2022

AGRICULTURAL AND BIOSYSTEMS ENGINEERING

BOARD EXAM REVIEWER

PRODUCTION AND OPERATING

COSTS OF AGRICULTURAL
MACHINES
by

Engr. Alexis T. Belonio, MS

Agricultural and Biosystems Engineer
ASEAN Engineer

Volume 6 – Agricultural Machinery and Mechanization

 Introduction

n Careful appraisal and good planning must be undertaken before

making an investment in an agricultural machines.
n Economic analysis determines which of the different alternatives
of agricultural machines is most viable to purchase and operate.
 Methods of Appraising Investment

n Discounted Method
• It involves discounting and allows payment and receipts
occurring at different times in the future to be converted to a
common standard in terms of their present value.
n Undiscounted Method
• It does not consider timing of cost and benefit flows and the
changing value of money over time.
 Terms
n Cost Factors – total cost of using the machine which includes
charges for ownership and operation.

Fixed Cost – It is the ownership cost which is independent of

use.
Variable Cost – It is the cost associated with the operation of the
machine, which varies directly with the amount of
use.

n Depreciation – This reflects the reduction in value of an asset with

the use and time. The actual total depreciation can never be
known until the equipment has been sold. It can be estimated by
using different computational methods, depending on the
objective.
n Interest – It is the interest charged for the use of the money
invested in a machine. Simple interest on the average
investment over the life of the machine can be added to the
annual depreciation to estimate the yearly capital cost of
ownership.
n Repair and Maintenance Cost – It is the cost associated with
maintaining the machine, including its repair.
n Fuel Cost – It is the cost incurred for the fuel consumed in
operating the machine.
n Labor Cost – It is the cost incurred in operating the machine
based on the 8-hour rate. For owner operator, labor cost is
determined from alternative opportunities for the use of time.
This cost varies depending on the prevailing labor cost in a
certain area.
n Machine Custom Cost – It is the amount paid for hiring the
equipment and operator services to perform a certain task.
n Operating cost – It is the cost which depend directly on the
amount spent in operating the machine. This includes labor,
fuel, lubrication, as well as repair and maintenance.
n Ownership Cost – It is the cost which does not depend on
the amount spent in operating the machine. It includes
depreciation, interest on investment, taxes, insurance, and
storage.
n Lease – It is the contract for the use of a machine for an
agreed period of time in return for periodic payment. The
ownership remains with the lessor and the lessee acquire the
right of temporary possession and of operating the machine.
n Obsolete – It is the condition of a machine when it is out of
production and parts to repair and update it are not available
from local suppliers, or it can be replaced by other machine
or method that will produce a greater profit.
n Price – It is the market value per unit of a machine.
n Rent – It is a short-term contract for the use of machinery in
exchange for a fee.
n Gross – The return for sale or product and the value received
for a service or product before expenses are deducted.
n Net – It is the return for sale of a service or product and the
value received for a service or product less all expenses
except income taxes.
n Maintenance and Service – It is the periodic activities carried
out to prevent premature failure and to maintain good
functional machine performance.
n Specific Fuel Consumption – The fuel consumed by an engine
in delivering a given amount of energy.
n Repair – It is the restoration of a machine to operative
condition after breakdown, excessive wear, or accidental
damage.
 Production Cost Analysis

• Prepare a list of all the materials needed to build the machine.

Lists must be classified into fabrication materials like metal plates
and bars; standard materials like bearings, bolts and nuts; and
consumables like paints, brush, cutting discs, etc.
• Determine the price of each material needed by canvassing from
suppliers. Price per unit of each materials must be reflected so
that it would be easy to tabulate and compute for the total cost at
the end.
• Determine the sub total cost for the fabricated, standard and
consumables needed.
• Compute for the labor cost to build the machine. Usually it is 60%
of the total material cost. The percentage cost can be adjusted
depending on how difficult the fabrication is to be done.
• Determine the direct cost in producing the machine by adding the
materials and labor costs.
• Determine the indirect cost associated with the fabrication of the
machine by adding the cost of electricity needed or consumed and
the administrative cost. Usually, 15% of the direct cost is allocated
for the cost of electricity and 10% of the direct cost is allocated for
administrative cost.
• Compute for the fabrication cost by adding the direct and indirect
costs needed or spent in building the machine.
• Add a contingency of 10% to the fabrication cost to get the total
production cost.
• Determine the selling price by add mark up, which is 25% of
production cost, and taxes, which includes 3% percentage sales
tax and 12% income tax.
 Table for Determining the Production Cost of Ag Machine
Fabrication
Materials Bars, sheets, CRS, etc Sub total
Standard Materials Belts, bearing, pulley, etc Sub total
Consumables Welding rods, cutting disc, oxyacetylene, etc Sub total

