# Part 5 ACCOUNTING AND EQUIPMENT COSTS

## I ACCOUNTING

The keeping of accounts is of fundamental importance in knowing the cost price of the various finished products.

It is, therefore, essential to know each day the amounts of milk received and the products obtained.

### 1. Reception

For reception, the following data should be known.

 “The village dairy” Date Amounts of milk received % of fat 12 February 385 3.6 13 February 405 3.7 14 February 395 3.6

### 2. Standardization

If the whole milk received at the dairy contains 40 g of fat per litre, and the milk for cheese-making has to be standardized to a fat content of 26 g per litre, the following balance is obtained:

 100 × 40 = 26x + 400 (100 - x) 4000 = 26x + 4000 - 400x 374x = 36 000. x = 96.25 litres.

Therefore, 100 litres of milk with a fat content of 40 g per litre will produce 96.25 litres of milk containing 26 g per litre of fat, and 3.75 litres of cream with a fat content of 400 g per litre.

### 3. Cheese-making

In the case of making a Gouda-type cheese, yield will be approximately 11 kg of cheese per 100 litres of milk.

According to the balance resulting from the standardization (see above), 96.25 litres of milk for cheese-making will give:

For butter, the yield is as follows. After standardization, 3.75 litres of cream at 400 g per litre are obtained. The total amount of fat content will be therefore: 1 500 g. The butter will have a fat content of 82 percent, and so the butter yield will be:

The breakdown, exclusively for butter and cheese-making, is therefore as follows:

This represents a theoreticval breakdown - i. e. showing, in theory, the amount per product after milk processing. This, of course, needs to be compared with the amounts actually produced. If there is too great a difference, one must then proceed to ascertain just where the discrepancy lies; whether in the measurement of the volume of milk received, the determination of fat content, or in the quantities of milk and cream after standardization, etc.

## II STUDY OF COST PRICE

Study of the cost price of each product is essential in order to determine the sale price for dairy products.

The calculation of cost price of dairy products is based on average daily production and actual output obtained.

In the simple example already taken for the breakdown based on 100 litres of milk, the cost price of cheese and butter is established as follows.

### 1. Cost of raw material

Over one year the average of 100 litres of milk is received daily. From the outset of operations, this milk will be paid E per litre. The cost, therefore, of the raw material, is:

100 × E

The usual consumption is that in 1 litre of milk the value of the fat content represents 50 percent of the price of the milk. It can therefore be concluded that the purchase price of 1 g of fat content, if the milk has an average rate of 40 g per litre, is:

The butter contains 82 percent fat content and therefore the cost price of 1 kg of butter will be based on the cost of 820 g of fat content. This makes the cost price of 1 kg of butter:

The above example shows that 100 litres of milk with a fat content of 40 g per litre will supply 96 litres of milk with a fat content of 26 g per litre, for cheese-making.

The next step is to determine the value of the milk used for cheese-making. This milk is composed of:

 milk solids + fat content of milk (50% of the value of the milk (cost of the fat content at 26 g per litre)

The cost price of 1 litre of milk for cheese-making is therefore:

The cheese yield of 100 litres of milk for processing is therefore approximately 11 kg of cheese.

The material cost, therefore, of 1 kg of cheese for accounting purposes is:

As a further example, assuming that for milk 160 monetary units are paid in a local currency, the material cost price of the butter for accounting would therefore be for 1 kg of butter:

10.25 × 160 = 1 640

As for the material cost for 1 kg of cheese, the figure is calculated as follows.

The cost of 1 litre of milk for cheese-making, with a fat content of 26 g per litre, would be:

 = 3.2 + 52 = 55.2

The cost of 1 kg of cheese would be:

 = 501

The above data provides an approximate but adequate estimate of the cost of raw materials for making butter and cheese.

To obtain the total cost price per product, the processing costs also have to be added.

These costs are made up of fixed costs and variable costs.

The only cost involved in collection of the milk is the salary of the collector if employed by the village dairy.

In processing, salaries of the staff supervising and operating the dairy will have to be paid, as well as the expenses for fuel (wood, bottled gas, etc.) and the products used during processing (cleaning supplies, cultures, rennet, packaging materials).

All these costs are added to the cost of the unit of weight of the final product.

