land as irrigated, dry
etc. Besides, one should also consider the slope of the land, topography and soil type for better
irrigation, coverage and efficient distribution of water. The water flow should be in accordance with
the land gradient and thus the plan layout will have an efficient irrigation and drainage network
with minimum conveyance loss.
6. Buildings and Roads
To facilitate easy accessibility of different fields and to monitor (or) supervise the day-today
functions, it is always desirable to have the farm buildings at the center. It is better to locate storage
go downs and implement sheds adjacent to farm office to control pilferage. The approach road
should be wider i.e.., 15-20 ft and link roads should be 9-10 ft width. Adequate care should be taken
to minimize the area under buildings and roads and other permanent structures.
8. Cropping Pattern
Farm income is greatly influenced by cropping pattern. The cropping pattern varies from
farm to farm depending upon soil type and fertility, water availability and other socio-economic
factors like preference of decision maker, market availability, price etc. In designing farm layout,
area allocation for perennial crops should be planned well ahead since the crop may occupy the
land permanently.
9. Transport and Communication
For efficient transit of farm produce soon after harvest, required transport and communication
facilities may be created in the farm.
10. Fencing
This is essential to fix the boundary of the farm and to protect the farm from trespassing and
encroachment. Fencing is an age-old practice and it is all about privacy, beauty and security that a
farm demands to offer best out of its all. Fencing is a one-time investment and affords a long-term
protection for agricultural fields and properties and helps curtail crop losses from diverse disruptive
causes.
 An effective fencing set up can

1. Demark a possessed property (legal requirement),

2. Keep out stray animals and intruders,
3. Separate lands in case of mixed farming,
4. Keep trespassers away,
5. Protect land and crop, and many more.
Types of fencing offer various cost effective and environmentally friendly fencing solutions.
1. Wooden fencing, 5. Synthetic fencing,
2. Live fencing 6. Rail fencing, and
3. Stock fencing, 7. Power fencing
4. Wire fencing, 8. Solar fencing
Living Fence: Living fence around the farm has multiple benefits. Besides protection from
trespassers and cattle, a living fence also provides a buffer, and with a sensible choice of plants,
evens some cash crops. Live fences can be divided into two basic categories:
a) Live fence posts:
Live fence posts are widely spaced, single lines of woody plants that are regularly pruned back and
used instead of metal or wooden posts for supporting barbed wire, bamboo or other materials.
b) Live barriers or hedges
Hedges are thicker, more densely spaced live fences that generally include a number of different
species and do not normally support other fencing material.
The species suitable for live fence should be thorny, non-edible and non-browsable for cattle
and goats, hardy and relatively maintenance-free (other than pruning / lopping), adaptable to the
local conditions, fast-growing and producing something that can yield some revenue.
The primary purpose of live fences is to control the movement of animals and people;
however, they have proven to be extremely diverse, low risk systems that provide farmers with
numerous benefits. Besides their main function living fences can provide fuel wood, fodder and
food, act as wind breaks or enrich the soil, depending on the species used.
A live fence should ideally be planted just before the monsoons and watered regularly after
the rainy season is over to ensure optimum growth. Usually thorny plants are grown to make a live
fence. For example bushes such as agave and cactus, creepers, and small shrubs (perennial bushes)
are the most sought after ones. Besides, trees such as Subabul and Gliricidia can also be planted as
live fence.Often trees in living fences are allowed to grow to larger sizes than with hedges. A genus
of particular importance as living fence is Gliricidia which can serve both as fences and as sources of
fuel wood and fodder.
 Agave crop comes up on dry soils unsuitable for crop cultivation but grow vigorously on dry,
well drained sandy loam soils. In the border, a trench with a width of 30 cms may be dug and the soil
excavated should be used to make raised bed at the inner side of trench. The agave saplings are
planted during the rainy season at a space of 45 Cms in pits of 20 cm3.
Gliricidia sepium is a common live fence post species established through large stem cuttings
root with relative ease, and it has multiple uses such as a forage and green manure. Combination of
Agave, Sisal and Gliricidia is suggested as live fence. The cost of live fence is very minimal @Rs 7-
8 per running feet. A perimeter of 3000 ft. (10 Acres) would cost around Rs. 25,000 as against other
alternatives.
Farm wired fencing costing Rs 50 to Rs 120 per running feet. Particularly for Barbed wire,
Electric/ invisible, woven wire, hog wire and Hog panel, Deer and mesh & chicken wire are suitable
for farm based on the requirement.
Type of fence Materials Rs /feet
Security style wire fence Wire mesh, chain link and metal option 100-250

Problem 1: Estimate the cost of fencing for 10-hectare farm of the given layout. Use barbed wire
type fencing for 6 feet height of which 3 feet for 15 cm x 30 cm gap at bottom and 30cm x30cm gap
for remaining upper 3 feet height. Use supporting stone post at every 7 feet on the cost of Rs 150
per post. In order to give strength to the structure, provide two side supporting post at every 100
feet. Total height of the stone post is 7 feet of which erect them at one feet depth with concrete
support, costing Rs 20 per pit for including labour and material. The barbed wire costing Rs 8000
per quintal running to the length of 3000 feets. An average amount of Rs 30 per feet is required as
labour cost for fencing. (Hint: Estimate the barbed wire cost per 10’ x 6’ and estimate the total
material (stone post and barbed wire) costs. Layout of the farm is given below;
Material and Labour cost
10 Hectare Farms

S.No Details Unit Rs

300 meters
1 7’ Stone post 1 No 150

2 Barbed wire qtl 8000

3 Pit making and Per pit 20 300 meters

filling with concrete

4 Fence Per 10’ 30

200 meters
commissioning cost fence

5 Other material 10’ 5 400 meters

expenses fence
Ex. No.: 02 Computation of Depreciation and cost of Farm Assets: Valuation of Assets
Date: by Different Methods
A. Depreciation
While estimating cost or expenditure incurred, there is no problem in accounting for the cost
of mono period resources. The difficulty arises in accounting for the cost of poly period resources,
as they provide services for a number of years to the farm business. Farmer uses different resources
during the production period of an agricultural year. It is not rational to account for the entire
purchase price of these resources as a cost in a single production cycle, since they are used in many
production cycles. Depreciation is such an accounting procedure to account for the cost of services
rendered by the poly period resources in each production cycle in which they are used. It is also
known as capital consumption allowance.
Depreciation involves spreading of the original cost of an asset over its entire useful life.
Depreciation is an non-cash expenses that reduces the exact value of an asset over time due to its
wear and tear of its use. The loss in value of an asset over time is determined by the following
factors: (i) Remaining life; (ii) Extent and nature of use (iii) Time obsolescence
The relative importance of the above factors varies with the kind of asset and the use to
which it is put. Depreciation charges may either be spread uniformly over the entire useful life of an
asset or they can be relatively heavier during the early life of an asset, depending on the nature and
extent of use of the asset. Thus, some methods of calculating depreciation may be more appropriate
for some assets than for others. Three common methods of calculating depreciation are discussed
below:
1. The straight - line method
By this method, the annual depreciation of an asset is computed by dividing the original cost
𝑂𝐶−𝑆𝑉
of the asset less salvage value by the expected years of life, i.e., 𝐴𝐷 =
𝐸𝐿
Where AD, OC, SV and EL stands for annual depreciation, original cost, salvage value and
expected life period in years respectively. Annual depreciation remains the same for each year
during the useful life of the asset.
Example: What would the annual depreciation for an asset be whose cost is Rs. 1,000, salvage
value Rs.100 and expected useful life 10 years?

This method is relatively simple and easy to understand even by semi-literate farmers.
However, equal loss in value every year during the entire expected useful life of an asset may
sometimes be too unrealistic. This method is useful for durable assets like buildings and fences
which may require uniform maintenance during their lifetimes.
2. The Declining- Balance method
According to this method, a fixed rate of depreciation is used every year and applied to the
remaining value of the asset at the beginning of each year. It is important to note that salvage value
is not subtracted from the original cost as in the previous method. Instead, a fixed rate of
depreciation which should be nearly twice that used under the straight line method is applied to the
uncovered balance until the salvage value is reached, after that no depreciation is worked out.
DDB = (C - A) x R
DDB = Depreciation / year by declining balance method
C = Purchase Cost
A = Accumulated depreciation taken in prior years
R = Rate at which depreciation is taken (usually twice the
straight line method)
This is useful in a situation, where an asset depreciates at a faster rate in the beginning as in
the case with most machinery and the automobiles.
Example: Assume, Rs. 1,200 as value of an asset with an expected life of 10 years and a
salvage value of Rs. 200. The rate of depreciation is 20 percent.
Calculations of depreciation by using the Declining - Balance method
Year Value at the beginning Annual Remaining balance
of the year (Rs.) depreciation (Rs.) (Rs.)
1 1,200 1200 × .2 =240 1200 - 240 = 960
2 960 960 × .2 = 192 960 - 192 = 768
3 768 768 × .2 = 153.6 768 - 153.6 = 614.4
4 614.4 614.4 × .2 = 122.88 614.4 - 122.88 = 491.52

After the fourth year, the same procedure is continued till the remaining balance reduces to
an amount equal to the salvage value, i.e., Rs. 200 in this case.
This method is suitable for a situation where an asset depreciates at a faster rate in the
beginning as in the case with most machinery and automobiles.
3. The sum- of - the -year Digits method
The following formula is used for calculating the annual depreciation (AD) by this method:
AD = F × Amount to be depreciated,
Where amount to be depreciated equals the cost less salvage value and F is a fraction. F for any
 year, say the second year, for an asset with an expected life of five years can be calculated as
follows:
F = Years of remaining life at the beginning of accounting period
Sum-of-the-year-digits

Similarly, F for first and fifth year will be and respectively. As the value of F keeps on declining
each year, the annual depreciation also declines with the advancement in age of the asset as in the
declining balance method. This method also suits those assets for which relatively
higher depreciation needs to be charged during the earlier years of their life.

Value at the beginning of

Annual depreciation (Rs.) Remaining balance (Rs.)
the year

Year 1 Rs. 1,200 (1,200 - 100) = 200 1,200 -200 = 1,000

Year 2 Rs. 1,000 (1,200 - 100) = 180 1,000 -180 = 820

Year 3 Rs. 820 (1,200 - 100) = 160 820 -160 = 660

Year 10 Rs. 120 (1,200 -100) = 20 120 -20 = 100

This method is perhaps much more complicated than the straight - line method and thus not as
popular.
Problem 1: Work out the depreciation values three methods such as straight-line method, the
declining- balance method and the sum- of - the -year digits method for a power sprayer (purchased
in 2008) and a tractor (purchased in 2004). The power sprayer was purchased for Rs 10000 (salvage
Rs 100) and the tractor was purchased at Rs 2.5 lakhs (salvage 10 % cost). Use 20% depreciation
rate for power sprayer and 10% depreciation for tractor for calculating Declining balance method.
Calculate the depreciation by all three method and offer your comments.

Problem 2: Calculate depreciation for the power tiller purchased for Rs.1, 50,000 by the above
three methods. The salvage value is Rs.15,000, depreciation percentage is 12% per year and its
economic life is 12 years. Offer your comments.

Problem 3: Calculate depreciation value (by any two methods) of an oil engine purchased at Rs.12,
000 with an expected life of 10 years and salvage value of Rs.1, 200.
B. Valuation of farm assets

Farm inventory is a complete listing of all that a farm owes at a particular date
generally at the beginning and the end each agricultural year. It includes not only the listing of
physical assets but values of all such assets, liabilities and debts as well. There are two steps
involved in taking a farm inventory.
1. Examination of physical Assets
It includes a complete listing of all the physical assets, including a verification of weights and
measures. The losses, wastages, shrinkages or gains which accrue over time are all accounted for.
2. Valuation physical assets
After the physical assets have been examined and listed, it is important to value them. Valuation
of farm inventories is an important step in the process of taking an inventory on a farm. The nature
and purpose of an asset generally determines the best method for its valuation. However, a few
common methods of valuation are discussed below:
Valuation at Cost: According to this method, the amount of money actually invested on the assets
when it was acquired is entered in the inventory. This method has the following limitations:
(i) It cannot be used for the valuation of farm products.
(ii) The effects of inflation and deflation are ignored.
(iii) Original investment value has only a limited use when considered somewhere in the middle
of the business.
Net Selling Price: The method of valuation is generally applied to those assets which are primarily
held for sale on the farm. It represents market price less the selling costs. It is an effective method
of valuation for crops and livestock produced for the market. However, it cannot be used for the
valuation of buildings and machines for which no actual market may exist.

Cost minus Depreciation: The method assumes that the p9urchase price of an assets
approximates its value. Thus, the value of the assets in subsequent years can be estimated by
subtracting the depreciation from its cost. This is a popular method for the valuation of machinery
and breeding livestock.

Cost or Market Price, whichever is less: In general, market price provides the best approximation
of its value. Farm supplies are generally valued using this method but it can understate or overstate
the value of an asset.

