Aec 308

AEC 308 COURSE GUIDE
COURSE
GUIDE
AEC 308
PRINCIPLES OF FARM MANAGEMENT
Course Developer/Writer Dr. Stephen J. Ibitoye

Kogi State College of Education
Ankpa
Programme Leader Prof. Afolabi Adebanjo

National Open University of Nigeria
Course Coordinator Dr. N.E. Mundi

NATIONAL OPEN UNIVERSITY OF NIGERIA
ii

Headquarters
14/16 Ahmadu Bello Way
Victoria Island
Lagos
Abuja Office:
NOUN Building
No. 5, Dar es Sallam Street
Off Aminu Kano Crescent
Wuse II, Abuja
Nigeria.
e-mail: centralinfo@nou.edu.ng
URL: www.nou.edu.ng
Published by
Printed 2008
ISBN: 978-058-917-1
All Rights Reserved
iii
CONTENTS PAGE
Introduction ………………………………………………… 1
What You will Learn in this Course………………………… 1
Course Aims………………………………………………… 2
Course Objectives……………………………………………. 2
Working through this Course………………………………… 3
Course Materials…………………………………………….. 3
Study Units………………………………………………….. 5
Textbooks and References…………………………………… 5
Assessment…………………………………………………… 6
Tutor-Marked Assignment…………………………………... 6
Final Examination and Grading……………………………... 6
Summary…………………………………………………….. 6
iv
Introduction
Agriculture is regarded as the art and science of cultivating crops, raising
livestock, provision of raw materials for industries and marketing of
agricultural products for man’s use. There are many branches of agriculture
which among others include: agricultural economics, crop science, soil
science, animal science, fishery, forestry and agricultural engineering.
Agricultural economics involves the application of economic principles in

agriculture. One of the important branches of agricultural economics is
farm management. Generally speaking, management is the ability of some
people to compel economic progress through forceful direction and co-
ordination of other people’s efforts. When apply to farm business,
management could be seen as a practical undertaken of the farm business
with respect of how to put the crop and livestock husbandry to work on the
farm as a means of obtaining high profit.
Farm management is a science which deals with proper combination and

operation of production factors including land, labour and capital. In this
age of science and technology, success in business requires ability to
harness scientific and technical knowledge. It involves having a personal
command and clear hold on the technological, commercial and human
aspects of business which become interwoven into successful progress in
business.
The idea that managers are born not made is erroneous and is dying. The
feeling that technical and commercial competence alone can see you
through does not hold either. People through the ages realized that it’s
possible to develop managerial skills through training.
This course is designed to provide essential skills needed in farm business.
What You will Learn in this Course

This course guide tells you briefly which is a two credit units course. What
to expect as you read through AEC 308; Principles of farm management, it
is a two credit unit’s course. The course is the first that a student of
agricultural economics will offer under farm management. This introduces
students to the essentials of farm management. After the successful
completion of this course, students will be introduced to more advance
aspect of farm management.
Principles of farm management are presented under five modules; Module

1 discussed the meaning, principles and functions of farm management. A
proper understanding of the nature of farm management is very essential in
AEC 308 PRINCIPLES OF FARM MANAGEMENT
any successful farm business. Another important aspect of this module is

the principles of farm management, which are the fundamental laws on
which management is built. Also discussed were functions of farm
manager.
Module two discussed the common concepts and tools in farm

management. These concepts and tools discussed include: law of
diminishing returns, substitution, opportunity cost, farm valuation and
depreciation etc. The understanding of these concepts and tools by farm
manager are very important to the smooth running of any farm business.
Farm input resources which include land, labour, capital and entrepreneur
form the bulk of our discussion in module three. Proper understanding of
these resources is very essential, as no production can take place without
them.
Entrepreneur which forms the basis for this course is further elaborated in
module four. The various forms of business organization are discussed.
They include single proprietorship, partnership, cooperatives and corporate
business. The last module (five) explains how to properly record financial
transactions on the farm and also calculate profit in order to assess the
progress of the farm.
Course Aims
The overall aim of this course is to explain how to effectively manage farm
businesses in order to make high profits.
Course Objectives
In addition to the overall aim, this course is set to achieve some objectives.
After going through this course, you should be able to:
• Define farm management