Fabrication material + standard materials +

Material Cost consumables Total

Direct Material Cost

Labor (60% of Material Cost)
Sub total

Indirect Electricity, etc (15% of Direct Cost)

Administrative (10% of Direct Cost)
Sub total

Fabrication Cost (Material Cost + Direct Cost + Indirect Cost)

Contingency (10%)
Total Production Cost (Fabrication + contingency)
Mark up (25% of TPC)
Taxes (3% sales & 12% income tax)
Grand
Selling Price total
 Sample Production Cost Analysis

An axial-flow coconut decorticator is to be produced to provide

farmers a means to extract coco fiber and coco peat. The list and
prices of each material to be used are given in Table 1. Determine
the total material, labor, and fabrication costs. Considering the
different assumptions, what is the direct and indirect costs in
fabricating the machine? What is the production cost? What is the
selling price for the machine, considering a profit margin and taxes
of 25% and 15%, respectively?
 Bill of Materials for the Decorticator
A. Fabrication Materials
Qty Unit Material Unit Cost Total Cost
(PHP/unit) (PHP)
1 plate MS plate 6mm, 1.2m x 2.4m 2,000.00 /sheet 2,000.00
1.5 plate MS plate 3 mm, 1.2m x 2.4m 1,200.00/sheet 1,800.00
1 length Angle Bar 6mm x 3 in. x 6m 300.00/length 300.00
1 pc CRS Hexagonal Bar 2 in. x 1.2m 800.00/foot 3,148.80
1 pc CRS shaft 3 in D x 70 cm 700.00/foot 1,607.20
1 plate MS Plate 10mm, 1.2m x 2.4m 10,000.00/plate 10,000.00
3 length CRS Shafting ¾ in D x 10m L 300.00/length 900.00
Total 19,756.00

B. Standard Materials

1 pc Engineering Plastic 6 in.D x 70 cm 300.00/foot 688.80

2 pcs Pillow block 2in. 320.00/pc 640.00
1 pc V-Pulley 2groove, 5 in. 220.00/pc 220.00
1 pc V-Pulley 2 groove, 4 in 190.00/pc 190.00
2 pc V-belt, type B approx B70 60.00/pc 120.00
1 unit 18 hp diesel 20,000.00 20,000.00
16 pcs Hexagonal bolt, nut, washer 12 mm x 1 in. 3.50/pc 56.00
10 pcs Hexagonal, bolt, nut, & washer 20mm x 2 in. 2.50/pc 25.00
Total 21,939.80
C. Consumables

10 kg Welding Rod 6013 110.00/kg 1,100.00

2 Liter2 Enamel paint 300.00/liter 600.00
2 Liter2 Lacquer thinner 120.00/liter 240.00
2 pcs Cutting disk 14 in. 190.00/pc 360.00
2 pc Grinding disc 4 in 80.00.00/pc 160.00
Total 2,460.00

Direct Cost Material Cost 44,155.80

Labor (60% Material Cost) 26,493.48
Contingency (10% of Material Cost 4,415/58 75,064.86
Indirect Cost Utilities (15% of Direct Cost) 11,259.73
Administrative (10% of Direct Cost) 7,506.49 18,766.22
Fabrication Cost Direct + Indirect Cost 93,831.08
Total Production Cost Fabrication Cost + 10% Contingency 103,214.19
Mark-Up 25% of Total Production Cost 25,803.55
Taxes 3% sales tax + 12% Income Tax 19,352.66
Selling Price Total Production Cost + Mark-Up = Taxes PHP148,370.49
 Operating Cost Analysis

n Determine the annual fixed cost, which includes depreciation,

interest on average capital investment, repair and maintenance,
and tax and insurance. Usually depreciation is determined using
the straight line method with the formula

D = (P-S) / L
where:
D - depreciation, P/year
P - principal, P
S - salvage value, P
L - life span
The salvage value is usually 10% of the purchase price of
the machine. The life span depends on the machine and is
usually 5 to 7 years for field equipment; while, 10 to 15 years
for farmstead equipment. The interest on investment
depends on the prevailing interest rate charged by banks on
loans and is usually 24%. Repair and maintenance is
usually 10%; while, insurance is 3%. Tax includes 3%
percentage sales tax and 12% income tax.
n Determine the variable cost which includes fuel, oil, and wage
of the operator. It depends on how long the machine is
operated. Fuel consumption and oil requirement of the
machine can be determined from the manufacturer’s brochure
or catalogue. The cost of labor depends on the prevailing
wage for laborer in the area, depending on the skills of the
operator.
n Determine the total operating cost of the machine by adding
the total fixed costs and the total variable cost.
n Determine the operating cost per unit by dividing the total cost
by its field or functional capacity. This is expressed in P/hr,
P/hectare, or P/kg.
n Calculate the BCR by dividing the purchase price by the
difference between the commercial rate of the machine and
the computed operating cost.
n Calculate the payback period (PBP) which is the length of
time from the start of purchasing the machine until its net
benefit equal cost.
 Undiscounted Measures

n Break-Even Point – It is the level of operation at which total cost

equal to total benefits or gross income. It is useful in determining
the level at which the machine should be operated in one year to
cover the annual cost.