Replacement Cost: It represents a value of an asset which is equal to the cost to reproduce the asset
at the present prices and under the existing technological improvements. This method may be
successfully employed for the valuation of fixed and long-lived asset.
 Replacement Cost Less Depreciation: It represent an improvement over the previous method as it
provides a more realistic valuation of fixed and long-lived assets like buildings, particularly when
wide price changes may occur. However, this method should be used very carefully as it may often
lead to over valuation.

Income Capitalization: For assets like land whose contribution towards the income can be
measured for each production period and have long life, income capitalization is an ideal method of
valuation. The expected level of income is Rs.1000 per year, the present value of the land then can be
easily assessed by using this method, if the rate of interest is 10 per annum, i.e.,

Thus, price of land in question would be valued at Rs.10,000. This method is generally used in
combination with other method.
In short,
(i) For all assets that will be sold within the year, use the net selling price.
(ii) For all farm supplies (inputs) use cost or market price whichever is lower.
(iii)For capital asset which includes machinery and breeding livestock, cost less depreciation is the
best method of valuation.
(iv) For farm buildings, if constructed a long time ago, use the replacement less depreciation
method, For other building, constructed only a few years ago use the cost less depreciation method.
(v) For farm land, use the Income capitalization method to obtain its present value.
 Ex. No.: 03 Application of Equi-Marginal Returns / Opportunity Cost Principle in
Date: Allocation of Farm Resources

Cultivator has limited capital and his main objective is to maximise net profit. Farmer is
having several alternatives for his available capital. He should spend the amount, in such a way that
he will get maximum profit. This can be achieved by using the principle of equi-marginal returns.
The equi-marginal return principle helps us to understand how to achieve maximum return by
allocating the available capital to the different enterprises.

The law of equi-marginal return states that “the profits are maximized by
using the resource in such a way that the marginal returns from the resources are
equal in all cases.”

Farmers reach maximum return when he allocates every additional amount of capital so as to
get equal marginal return. Thus, the producer will be in equilibrium when the following equation
holds good:

Where MR = marginal return in each enterprise and C is cost/investment in each enterprise.

This principle can be illustrated with the help of following example. Suppose, farmer is

having Rs.50,000 for investing. His locality is favourable to take crop enterprise, dairy enterprise and

poultry enterprise. It is observed from the table that, when all the amount was invested in any one

enterprise net profit from crop enterprise, dairy enterprise and poultry enterprise is obtained as Rs.

26,000, Rs.22,000, and Rs. 28,000 respectively.

S.No. Investment pattern (Rs) Return realized per Rs 10000
Crop Dairy Poultry
1 First 10000 20000 19000 21000
2 Second 10000 19000 18000 19000
3 Third 10000 15000 15000 15000
4 Fourth 10000 12000 11000 12000
5 Fifth 10000 10000 9000 11000
Total realized return 76000 72000 78000
Total amount invested 50000 50000 50000
Profit in each enterprise 26000 22000 28000

However, if the same amount is spent according to principle of equi-marginal returns, total
net profit will be as shown below in the table given below.

Expenditure according to principle of equi-marginal return

Order of investment Amount Enterprise Marginal Return

First 10000 Poultry 21000
Second 10000 Crop 20000
Third 10000 Crop 19000
Fourth 10000 Dairy 19000
Fifth 10000 Poultry 19000
Total 50,000 98000
Net Profit 48000

It is observed from the above table that cultivator is getting total net profit of Rs. 48000 which is
more than profit from any single enterprise. Thus, for maximum net profit cultivator should invest
Rs.20000 in crop enterprise, Rs.20000 in poultry enterprise and Rs. 10000 in dairy enterprise. It is
observed from the above table that marginal returns from all the three enterprises are equal i.e.
Rs.19000. Thus, it can be stated that amount should be invested in such a way that marginal returns
should be equal in all the alternatives.

Opportunity cost

In agriculture, resources are limited and have alternative uses. When resource is put to one use
opportunities of other alternatives are lost. John A. Perrow defined “opportunity cost is the amount of
the next best produce that must be given up (using the same resources) in order to produce a
commodity.” The concept was first developed by an Austrian economist, Wieser.

Opportunity cost are calculated by two methods:

(a) On gross income basis-when cost of production are equal.

Enterprises Gross income Cost of Net income

production

Tobacco yield 12 qtl @ Rs 3000/qtl 36000 10000 26000

Potato yield 140qtls @ Rs400/qtl 56000 10000 46000

In this case, it is better to grow potatoes than tobacco. The opportunity cost of growing tobacco is
the gross income of Rs.56000 which was sacrificed by not producing potato.

(b) On net income basis-when cost of production are not equal.

Income Tobacco Potato Wheat

(HYV)

Gross income 36000 56000 70000

Cost of production 10000 10000 18000

Net income 26000 46000 52000

In this case net income generated by the three crops, tobacco, potato ad wheat are Rs 26, 46 and
52 thousand respectively. It is therefore, wise to grow wheat at it gives the highest net income.
The Opportunity cost of growing potato is the net income of Rs. 52000 which was sacrificed by
not growing wheat

Opportunity cost is the return, the resource can earn when it is put into its next best alternative use.
 Ex. No.: 04 Determination of most Profitable Level of Inputs use in a Farm Production
Date: Process (How much to produce)

A factor product relationship is considered as one of the basic relationships in production

economics which helps to identify the optimum level of input to produce the output which give
maximum profit. In the short run, this analysis explained the law of diminishing marginal returns or
law of variable proportion. Actually, this refers to the study of output or return in situations where
the proportion of inputs (variable inputs to fixed inputs) are varied, hence this principle is called as
law of variable proportion.
Definition
Law of Diminishing Returns or Law of Variable Proportions
It states that if one variable factor is increased with quantities of other factors held constant,
the marginal increase to the total product may increase or remain constant at first but will eventually
decrease after a certain point.

If successive units of one input are added to given quantity of other inputs, a point is reached,
where the addition to product per additional unit of input will decline. This principle establishes the
technical relationship between the inputs and outputs known as production function. A production
function is a mathematical relationship explaining the way in which the quantity of a given
product depends on the quantities of different inputs which are employed in the production process.

A production function shows the relationship between the output of an enterprise and
variable inputs needed to achieve the output. It can be expressed in verbal, graphical and
mathematical form.
A production function can be specified as

Y = f ( X1/,X2,X 3 ....................Xn )

(Output of teak in cubic meter per hectare is the function of fertilizers, seeds, manures…..etc.) Here
the inputs which are variables in the process of production are placed on left hand side of the bar
and the inputs which are held constant are written on the right hand side. This law clearly indicates
the total, average and marginal products curves for single variable input with the combination of
other fixed inputs.

Total Physical Product (TPP)

It represents the total output or yield that can be attained with the variable input X1 and a
set of fixed inputs X 2 …… X n.

Y = f (X1/ X2, X 3 .................... X n)

Average Physical Product (APP)
It is the total physical product due to the variable input. ie., it is the total output divided by the number

units of the variable input. APP= ; where Y = Total physical product and X = Input level

Marginal Physical Product (MPP)

It shows the change of total product associated with using each additional unit of variable input
(X)

Elasticity of Production: It is the ratio between the per centage change in output and percentage
change in the input level. The elasticity of production can also be defined in terms of relationship
between MPP and APP as given below.

We know that =MPP and that =APP; Therefore Ep=

Different Stages of Production

Stage I (Irrational Zone)
1. TPP is increasing at increasing rate
2. MPP is increasing
3. APP is increasing
4. Ep ≥ 1
5. Stage ends where MPP = APP
Stage II (Rational Zone)
1. TPP is increasing at decreasing rate
2. MPP is decreasing
3. APP is decreasing
4. 0 < Ep < 1
5. Stage ends where MPP = 0
Stage III (Irrational Zone)
1. TPP is decreasing at increasing rate
2. MPP is negative
3. APP is decreasing
4. Ep < 1
Relationship between MPP and TPP
1. When MPP is increasing, TPP is increasing at increasing rate.
2. When MPP is > zero and decreasing, TPP is increasing at decreasing rate.
3. When MPP is zero, TPP is at its maximum.
4. When MPP is negative, TPP is decreasing.
Relationship between MPP and APP
1. When MPP > APP, APP is increasing.
2. When MPP = APP, APP is maximum.
3. When MPP < APP, APP is decreasing.
Optimum Output production
There are two optimum in the production process.
1. Physical optimum/ agronomic optimum level of production by applying
variable input up to MPP=0.
2. The economic optimal level of input use can be found out by equating the
Marginal Value Product (MVP) and the Marginal Cost of input use (MC): MVP = MCx
MVP = MPPx x Py
MCx = P x
 Ex. No. : 05 Determination of Least-Cost Combination (LCC) Of Inputs
Date:
Farmers often use inputs, which are substitutable - with one input (say X1) for the other (say
X2) - to produce a given level of output. In such situations, a farmer may be interested to know
which combination of these inputs cost him the least. This particular combination is known as least
cost combination.
Optimum combination of two inputs (X1 and X2)
When different combinations of two inputs are available for producing a given amount of
output, a farmer has to select the optimum combination among the various combinations. The
optimum combination is one which results in least cost (minimum cost) for producing a given
amount of output. The least cost principle says that a producer can add more and more units of one
input (X2) to replace another input (X1) as long as the value of the replaced input (-  X1.PX1) is greater
than the value of the added input (  C.Pc. >  L.Pl). The optimum or Least Cost Combination
(LCC) is obtained when MRTS X1 X2 = inverse price ratio between X2 and X1
Marginal Rate of Technical Substitution (MRTS)
It refers to the number of units of an input that must be reduced for one unit increase in another
input to maintain the given level of output.
𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑑 𝑖𝑛𝑝𝑢𝑡 X1 ΔX1
MRTS X2X1 = =
𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑎𝑑𝑑𝑒𝑑 𝑖𝑛𝑝𝑢𝑡 X2 ΔX 2

Least Cost Combination

A given level of output can be produced using many different combinations of two variable
inputs. Here the problem is to find out a combination of inputs, which should cost the least, and
result in better returns to the farmer. There are three methods to find the least cost combination
(LCC).

1. Tabular or Arithmetic method

One possible way to determine the least cost combination is to compute the cost of all
possible combinations and then select the one with minimum cost. The method is suitable where,
only a few combinations produce a given output.
 2. Algebraic Method
The LCC is at a point where the slope of the isoquant is equal slope of the iso cost line. The
slope of the isoquant is called marginal rate of technical substitution (MRTS).
1. Compute Marginal rate of Technical substitution (MRTS) of X2 for X1 MRTS X2X1 = ΔX1
ΔX2
2.Compute slope of the price line/ iso cost line is inverse price ratio of input

ΔX1 PX2
=
ΔX2 PX1

So, the least cost combination (LCC) is MRTS=slope of budget line which is inverse price ratio.
If these ratios are cross multiplied, then the relationship will be 𝖠 X2.P X2 = -𝖠 X1.P X1. Hence, as
long as MRTS is greater than the price ratio, X1 can be replaced by adding more X2. Graphically, it is
the point at which the budget line (Iso-cost line) is tangent to the isoquant, (Fig.). The least cost
combination can also be found out by computing the total cost for each combination and selecting
the particular combination which results in minimum cost.
Iso cost line can be derived by solving TVC.

Fig : Least cost combination of Factors

3. In graphical method: using the value calculated in algebraic method the isoquant and budget

line are drawn in a graph sheet. Suitably moving the budget line without changing the slope, the
tangency to the isoquant gives the least cost combination of inputs.
Problem 1: The following N and P fertilizers combination produce 2100 kg of Dry Chillies per ac.
The cost of nitrogen is Rs 34 and Phosphorus is Rs 42.5. Find out the least cost combination also
draw the graph of iso-quant and iso-cost curves.

Nitrogen Phosphorus MRS= Price ratio= Total Cost

(X1) (X2) X1 X2 (Px1.X1+ Px2.X2

65 40
70 25
75 17
80 11
85 7
90 4
95 2
100 0

Problem 2: Different combinations of two animal feeds, Lucerne -X1 and Concentrate-X2 required
to produce 2000 liters of milk in 280 days are given in the following table. (column to be followed

, , )

(1) If the price of X1= Rs.0.6 and price of X2 = Rs 6.3 find out the least cost combination.
(2) Estimate LCC if PX1=Rs 0.30 and P X2= Rs 2.1
(3) Plot the iso- quant and iso- cost curve in a graph.
X1 6500 6680 6890 7140 7440 7790 8200 8685 9255 9915
X2 1050 1000 950 900 850 800 750 700 650 600
Ex. No.: 06 Selection of Most Profitable Enterprise Combination
Date:
The aim of the study of product – product relationship is to determine the optimum
combination of products for a given level of input. Here, products refer to different enterprises like
crops, dairy, poultry, etc. which can be produced from the same inputs.
Production Possibility Curve (PPC/ Iso Resource curve
The production possibility curve presents all possible combinations of two products that
could be produced with given amounts of input.
Production possibility curves are
sometimes called opportunity curves or iso-
resource curves. Term ‘opportunity curve’ is
used because the curve presents all possible
production opportunities. It is known as iso-
resource curve because each output
combination on this curve has the same
resource requirements. Production possibility
curve can be drawn either directly from
production function or from total cost curve.
The production possibility curve in figure thus,
presents all possible combinations of two
products (cotton and Maize), with 10 units of
input (10 acres of land).