• Explain the principles and functions of farm management
• List the special characteristic of agriculture that affect farm management
decisions and proffer solutions to them
• Describe some of the common concepts and tools used in farm
management.
• Determine depreciation charge for any farm asset
• Explain the meaning, list the characteristics and determine the
importance of farm input resources-land, labour, capital and
entrepreneur.
ii
• Identify the type of farm business organization and list their

characteristics, advantages and disadvantages.
• Determine the importance of keeping farm records and accounts
• Prepare balance sheet and profit and loss accounts for any given farm
enterprise
• Calculate and explain the implications of the common financial ratios to
farm management.
Working through the Course
AEC 308: Principles of Farm Management is a two (2) credit load course.
As a two credit load, it is expected that the lecture hours will be eight (8).
In addition to eight hours of lectures with the course facilitator, tutorial
classes will also be organized for students to discuss the technical areas of
this course. During the first reading, you are expected to spend a maximum
of two (2) hours on each unit of this course. During the period of two (2)
hours, you are expected to read through the text of the unit and also answer
the self assessment exercises and questions. In addition to tutorial classes, I
would advice that you form discussion group with your mates to discuss
some of these questions especially those involving calculations. Discussion
group of between three to five people will be adequate.
Course Materials
You will be provided with the following materials for this course:
• Course Guide
The material you are reading now is called course guide which introduced
you to this course.
• Study Guide
The textbook prepared for this course by National Open University of

Nigeria is called study guide. You will be given a copy of the book for your
personal use.
• Textbooks
At the end of each unit, there is a list of recommended textbooks which

though are not compulsory for you to acquire or read, but are necessary as
supplements to the course materials.
iii
• Other Materials
In addition to above materials, it is very essential for you to buy calculator.

It will assist you in the areas that require calculations.
Study Units
The following are the study units arranged in modules as contained in this
course.
Module 1 The Meaning, Principles and Functions of Farm Management
Unit 1 Nature and Scope of Farm Management

Unit 2 Basic Principles of Farm Management
Unit 3 Special Characteristic of Agriculture
Unit 4 The Decision Making Functions of Farm Management
Module 2 The Common Concepts and Tools in Farm Management
Unit 1 Economic Principles and Farm Management

Unit 2 Farm Cost
Unit 3 Valuation and Depreciation of Farm Assets
Unit 4 Literate versus Illiterate Farmers in Farm Management
Module 3 Farm Inputs Management
Unit 1 Land
Unit 2 Capital
Unit 3 Labour
Unit 4 Entrepreneurship
Module 4 Forms of Business Ownership
Unit 1 Single proprietorship

Unit 2 Partnership
Unit 3 Corporate or Limited Liability Company
Unit 4 Cooperative Societies
iv
Module 5 Farm Records and Accounting
Unit 1 Concept of Farm Records and Accounting

Unit 2 Farm Record Designs
Unit 3 Benefit-Cost Analysis of Agricultural Projects
Unit 4 Financial Statements
Unit 1 in the material discusses the nature and scope of farm management.
The areas covered in the unit include: - the meaning, nature and scope of
farm management. Unit 2 gives the general principles of management as
well as the basic principles of farm management. Unit3 gives the meaning
of risks and uncertainties. Also discussed are the types of risks that affect
farm management and how risks can be effectively managed in agriculture.
The last unit of the first module (unit4) discussed the types of farm
management decisions and the functions of farm manager.
Unit1 which is the first under module 2 discussed economic principles as it

relates to farm management. The economic principles discussed include:-
diminishing returns, substitution, opportunity cost, diversification and
specialization. In unit2, you will study the meaning of cost, types of cost
and implications of costs in farm management. In unit3, you will also learn
the various methods of estimating depreciation charges. Unit4 which is the
last in this module discussed the difference between substance and
commercial agriculture.
In unit 1 of module 3, you will be exposed to the meaning and

characteristics of land, sources of land and management of land. Unit2
discussed capital resources. The areas covered include: - meaning and
characteristics of capital and sources of capital for agricultural production.
In unit3, you will learn about the meaning of labour, characteristics of
labour, sources of labour and factors that affect the efficiency of labour.
The last unit of this module (unit 4) presents information on the meaning,
characteristics and importance of entrepreneur.
Module 4 which comprises of unit1; single proprietorship, unit 2:

partnership, unit 3; corporate organization and unit4; cooperative societies,
discussed the meaning, features, advantages and disadvantages of these
forms of business ownership.
In unit1of module 5, you will learn about the meaning of farm records and
farm accounts, types of farm accounts and the advantages of keeping farm
records and accounts. Unit 2 discussed the various designs of farm records
v
available for crop farmer, poultry farmer and cattle farmer. In unit3, you
will learn about the benefit-cost analysis of agricultural projects. The final
unit in this module (unit4) presents information on the meaning of assets
and liabilities, sample of balance sheet account, financial ratios and profit
and loss account.
Text Books and References
As earlier discussed, AEC 308 is an introductory course to farm

management. For detailed information about the areas covered in this
course, you are advice to consult more recent editions of the following
recommended books:
Abbott J.C. and J.P. Makeham (1980). Agricultural Economics and

Marketing in the tropics. London. Longman.
Adegeye A.J. and J.S. Dittoh (1985). Essentials of Agricultural Economics.

Ibadan. Impact publishers Nig. Ltd.
Castle N.E. and H.M. Becker (1987). Farm Business Management. New
York. Macmillan.
Upton M. (1993). Farm Management in Africa. London Oxford University

Press.
Uptom M. and Q.B.O. Anthonio (1981). Farming As a Business. London:

Oxford University Press.
Assessment
There are two components of assessment for this course:
• Tutor-Marked Assignment (TMA)

• End of course examination.
Tutor-Marked Assignment
The TMA is the continuous assessment component of this course. It

accounts for 30 percent of the total score. You will be given four (4) TMAs
to answer. At least three of them must be answered before you are allowed
to sit for the end of course examination. The TMAs would be given to you
by your facilitator and returned to him or her after you have done the
assignment.
vi
Final Examination and Grading
This examination concludes the assessment for the course. It constitutes 70

percent of the whole course. You will be informed of the time for the
examination through your study centre manager.
Summary
AEC 308: Principles of Farm Management is designed to provide

background information and practical experiences on how to successfully
form and manage a farm business. By the time you complete studying this
course, you will be able to answer the following type of questions:
• What is farm management?

• State the principles of farm management
• What are the functions of farm manger?
• Give the characteristics of agriculture that affect management decisions
and suggest solutions to them.
• Explain the following economic concepts and tools as they relate to
farm management:
• Law of diminishing returns
• Opportunity cost
• Substitution
• Diversification and specialization
• Depreciation of farm assets
• Define land, capital and labour and state their characteristics.
• Give the meaning and characteristics of the following forms of business
organization:
- Single proprietorship;
- Partnership;
- Corporate; and
- Cooperative societies.
• List the advantages and disadvantages of the following forms of

business ownership:
- Single proprietorship
- Partnership
- Corporate organization
- Cooperative society
- Give the advantages of keeping farm records and accounts
vii
MAIN
COURSE
Course Code AEC 308
Course Title Principles of Farm Management
Course Developer/Writer Dr. Stephen J. Ibitoye

Kogi State College of Education
Ankpa
Programme Leader Prof. Afolabi Adebanjo

Course Coordinator Dr. N.E. Mundi

NATIONAL OPEN UNIVERSITY OF NIGERIA
viii

Headquarters
14/16 Ahmadu Bello Way
Victoria Island
Lagos
Abuja Office:
NOUN Building
No. 5, Dar es Sallam Street
Off Aminu Kano Crescent
Wuse II, Abuja
Nigeria.
e-mail: centralinfo@nou.edu.ng
URL: www.nou.edu.ng
Published by
Printed 2008
ISBN: 978-058-917-1
All Rights Reserved
ix
CONTENTS PAGE
Module 1 The Meaning, Principles and Functions of

Farm Management ……………………………….… 1
Unit 1 Nature and Scope of Farm Management……………. 1

Unit 2 Basic Principles of Farm Management……………… 6
Unit 3 Special Characteristics of Agriculture
that Affect Farm Management………………………. 13
Unit 4 The Decision Making Functions of Farm
Management…………………………………………. 21
Module 2 The Common Concepts and Tools in Farm ………. 28

