Is your greenhouse in the green?

Profit for any business can be calculated by the simple formula: profit = number of units sold x (sales price per unit - total costs per unit). All growers know how many units of a specific crop they sell at a given price. They also know the profitability of their business from their income tax records at the end of the year. However, most growers produce many crops. Thus, the third vital component of the profit equation, the cost of producing an individual unit, is often not known. Determining the profitability for each crop requires knowledge of its production costs. The process of assigning production costs to each crop and subsequently calculating the profit of each crop is called cost accounting.

The computer program Greenhouse Cost Accounting, distributed by Rutgers University Cooperative Extension, can be used on computers with a Windows operating system and Microsoft Excel software. The Greenhouse Cost Accounting software enables users to perform cost accounting and to determine the profitability of greenhouse crops. This information can be used by managers to analyze various production, financial and marketing strategies. The Greenhouse Cost Accounting program uses cost information growers already have. Much of the data needed is typically found on income statements, and the rest is direct cost information for each crop. From these inputs, the program allocates as many costs as possible to individual crops. The remaining unallocated costs are assigned to each crop on a per square-foot-week basis. (See page 69 to find out more on manual square-foot-week calculation.)

The program output provides information on costs and returns on a per-crop, per-unit and per-square-foot basis. It also provides an income statement showing total costs, allocated costs and unallocated costs. This output can aid the manager in making decisions about pricing, reducing unprofitable production, controlling costs and increasing sales of profitable crops. You can also perform the same kind of analysis yourself by hand or by developing your own spreadsheet.

The costs incurred in a greenhouse business can be grouped into two categories: variable and overhead costs. Variable costs are costs that change with the level of production and can usually be allocated to a Á particular crop. Examples of variable costs are the costs of petunia seeds and bedding plant flats; both relate specifically to petunia production. They are part of the total costs per unit given in the profitability equation on page 66. Overhead or fixed costs are those costs that are incurred regardless of the level of production and are common to all crops. These costs include depreciation of the greenhouse structure, equipment and other facilities and costs such as interest, repairs, insurance, taxes and salaries of overhead personnel (e.g., the manager, sales people, growers, secretaries, bookkeepers, etc.). The total cost of production is the sum of variable and overhead costs.

A business owner or manager may not know the various costs of producing a specific crop. For example, the total cost of seeds is usually known. However, the cost of petunia seeds may not be known. If the cost of petunia seeds is known, enter it as a variable cost for producing petunias; if it is not known, enter a zero. You can treat variable costs that you can't assign to a particular crop the same way you would overhead costs. The program will then assign the cost of seeds along with other unassigned costs on a per-square-foot-week basis.

Inputs

The program has two sections: the input and the results. The input section is divided into two parts. The first part includes values from the income statement and space usage information. Table 1, page 67, is an example of input from the income statement for a 20,000 sq.ft. greenhouse.

The second part involves information on the cost of producing each crop (see Table 2, page 67). The user supplies the name of each crop produced; the costs of labor, seed or plants, containers, growing medium, fertilizer, chemicals and tags; and other direct costs associated with the crop. For example, the labor cost for producing petunia flats is $3,385. However, most managers probably do not know the cost of labor devoted to each crop. If the labor cost of producing petunia flats is unknown, enter $0, and the program will assign labor costs on a per square-foot-week basis.

You also need to enter the number of units started, the space devoted to each unit, the weeks needed to grow the crop, the percent sold and the price per unit -- items that most managers know for each crop. If the same crop is sold at more than one price, then that crop may be treated as two or more crops. For example, perhaps 20 percent of petunia flats are sold at $6 per flat to customers who buy more than 100 flats, and 80 percent were sold at $6.50 to customers who buy less than 100 flats. Two entries can be Á made showing 4,000 units started of "petunia flats-2" at $6. Total costs can be allocated by the user on an 80/20 percent basis. Another option is to enter the average price for petunias.

Results

We have calculated overhead costs, costs per crop and costs per unit (flat or pot) (See Table 3, page 68). The costs per unit include the costs for labor, seed or plants, container, media, fertilizer, chemicals, tags, other direct costs, total direct costs, overhead costs, loss of unsold plants, total costs, sales price and profit or loss. The costs for each crop include: sum of direct costs, square feet per crop, square-foot-weeks per crop, total crop sales, total crop costs, profit per crop, profit per unit and profit per square foot-week. Totals for the entire business are also calculated for each of the above categories.

In the example in Table 3, page 68, poinsettias are unprofitable, and the other crops are profitable. Marigold flats are the most profitable crop per unit, and petunia flats are the second most profitable. In the cost per crop section of Table 3, the overhead cost per square-foot-week is $0.267.

Differences in profit pictures exist between cost per square-foot-week and cost per unit. Marigold flats are the most profitable crop per unit, but geraniums in 4-inch pots are the most profitable crop per square-foot-week. Geraniums in 4-inch pots have a lower profit per pot because they are sold at the lower price per unit than the marigold flats. However, geraniums in 4-inch pots are the most profitable crop per square foot-week because of more efficient use of space. Returns per square-foot-week of bench space may be the most informative way of comparing profitability among crops because of differences in use of space.

As shown in this hypothetical example, knowledge of the profitability of each crop helps managers make production and marketing decision to improve their businesses.