Unlimited resource availability situation

When the amount of available input is unlimited, resource allocation is determined by
equating the price of input to Marginal Value Product of output.

Px = MVP (MVP = MPPx x Py)

Limited resource availability situation
The inputs are to be shared judiciously among different enterprises when the inputs are
limited in quantity. The degree of interdependence among enterprises depends on their
technical and economic relationships.
 Competitive Products
Products are termed competitive when output of one product can be increased, only by
reducing the output of the other product. Outputs are competitive because they require the
same input at the same time. e.g. production of sugarcane and paddy under irrigated condition,
when they compete for water.

Complementary products
Two products are complementary if an increase in the production one product causes
an increase in the production of the second product, when the total amount of input used on the
two are held constant. e.g. If cereals are grown after a pulse crop, the output of cereals increase
because the legume crop fixes atmospheric nitrogen and makes it available to the succeeding
cereal crop.
Supplementary Products
Two products are called supplementary if the production of one of the products can
be increased without increasing or decreasing the production of the other product. e.g.
sunflower cultivation and honey bee rearing.
Joint Products
The products which results from the same production process are termed joint products.
e.g. Wool and mutton, paddy and straw.
The optimum product combination is the one, which maximizes the profit. It is obtained
when the substitution ratio of the products (MRPS –Marginal Rate of Product Substitution)
equals the inverse price ratio.
Determination of Optimum Product Combination
For profit maximization, a rational producer should operate in the range where two
products are competitive and within this range, the choice of products would depend upon the
marginal rate of product substitution and output price ratio.
1. Algebraic Method
Work out the marginal rate of product substitution of sorghum y1 for bajra y2 (Signs ignored)
1. Compute Marginal rate of Product Substitution of Y2 for Y1: MRPSY1Y2)

𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑑 𝑜𝑢𝑡𝑝𝑢𝑡 Y1 ΔY1

MRPS Y2Y1 = =
𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑎𝑑𝑑𝑒𝑑 𝑜𝑢𝑡𝑝𝑢𝑡 Y2 ΔY2
2. Compute inverse price ratio (PR) =

3 Optimum products combination is obtained by equating MRPS=PR;

Rule: If ΔY1.PY1 > ΔY2.PY2 more input should be diverted towards the production of Y1,
thus producing less of Y2.

2. Tabular method: total revenue is calculated as (Y1.PY1)+(Y2.PY2), and the combination with
maximum total revenue is chosen as a best enterprise combination.
3. Graphic Method
The optimum combination of two products can be found out with the help of production
possibility curve and iso-revenue line. The profit maximizing enterprise combination is
identified where the iso-revenue line is tangent to production possibility curve.
Production possibility curve is drawn by joining all combination of two products to be
produced for a given level of input. The Iso-Revenue line is drawn by joining the two
extremes of level of outputs that yield the same revenue.
Problem 1: For the given problem, work out the optimum product combination. Let price of
Cumbu (Y1) Rs. 600/unit and Price of Bhendi (Y2) Rs.1450/unit
Bhendi Price ratio Total Revenue
Cumbu
Y2 Y1 Y2 MRPS= Py2/Py1 Y1.Py1+Y2.Py2
Y Y1/Y2
120 0
108 8
96 15
84 21
72 26
60 30
48 33
36 35
24 36
12 36.5
0 36.75
Comment on the revenue maximizing combination of the two products.
Problem 2: Choose the optimum combination of two enterprises, i.e. Bhendi and Chillies
from the yield data given, if each one of these combinations can be produced by same level
of input. The price of Bhendi is Rs. 21.5 per quintal and price of Chillies is Rs. 61 per
quintal. Verify the results by working out the total revenue.

Bhendi-Y1 2510 4330 5840 6920 7810 8340 8590 8765 8885
Chilles-Y2 5810 5630 5380 5000 4425 4005 3700 3440 3220

Problem: 3. Combination of Tomato and Brinjal produced using 200kg of Nitrogen is

given in the following table. Work out the optimum combination of Tomato and Brinjal
for the given level of Nitrogen. (PY1 = Rs. 280 per quintal; P Y2 = Rs. 400 per quintal)

Tomato Brinjal Price ratio Total Revenue

Y (qtl.) Y2 (qtl.) Y1 Y2 MRPS Py2/Py1 Y1.Py1+Y2.Py2
0 60
20 56
40 50
60 41
80 30
100 16
120 0
Ex. No.: 07 Application of Cost Principles including CACP Concepts in the Estimation of
Date: Cost of Cultivation and Cost of Production of Agricultural Crops.
Cost: Costs refer to the money value of effort extended or sacrifice made in producing an
article or rendering a service or achieving a specific purpose. Costs thus are the expenses
incurred in organizing and carrying out the production process. They include outlays of funds
for inputs and services used in production. Money value of all inputs used in the production
process is termed as the total cost.

Variable Cost: Variable cost is the cost that varies with the level of output. i.e., higher the
level of output higher will be the variable cost and vice versa. These include expenditure on
labour, bullock, machinery charges, seeds, manures, fertilizers, plant protection chemicals,
irrigation charges, value of other miscellaneous inputs and interest on working capital.

Fixed Cost: Fixed cost is the costs that do not vary with the level of output. They have to
be incurred whether cultivation has been done or not. It includes the value of services provided
by the fixed inputs such as land revenue, taxes, rental value of land, depreciation on building
and machinery and interest on fixed capital.

Cost of Cultivation: It refers to the cost of various inputs and input services used for raising a
particular crop. It includes all the operations from land preparation to threshing, cleaning and
taking the product from the field to home. Cost of cultivation always refers to unit area (acre
or hectare).
Cost of Production refers to cost incurred in production of one unit of output and is
normally associated with variable and fixed costs. The variable costs relate to the cost of
variable inputs and fixed costs to fixed inputs. The components of variable costs in crop
production are the value of seeds, manure, fertilizers, plant protection chemicals, wages for
labor, hire charges for bullocks, machinery and the value of other miscellaneous inputs used in
crop production. The interest on variable capital should also be worked out and included
under variable cost. Fixed cost includes the value of services provided by the fixed inputs such
as land, buildings and machinery. Rental value of land, interest on other fixed capital excluding
land, depreciation, taxes etc., constitute the fixed cost.
Procedure for estimating the cost of production

1. Estimate the total variable cost of producing the crop in a given area.
2. Work out the total fixed cost for the farm and apportion it to the particular crop based on
area and duration of the crop.
3. The sum of the total variable and fixed cost (item 1 and 2) gives the total cost of producing
the output from the given area.
4. Divide the total cost (item 3) by the total output (in kg/qtl./tonne) to estimate the average
cost of production/unit quantity.
5. If a by- product is also produced along with the main product (eg. paddy grains and straw),
deduct the value of by-product (straw) from the total cost to get the net cost. The net cost
is divided by the total quantity of the main product (grain) produced to get cost of
production/unit output.
6. In the case of mixed crops, the total cost of producing crops in a given area can be
apportioned among the crops based on the value of output obtained from each crop.
7. When inter crops are grown with main crop, the value of output from intercrops may be
deducted from the total cost and the net cost can be worked out or the total cost may also
be apportioned among the main crop and intercrop based on the value of output from each
crop.
Estimation of the Cost of Cultivation using CACP concepts: Cost of cultivation on the
other hand, relates to an accounting procedure of quantifying the costs incurred in
undertaking production per unit of land. Cost of production i.e. cost of producing per unit
of output helps as a benchmark of deciding upon the support prices, procurement prices fixed
for particular production of crop outputs. Cost of cultivation on the other hand, is the
benchmark for fixing the scale of finance for credit operations like crop loans etc.

In India, the Commission on Agricultural Costs and Prices (CACP) is involved in

collecting farm level data and worked out cost of production. For easy computations, the
commission categorizes the cost components as follows:
Cost Concepts
Cost A1: It includes all actual expenses in cash and kind incurred in production by the
farmer.
1. Value of human labour (hired).
2. Value of bullock labour (both hired and owned).
3. Value of machine power (both hired and owned).
4. Value of seeds (both owned and purchased).
5. Value of insecticides and pesticides
6. Value of manure (both owned and purchased)
 7. Value of fertilizers
8. Depreciation on farm implements and farm buildings.
9. Irrigation charges
10. Land revenue, cess and other taxes.
11. Interest on working capital.
12. Miscellaneous expenses (electricity charges, etc)
Cost A2 : Cost A1 + rent paid for leased in land
Cost B1: Cost A2 + Interest on value of owned capital assets (excluding land)
Cost B2 : Cost B1+ rental value of owned land
Cost C1 : Cost B1+ Imputed value of family labour
Cost C2 : Cost B2+ Imputed value of family labour
Cost C3 : Cost C2 + 10% of cost C2 (10% of cost C2 added to cost C2): This is a recently
added concept to provide allowance for managerial functions undertaken by the farmer.
From the above classification certain cost components and various income measures are
derived as follows:
Cost of production (per unit of produce) = (Cost C3- value of by product) / main product yield.
Income measures
1. Gross Income : Value of main product + Value of by product
2. Net Income : Gross return – Cost C3
3. Farm Business Income : Gross return – Cost A1
4. Owned Farm Business Income : Gross return – Cost A2
5. Family Labour Income : Gross return – Cost B2
6. Farm Investment Income : Net Income + Rental Value of Owned Land +
Interest on Fixed Capital
7. Returns over Variable Cost : Gross Return – Variable Cost
Problem 1:
Using the given data, work out the different Cost concepts, Cost of Production and different
income measures.

Particulars Tomato Onion

S.No Rs/ha Rs/ha
1. Value of human labour 48735 33345
2. Value of machine labour 7410 5870
3. Seeds/planting material 9855 19834

4. Manures and Fertilizers 26939 33803

5. Plant Protection chemicals 8906 9740

6. Irrigation expenses 750 850
7. Yield (Ton/Ha) 24 10

8. Land Revenue and other Taxes 550 425

9. Interest on Working Capital (7%)

10. Depreciation of farm implements and buildings 3938 1765

11. Rental Value of Owned Land 2500 1765

12. Imputed value of family labour 3500 2000

13. Interest on Fixed Capital other than Land 2357 1434

14. Price / Kg (value of main product) 10 25

15. Value of by product 2000 1500

Problem 2: A farmer cultivated paddy in 2 hectares of land of which 0.4 ha was leased-in at a
cost of Rs.10000 per year. He invested Rs. 18000 on the pump house and thrashing floor which
depreciated @ of 3 % per annum. He owned implements worth of Rs. 800, whose depreciation
was @ 8% of its value/year. The interest rate for long-term borrowing was 8.5% and short term
borrowing 11 %. Land revenue is Rs. 250/ha/year land cess is Rs.100/ha/year and water charges
Rs. 50/ha/year. His family put 20 hrs of family male hrs and 15 female family labour days in
the production process. He cultivated three crops per year. Calculate cost of cultivation and cost
of production of paddy. Workout the various income measures of the paddy farmer.
The expenditure per ha is given below:
1. Seed: 60 Kg @ Rs. 18 per Kg.
2. Nursery Preparation: Bullock labour 8 hrs @ Rs.22.50 per hour.
Human labour for land preparation 8 hrs @ Rs.20.00 per hour.
3. Main field preparation: machine labour (Tractor) 2.3 hrs @ Rs.500.00 per hour.
Human labour 48 hrs @ Rs.17.5 per hr.
4. Transplanting: Male labor 8 no’s @ Rs. 100 per day; Female labor 35 @ Rs.60 per day
5. Fertilizers & Manure: FYM 6 tractor load @ Rs. 500 per tractor load
Chemical fertilizers 500 Kg. @ Rs. 7.50 per Kg
Application of fertilizers and manure: Male Labour 2 no’s @ Rs. 100 per day.
6. Weeding: weedicide 1.25 liters @ Rs.380 per liter
2 weeding @ 30 Female labour per weeding @ Rs.30 per female labour.
7. PP measures: 1 spraying @ 0.5 lit @ Rs.180 per liter and o.5 Kg fungicide @
Rs. 600 per kg; spraying charges: Rs.150 per spray.
8. Irrigation charges: 200 Kg of Paddy
9. Harvesting and thrashing: 3 hrs of combined harvester @ 1600 per hour
10. Yield: Grains 60 Quintals @ Rs.720 per Quintals; Straw 80 Qtls Rs. 50 per Quintal
Ex. No.: 08 Estimation of Cost of Cultivation and Cost of Production of Perennial
Date: Crops / Horticultural Crops
Estimating cost of cultivation for the perennial crops/ horticultural crops is different
from estimation for annual crops. There are three major components in cost of cultivation
estimation in perennial crops. The following points are to be considered while calculating the
cost of cultivation per unit area and the cost of production for the perennial crops like mango,
Guava, Lime, Coconut etc.,

1. Establishment cost: Expenditure on land preparation, pit making, soil filling, seedling,
fertilizer, planting and setting up of irrigation system (traditional method, drip/sprinkler
system) are considered in estimating the establishment cost which one time, in the first year.