Management
Unit 1 Economic Principles and Farm Management……….. 28

Unit 2 Farm Cost…………………………………………… 35
Unit 3 Valuation and Depreciation of Farm Assets………… 43
Unit 4 Literate versus Illiterate Farmers in
Farm Management………………………………….. 52
Module 3 Farm Inputs Management ……………………….. 57
Unit 1 Land………………………………………………….. 57
Unit 2 Capital……………………………………………….. 61
Unit 3 Labour……………………………………………….. 66
Unit 4 Entrepreneur…………………………………………. 74
Module 4 Forms of Business Ownership ……………………. 79
Unit 1 Single Proprietorship………………………………… 79

Unit 2 Partnership…………………………………………… 85
Unit 3 Corporate or Limited Liability Company……………...92
Unit 4 Cooperative Societies……………………………….. 99
Module 5 Farm Records and Accounting …………………… 106
Unit 1 Concepts of Farm Records and Accounting……….. 106

Unit 2 Farm Record Designs……………………….……… 113
Unit 3 Benefit–Cost Analysis of Agricultural Projects….... 123
Unit 4 Financial Statements……………………………..… 132
x
MODULE 1 THE MEANING, PRINCIPLES AND

FUNCTIONS OF FARM MANAGEMENT
Unit 1 The Nature and Scope of Farm Management

Unit 2 Basic Principles of Farm Management
Unit 3 Special Characteristics of Agriculture that Affect Farm
Management
Unit 4 The Decision Making Functions of Farm Management
1
UNIT 1 NATURE AND SCOPE OF FARM

MANAGEMENT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Meaning of Farm Management
3.2 Nature of Farm Management
3.3 The Scope of Farm Management
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings
1.0 INTRODUCTION
Agriculture is regarded as the art and science of cultivating crops,

raising livestock, provision of raw materials for agro – allied industries
and marketing of agricultural produce for man’s use. There are many
branches of agriculture which among others include: Agricultural
Economics, Crop Science, Soil Science, Animal Science, Fishery,
Forestry and Agricultural Engineering.
Agricultural Economics involves the application of economic principles

in agriculture. One of the important branches of Agricultural
Economics is Farm Management. This unit examines the meaning and
nature of Farm Management. In addition, the unit also describes the
scope of Farm Management.
2.0 OBJECTIVES
By the end of this unit, you should be able to:
• define Farm Management

• state the relationship between Agricultural Economics and Farm
Management
• identify the Nature of Farm Management
• describe the Scope of Farm Management.
2
3.0 MAIN CONTENT
3.1 The Meaning of Farm Management
Generally speaking, management is the ability of some people to compel

economic progress through forceful direction and co-ordination of other
people’s efforts. When applied to farm business, management could be
seen as a practical undertaking of the farm business with respect of how
to put the crop and livestock husbandry to work on the farm as a means
of obtaining high profit.
Farm Management is a science, which deals with proper combination

and operation of production factors including land, labour and capital.
In this age of science and technology, success in business requires
ability to harness scientific and technical knowledge. It involves having
a personal command and clear hold on the technological, commercial
and human aspects of business, which become interwoven into
successful progress in business.
The idea that managers are born not made is erroneous and is dying.
The feeling that technical and commercial competence alone can see
you through does not hold either; People through ages realized that it is
possible to develop managerial skills through training.
Most people planning to go into the farm business probably think in

terms of how much profit they can make in the shortest possible time.
However, the way and manner profits are arrived at are very much
dependent on a good understanding of what a business really entails. A
business may be defined as any activity which involves the production,
selling or trading of needed products and services. When such activity
revolves around a farm, it is a farm business.
A farmer needs to know not only how to cultivate his crops and tend his
livestock, but also how to manage his farm. Many farms consist of
different sections, each devoted to the production of one kind of crop or
livestock. These sections of the farm are known as enterprises. Every
farmer must face the management problem of the enterprises. The
importance of farm management can manifest itself in various ways,
like detecting and finding solutions to management problems of
deciding which enterprises to have, how much to produce in each
enterprise and what method to use.
3.2 Nature of Farm Management
1. Every farmer must know and be able to do all the practical jobs
connected with farming enterprises. For this practical
3
knowledge, there is no substitute. This explains the fact that