n Payback Period – It is the time it takes to recover the cost

invested on the machine. It is useful in choosing among the
investment alternatives when there is a high degree of risk
involved and/or financial resources are limited to decide for a
short period.
 Discounted Measures

n Internal Rate of Return – It is the discount rate that equates the

present value of the expected cash outflows with the present value
of the expected inflows.

n Net Present Value – It is a discounted cash flow approach to

capital budgeting. With the present-value method, all cash flows
are discounted to present value using the required rate of return.

n Benefit-Cost Ratio – It is the ratio of the total benefits derived

from operating the machine to the total cost needed for operation.
Make an operating cost analysis of a power tiller to be used for custom
plowing and harrowing of rice fields. The power tiller can do plowing at 1
ha/day and harrowing at 3 ha/day operation. The investment requirement for
the power tiller including plow, harrow, and trailer is PHP125,000.00. The 8
horsepower diesel engine cost PHP62,000.00 and a leveler of PHP5,000.00.
Life span is 7 years with 10% salvage value. Interest, repair and
maintenance, and insurance is 24%, 10%, and 3% of the investment cost,
respectively. The engine consumes 1.2 liter per hour at PHP47.00 per liter.
One person will operated the machine at P250.00 per 8 hour day. If tractor
tiller will be used followed by power tiller harrowing, the custom rate is P3,500
per hectare whereas if power tiller and harrowing will be employed, the
custom rate is P4,500 per hectare. What is the cost of using the machine in
preparing the field. How much savings can be derived when investing in the
tiller with tillage implement. What is the payback period of the machine?
 Operating Cost Analysis of Power Tiller
Field Capacity (Hactare per day) Operating Cost
Plower 1 Plowing Per Hectare 744.69
Harrowing 3 Harrowing Per Hectare 248.23
Total Cost for Land Preparation
Investment Cost (P) 1/ One Plowing& two harrowing 1241.16
Power Tiller, Plow, Harrow & Savings (P/Hectare)
Trailer 58,000.00 Tractor Tiller Preparation 8/ 2258.84
8 hp Kubota Engine 62,000.00 Power Tiller Preparation 9/ 3258.84
Leveler 5,000.00 Payback Period (Ha) 38.36
Total 125,000.00 Tractor Tiller Preparation 55.34
Power Tiller Preparation 38.36
Fixed Cost (P/day) 1/ Life Span - 7 years
Depreciation 2/ 30.82 2/ Straight line with 10% salvage
Interest on Investment 3/ 8.22 value
Repair and Maintenance 4/ 3.42 3/ 24% of the investment cost
Insurance 5/ 1.03 4/ 10% of the investment cost
Sub-Total 43.49 5/ 3% of the investment costs
6/ 1.2 liters per hour at P47 per
Variable Costs (P/day) liter
Fuel 6/ 451.20 7/ One (1) person @ P250.00 per 8 hour-day
Labor 7/ 250.00 8/ At P3,500 per hectare if tractor tiller is used
Sub Total 701.20 followed by power tiller harrowing
9/ At P4,500 per hectare if power tiller is used for
Total Costs (P/day) 744.69 plowing and harrowing
A rice husk gasifier that can generate 3kWe electricity is to be
purchased from a supplier. The investment cost for the machine is
PHP55,000.00. It has an estimated life span of 5 years. Considering
an interest on investment of 24%, repair and maintenance of 10%, and
insurance of 3%, what is the total fixed cost of the machine? If the
cost of rice husks fuel is PHP1.00 per kg and the cost of gasoline to
start up the operation of the gasifier is PHP55 per liter at a rate of 09
liter per hour, what is the variable cost of operating the gasifier if it
also consumes 1 liter of engine oil (PHP200 per liter) per every 600
hours. The gasifier parasitic load is 0.9kWe. Cost of electricity from
the grid is P10.50 per kW-hr.
 Operating Cost Analysis
Investment Cost (P) 1/ 3 kWe Power plant
6 hrs 8 hrs 12 hrs
Gasifier and Gas Conditioning 35,000.00 35,000.00 35,000.00
Engine and Generator 20,000.00 20,000.00 20,000.00
Total 55,000.00 55,000.00 55,000.00

Fixed Cost (P/day)