2. Maintenance cost: The annual maintenance cost generally includes expenditure on pruning
and other intercultural operation, weeding, fertilization, irrigation, operation cost on inter crops,
if any, are to be considered and the costs are reoccurred in every year.

3. Return: Though the benefits/ return from the perennial crops start from third or fourth years
onwards (mango, lime etc.,) in some cases return start from 5th year onwards (coconut etc).
However, stabilization of the yield varies among crops.
The perennial crops give annual return or seasonal return in some cases. In case of tree
crops like Casuarinas, Eucalyptus,Teak etc., harvesting / logging will take at the end of the
period or after getting economic maturity which will take 7-15 years (Teak, Casuarinas).
Problem 1: Estimate the Cost of Cultivation and Cost of Production of Casuarina from
the given details.

Unit 1st 2d
n r3d
S. Particulars Unit Qty. Rate 4th
No. (Rs.) Year Year Year Year Total

A. Cost of Planting
1 Cost of initial ploughing Hrs 7 400 2800 0 0 0
Alignment and Digging of
2 pits MD 100 100 10,000 0 0 0
Application of manure (Incl.
3 cost LS 2 1000 2,000 2000 2000 0
4 Cost of Casuarina clones Nos 4500 3 13500 0 0 0
Refilling of pits, planting
5 and Channel formation MD 100 100 10000 0 0 0
6 Causality replacement MD 4 100 400 0 0 0
7 Seedling cost Nos 225 3 675 0 0 0
B. Cost of Maintenance
Irrigation and Protection 4 MD
1 expenses Months x 12 1000 4800 4800 4800 3000
2 Soil working and weeding MD 50 100 5,000 5,000 0 0
C. Fixed Expenses
Depreciation of farm
3938 3938 3938 3938
implements and buildings
Rental Value of owned
2500 2500 2500 2500
Land
Imputed value of family
3500 3500 3500 3500
labour
Interest on Fixed Capital
2357 2357 2357 2357
other than Land
D. Yield Ton 120
Price (Rs./ton) Ton 4000
Problem 2: Cost of Cultivation of Amla (Rs/ha) Economic life Period is 25 years
Sl.No. Item of expenditure
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
I Materials
1 Planting material including transport 40138 4014 0 0 0 0 0 0 0 0
2 Drip Irrigation 106210 0 0 0 0 0 0 0 0 0
3 Fencing 61302 0 0 0 0 0 0 0 0 0
4 Cost of FYM 9263 8892 8892 9386 9386 9386 9386 9386 9386 9386
5 Cost of fertilizers 1455 2464 3449 4434 5588 5588 5588 5588 5588 5588
6 Plant protection 2470 2717 2470 2470 2470 2470 2470 2470 2470 2470
II Operations (Man days)
1 Land preparation 8645 0 0 0 0 0 0 0 0 0
2 Peg Marking & Digging of pits 55575 0 0 0 0 0 0 0 0 0
3 Planting and staking 9263 0 0 0 0 0 0 0 0 0
4 Manures & fertilizers application 1482 1853 2223 2470 2470 2470 2470 2470 2470 2470
5 Irrigation 1482 1235 1235 618 618 618 618 618 618 618
6 Appl. of plant protection 371 618 618 618 618 618 618 618 618 618
7 Intercultural 1853 2223 2470 1235 1235 1235 1235 1235 1235 1235
8 Harvesting 0 0 0 0 600 700 800 1000 1000 1000
9 Inter cropping 1853 0 0 0 0 0 0 0 0 0
III Fixed Expenses
Depreciation of farm implements and
2938 2938 2938 2938 2938 2938 2938 2938 2938 2938
buildings
Rental Value of owned Land 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500
Imputed value of family labour 2500 2500 2500 2500 2500 2500 2500 2500 2500 2500
Interest on Fixed Capital other than Land 1350 1350 1350 1350 1350 1350 1350 1350 1350 1350
Yield (Kg/Tree) 5 15 25 50 75 100
Yield (Kg/ha) 3125 9375 15625 31250 46875 62500
Price (Rs/Kg) 10 10 10 10 10 10

For remaining years, the expenses and yield are same as that of 10th year
34
 Ex. No.: 09 Estimation of Cost and Returns of Livestock Products.
Date:
A. Economics of maintenance of a pair of bullock/milch animal/Poultry birds
The cost of maintenance involves both fixed and variable costs. The fixed cost
includes depreciation on the value of the animal, interest on the value of the animal, cost of
housing insurance and value of ropes. The variable cost consists of the value of fodder (both
green and dry); feed (oil cakes, cotton seed, bran, feed mixtures, salt, minerals etc.), labour
required for maintenance, veterinary and shoeing charges.
Steps
1. Work out the annual depreciation considering the economic life period and salvage
value of the animals.
2. Work out the annual interest on the value of the animals.
3. Work out the (a) annual depreciation for the cattle shed, and (b) interest on the value of
the cattle shed, (c) estimate the annual maintenance cost of the shed and the sum of the
three items (a+b+c) constitute the annual cost of maintenance of the cattle shed. The
total annual cost of maintenance of the shed should be divided by the number of animals
housed in the shed to find out the share of each animal in the total cost of housing.
4. The annual insurance premium for the animals/shed should be estimated.
5. The sum of the above four items is the total annual fixed cost involved in maintaining
the animal.
6. Estimate the total value of variable inputs used by the animals considering the
quantity and price of these inputs.
7. The total cost of maintenance/annum can be estimated by adding the total annual fixed
cost and total annual variable cost.
8. The value of dung produced by the animal per annum may be deducted from the total
cost. To estimate the cost of maintenance/working day in the case of bullocks divide
the net annual cost by the total number of days of work/annum.
9. In the case of milch animals to work out the cost of milk production the net cost of
maintenance should be divided by the total amount of milk produced. (It is assumed
that out of 12 months the lactation period is 10 months and dry period is 2 months).
Problem 1: From the data given below, work out the cost of production (COP) of milk and the net
profit (NP) per year from a cow. Also calculate the BCR and break-even (BE) level of milk
production. A dairy farmer rears 5 exotic cows, each one costing Rs.15000 each. The economic
life period of cows is 10 years and after that it would be sold for Rs. 1000 for meat purpose. The
insurance premium paid was 4% of the value of the cattle. The cattle shed was constructed at a cost
of Rs. 50000 and the depreciation was calculated at 5 %of the value. The rate of interest was 10 %
for long term loans and 12 %for short-term loans. Estimate COP, NP, BCR and BE for 12% increase
in price of concentrate and 3% increase in Milk price.
The variable expenses for maintaining a cow was as follows:
Lactation Period
The green fodder requirement 25 Kg per day @ of Rs. 0.50 per kg
Concentrate 6 Kg per day @ of Rs. 6 per kg
Dry Period
The green fodder requirement 15 Kg per day @ of Rs. 0.50 per kg
Concentrate 2 Kg per day @ of Rs. 6.00 per kg
Other expenses performance animal
The dry fodder requirement 5 Kg per day @ of Rs. 1.00 per kg
Labour for maintenance 2 hrs @ of Rs. 12 per Hour.
Veterinary charges per year Rs. 300
Miscellaneous Expenses Rs. 300
The milk yield 8 liters @ Rs. 20 per Litre
The value of farmyard manure per annum Rs. 400
Net value of one-year-old calf is Rs. 600
B. Farm mechanization
The cost of operating a machine includes both fixed and variable cost. The total annual fixed cost
includes depreciation, interest on insurance. The variable cost comprises of the cost of fuel
electricity, lubrication oil and wages for machinery operator.
i) Total annual fixed cost
1. Work out the annual depreciation for the machine (Original value – salvage value)/life period.

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − 𝑠𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒

Average annual depreciation=
𝐿𝑖𝑓𝑒 𝑃𝑒𝑟𝑖𝑜𝑑

2. Work out the interest on the average value of the machine.

3. Estimate the cost of repairs and maintenance. It can be taken as 10 per cent of the average value
of the machine.
4. Estimate the taxes and insurance premium paid/annum. It can be assumed as 2 per cent of the
average of the machine.
5. Add the above four items to get total average annual fixed cost (TAFC)= 1+2+3+4
6. Work out the average fixed cost/hour by dividing the total annual fixed cost by the number of
hours the machine is used /annum. (AFC = TAFC/ No. of hrs)
ii). Running cost/hour
1. Work all the value of fuel / electricity and lubricants consumed by the machine / hour.
2. Work out the wages/hour for the operator.
1. Cost of performing an operation by machine
Estimate the cost of operating the machine per hour by adding the average fixed cost / hour with
the running cost/hr and this amount should be multiplied by the number of hours for which the
machinery is used to perform that particular operation.
From the given data, work out the cost of spraying one ha of silk cotton with power sprayer. The
total number of spraying given is 10 and the average time taken/spraying is 2 hours. Four labour
hours are required / spraying and the cost of labour / hour is Rs.100.
Cost of power sprayer : Rs.7000
Useful life period : 2500 hours (10 years)
Salvage value : Rs.400
Fuel requirement : 1 lit of petrol/hour
Lubricating oil : 25ml/lit. of petrol
Cost of petrol : Rs.70.00/lit
Cost of lubricating oil : Rs.86.00/lit
Hire charge : Rs.75/hrs
 Ex. No.: 10 Preparation of Farm Plan and Budget
Date:
Farm Planning
Farm planning is a decision-making process in the farm business, which involves organization
and management of limited resources to realize the specified goals continuously. Farm planning
involves selecting the most profitable course of action from among all possible alternatives.
Objectives of Farm Planning
The ultimate objective of farm planning is the improvement in the standard of living of the
farmer and immediate goal is to maximize the net incomes of the farmer through improved resource
use planning. In short, the main objective is to maximize the annual net income sustained over a
long period of time. The farm planning helps the cultivator in the following ways:
a) It helps him examine carefully his existing resource situation and past experiences as a basis for
deciding which of the new alternative enterprises and methods fit his situation in the best way.
b) It helps him identify the various supply needs for the existing and improved plans.
c) It helps him find out the credit needs, if any, of the new plan.
d) It gives an idea of the expected income after repayment of loans, meeting out the expenditure
on production, marketing, consumption, etc.
e) A properly thought of a farm plan might provide cash incomes at points of time when they may
be most needed at the farm.

A farm plan is a programme of total farm activities of a farmer drawn out in advance. An
optimum farm plan will satisfy all the resource constraints at the farm level and yield the
maximum profit.

Characteristics of a Good Farm Plan

A good farm plan generally should have the following characteristics:
a) An element of flexibility in a farm plan is essential to account for changes in the environment
around the farm.
b) A farm plan should maximize the resource use efficiency at the farm.
c) It should provide for the attainment of the objectives of profit maximization through optimum
resource use and balanced combination of farm enterprises.
d) Risk and uncertainty can be accounted for in a good farm plan.
e) The plan helps in timely acquisition and repayment of farm credit.

A successful farm business is not a result of chance factor. Good weather and good prices
help but a profitable and growing business is the product of good planning. With recent
technological developments in agriculture, farming has become more complex business and
requires careful planning for successful organization. A farm plan is a scheme for the organization
and operation of the farm business and it involves the physical component of the farm decisions.
A farm plan is a programme of total farm activity of a farmer drawn up in advance. A farm plan
should show the enterprises to be taken up on the farm; the practices to be followed in their
productive use of labour, investments to be made and similar other details
Farm planning enables the farmer to achieve his objectives (Profit maximization or cost
minimization) in a more organized manner. It also helps in the analysis of existing resources and
their allocation for achieving higher resource use efficiency, farm income and farm family welfare.
Farm planning is an approach which introduces desirable changes in farm organization and
operation and makes farm a viable unit.
Type of Farm Plans
1. Simple farm planning: It is adopted either for a part of the land or for one enterprise or to
substitute one resource to another. This is very simple and easy to implement. The process of
change should always begin with these simple plans.
2. Complete or whole farm planning: This is the planning for the whole farm. This planning is
adopted when major changes are contemplated in the existing organization of farm business.
It refers to making out a plan for the farm as a whole or for all decisions on one
enterprise. In case the budgeting analysis involves complete reorganization of the farm business, it
is caned complete budgeting. Complete budgeting considers all the crops, and livestock, producing
methods, estimates of costs and returns for the farm as a whole
Steps involved in complete plan
1. Estimation of expected yield, costs and prices: For different proposed enterprises the
expected yield, cost of various inputs and prices of output are to be taken.
2. Availability of farm resources: The existing resources especially land suitability for
various crops, labour in different time periods, various forms of capital etc are to be
estimated.
3. Existing enterprise mix and input use: What crops are being raised on each field and use
of different inputs and crop practices followed are also recorded in detail.
4. Weaknesses in the existing plan: In terms of crop pattern and practices, the weakness in
existing plan is written in detail.
5. Preparation alternate plans: Considering the existing plan and its weaknesses and net return
 from proposed enterprises as well, the alternate plans which promise higher net returns are
prepared.
6. Selecting the best plan: The most suitable plan which promises the highest return with
minimum risk is selected.

