Accounting for Pig Farms (#362)
/Overview of Pig Farms
A quick word on the flow of operations. The furthest upstream operation is the breeder farm, which produces the pig breeds. The pigs then go to a finisher farm, where the pigs are fed – a lot – and made ready for the slaughterhouse. And, of course, the slaughterhouse is the furthest downstream operation.
The Pig Farm Chart of Accounts
So, let’s get into the accounting. First, there are a couple of new items in the chart of accounts. First is an inventory account, which is Inventory – Feeder Livestock. This is the cost of the hogs that are being fattened in a feedlot, where the intention is to sell them on to a slaughterhouse. You might have a separate record for each pig, which contains the weight and value of each pig over time, so you can track the increase in value of each animal.
You also have feed inventory, which contains the cost of the feed on hand that you’re expecting to use to feed the pigs. This account is used at both the breeder farm and the finisher farm.
You could also have an account for non-current assets, which is for breeding livestock. This one contains the value of any breeding pigs, so these are not animals that you plan to sell to a slaughterhouse. This account would be used in a breeder farm.
In addition, you have two revenue accounts. One is for the sale of feeder livestock, which of course is from the sale of pigs. But in addition to that, you also have a revenue account for the change in value – up or down – that’s caused by the change in total value of the pigs that are being held for sale at the end of the reporting period.
There are also two significant expense line items, which are the feeder livestock account and the purchased feed account. The first one is for the cost of feeder pigs, which are charged to expense as soon as the pigs are sold.
The second one is the cost of the purchased feed that was consumed during the period. Most other expenses, with the exception of veterinarian fees for the animals, are pretty standard.
Pig Valuation
Now, the most interesting transaction in pig farming is valuing the pig inventory. Under generally accepted accounting principles, you can value market livestock – which is to say, pigs that you intend to sell – at their net realizable value. This is its estimated selling price, minus the cost of transport. There are a couple variations on when you can use net realizable value, which I’ll get to next.
If you raise a pig for sale, then you can use the actual cost of raising the pig as its recognized cost. However, that can be pretty hard, so another option is to record its net realizable value. This option is only available if it’s easy to find the market price, and the pigs are available for immediate delivery.
But what if you purchase a pig for sale? In that case, you value it at the lower of its original cost or its current market value. But, if for some reason you don’t have that information, you can use net realizable value instead. Most of the time, it’s going to be at the lower of cost or market. For example, a pig farm buys a pig for its feedlot operation, and plans to eventually sell it to a slaughterhouse. The original cost to purchase the pig was $500, and its current market value is $600. Since we’re using the lower of cost or market rule on this one, the farm accounts for the pig at its cost of $500.
And then, what if you’re raising pigs for your own use – in other words, for breeding purposes? In this case, you cannot use net realizable value. The only acceptable option is to value the animals at the lower of their actual cost to produce, or their current market value.
In short, if you use the net realizable value option, you could end up making a valuation adjustment that alters the revenue line item in the income statement. Even if you haven’t made any actual sales. Here’s an example. A pig farm raises pigs on its feedlot, which it intends to sell. At the end of the reporting period, the accountant adds up the number of pigs, and figures that they’re worth $400,000 at the current market price. The beginning balance of this valuation was $380,000, so there’s been an increase of $20,000 in the value of the farm’s pigs. So, you would debit the value of its inventory account for $20,000, and credit its revenue account for the same amount.
Actually, you’d probably credit a different revenue account, something like “change in value of raised livestock.”
The Cost of Pigs Kept for Breeding
Which leaves us with one other topic, which is what to do about the cost of those pigs that you’re keeping for breeding purposes. These animals are valued at their full cost. And this can get annoying, because you’re supposed to accumulate all direct and indirect costs of raising these animals. That means things like breeding fees, and the cost of feed, and farm labor, and fuel, and supplies, and veterinarian services. You keep on capitalizing these costs until the pigs are fully grown. At that point, you depreciate these costs over the expected useful lives of the animals.
Once the pigs are fully grown, any additional costs of these animals are charged to expense in the period incurred. So, the ongoing cost to feed them gets charged to expense, along with veterinarian fees, and vaccinations, and so on.
When you eventually sell one of these animals, you compare the price received to the book value of the animal, and then recognize a gain or loss on the sale, just as you would for any other type of fixed asset. If a pig dies, then you’d use the same accounting as though you’d sold it at a price of zero; which usually means that you’ll have to write off the remaining net book value of the animal.
This is obviously a lot of work, from an accounting perspective. You could tag each animal and individually accumulate the costs for each one, but it’s easier to just do it for an entire herd of pigs, and then allocate the cost to each individual animal in the herd.
Standard Costing of Pigs
The listener came up with one other question, which is whether it’s acceptable to assign a standard cost to a pig. Yes, of course you can. You can use standard costing in lots of industries. The main concern is to set the standard cost as close to the actual cost as you possibly can, so that your costs are fairly realistic.