Calculating Greenhouse Production Costs

Spring 2001 vol. 8/no. 2 Calculating Greenhouse Production Costs Grower Profile: Longfellow's Garden Center Peat Bog Restoration (Part 2): Harvesting Peat Peat Production Costs Product Update: PRO-MIX With 'Options' Upcoming Trade Shows

Do you know how much it costs you to produce a bedding plant flat? Knowing the answer to this question can help identify where you can reduce production expenses. This article will explain how to calculate these costs. All costs presented are based on the 1993 US national average for producing bedding plants in a 20,000 ft2 double layer, polyethylene greenhouse. Before we begin, we must explain the two major cost categories: overhead costs and variable costs. Overhead costs remain constant regardless of the crop or how many units are produced. These costs include salaries, fuel, rent, interest, depreciation, etc. Table 1 provides an example of these costs. To calculate the cost per square foot per week, divide the square feet of growing area by the number of weeks the greenhouse is in use. To illustrate using the data from Table 1, divide the total overhead costs of $165,000 by 15,400 ft2 of growing area (77% of the 20,000 ft2 facility is used for growing) and then by 52 weeks (weeks the greenhouse is used). This equals $0.20 per ft2/week.  Table 1. Overhead costs.  Overhead Cost  Annual Total   Cost per ft2/ week   Salaries & Benefits* $63,000  $0.079   Heating Fuel (13,420 gal) 13,420  0.017   Electricity 1,935  0.002   Telephone 1,273  0.002   Depreciation 25,000  0.031   Interest 15,000  0.019   Insurance 4,852  0.006   Repairs 12,409  0.015   Property Taxes 769  0.001   Office Expenses 796  0.001   Equipment Rental & Expenses  14,000  0.017   Land Rental  1,565  0.002   Miscellaneous  6,957  0.009   Bad Debt  700   0.001   Total $161,675  $0.200  * Salaries assume 1 general manager, 0.8 salesperson, 0.4 secretary/bookkeeper.

 

Variable costs change as the number of units produced increase or decrease; however, the cost per unit stays the same except for volume discounts. These costs include seeds, trays, growing medium, fertilizer, labor, etc. Most of these costs are determined by adding up the invoices, but labor, interest and loss require more calculation. Labor or Hourly production labor costs should be calculated for each task. To determine the cost per task, note the time and number of employees it takes to produce a specific number of units. Take the hourly wage times the number of employees and divide it by the number of units produced to determine the labor cost per unit. Interest on money borrowed to buy materials (flats, pots, media, chemicals, etc.) can be calculated on a per plant basis. First divide the annual interest rate by 52 weeks to obtain the weekly interest rate. Then multiply the weekly interest rate by the number of weeks your money is tied up in that crop. Multiply this interest cost by the amount of money borrowed to purchase materials (seeds, flats, growing medium, fertilizer, etc.) to produce a specific crop. Divide this cost by the number of units produced to determine the cost per unit. In Table 2 the interest cost per flat of bare-root seedlings is $0.63. Loss accounts for the portion of the crop that will not be sold. To calculate it, add up all costs required to produce one unit and multiply this by the number of unsold units. Then divide this number by the number of units sold. To illustrate, lets use the data from Table 3 to calculate the loss for a bedding plant flat produced from bare-root seedlings. Add $3.04 (variable cost) + $2.62 (overhead cost) = $5.66 (total cost). Then multiply $5.66 x 300 flats (flats not sold) and divide by 5700 flats (flats sold) = $0.30 (loss allocation per flat). Seedling Production costs Table 2 shows you how to calculate the production costs for producing bare-root seedlings or plugs. Either 555 seeds were sown in an open plastic flat to produce bare-root seedlings or 288 seeds were sown in a 288 plug sheet. Assuming a 90% survival rate, 500 bare-root seedlings were produced in three weeks or 259 plugs were produced in six weeks. According to Table 2, it costs more to produce an open flat of seedlings, but the cost per seedling was slightly less than the cost per plug.  Table 2. Variable Costs for Producing Seedlings.  Variable Cost  Bare-root Seedling  288 Plug   Seeds $6.94  $3.60   Tray 0.47  0.59   Growing Medium 0.46  0.15   Fertilizer 0.01  0.01   Labor* 0.55  0.48   Interest on Variable Costs** 0.63  0.22   Overhead Costs (from Table 1)*** 0.98  1.96   Total per flat 10.04  $7.02   Total per Seedling $0.018  $0.024  * Labor costs $8.00 / hour which includes insurance, breaks and benefits. ** Interest rate is 9% and it takes 6 months to pay the loan. *** Overhead cost is determined by multiplying $0.20 per ft2 / week (from Table 1) times the flat size (1.64 ft2) times 3 or 6 weeks of production. Bedding Plant Production Costs In Table 3 we conclude our example by transplanting the bare-root seedlings or plugs into 606 bedding trays to produce saleable bedding plants. Notice it costs more to produce bedding plants from bare-root seedlings than from plugs. Why? Overhead costs were higher for the bare-root seedlings, as it took eight weeks to finish them versus four weeks for the plugs. More labor was also required to transplant bare-root seedlings.  Table 3. Variable Costs for Producing Bedding Plants.  Variable Cost  Bare-root Seedling  288 Plug   Seedlings (36 per flat)* $0.65  $0.88   Flat 0.47  0.47   Insert 0.29  0.29   Growing Medium 0.37  0.37   Label 0.15  0.15   Fertilizer 0.06  0.03   Growth Regulator 0.03  0.03   Pesticide 0.02  0.01   Labor 0.85  0.50   Interest on Variable Costs 0.15  0.13   Total Variable Costs $3.04  $2.86   Overhead Costs** 2.62  1.31   Loss Allocation (5%) 0.30  0.22   Total per Flat $5.96  $4.39  * From Table 2 it cost $0.018 or $0.024 for each bare-root seedling or plug. Multiply this number by 36. ** Overhead cost is determined by multiplying $0.20 per ft2 / week (from Table 1) times the flat size (1.64 ft2) times 8 or 4 weeks of production Although this example might not apply to your specific situation, it does show that it is cheaper to produce bedding plants from plugs as opposed to bare-root seedlings. Remember these are the average costs for 1993 and there might be several expenses that your business might have that are not included in this example. We would encourage you to calculate your own production expenses to determine the least expensive way to produce your crops. With the costs of materials going up, it is good to put these increases into perspective. For example, the cost of the growing medium was only 6-8% of the total cost of a finished bedding plant flat. If the price of the growing medium goes up a few percentage points, it will add a few cents to the total cost per flat. Material is based on, and charts are taken from, the chapter cost accounting, by Robin G. Brumfield, in Bedding Plants IV, E. Jay Holcomb, editor, Ball Publishing, C 1994 by Pennsylvania Flower Growers Inc. All rights reserved. Used by permission.