7. Implementation of selected plan: The resource requirements for the selected plan are
estimated and arrangements are made for their availability at required time such that the
selected plan may be implemented.
Farm Budgeting
Farm budgeting is a method or analyzing plans for the use of agricultural resources available
with the farmer.
Types of Farm Budgeting
There are two types of farm budgeting.
a. Partial budgeting - enterprise budgeting and
b. Complete budgeting
a. Partial Budgeting
For taking a specific farm management decision, the help of partial budgets are essential.
Partial budgeting is a statement of added cost and added returns as a result of change in one or few
activities of the farm such as increase or decrease in the level of enterprise, introduction of a new
enterprise or adoption of new technology/ machinery over the old one etc., For example,
1. Substitution between enterprises e.g. sugarcane for paddy
2. Substitution between factors input e.g. machinery for labour
3. Changes in farm practices e.g. direct selling of papaya or extracting papain and then selling.
Under partial budgeting, the credit and debit aspects of such changes are analyzed.
Credit side
Extra revenue is based on net additional yield of main product and arriving at the value of
additional output obtained by the farmer at the time of harvest. If the product is for sale, marketing
costs are deducted. Another aspect of credit is in terms of reduction of cost.
Debit side
Extra cost denotes the value given up to bring the extra input. For purchased inputs, market
price is considered and for owned resources, the opportunity cost is considered. The other aspect of
debit is reduction in revenue.
Illustration
A farmer in Vilathikulam block of Tuticorin district is cultivating traditional irrigated
Chillies. A new improved variety of Chillies has been released for adoption. The cost of cultivation
and input requirements are supplied by Agricultural Development Officer of the block. The cost and
returns for traditional varieties is available with the farmer from his previous experience. The farmer
compares the traditional and improved variety with the partial budgeting technique as detailed
below.
Partial Budget showing change from traditional chillies (K2) to Improved Chillies cultivation
Debit ( A) Credit ( B)
1. Added Cost Amount Added Amount
(Rs) return (Rs)
i. Human labour 1645 Gross return (Difference between the 11703
gross return of K2 chillies and
ii improved chillies per hectare)
Bullock labour 1275
iii Manures and Fertilizers 1319
iv. Pesticide 1199
v Irrigation 124
vi Interest on working 50
capital
II Reduced return Nil Reduced Cost 1580
A. Total added cost and B. Total added return and reduced cost
5562 13283
reduced return
Net change in income: B - A = Rs.7721
Since cultivation of improved variety gives an additional income of Rs.7721 per hectare
compared to traditional one the farmer decides to switch over to the improved one.
b. Complete budgeting
It refers to making out a plan for the farm as a whole or for all decisions on one enterprise. In
case the budgeting analysis involves complete reorganization of the farm business, it is called
complete budgeting. Complete budgeting considers all the crops, and livestock, producing
methods, estimates of costs and returns for the farm as a whole.
Steps involved in complete budgeting
1. Estimation of expected yield, costs and prices: For different proposed enterprises the
expected yield, cost of various inputs and prices of output are to be taken.
2. Availability of farm resources: The existing resources especially land suitability for
various crops, labour in different time periods, various forms of capital etc are to be
estimated.
3. Existing enterprise mix and input use: What crops are being raised on each field and use
of different inputs and crop practices followed are also recorded in detail.
4. Weaknesses in the existing plan: In terms of crop pattern and practices, the weakness in
the existing plan are written in detail.

5. Preparing alternate plans: Considering the existing plan and its weaknesses and net return
from proposed enterprises as well, the alternate plans which promise higher net returns are
prepared.
6. Selecting the best plan: The most suitable plan which promise the highest return with
minimum risk is selected.
7. Implementation of selected plan: The resource requirements for the selected plan are
estimated and arrangements are made for their availability at required time such that the
selected plan may be implemented.
1. Assignment for Farm Planning:
Assignment: Prepare complete farm plan for a farmer in western zone having 1 ha of wet land, 2 ha
garden land and 1 ha of dry land. Farm plan must include both cereals, pulses and other commercial
crops like sugarcane and turmeric with the livestock component. A farmer is having a bore well
which support for 3 ha and has no capital constraints.
2Assignment for Budgeting:
A. Partial Budgeting: Factor- Substitution- Hand weeding Vs herbicides application
Farmers growing Bhendi usually take up hand weeding employing women labour. The
labour requirement per hectare is 60 women days. The Department of Agriculture recommends
application of one litre of herbicides per acre followed by a hand weeding which required only 25
women days/ha. The wage rate /women day is Rs 200. The cost of application of herbicides is
Rs 200. The cost of herbicides is Rs 800 per lit. There is a 200 kg of additional Bhendi yield in case
of pre-emergent herbicide application to the crop. The sale price of Bhendi is Rs 12 per kg. Suggest
the farmers the most economical method of weed control (a) with additional yield (b) without
additional yield.
B. Using partial budgeting, suggest the farmer whether to go for hybrid Tomato in place of
local variety. The costs and returns per ha for the variety and hybrid are furnished below.
Particulars Local Variety Hybrids Rs/ha
S.No Rs/ha
Seeds/planting material 6855 10857
Manures and Fertilizers 26939 32584
Plant Protection 8906 8572
Irrigation expenses 750 750
Value of machine labour 7410 7410
Value of human labour 48735 50726
Interest on Working Capital (7%)
Yield (Ton/Ha) 20 25
Price / Kg 10 10
Ex. No.: 11 Farm Records and Accounts: Usefulness, Types of Farm Records– Farm
Date: Production Records-Farm Financial Records

Management of a farm business requires a wide range of information on physical and financial
performance. Farm book-keeping is known as a system of records written to furnish a history of the
business transactions, with special reference to its financial side. Records and accounts help in
evaluating the performance of the farm business, obtaining credit from financial institutions, filing tax
returns, evaluation of investment alternatives etc.
i. Advantages of farm records and accounts
The various advantages of keeping systematic farm records can be described as under:
1. Means to higher income
To obtain higher income, farmers must have exact knowledge about present and potential
gross income and operating costs.
2. Basis for diagnosis and planning

Diagnosis of management problems is the pre-requisites of sound planning. Records and accounts
provide the basic information needed for such a diagnosis.
3. Way to improve managerial ability of the farmer

The farmer gets a better insight into the working of his business, and farmer can avoid mistakes
and losses.
4. Basis for credit acquisition and management

Properly kept records and accounts can demonstrate and authenticate the production and income
potentials and credit worthiness of the farmer.
5. Guide to better home management

Records and accounts provide information on farm-household economy. Analysis of farm

records provides good guides for the allocation of resources between production improvement and
immediate family welfare.
6. Basis of conducting research in Agricultural Economics and production economics
Research requires precise and correct data which is possible only proper records and accounts are
maintained on the farm.
7. Basis for government policies

The farmers need to continuously feed the facts for state and nation, farm policies such as land
policies, price policies, and crop insurance, etc.
 ii. Problems in Farm Accounting
a) As Indian farmers carry out only subsistence nature of farming, recording is not essential to them.
b) Indian farmer acts as an owner, manager and labourer. Hence, recording becomes complex.
c) Illiteracy and lack of business awareness of farmers prohibit them to have farm records.
d) Fear of taxation prevents farmers from recording and accounting the information.
e) Forecasting becomes complicated because of very high risk and uncertainties involved in farming.
A good system of accounts for any farm is one that enables recording information that the farmer
needs and also permits the desired analysis of the information recorded.

Systems of Book-Keeping

There are two systems of farm accountancy: (i) double entry system, and (ii) single entry system.

Double entry system

It is a method of recording each transaction in the books of accounts in its two fold aspects, i.e.
two entries are made for each transaction in the same set of books, one being a debit entry and the
other a credit entry.

Single entry system

This is the system which ignores the double effect of transactions. Only personal accounts of
debtors and creditors are kept and impersonal accounts are ignored altogether.

3. Types of Farm records: Farm records are usually of the following types:

(i) Farm inventory; (ii) Physical farm records; (iii) Financial farm records

There are many different kinds of farm records and accounts, each of which can be adopted
for a given purpose on a particular farm situation.

Farm inventory refers to the listing down the items possessed by the farm on a specified date which
includes inventory of crop and livestock, inventory of farm machinery, and farm building.

Physical Farm Records

Physical records are related to the physical aspects of the operation of a farm business. They do
not indicate financial position or the outcome of the farm business, but simply record the physical
efficiency or performance of the farm.

Physical farm records normally include the following records:

 ii) Farm map, soil map and contour map, Stock register.
iii) Charts on physical efficiency,
iv) Land utilization record,
v) Farm production and disposal record, Input registers,
vi) Labour records, daily work diary and machinery use records.

Financial Farm Records which deal with the financial transactions can be recorded in four main
types of accounts. (a) Accounts dealing with external agencies; (b) Accounts dealing with capital
investment; (c) Operation accounts; and (d) Service accounts

The Following are the farm records maintained by the co-operate farms and state farms.
1. Forecast register
Field Area Nature Wage rates and labourers forecasted
of work
Skilled Wage Semi Wages Unskilled Wage
labourers rate Skilled rate labourers rate
Labourers
(in Rs.) (in Rs.) (in Rs.)

Amount
Skilled Amount Semi-Skilled Amount Unskilled Amount
Labourers Labourers labourers
(in Rs.) (in Rs.) (in Rs.)

This is prepared a day in advance of the actual labour requirement on the farm. Keeping in
view of the various operation to be performed for various crops, the requirements is forecasted. The
labour units indicated in this register should not exceed the labour units given in DMS.
 2. Daily memorandum sheet (DMS)
Field Purpose Allotment of labourers
of work
Skilled Wages Semi Wages Unskilled Wages Amount
(inRs.) Skilled (in Rs.) (in Rs.) (in Rs.

This deals with the distribution of work in a day along the labour units employed and the
wages paid for various operations.
3. Muster Sheets
S.No Name of Sex Nature No. of days No.of Wages Amount
the casual of work worked in a days rate/day (in Rs.)
labourers fortnight (in Rs.)
1 2 3 …..15

The particulars of the labour units employed including the number of days employed and the wage
bills are posted in these sheets. These sheets give an idea of fortnightly expenditure incurred on the
labour wages.
4. Permanent Dead Stock Register
Date Particulars Receipts Issues Balance

5. Temporary Dead Stock Register

Date Particulars Receipts Issues Balance

This register gives the managements an idea of the stock issued and balance available so that future
requirements can be assessed and undertake the purchase as and when required.
 6. Fertilizer and chemicals register
S.No Date Particulars Receipts Issues Balance

The details of the different fertilizer purchased along with the purpose for which they are
issued are posted here. This register presents the position of the stock of fertilizers and chemicals
available at any given point of time.
7.Seed stock register (grams/kgs/nos.)

Date Particulars Receipts Issues Balance

This register gives the details of the purchases, issues and balance of the seeds of different
varieties of crops grown on the farm.
8.FYM and cattle feed register (kgs/tonnes)

S.No Date Particulars Receipts Issues Balance

This register deals with the particulars of receipts, issues and balance of FYM and cattle feed.
9.Tractor expenditure register(Rs)

Date Particulars Receipts Issues Balance

This register contains the information pertaining to the purchase of items like diesel, spare
parts, etc and their use as per the requirements. The stock position of the same is also available in this
register.
10. Livestock Register

Date of From whom Description of Date of birth Book value

purchase purchased/received the animal (in Rs)

The description of the animal along with the source of obtaining the same and date of birth of
the animal and value are entered here.
11.Farm produce stock register

S. Dry land/ Season Main Entered in page Signature Signature of

No Wet land crop product no. of produce of the store the farm
variety (Qtls/ stock register keeper superintendent
tonnes)

The details of crop wise and variety wise main product and by product are entered here. This
gives an account of the total product obtained from the farm.
12.Produce stock register

Date Issue/sale Receipts Issues Balance

The information posted in the farm produce stock register is brought over here. Under the
column “receipts” the quantity recorded in the farm produce stock register is entered here. The issue
column indicates the details as to whether the produce was issued to the farm or sold.
13.Indent register

Indent Date Particulars Quantity Purpose Receiver Indent Signature of Signature of

No. the store the farm
keeper superintendent
 The register presents the indents that are made. Under the column “purpose”, if the input
indented is fertilizers, the crop to which it is proposed to be applied is entered here. This register holds
good for all farm supplies.
14.Sales price register

S.No. Name of the Quantity Rates furnished by Rate per unit Rate at
product proposed for the secretary, in the local which
sale Regulated market market (Rs) disposed(Rs)
committee (Rs)

Sales particulars of the produce obtained on the farm are found in this register. The rates
furnished by the agricultural market committee and that of local markets are obtained and then the
rates at which produce was disposed is entered. This type of information is mostly seen in the
Government farms.
15. Sanction Register

S.No. Date Particulars Quantity Rate Amt to be Head of Signature Signature

cum (unit Sanctioned the of farm of
purpose of price (Rs.) Account manager sanctioning
expenditure Rs.) authority

It provides the details of the items of expenditure along with the rate per unit and amount to be
sanctioned. The proposed items are purchased after due sanction from the concerned authorities.
16. Auction Register

S.No Name of Address Amount Signature Amount Signature

the of the (Rs.) of the deposited of the
bidder bidder bidder (Rs.) successful
bidder

The information of those items, which are auctioned, can be known from the auction register.
17. Cash book
Date Opening Sales bill Amount Amount Cash on
Balance No. (Rs.) remitted to hand (Rs.)
the bank
(Rs.)

