Direct costs and overheads

To work out cost of production, you need every cost in the business. But not every cost belongs to one enterprise. So it helps to sort costs into two groups.

Direct costs

Direct costs belong to one enterprise and go up or down with its size. They're also called variable costs. Examples:

• feed, drench, vaccines and vet bills
• shearing and crutching
• freight, commission and selling costs
• bulls, rams or boars you buy
• agistment.

These are usually easy to find. Most of them are on invoices with the enterprise's name on them.

Overheads

Overheads are costs you pay whatever the size of the enterprise. They're also called fixed costs. Examples:

• rates and insurance
• fuel, vehicle costs and repairs
• permanent wages
• the accountant, phone and power
• depreciation, which is the wear on your gear spread over the years you use it.

Don't forget your own labour

Many family farms don't pay the owner a wage. That makes the cost of production look lower than it really is. Both the MLA and Making More From Sheep calculators put a value on owner and family labour. The Making More From Sheep calculator uses $55,000 a year for the first owner, shared by the time spent on sheep. If you'd have to pay someone to do your job, it's a real cost.

Sharing overheads across enterprises

If you run more than one enterprise, overheads have to be shared out. A common way is by DSE. DSE means dry sheep equivalent. It measures how much feed an animal eats, compared with a dry adult sheep. MLA's method allows overheads to be shared by DSE, or one by one.

So if cattle use 60% of the farm's DSE, they carry 60% of the shared overheads. It isn't perfect, but it's consistent, and that's what makes it useful from year to year.

Why the split matters

When you look for savings, direct costs and overheads behave differently. Cutting a direct cost, like drench, saves money on every head. But it may cost you in growth or deaths. Overheads don't fall when you run fewer stock. In fact, running more stock over the same overheads is often the cheapest way to lower your cost per kg.

Our guide to adding a new enterprise shows how overheads change when you add one. You can set out costs by enterprise in the enterprise gross margins spreadsheet.