Milk and dairy products: production and processing costs


J.C. Belloin

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ISBN 92-5-102503-7

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2.1  Background

2.2  The point of cost prices

2.3  Classification of charges

2.4  Cost centres

2.5  Ascertaining and analysing differentials

2.6  Setting up a budgetary control procedure (management audit)


3.1  General considerations

3.2  Cost accounting applied to the agricultural enterprise

3.3  Livestock

3.4  Feeding livestock

3.5  Available on-farm labour

3.6  Presentation of a dairy plant

3.7  Auxiliary cost centres

3.8  Structural charges

3.9  Summary of model tables used to determine milk production costs


4.1  Different milk-collecting systems

4.2  Making the most of milk pick-up rounds

4.3  Pick-up work-time study

4.4  Analysis of collection costs

4.5  Analysis of cooling costs

4.6  Overall cost “refrigeration-collection-reception”


5.1  Cost of auxiliary centres

5.2  Structural cost centres

5.3  “Pre-workstation” processing costs

5.4  Evaluation of milk content - yields and costs

5.5  Dairy product distribution and marketing costs



In “liquid milk equivalent” international milk prices are less than half the price paid for domestic liquid milk in many Third World cities. Though the international milk market may fluctuate in the short term, it is likely to remain low in the years to come. From a strictly economic standpoint, therefore, it might not seem reasonable to encourage Third World countries to develop dairy programmes. However, development potential and specifics do vary considerably from country to country and from one region to the next. An individual government may have its own social or political reasons for wishing to develop milk production.

In point of fact:

Many Third World countries have decided to develop national dairy production for the above reasons. A certain amount of protectionism is necessary to ensure success and avert unfair competition between producer country-subsidized dairy imports and domestic production. The government needs to tax dairy imports, particularly powdered, concentrated or evaporated milk products. The revenues are used to finance dairy development projects or to boost producer prices (subsidizing some major components of production costs). For the consumer, the outcome of these measures is high-priced milk and dairy products. In many developing countries, the cost of one litre of milk is equivalent to more than 5 percent of the median daily income - in some cases as much as 60 percent.

Consumer milk prices have a great psychological impact. Many governments are tempted to try to regulate milk prices to keep the urban population happy, but milk producers' associations often have great economical and political strength. This leaves the government very little room for manoeuvre, caught as it is between producers and consumers. The dangers inherent in a failure to take appropriate measures are:

To act with discernment, a government therefore needs to know milk production costs in its major milk-producing regions, as well as the costs of processing and marketing milk and of the major dairy products. Getting such data is, in practice, a highly complex matter, and the figures tend to be approximative.

Production costs do in fact fluctuate greatly in accordance with:

Likewise, processing costs are frequently not known as most dairies simply list all manufacturers' gross profits without itemizing the real processing cost of each of the individual products manufactured. In addition, these costs are often too high because dairy plants have been overequipped and depreciation is excessive for the volumes actually processed. Frequently, the processing equipment does not produce the expected yields due to shortages of spare parts and inadequate maintenance.

National dairy policy-makers will therefore require the most detailed information possible on the various cost prices. They will also have to consider such concepts as added value, which is connected to the social function of domestic dairy production.

Added value represents the difference between the value of output over a specific period of time and the value of the goods and services purchased abroad and used to produce this output during this same period.

Added value during a given period can be measured by adding up the following items: personnel costs, duties and taxes, financial costs, depreciation, profit.

In a way, added value is a measure of an enterprise's contribution to the national wealth. It is a much better reflection of actual business activity than turnover, and is the figure which expresses the purpose of the business for time and place, e.g. comparisons between different years and different enterprises.

Ratios such as, for example:

Personnel costsDepreciation
Added valueAdded value

make it possible to measure the respective share of staff and equipment in the wealth generated by the enterprise.

An increase in added value has the following effects:

The first purpose of this paper is to review the basic concepts of cost accounting and the second to suggest a method for calculating and managing the costs of producing, processing and marketing milk and dairy products which can be applicable to individual circumstances. Obviously, each case is specific, and there is no universal way of calculating cost price. Cost price, moreover, is only valid at a given moment. Such findings are primarily of use to those in charge of dairy farms or plants, who can use them to lower cost prices, but they will also be of interest to the makers of national dairy policy.