The details of cash remittances and cash on hand are shown here.
Thus the main objectivity of maintaining the records is to control the farm business, guide
future decisions and provide data required for sound farm planning.
Assignment:
Observe the types of records maintained in TNAU farm and give brief note on it.
 Ex. No.: 12 Preparation of Cash Flow Statement
Date:

The cash flow statement is the other important financial document needed to analyze the
financial position of the farm business. The cash flow statement examines the amount of cash
available to the farm and his family (both farm and non-farm) and how that cash is utilized in both
farm and non-farm activities. It can be prepared either on annual basis, or more a frequent basis
such as quarterly or monthly.
Hence, cash flow statement is a month by month or quarter by quarter comparison of the
expected cash income and expected cash expenses at the end of the each month or quarter.
Importance

1. It is helpful to know whether the cash will be available when it is needed.

2. If surplus cash exists where the farm operator would deposit the funds or invest the funds or
repay the loan borrowed.
3. It helps to decide the magnitude of borrowing, timing of borrowing the funds or invest the funds.
4. It helps to know the potential effects that marketing factors have on the need for borrowed
funds.
Components of Cash flow statement
I. Beginning cash balance
II. Cash inflows
It means returns or amount received from the investment. It includes the amount received by
the farmer through the sale of crop and livestock products and by way of borrowing and income
from other sources i.e., off farm and non-farm income.
Total cash available excluding borrowing
a. Beginning cash balance
b. Farm operating receipts
c. Capital receipts
d. Income from other sources
e. New operating loans and crop loans
f. New intermediate and long-term loans
III. Cash outflows: Total cash required excluding
a. Principal repayment e. Non -farm Investment
b. Variable cash expenses f. Personal expenses
c. F i x e d cash expenses g. Repayment of loans
d. Capital expenditures
IV. Ending Cash Balance: Total Cash Inflow – Total Cash Outflow
FORMAT OF CASH FLOW STATEMENT
S. No. Item Quarter
I II III IV
(July – Sep) (Oct –Dec) (Jan – (Apr –June)
A Cash Inflows
1. Beginning Cash Balance
2. Farm operating receipts
Crop sales
Sale of livestock products
Income from other sources
3. Capital receipts
Sale of livestock
Sale of machinery
Sale of land / real estate
4. Non-farm income
Wages and salaries
Dividends and interests
Sale of bonds and stocks
Total cash available
(1+2+3 + 4)
B. Cash Outflows
1. Variable cash expenses
Purchase of seeds
Rent
Diesel
Fertilizer
Plant protection chemicals
Interest on operating loans
intermediate and long term loan
Sub total
2. Fixed cash expenses
Taxes
Maintenance cost
Insurance
Interest on intermediate and
long term loan
Sub total
3. Capital Outflows
 Purchase of livestock
Purchase of machinery
Purchase of land
Sub total
4. Non-farm investment
Purchase of stocks and bonds
LIC savings
Sub total
C. PERSONAL EXPENSES
Income tax
Family living expenses
Sub total
D. LOANS
Total cash outflows
(B+C+D)
E. ENDING CASH BALANCE
=Cash inflow – Cash outflow
 Problem 1: Using the information prepare a cash flow statement and offer your comments on the
availability of finance.
S. Particulars I quarter II quarter III quarter IV quarter
No (June- Aug) (Sep.- Nov.) (Dec. – Feb) (Mar. – May) Total
I Cash receipts (in Rs.)
1 Cash Balance Brought 3,000 - - - 3,000
2 Total operating sales 1,350 1,400 30,200 7,800 40,750
(farm and live stock
Products)

3 Total capital sales (Milch - 5,000 - - 5,000

4 Non-farm income (Family 2,000 1,500 2,000 3,200 8,700
members Working
5 Borrowings (ST, MT and LT 7,500 - - - 7,500
loans From institutional
6 Total
II Cash expenses (in Rs.)
1 Operating expenses 8,500 6,750 6,200 5,300 26,750
2 Capital investment (purchase - - 6,000 - 6,000
of milch cattle)
3 Family living expenses 2,400 2,800 3,200 3,000 11,400
4 Payment of previous
Years debt 500 500
5 Payment of ST loans - - -
and installments on 7,968 7,968
investment loans
Total
III Cash balance
(in Rs.)
Ex. No.: 13 Preparation and Analysis of Net worth Statement and Profit and Loss statement
Date:
F
inancial Analysis involves maintaining and using records and other information needed to
measure the financial performance of the business. The most widely used financial statements are
(i) Net worth statement or balance sheet, (ii) profit loss statement or Income statement and iii)
cash flow statement.
A. Balance sheet
Balance sheet is a summary of assets and liabilities of the business, together with a statement of
the owner’s equity or net worth. (or) It is a systematic list of all assets and liabilities of the
business. A fundamental accounting equation balances the net worth statement. Total assets are
always equal to the sum of total liabilities and net worth.
Total assets = Total liabilities + Net worth.
The equation indicates value of claims on Total assets by the owner and creditors is equal
to the values of the total assets.
Balance sheet represents the financial condition of the business on a particular date. Hence
it is compared to a ‘snapshot’ which gives the picture in a specific moment in time. The income
and cash flow statements are like moving pictures that give the performance of the business over
time. Net worth is placed on liability side showing owner, like creditor has a claim against the total
assets equal to net worth. Hence net worth is actually a liability that owes to the owner just as debts
(liabilities) owes to lenders.
Net worth is present only when assets are greater than liabilities. If liabilities are greater
than assets, then the difference is called net deficit and it is placed on the asset side of the balance
sheet. If represent the shortage of assets with reference to the liabilities. Classification of Assets
and Liabilities
Characteristics of balance sheet
1. They record values at a specific point of time
2. The timing of balance sheet vary according to the timing of business year
3. Most balance sheets report a date of December 31st
4. If the business year does not correspond with a calendar year, the year-end balance sheet
would report a different date. The date should be chosen such that two successive balance
sheet represent the beginning and end points of time covered by the intervening balance
sheet.
 5. The net worth statement in principle is a simple document. It consists of three main parts
(a) Assets (b) Liabilities and (c) Owner’s equity (or) Net worth
A. Assets: Assets include all items of property having a money value, which are in the legal
possession of the farmer including all claims against the property of others. (Value of things
owned). An asset can be defined as anything of value (money) in possession of farm business. Farm
assets can broadly be classified into following three categories
1. Current Assets: They are defined as cash and other items where values are reasonably expected
to be realized in cash, sold or consumed during the normal operating cycle of the business usually
one year. The liquidation of these items will have the least effect on the business ability of the
individual or firm to continue operating. Marketable securities, accounts and notes receivable,
prepaid expenses and inventory which are expected to be converted into cash or accounts receivable
during the year are included under current assets. The term inventory includes farm products
awaiting sales, products in the process of production or goods to be used directly or indirectly in
production. Eg. Feed, seed, farm supplies, standing crops, crop and livestock products kept for
sale, cash on hand, accounts receivable etc.,
Note: Many current assets have the same value whether recorded on cost basis or on current market
value basis except stocks and bonds.
2. Intermediate or working Assets: These are items that can be liquidated but generally would
require more time to achieve a fair price and also would have a significant influence on ability to
continue in its basic format of operation. Items of this nature include draught animal, milch animal
and livestock in growing stage to be sold in later years, machinery, equipment, movable farm assets
and equity capital invested in cooperative societies etc. In a sense, these items are basically intended
to support production and are not intended for sale. Because of this, intermediate assets are
somewhat more difficult to liquidate than current assets and if liquidated, nature of farming
operation would be modified to a greater extent. For e.g. liquidating the draught animal would
certainly have a major impact on farming activity. The assets will be valued by deducting the
depreciation cost.
3. Long term Assets: The long-term assets of the business are the major assets. eg. Land, buildings.
If a major portion of these assets were liquidated, the business would have to be terminated. These
assets are the least likely to be liquidated. Valuation based on cost or current market value can have
a tremendous impact on the rupee amount recorded for these assets.
B. Liabilities: Liabilities include all legal claims by others to the property or income of an
individual. It is the debts owned.
1. Current Liability / Short term Liability: Short term liabilities are those claims (debts) on the
business which will become due (payable) during the next production period or accounting period.
eg:- crop loans, interest payments for LT Loans etc.
2. Intermediate Liabilities: Intermediate liabilities are those claims, which will be paid, generally
over a period of two to ten years. eg: Medium term Loans taken for purchase of machinery,
breeding livestock etc. for which repayment period is 2 to 5 – 7 years.
3. Long term Liabilities: Long term Liabilities are those claims on the business, which will be
paid over a period of greater than ten years. eg: LT Loans taken for permanent improvements on
the farm.
4. Contingent liabilities: These are obligations which become due only under specific
circumstances. A common contingent liability is capital gain taxes. These taxes become due only
if the capital assets sold.
C. Net worth / Owner Equity: It represents the residual entry in the account, which balances the
statement. Net worth = Total Assets – Total Liabilities

Net worth is an indication of the amount of equity the owner has in the business and is considered
to be the balancing entry of net worth statement. In some cases, liabilities exceed the assets of the
business. In this situation the business has a negative net worth and the balancing entry is defined
as net deficit. The net worth statement is one of the primary documents used by lending agencies
in evaluating requests for new loans or extension of existing loans.
From the balance sheet, the following ratios can be worked out.
Analyzing the Balance sheet/ Net worth Statement Concepts

Liquidity: Liquidity relates to the firm’s capacity to generate sufficient cash to meet its financial
commitments (market transactions and cash obligations) as and when they become due. Liquidity
is a short run concept.
Solvency: A firm is solvent when the current market value of its assets exceeds its debt obligations
and it is able to meet these debt obligations over a sufficiently long period of time. It is defined as
a value which would have left after all assets are converted into cash and debts are cleared or repaid.
A solvent firm may either be liquid or illiquid. Conversely it may be insolvent and either
liquid or illiquid. Ratio analysis is not only facilitates comparison among different firms but also
helps in comparing the same firm over a period of time.
Ratio can be broadly classified into Liquidity and Solvency ratios.
Liquidity ratio Remarks
1 Current ratio= Current assets Higher the ratio the more liquid the farm
(CA) / business
2. Intermediate ratio A farm with CR and IR less than 1 may be
(IR)=(CA+IA)/(CL+IL) facing

3. Debt structure ratio = Current Lower the ratio higher liquid the farm
Liability (CL) / Total liability business
4. Acid test ratio= (Current To compare two firm with equal current ratio.
assets –Value The low
Solvency ratio
1. Leverage ratio (LR)= TA/ Net Higher the ratio larger the claims on firms
worth relative to its
equity.
Leverage ratio of 2 indicates that every rupee
2. Net capital ratio (NCR)= Greater than one indicates the ability of
TA/TL the firm to generate sufficient amount to
repay total liability. It also gives the long run
3.Dept equity ratio Lesser the ratios larger the debt structure
4. Equity-value ratio (EVR)= Where, TL= total liability; NW=Net worth ;
NW/TA TA= Total
The net capital ratio, debt-equity ratio and equity-value ratio are indicators of long term
solvency of the business. These ratios indicate a manager's willingness to use borrowed capital in the
operation of his business.
If the net capital ratio works out to less than one, the farm is using more of borrowed funds.
e.g. for the farm that has relatively stable expense and income situations, such as dairy farm,
lending institutions may be willing to advance credit even with NCR as low as 1.0. In other
business such as orchards where income and expense fluctuate greatly from year to year
financial institutions might consider a NCR of 2 or 3 as a more appropriate value, for advancing
loans.
Again, the direction of movement of these ratios through time is more important.
i. NCR should be increasing over time.
ii. Debt equity ratio should be decreasing over time. Equity ratio approaching , would be
making progress towards higher solvency levels
 Balance /sheet of a Hypothetical Farm