good Farm Management is often considered as an art rather than
a science and this explain why some farmers fail while others
succeed.
For farmers to succeed they must also know the scientific

principle of crops and livestock production particularly in the
area in which the farming is to be practiced and also the soil type,
disease, weather and the season could be studied or obtained from
an extension worker in the area.
It so demands that farmers must know and use the basic business
principles in accordance with which the common farm practices
and scientific principles should be applied.
2. Farm Management is also concerned with effective employment

of socially acceptable guidelines for all levels of organization. In
policy formulations and achieving results, relevant facts must be
considered. It must at all times try to attain optimum level of
effectiveness and economy of operations. To do this, human
satisfaction, welfare package and morale boosting must be
promoted. Farm Management responsibility is a continuous and
living activity which must not be replaced by routines or
operational techniques meant for lower level operatives in the
absence of the manager. No matter how large an organisation is,
the management process must be seen as a unified process in
which all the parts are inter-related and working towards a single
purpose or set of objectives. The management process is based
on systematic diagnosis of the problem, finding the facts,
assessing and interpreting the findings, making decisions, giving
instructions, ensuring execution and checking the results. Farm
Management performance is judged by the achievement of
purpose or objectives, effectiveness of operations and most
important, the contentment of the farm workers.
3. Many people considered farming a poor man’s occupation or

business. Many educated youth will not like to remain in the
rural areas to take up farming as their major occupation. These
people do not realize the great importance of farming. It should
be noted that everybody from the highest down to the beggars on
the street depend on farmers for his food. For the country to
develop and move out of poverty level the participation of every
citizen in farming business is required.
3.3 The Scope of Farm Management
4
The scope of Farm Management is as wide as the scope of agricultural

economics itself, because there is hardly any aspect of agricultural
economics that is not relevant to Farm Management.
The broad scope of Farm Management could be viewed from its broad
functions which include: planning, organizing, directing, implementing,
control and risk management. In order to perform these functions
effectively, Farm Management involves the study of the problems of
production – which is a collective activity and an attempt of man to
satisfy his wants, distribution – which is the process of transferring
goods from the producer to the consumer, consumption – which is the
satisfying of wants through the use of goods and services and exchange
which concerns the attempts made by man to exchange whatever he
produces for the goods and services of other people.
Other areas of Farm Management include the study of financial

management. This involves keeping financial records, raising funds for
farm businesses and how to make careful use of the fund. Besides, it
includes the study of the marketing of agricultural products, the study of
farm inputs so as to ensure proper co-ordination of land, labour and
capital. The right quantities of these resources needed on the farm are
also studied.
In general, since the ultimate goal of studying Farm Management is to

make maximum profit, the study of Farm Management rests on a broad
formation of the study of human nature and its most fundamental
propositions that is applicable to all conditions of mankind.
SELF ASSESSMENT EXERCISE
1. Differentiate between agriculture, agricultural economics and

Farm Management.
2. Define the following terms:
(i) Management
(ii) Enterprises
(iii) Business
3. Is Farm Management a science or an art?
4.0 CONCLUSION
In this unit, we have discussed the meaning, nature and scope of Farm
Management. From these discussions, it can be concluded that the main
objective of Farm Management is to ensure proper combination and
operation of production resources to bring about a maximum and
continuous return to the most elementary unit of farming.
5.0 SUMMARY
5
In this unit we have learnt that:
• Farm Management is a branch of Agricultural Economics and

Agricultural Economics is also a branch of Agriculture.
• Farm Management embraces the proper co-ordination of both human
and material resources on the farm as a means of maximizing the
farmer’s net farm income.
• Farm Management is seen as both an art as well as science.
• The scope of Farm Management is as wide as that of Agricultural
Economics. It includes: production, distribution, consumption and
exchange of farm products.
6.0 TUTOR-MARKED ASSIGNMENT
1. (a) What is Farm Management?

(b) Describe the nature of Farm Management.
2. Describe the scope of Farm Management.
7.0 REFERENCES/FURTHER READINGS
Akinwumi J. A. (1981). Business Management. Synoptic Lecture

Notes.
Ayinde A. T. Abdul-Azeez A. and Adebayo R.O (1999). Agricultural

Economics and Statistics. Ado – Ekiti. Adebayo Publishing
Nigeria Ltd.
Castle, N.E. and Becker H.M. (1967). Farm Management. New York.
Macmillan Pub.
Heady, E.O. and Jenson H.R. (1984). Farm Management Economics.