Depreciation 2/ 27.12 27.12 27.12
Interest on Investment 3/ 7.23 7.23 7.23
Repair and Maintenance 4/ 3.01 3.01 3.01
Insurance 5/ 0.90 0.90 0.90
Sub-Total 38.27 38.27 38.27

Variable Costs (P/day)

Fuel 6/ - - -
Gasoline 7/ 28.88 28.88 28.88
Engine Oil 8/ 2.00 2.67 4.00
Sub Total 30.88 31.54 32.88

Total Costs (P/day) 69.15 69.82 71.15

Generation Cost per kW-Hour 9/ 5.76 4.36 2.96
Savings per Day 10/ 56.85 98.18 180.85
Payback Period (Years) 2.65 1.53 0.83
1/ Complete set; 5 years life span
2/ straight line with 10% salvage value
3/ 24% of the investment cost
4/ 10% of the investment cost
5/ 3% of the investment costs
6/ P1.00 per kg of rice husks
7/ 0.9 liter per hour for 35 minutes @ P55/liter per day operation
8/ P200.00 per liter @ 1 liters per engine-oil change every 600 hours
9/ At a parasitic load of 0.9 kw
10/ At a prevailing cost of electricty of P10.50 per kw-hr
QUESTIONS AND PROBLEMS
 4. Costs of fabricated and
1. Sum of money required to
standard components of a
acquire machines.
machine.
a. Production cost
a. Material cost
b. Overhead cost
b. Production cost
c. Investment cost
c. Manufacturing cost
d. None of the above
d. All of the above
2. Cost of using a machine per
5. Cost of manpower in
unit time, area, output, etc.
fabricating a machine.
a. Fixed cost
a. Fabrication cost
b. Variable cost
b. Overhead cost
c. Operating Cost
c. Labor cost
d. All of the above
d. None of the above
3. Costs of materials, labor, and
6. Cost associated with the use
overhead in producing a
of a machine.
machine.
a. Operating cost
a. Material cost
b. Rental cost
b. Production cost
c. Custom cost
c. Investment cost
d. All of the
d. None of the above
7. Cost associated with the a. Fixed cost
production of a machine but not b. Variable cost
classified as materials or labor, like c. Total cost
transport of materials, d. None of the above
consumables, etc.
a. Production cost 10. Difference between the
b. Overhead cost investment cost and the salvage
c. Operation cost value divided by the life span of the
d. None of the above machine.
a. Depreciation
8. Cost associated with the b. Interest on investment
utilization of a machine which c. Insurance
includes depreciation, interest on d. None of the above
investment, repair and
maintenance, insurance, etc. 11. Amount charged for a unit of
a. Fixed cost machines based on manufacturing
b. Variable cost cost plus tax payable, and
c. Total cost incorporating a certain percentage
d. None of the above for mark-up.
a. Investment cost
9. Cost associated with the b. Administrative cost
operation of a machine, particularly c. Selling price
in terms of fuel, electricity, etc. d. None of the above
consumed and of labor employed.
12. Sum of the production cost,
selling, and administrative cost.
a. Production cost
b. Overhead cost
c. Manufacturing cost
d. None of the above
13. Itemized list and cost estimates
of fabricated and standard materials
needed in the fabrication of a
machine.
a. Bill of lading
b. Bill of payment
c. Bill of materials
d. All of the above
14. Number of years required to
recover the cost of investment for a
machine.
a. Benefit cost ratio
b. Internal rate of return
c. Payback period
d. None of the above
15. Indicator that attempts to
summarize the overall value of
money in using a machine.
a. Percentage benefit over cost
b. Cost-Benefit Ratio
c. Benefit-Cost Ratio
d. None of the above
16. Profitability measure used to
evaluate the efficiency of an
investment on a machine, which is
determined by dividing the return of
an investment by the cost of the
investment times 100.
a. Payback period
b. Benefit cost ratio
c. Return on investment
d. None of the above
17. Internal rate of return of a
project is analyzed to see whether
it is viable or not. Based on this,
which of the statements below is
true?
a. The higher the internal rate of
return, the more viable is the
project.
b. The lower the internal rate of
return, the more viable is the
project.
c. The internal rate of return must
be equal with the prevailing rate to
make it viable.
d. None of the above
18. Useful life of a machine before
it becomes unprofitable for its
original purpose due to
obsolescence or wear.
a. Economic life
b. Life span
c. Profitable life
d. All of the above
19. Ability of a machine to perform
a timely operation that optimizes
return from crop considering
quality and quantity of the product.
a. Operating time
b. Timeliness
c. Functional time
d. None of the above
20. In trade circles, CIF stands for
_____.
a. Cash-In-Fist
b. Cost, Insurance and Freight
c. Cost-In Freight
d. None of the above
21. Cost of machine including
shipment.
a. Free-on-board
b. Freight-on-board
c. Cost-in-freight
d. None of the above