Assets Amou Liabilities Amo

Current assets Current liabilities
Cash on hand Crop loans to be repaid to 8,000
10,000 Institutional agencies
Savings in bank 8 Accounts payable 11,00
Value of grains 3
ready for disposal 5,
Livestock Products 6 Hand loans 5,000
(eggs, birds, etc) 0,
Fruits, Vegetables, 8 Money owed to input 25,00
fodder And feed , Suppliers 0
Value of bonds and 2 Annual installments of MT 19,00
Shares to be , and LT loans 0
Sub- 1,2 Sub-Total 68,00
Intermediate assets Intermediate liabilities
Dairy cattle 1 Livestock loan 8,000
0 (Outstanding
Bullocks 9 Machinery loan 15,00
, (Outstanding 0
Poultry birds 1 Unsecured loans 10,00
5, (outstanding amount) 0
Machinery and 15
equipment’s ,0
Tractor 1,75
Sub – Total 2,2 Sub – Total 33,00
Long term assets Long term liabilities
Land 6,00 Tractor loan (outstanding 1,20,
,000 amount) 000
Farm buildings 25 Orchard loan (outstanding 25,00
,0 amount) 0
Unsecured loans (land 10,00
development) 0
Sub total 6,25 Sub total 1,55,
Total of assets 9,75 Total of liabilities 2,56,
Net worth or equity 7,19,
Total of liabilities + net 9,75,

Problem 1: Classify the assets and liabilities in the given problem and prepare a balance sheet.
Comment on the net worth of the business.
A farmer has 13.50 acres of land of which, 10 acres are dry land that has a market value of
Rs. 8,000/ ac, 3 acres are garden land and value is Rs. 40,000 per acres and 0.50 acres of wetland
worth Rs.40,000/acre. He has mortgaged land worth of Rs.40, 000 with the Land Development
Bank. He has established a mango garden in 1.00 acre ten years back. It is worth Rs.20,000. He
has a standing crops and other inputs stored to the value of Rs.30,000. He has in his store, cotton
worth of Rs.5,000 meant for sale. The farmer has a bullock cart valued at Rs.7,000 and a pair of
bullocks worth Rs.10,000. He has purchased the bullocks on loan and the balance to be paid is
Rs.7,000. He has a milch animal for home consumption worth of Rs.4,500. The Farm has an oil
engine worth of Rs.7,000. The farmer has to repay Rs.15,000 on the crop loan and Rs.4,000 in
long term loan. He has a bank balance of Rs.2,500, cash Rs.1,500 and accounts receivable of
Rs.1,500.

B. Income Statement / Profit Loss Statement

The income statement or profit and loss statement is an important financial record that
measures financial progress and profitability of business over time. The income statement is a
summary of both the cash and non-cash financial transactions of the farm business, which
occurred during the selected accounting period. This document is important because it is
extensively used in analyzing the profitability, efficiency and financial stability of the business.
Information from this document is also used in the preparation of cash flow summary.
Importance
1. It is used to identify net cash farm income
2. It is useful for identifying information needed in preparing income tax returns and analyzing
the cash flows generated by the farm business apart from non-farm sources.
3. It is useful in analyzing the relationship between cash and non- cash sources of income.
4. The income statement is otherwise called as profit and loss statement because it measures
the net income or loss of the farm business.
Components of Income statement
1. Cash farm receipt
2. Cash farm expenses
3. Adjustments for changes in inventory and capital assets
4. Non -cash farm income
The income statement is divided into two major sections namely income and expenses.
A. Income
Cash Receipts
It includes receipts from sale of any agricultural produce, livestock and livestock products.
Inventory: (Eg.) Seeds, fertilizers, grains under storage
 Capital assets: (Eg.) Machinery and livestock
The sale of milch animal and equipment are major items. The receipts from sale of these items are
separated from normal cash receipts and they are called as net -capital gain.
Non-farm income
Income derived from activities not related to agriculture. It includes interest from loans, dividends,
salaries from other jobs etc.,
Off farm income
Income derived from activities related to agriculture but not from farming activities. It
includes wages from hiring out of labour for agriculture activities.
B. Expenditures
The other major section of the income statement relates to the expenses of the business.
i) Cash farm expenses
It includes expenses incurred for meeting variable cash expenses such as purchase of seed,
fertilizers, plant protection chemicals and fixed cash expenses like water tax, land tax, insurance
etc.,
(a) Operating expenses are cash expenses, which generally vary with size of the business
operation.
(b) Fixed expenses do not vary significantly with a change in the volume of business done under
the period of reporting.
The sum of operating and fixed expenses is the cash farm expenses of the business.
ii) Total Farm Expenses is the sum of cash and non-cash income of the farm.
iii) Total Expenses is the sum of farm and family expenditures family.

Format of the income statement

Sl.No Income Value (RS) Sl.No Expenditure Value (RS)

I Cash farm revenue I Cash farm expenses
Variable cash
expenses
Fixed cash expenses
II Net Capital gains II Non cash adjustments
income on capital
III Total cash farm III Total farm expenses
revenue
IV Non-farm income IV Family expenses
V Off-farm income
Total income Total expenses
Net Cash farm income = Total Cash farm income - Total cash farm expenses
Net Farm Income = Total farm income - Total farm expenses
Total Net Income = Total income - Total expenses

Income Statement of a Hypothetical Farm

Particulars Amount (in
I. Receipts
A. Returns from the sale of crop output 52,000
B. i. Revenue from milk and milk products 5,000
ii. Returns from poultry enterprise 12,000
Returns from supplementary enterprises 17,000
C. Gifts 2,000
D. Gross cash income 71,000
Appreciation on the value of assets 3,000
Gross income 74,000
II Expenses
Operating expenses or costs
A. Hired human labour 10,500
B. Bullock labour 900
C. Machine labour 1,500
D. Seeds 1,100
E. Feeds 5,000
F. Manures & fertilizers 3,000
G. Plant Protection measures 1,550
H. Veterinary aid 500
I. Irrigation 250
J. Miscellaneous 2,000
K. Interest on working capital 2,100
Total operating 28,400
Problem 1: Prepare a profit or loss statement using the following information and work out the net
profit or loss.
Mr.Subbu owns 6 acres of agricultural land. He cultivated paddy, sugarcane and groundnut
during the year. He had sold 30 quintals of paddy @ Rs.1000 per quintal, 16 tonnes of sugarcane
@ Rs.1500 per tonne, and 20 quintals of groundnut @ Rs.2500 /qtl. He has two milch animals
and a pair of draught animal. The milk sale fetched him Rs.10,000 during the year. He has taken
up a small broiler enterprise with 200 birds. He sold the birds at the rate of Rs.60 per bird. He
hired out the draught animal and earns Rs.10,000. He sold out a milch animal for Rs.15,000 and
another home bred animal for Rs.8,000 . He disposed of the old implements available in his farm
for Rs.5000. He has stored 16.67 quintals of paddy produced during the last year. He incured a
loss of Rs.2,000 in selling the milch animal.
His expenses are as follows:

S No Details Amount (Rs) SNo Details Amount (Rs)

1. Land rent 5,000 9 Irrigation 4500

structure repairs

2. Attached farm 2,000 10 Marketing 1800

servants expenses

3. Hired labour 6,000 11 Interest on 1200

current dept
4. Hired bullock labour 4,500 12 Depreciation on 850
buildings

5. Land revenue 600 13 Other expenses 1600

6. Maintenance of 4,000 14 Int. on 1000
machinery intermediate and
long term loans
7. Equipment 1,500 15 Livestock 1000
depreciation depreciation
8. Fertilizer purchased 2,000
Ex. No.: 14 Estimation of Break – Even Analysis.
Date:
Farmers have to decide whether to hire a machine or own a machine to perform a farm
operation. A minimum level of work is necessary to justify the purchase of a machine. Break-
even analysis is a method used to estimate the minimum level of work the machinery has to
perform to justify its purchase. At the breakeven point (BEP) there is no profit or loss.
Procedure to estimating the BEP.

1. Estimate the annual fixed cost; 2. Estimate the running cost/hour

3. Find out the custom hiring charges for the machine.
BEP =

Problem: From the data given, find out the BEP for the power sprayer. The prevailing custom
hiring charges for the power sprayer is Rs 50/tank. Workout the cost of spraying one ha of Chillies
with power sprayer. The total number of spray liquid given 10 tanks and the average time taken/
spraying is 2 hours. Four labour hours are required/ spraying and the cost of labour/hour is Rs 30.
Cost of power sprayer is Rs 13000 with the useful life period of 10 years (2500 hrs). the salvage
value is Rs.2500. The fuel requirement is one liter petrol /hr and the lubricating oil of 25 ml/lit of
petrol. The selling price of petrol is Rs 73 and for lubricating oil is Rs 250 per liter.

Assignments:

A. Work out the Break - Even Point for Power tiller: Given the cost of maintenance of power
tiller, find the maintenance cost per acres of 15 acre farm. Cost of the power tiller is Rs.80,000/-.
The interest on fixed capital is 12%. Annual repair cost is Rs.1,000, depreciation is 10% fuel and
lubrication costs Rs.9000, annual taxes Rs. 1,000/- and insurance premium Rs.1,000/-. Find the
maintenance cost of power tiller per acre.

B. Work out the Break - Even Point for the thresher cum winnower.

The thresher cum winnower was purchased at a cost of Rs. 1,00,000/-. Assume the interest
on fixed capital as 12% and depreciation as 10%. The annual maintenance charge is Rs.1,000/-.
The owner has employed 6 unskilled labourers @ Rs.50 per day and one operator @ Rs.100 per
day. The machine will consume electricity @8 units/hour. The electricity charge is @ Rs.3 per
unit. The output of the machine is 10 quintals of paddy / hour. The custom hire charges are Rs.12
per quintal.Find out the break even point of use of the threshers that would suggest the minimum
quantity pfpaddy to be threshed to justify purchase of the thresher cum winnower
 Ex. No.: 15 Graphical Solution to Linear Programming Problem
Date:

Linear Programming: George Dantzing (1947) developed the simplex method for
optimal transport of ammunition quickly with minimum cost. Linear programming is
a mathematical method of analysis, which finds the “best” or optimal combination of
business activities to meet a certain objective. Three components are needed to solve a
problem with linear programming technique. They are: (1) a desire to maximize or
minimize some objective, (2) a set of activities or processes available to accomplish
this objective and (3) a set of constraints or restrictions that limit one’s ability to
achieve this objective.

Programming implies planning of activities in a manner that achieves some optimal

result with restricted resources.
Definition of L.P.

Linear programming is defined as the optimization (Minimization or maximization) of

a linear function subject to specific linear inequalities or e qualities.

Max Z C X
j 1
j j

st
n

 aij  bi
j 1
i=1 to m; j=1to n

Xj>= 0

cj = Net income from jth activity xj = Level of jth activity

aij = Amount of ith resource required for jth activity

bi = Amount of ith resource available.

1) Basic assumptions of Linear Programming

i) Proportionality or linearity: Linear relationship exists between activity and
resource. For example, if one acre requires 30 man days, 100 Kgs of nitrogen and
Rs.60 of other variable expenses to produce 20 quintals of maize output, then 10
acres of maize would require exactly 10 times of each resource to produce 200
quintals of output.
ii) Additivity: The total amount of resources used by several enterprises on the farm
must be equal to the sum of resources used by each individual enterprise. Hence no
interaction is possible. The same is true for the products also.
iii) Divisibility: Fractions can be used and enterprises can be produced in fractional
units. Resources and products are infinitely divisible.
iv) Non-negativity: None of the activity is negative.

v) Finiteness: Number of activities and constraints are finite.

vi) Certainty: Almost all planning techniques assume that resources, supplies, input
- output coefficients and prices are known with certainty.

2) Concepts used in Linear Programming

i) Solution: A solution refers to any set of activities Xj, j = 1, 2, 3, ..., n, which
satisfies a system of inequality constraints. There may be innumerable solutions to
a given linear programming problem.

ii) Feasible Solution: Any solution to a linear programming problem is said to be

feasible, if none of the Xj is negative. How when non-negativity constraint is there
in the model.

iii) Infeasible Solution: It refers to a solution, where some of the variables, Xjs,
appear at a negative level.

iv) Optimum Solution: One of the feasible solutions is optimum, provided a feasible
solution exists. Such a feasible solution, which optimizes the objective function, is
called an optimum solution. The set of Xj in this case satisfies the set of constraints
and non-negativity restrictions and also maximizes the objective function.

v) Unbounded Solution: Many a time, faulty formulation of a linear programming

problem may result in an arbitrarily large value of the objective function and the
problem has no finite maximum value of profit. It represents a case of unbounded
solution to a linear programming problem.