Englewood Cliffs. Prentice Hall Inc.
Upton M. (1993). Farm Management in Africa. London. Oxford

University Press.
UNIT 2 BASIC PRINCIPLES OF FARM MANAGEMENT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Principles
3.2 The General Principles of Management
3.3 Basic Principles of Farm Management
6
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit 1, we discussed the nature and scope of Farm Management. Like

other business enterprises, the ultimate goal of Farm Management is
profit making through efficient allocation and utilization of farm
resources. Farm Management was also viewed as an art as well as a
science.
The scope of Farm Management revealed that the study of Farm

Management involved all aspects of human endeavour. There is no area
of agricultural economics that is not relevant to Farm Management. The
study of production, distribution, consumption, and exchange are all
essential in the study of Farm Management. This unit is devoted to the
study of the principles of Farm Management.
2.0 OBJECTIVES
By the end of unit 2, you should be able to:
• define Principle
• list and explain ten (10) general Principle of Management
• identify and explain four (4) basic Principles of Farm Management.
3.0 MAIN CONTENT
3.1 Definition of Principles
A principle is a fundamental truth, the basis of reasoning, the primary

element or general law. The principles of Farm Management represent
the fundamental laws on which Farm Management practices is built.
Principles must be general in coverage and applicable to diverse sizes
and composition of the farm enterprises. Farm Management principles
stand out and provide a foundation for effective practice.
3.2 The General Principles of Management
The general principles of management must be distinguished from the

methods or procedures for achieving the goals. They relate to the
primary purpose of an enterprise which is to provide goods and services
which are wanted by consumers, employing the most economical and
convenient methods.
7
Principles of management are only guidelines and that require great skill
in using and adapting them to particular circumstances. There are
fourteen (14) principles given and elaborated by Henri Fayol as follows:
a. Division of Work
Specialization, whether by workers or farm manager is necessary to

provide the required knowledge and expertise. Farm manager can train
farm workers to specialize in the various fields of agriculture.
b. Authority and Responsibility
Authority may be formal, conferred as a result of position in the

organizational hierarchy or personal, the result of personal
characteristics. Ideally, it should be both.
Responsibility must go with and match authority. The purpose of

authority is to direct activity in the right direction, sanctions or
punishments must be available to be applied to those who won’t
conform.
c. Discipline
This may arise from formal or unwritten agreements between

management and workers as to what is proper conduct or it may be
imposed on workers solely by management.
d. Unity of Command
Each worker must have one boss from whom he receives orders:
Departmental responsibility must be very carefully set out so that there
are no overlapping of authority.
e. Unity of Direction
There can be only one head of the organisation whose job is to see that
all efforts are directed to the same overall goals.
f. Subordination of Individual Interest to General Interest
At the individual level, the employer or manager must submerge his

personal interests or leave them behind at the workplace door. In the
case of sections and departments, group interests and aims must be
subordinated or suppressed for the common goal.
8
g. Remuneration of Personnel
It must be fair and satisfy the employer as a reasonable cost for services
rendered and the employee as a means of livelihood and return for
effort. Time rates, job rates, piecework and bonus schemes are all
admissible as appropriate.
h. Centralization
The degree of centralization would however, vary according to

circumstances and the abilities of the people concerned.
i. The Scalar Chain
This is the line of authority from superior to subordinate, from the very
top to the bottom of the business. In each aspect of the business, the
chain must be unbroken i.e. at each level, a man must have an
immediate boss, who himself has a boss and so on up to the managing
director. The scalar chain is the channel for authority to communicate
and implements decisions.
j. Order
A place for everything and everything in its place. This applies to

materials layout and human or social order. Social order needs a careful
balance or requirements and resources.
k. Equity
Fairness, kindness and justice to all, must not only be done but be seen
to be done.
l. Stability of Tenure of Personnel
As much as possible, a firm should provide a career structure so that its

manager stay and progress within the firm. Outsiders may at times have
to be brought in, but there must be a good reason for doing so.
m. Initiative
Encouragement of initiative promotes zeal and energy. Its use, must

however, be within the limits of respect for authority and discipline.
n. Espirit de Corp
9
This is the last of the principles and one which must permeate all others.
It is described as harmony among all members of the organisation. The
all too frequent management practices of divide and rule is roundly
condemned.
3.3 Basic Principles of Farm Management
All the general principles enumerated above are relevant to Farm

