April 2003

Is your greenhouse in the green? By Robin Brumfield

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

The computer program Greenhouse Cost Accounting, distributedby Rutgers University Cooperative Extension, can be used on computers with aWindows operating system and Microsoft Excel software. The Greenhouse CostAccounting software enables users to perform cost accounting and to determinethe profitability of greenhouse crops. This information can be used by managersto analyze various production, financial and marketing strategies. TheGreenhouse Cost Accounting program uses cost information growers already have.Much of the data needed is typically found on income statements, and the restis direct cost information for each crop. From these inputs, the programallocates as many costs as possible to individual crops. The remainingunallocated 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 returnson a per-crop, per-unit and per-square-foot basis. It also provides an incomestatement showing total costs, allocated costs and unallocated costs. Thisoutput can aid the manager in making decisions about pricing, reducingunprofitable production, controlling costs and increasing sales of profitablecrops. You can also perform the same kind of analysis yourself by hand or bydeveloping your own spreadsheet.

The costs incurred in a greenhouse business can be groupedinto two categories: variable and overhead costs. Variable costs are costs thatchange with the level of production and can usually be allocated to a çparticular crop. Examples of variable costs are the costs of petunia seeds andbedding plant flats; both relate specifically to petunia production. They arepart of the total costs per unit given in the profitability equation on page66. Overhead or fixed costs are those costs that are incurred regardless of thelevel of production and are common to all crops. These costs includedepreciation of the greenhouse structure, equipment and other facilities andcosts such as interest, repairs, insurance, taxes and salaries of overheadpersonnel (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 costsof producing a specific crop. For example, the total cost of seeds is usuallyknown. However, the cost of petunia seeds may not be known. If the cost ofpetunia seeds is known, enter it as a variable cost for producing petunias; ifit is not known, enter a zero. You can treat variable costs that you can’tassign to a particular crop the same way you would overhead costs. The programwill then assign the cost of seeds along with other unassigned costs on aper-square-foot-week basis.

Inputs

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

The second part involves information on the cost ofproducing each crop (see Table 2, page 67). The user supplies the name of eachcrop produced; the costs of labor, seed or plants, containers, growing medium,fertilizer, chemicals and tags; and other direct costs associated with thecrop. 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 eachcrop. If the labor cost of producing petunia flats is unknown, enter $0, andthe program will assign labor costs on a per square-foot-week basis.

You also need to enter the number of units started, thespace devoted to each unit, the weeks needed to grow the crop, the percent soldand the price per unit — items that most managers know for each crop. If thesame crop is sold at more than one price, then that crop may be treated as twoor more crops. For example, perhaps 20 percent of petunia flats are sold at $6per 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 çmade showing 4,000 units started of “petunia flats-2” at $6. Totalcosts can be allocated by the user on an 80/20 percent basis. Another option isto enter the average price for petunias.

Results

We have calculated overhead costs, costs per crop and costsper unit (flat or pot) (See Table 3, page 68). The costs per unit include thecosts 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, totalcrop sales, total crop costs, profit per crop, profit per unit and profit persquare foot-week. Totals for the entire business are also calculated for eachof the above categories.

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

Differences in profit pictures exist between cost persquare-foot-week and cost per unit. Marigold flats are the most profitable cropper unit, but geraniums in 4-inch pots are the most profitable crop persquare-foot-week. Geraniums in 4-inch pots have a lower profit per pot becausethey 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-weekbecause of more efficient use of space. Returns per square-foot-week of benchspace may be the most informative way of comparing profitability among cropsbecause of differences in use of space.

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