3) Estimation of Optimum Solution using Linear Programming: The estimation

of optimal solution using linear programming is given in table 18.5.
(a) Estimation of Optimum Solution using Linear Programming

Particulars Per Per Acre of

Acre Ground-Nut
of
Paddy
Income and Expenses
1. Gross income 2600 2000
2. Total cost 1100 600
3. Net income 1500 1400
Resource Requirements
1. Acres of crop- land 1 1
2. Hours of labour during 45 60
harvesting
3. Rupees of operating 1100 600
capital

(b) Estimation of Optimum Solution using Linear Programming

Particulars Amount Paddy Ground-nut
Available Per Maximum Per Maximum
Acre Area (Acres) Acre Area (Acres)
Needs Required Needs Required
1. Maximum land. 4 acres 1 4.00 1 4.00
2. Maximum hours. 225 hours 45 5.00 60 3.75
3.Maximum Rs. 3500 1100 3.18 600 5.83
operating capital.

Maximum Land Constraint

Maximum Capital
S
ISO REVENUE LINE
B Maximum Labour
C
Ground Nut

Minimum Paddy Area

D
Feasibility

Constraint
Region

OA E T PADDY
Fig.18.1 Estimation of Optimum Solution using Linear
Programming Technique
 There is also one additional restriction the farmer wants to incorporate into the
analysis. He wants a farm plan that has at least 0.7 acres of paddy. The line that connects
points A, B, C, D and E in the figure 18.1 defines an area which contains all
numerous combinations of paddy and groundnut that can be produced on this farm.
This region is called the feasible region of production. At any point outside this line,
the farmer could not produce that combination of paddy or groundnut without
isolating any one of the constraints.

In order to complete the graphic analysis, it is necessary to find out the optimal
combination of paddy and groundnut that maximizes the net return to the fixed
resources of land, labour and operating capital and minimum acreage requirements.
This is done by defining a line that will give a constant amount of net revenue, given
different acreage combinations of paddy and groundnut. The slope of the iso revenue
line is calculated by the following equation:

Since the iso revenue line indicates a set of net revenues, it is the farmer’s desire to
find an iso revenue line as far away from the origin as possible. The farther away the
iso revenue line, the greater the net income. In addition, he needs to be concerned that
the iso revenue line is within the feasible region of product ion. The iso revenue line S
and T fulfils both of these requirements. Thus, the production levels indicated at
corner point D achieves the maximum level of net Income.
Table Optimum Solution Using Graphical Method of Linear Programming
Particulars Non Optimal Plans Optimal Plan
A B C E (D)
1. Acres of Paddy 0.70 0.70 1.00 3.18 2.20
2. Acres of ground nut 0.00 3.23 3.00 0.00 1.80
3. Total net income (Rs) 1050 5565 5700 4770 5820
4. Total crop land used 0.70 3.93 4.00 3.18 4.00
5. Total harvesting labour used 31.5 225 225 143 207
6. Total operating capital used 770 2705 2900 3500 3500
The optimal plan is growing of 2.20 acres of paddy and 1.80 acres of groundnut. It has a
total net income of Rs.5620. This plan utilizes all the 4 acres of crop land and Rs.3500 of capital.
However, not all labour is used in this plan, with 18 hours being unused (225 - 207). The non-
optimal plans like A, B, C and E have lesser net income than that of optimal plan (D).

Assignment: Find the optimal solution using the above data (Use graph sheet)
Ex. No.: 16 Collection and Analysis of Data on Various Resources in India
Date:
Some of the important Natural Resources available in India are:- 1. Water Resources; 2. Forest
Resources; and 3. Land Resources.
1. Water Resources:
Water, a vital natural resource and precious commodity, is essential for multiplicity of purposes,
viz., drinking, agriculture, power generation, transportation and waste disposal. The chief sources
of water are rain water, sea water, ground and surface water. The World’s total quantum of water
is 140 x 1016 m3.
a. Sea Water: About 97% of earth’s water supply is in the oceans which is unfit for human
consumption or other uses due to high salt contents. Of the remaining 3%, 2.3% is locked in the
polar ice caps and hence inaccessible. The remaining 0.7% is available as fresh water.
b. Ground water: Ground water, a gift of nature, is about 210×109 m3 (210 BCM) (0.66%)
including recharge through infiltration, seepage and evapotranspiration. Out of this nearly one-
third is extracted for irrigation, industrial and domestic use, while most of the water is recycled
into rivers. The fresh water accounts ground water accounts 450 BCM, 200 BCM from surface
flow and 50 BCM which percolates down to ground water deposits. Total surface water flow in
the river basin accounts 185 BCM.
Water consumption in major sectors:
Irrigation:
Agriculture sector is the major consumer (93%) of water in India (Table 2). While in a country
like Kuwait, which is water poor, only 4% is used for watering the crops. On a global average,
70% of water withdrawn is used for irrigation.
Table 1 Estimates of water requirements (in Bcm) in India
Water need for 1974 2000 2025
Irrigation 350.0 630.0 770.0
Thermal power generation 11.0 60.0 160.0
Industries 5.5 30.0 120.0
Domestic needs 8.8 26.6 39.0
Livestock management 4.7 7.4 11.0
Total 380.0 754.0 1100.0

2. Forest Resources
Today forest may be regarded as any land managed for the diverse purpose of forestry, whether
covered with trees, shrubs, climbers, lianes or not.
Uses of forests:
1. Commercial uses:
They produce a large number of products of commercial as well as industrial importance.
Some of such valued products are structural timber, charcoal, raw materials for the
manufacture of paper, newsprint, panel products, bidi leaves, resins, gums, essential oils and a
number of useful medicinal shrubs.
2. Ecological uses:
Most of the ecologically useful plants are in the form of herbs, shrubs, climbers and grasses.
Tropical forests are considered as the lungs of the earth and have aptly been called as the life
support system. They are the treasure house of food, medicines and commerce. These forests
harbour some very primitive species of plants and animals and provide the most stable
environment for life and land.
3. Regulation of climate:
Rain forests, the most primitive ecosystem, are universally recognized for regulating the global
climate, rainfall and the consequent productivity of land and water.
4. Reducing global warming:
The forest canopy absorbs CO2 during photosynthesis and acts as a sink for green-house gases.
5. Soil conservation:
A properly stocked forest guards against soil erosion, damage of water sheds, floods and
sedimentation.
6. Regulation of hydrological cycle:
Forested watersheds act like giant sponges, absorb rain water, increase humidity by
transpiration and regulate hydrological cycle.
7. Medicinal value:
Most of the medicinal plants are found in the under-brush strata of the forest. They contain
chemicals such as alkaloids, glycosides, terpenoids, lignans, fatty acids, resins, tannins, gums
and many other substances which have specific effects on the human body. For example,
Tinospora cordifolia, Vitex trifolia, Serpentina, Eucalyptus, rusa grass, khus, camphor and
sandal wood are used in medicines. Quinine, a malaria drug, is obtained from the bark of
Cinchona.
8. Oils:
Essential oils, obtained from a variety of forest plants, are used in the manufacture of soaps,
cosmetics, pharmaceuticals, confectionery and tobacco flavouring etc.
9. Food products:
Vegetative shrubs, herbs, climbers, ferns, mosses are derived from trees and consist of flowers,
fruits, leaves, bark, stem or root. Several forest fruits, flowers and even leaves and roots are
eaten. Examples are bel, ber, phalsa, jamun, khirni and tendu. The parts of some plants are
used as vegetables and for making pickles. Examples are amla, anar, imli, karaunda, kokam,
kachnar etc. Kalazira is the seed of carum carvi and is used as a spice. Shahtoot fruit is eaten
or made into a sharbat. Tendu leaves are used as wrappers of tabacco to make bidis.
10. Desert vegetation:
India is gifted with cold desert vegetation of Tibet Plateau. It has been estimated that more
than 15000 known floral species are found in India. The North-East region, comprising of
Assam, Tripura, Meghalaya etc. is the richest zone. There are more than 6700 endemic species
largely found in Himalayas and Western Ghats of Peninsular India.
11. Shelter for tribal people:
The forests play an important role in the life of tribal people living in close proximity of
forests because they provide them food, shelter, timber, wood fuel, fruits, meat, medicines,
hides, skins and other products of their daily and commercial use. Forests also give shelter to
diverse species of plants, wildlife and micro-organisms.
12. Pollution moderators:
Forests absorb many toxic gases and can help in keeping the air pure. They also absorb noise
and thus help in preventing air and noise pollution.
13. Aesthetic value:
Forests also have a great aesthetic value. All people appreciate the natural beauty and
tranquility of forests.
Over Exploitation of Forest Resources:
Exploitation of vast potential of forests may be due to the following causes:
1. Commercial Demand:
2. Raw Materials for Industrial Use:
3. Development Projects:
4. Growing Food Demands:
5. Fuel Requirement:
Problems of Deforestation:
Destruction of biotic potential of land leads to deforestation, i.e., forest destruction. The total
forest area of the world was estimated to be 7000 million hectares in 1900 which fell down to
2100 million hectares by 2010. This process of deforestation is a serious threat to economy,
quality of life and future of the environment in our country.
a. Note that we are still far behind the target of achieving 33% forest area as per National
Forest Policy. Despite increasing awareness, deforestation rate continues to increase.
b. Each day about 32300 hectares of forests disappear and another 32300 hectare of forest
suffers degradation.
c. During the period 2005-2010, the tropical deforestation rate had increased by 9.5% as
compared to 1995’s deforestation rates.
d. Primary forests have suffered a loss of 25%.
e. Further, forests are being replaced by plantations with much less biodiversity.
Major Causes of Deforestation:
1. Rapid explosion of human and livestock population.
2. Overgrazing by cattle, indiscriminate felling of trees and over exploitation of land resources.
3. Construction of dams destroy thousands of square kilometres of tropical forests. The process
of filling the reservoirs may drown large tracks of forests, displace people and kill wild life.
4. Although dams are intended to provide inexpensive electricity, many of them are economic
failures because of lack of environmental planning. Erosion of water shed fills reservoirs with
silt and reduces the ultimate output and usefulness of dams.
5. Proliferation of industries, quarrying, irrigation and expansion of agricultural land for
farming to meet the growing food demand.
Forest Conservation:
The National Forest Policy of India (1988) recommended that one-third (33%) of our land
should be under forest cover. But today, the forest cover has reduced to merely 12%. Per
capita forest area available in India is 0.06 hectare as against 0.64 hectare of the world’s per
capita forest area. We have almost reached a critical state which must be remedied before it is
too late for our own survival.
Some conservation strategies have been listed as follows.
1. Conservation of Reserve Forests:
Reserve forests include National Parks, Sanctuaries, Biosphere Reserves and the areas where
major water resources are located, viz., the Himalayas, Western and Eastern Ghats. These
must be protected and no commercial exploitation should be allowed in these areas.
2. Production Forestry:
These are forests on the plains and their productivity can be enhanced by proper management.
Generally, fast growing trees (Eucalyptus, Acacia) are grown using modern techniques.
Production of commercial forestry is intended entirely for commercial purposes to meet the
needs of the forest based industries. Grazing lands and fallow lands not used for agriculture
can be used for raising such plantations.
3. Social Forestry:
Social forestry is based on public and common land to produce firewood, fodder, fruits and
small timber for rural community. The aim is to reduce pressure on natural forests for these
requirements.
4. Agro Forestry:
Same land is used for farming and forestry by taungya (growing crops between rows of trees)
and jhum (shifting crop and forest cultivation) techniques.
5. Urban Forestry:
It aims at growing ornamental and fruit trees along roads, parks or vacant lands.
Land as a Resource:
India has total area of about 329 million hectares. The utilization statistics available are for
nearly 92.5% of the total area. About 162 million hectares of land is under agriculture cover.
Nearly 5% of the land falls under fallow land. About 46 million hectares is under real forest as
shown by satellites. A part of land is not in use.
This waste land includes arid, rocky and sandy deserts. Cities and towns which use much land
must grow vertically rather than horizontally. The land is also needed for industry, commerce,
transport and recreation. Since total land is a fixed asset, we must make efforts for integrated
land use planning.
Land Degradation:
Land is an important component of the life support system. Unfortunately, land has been
overused and even abused over the centuries. Due to exploding population, land is used
increasingly which poses threats to its productivity.
Reckless use damages soil that results into (i) reduction in quality of wood land, grass land,
crop land, (ii) soil erosion, (iii) deforestation, (iv) degradation of water sheds and catchments,
(v) Due to demographic pressures land is under stress. Also due to sprawl in agriculture,
industry and urbanization, crop land is degraded and losing fast fertile top soil.

Problems
1 Collect the land use pattern for India and Tamil Nadu in 2000-01 and 2016-17, and calculate
the % change in the land use pattern and offer your comments.
2. Collect source wise net irrigated area for India and Tamil Nadu in 2000-01 and 2016-17, and
calculate the % change in the land use pattern and offer your comments.