Using the above example, the following costs can be estimated:

### 2. Collection costs

If the collector's salary is 6 000 monetary units and he collects an average of 100 litres of milk per day (two 50-litre cans) the monthly collection will total 3 000 litres. The collection costs, therefore, for one litre of milk are:

25 percent of this will be earmarked for bicycle repairs and maintenance:

 Collection costs per litre of milk Expenditure Monetary unit Salary 2.0 Maintenance and repairs 0.5 TOTAL 2.5

Considering that some 10 litres of milk are needed to make 1 kg of cheese, the collection cost per kg of cheese is then:

2.5 × 10 litres or 25

### 3. Processing costs

Assuming the processing unit employs 4 people on a full-time basis, each at a salary of 36 000 (monetary units), the total payroll will come to:
36 000 × 4 = 144 000 (monetary units).

Salary costs will then be broken down per kg of cheese. Knowing that the monthly average milk collection is 400 litres per day, or 12 000 litres per month, from which the cheese output is approximately 10 percent, then the salary costs per kg of cheese are:

Knowing the monthly expenditure to be 36 000 monetary units for power (to heat the milk) and for processing aids such as starter cultures, rennet, cleaning supplies, etc., then the cost per kg of cheese can be broken down as follows:

The cost of processing cheese from milk is therefore:

120 + 30 = 150 (monetary units)

### 4. Packaging costs

Here again, the packaging materials required are estimated on a monthly basis (number of sheets of greaseproof paper; cost of a wooden crate for transporting cheeses, etc.) and the price in terms of the individual package. If the total monthly cost of the packaging is 6 000 (monetary units), for example, the packaging cost per kg of cheese will then be:

### 5. Transport costs

The cost of transporting the products is also estimated on a monthly basis. If a vehicle is needed to transport the dairy products to town, depreciation of the vehicle needs to be taken into account. If the monthly transport cost is 24 000 monetary units, for example, the cost per kg of cheese is then:

### 6. Marketing costs

As already mentioned, marketing, i.e. offering the product to the customer, is a highly important factor. Consequently, marketing may involve the use of a stand in town for direct sale. In this case, the marketing costs will include the rental of the stand plus the vendor's salary. If these monthly expenses amount to 60 000 monetary units, the sale cost per kg of cheese is then:

SUMMARY

The following table summarizes all costs to be included in the sale price of 1 kg of cheese.

 Accounting service Cheese-making cost price per kg of cheese Monetary units Raw materials 501 Milk collection 25 Production costs • salary 120 • supplies, power 30 Packaging 5 Transport 20 Marketing 50 TOTAL 751

This gives us a cost price of 751 monetary units for 1 kg of cheese.

The profit will depend on local market conditions, but should normally range around 30 percent of the cost price. This gives us a profit margin of:

This would make the sale price of the product (1 kg of cheese)

751 + 225 = 976 monetary units

In this case the percentage of costs with respect to the sale price would be as follows:

 Distribution of costs as % of sale price % Raw materials 51.0 Collection 2.5 Processing costs 15.0 Packaging 0.5 Transport 2.0 Marketing 5.0 Profit margin 24.0 TOTAL 100.0

## III ESTIMATING EQUIPMENT COSTS

The suggested list of equipment primarily concerns equipment which is probably difficult to obtain locally. These are estimated costs, and are generally overestimated.

### 1. Milk collection equipment

 Estimated cost in US\$ • Chinese-type bicycle with spare parts 300 • Milk can with pressure cover 130 • Milk volume measuring can 100 • Funnel with filter 50 • Portable laboratory equipment including: Salut acidimeter 50 Glass cylinder 10 Lactodensitometer 15

### 2. Milk reception equipment

 • 50 litre milk can (aluminium) 400 • Milk scales 60 • Funnel with filter 50 • Milk pail 60 • Milk stirrer 20 • Milk sampler 10

### 3. Laboratory equipment

 • Laboratory wall cupboard used in determination of fat content 1 000 • Equipment and accessories for determination of milk acidity 50 • Glasswork 30 • Reagents for one year 60

### 4. Milk standardization equipment

 • Hand-operated separator: 300 1/hour 1 600 • Cream bucket 60 • Milk can with pressure lid 50 litre capacity 20

### 5. Cheese-making equipment

 • Stainless steel curd cutter 200 • Cheese stirrer 60 • Cheese thermometer 15 • Curd scoop 60 • Mould-filling tray 75 • Minor equipment such as brushes, aprons, cheese samplers, etc. 500

### 6. Butter-making equipment

 • Hand-operated pinewood barrel churn: capacity 30 litres of cream 200

### 7. Equipment for preparation of processing aids

 • Minor equipment used in the preparation of starter cultures and rennet 300