Management and can easily be related to the basic principles given
below:
• Planning and Control
Planning and control are important tools in Farm Management. They

provide the administrative aspect of the management. The essential
steps in planning and control involve setting of goals and objectives,
laying down of responsibilities for specific sections, determining or
setting appropriate standard of performance through systematic analysis
and assessment of the relevant facts; then ensuring effectiveness by
continuously comparing the achievements with the set goals. Work
specialization, simplification and standardization all help to make the
routine effective.
• Organisation
Organisation involves defining individual responsibilities as well as

inter-relationships between sections. A large farm business
establishment involving many enterprises requires subdivision into
appropriate sections with specialized related functions. As the
organisation grows larger, the individual supervisor may become
overloaded. The need then arises for the delegation of the part of the
responsibilities to lower level supervisors. Arrangement must then be
made to ensure effective co-ordination. There must be clear lines of
responsibility linking the farm Manager with various decision making or
execution centres; each supervisor must be responsible for a limited
number of subordinates in inter-related activities. Functional sections
must be so integrated as to avoid impairing the clear lines of
responsibility and command. Delegation of responsibility does not
excuse the superior officer from being accountable for any shortcoming.
No good farm manger will relax after delegating authority. At least
occasional checks are carried out to pick up slackness or deviation from
instructions.
• Co-ordination
10
There must be specific responsibility for deliberate continuous co-

ordination with laid down procedures. While linking up various aspects
of the enterprise, management must promote personal and social
satisfaction of all workers within the establishment. Group satisfaction
must be sought over and above individual satisfaction and since each
individual has varying external influences, it is very difficult to attain
this group satisfaction while completely satisfying each individual.
Regular contact and exchange of ideas ensures that all concerned are in
consonance with the management. There is unified command and no
one sees himself as slave to a boss. The set of instructions is initially
developed through consultation with various levels of operators and it is
best to allow people to understand why instructions are given. A clear
understanding of the impact of each person’s action or inaction will gear
him up towards his responsibility. These instructions must follow clear
lines of responsibility and the structural setting in the organisation.
• Motivation
The morale is kept high by keeping all workers informed about the
activities, the successes and drawbacks, consulting them before new
regulations are put forward, fostering the sense of responsibility,
allowing them to develop their own capabilities within the overall goals
of the organisation. Farm manager must give workers room to
contribute more than mere performance of their allotted routine duties.
There must be security of the job and confidence that one is not simply
being used. There must be fairness and objectivity in dealing with
workers. Discipline must be maintained and accepted by subordinates.
When there is a sense of responsibility, there will be no need to gear
people to action. Continuous review of codes of conduct helps to keep
them in line and updated. The personality of the farm manger to a great
extent determines the level of moral and discipline in the organisation.
SELF ASSESSMENT EXERCISE 2
1) Explain the meaning of the term ‘Principle’.

2) List all the fourteen (14) principles of management as presented by
Henri Fayol.
4.0 CONCLUSION
You have noted the fundamental laws guiding the operations of Farm
Management. It can be concluded from our discussions that any farm
manager that failed to strictly adhere to guiding principles will find it
difficult if not impossible to achieve his goals.
11
5.0 SUMMARY
In this unit, you have studied the basic principles of Farm Management.
In this regard you have learnt that:
1. Principle is a fundamental truth or general law.

2. Henri Fayol presented fourteen (14) generally acceptable
principles of management.
3. These fourteen (14) principles were condensed into four (4)
principles of Farm Management.
4. The four (4) basic principles of Farm Management include:
planning and control, organisation, co-ordination and motivation.
1) List any ten (10) general principles of management and explain any
five (5) of them.
2) Describe any four (4) basic principles guiding the effective operation
of Farm Management.
3) Explain the meaning of the following terms used in Farm
Management:
a) Espirit de corp
b) Scalar chain
c) Order
d) Equity
e) Unity of direction
Adegaye A.J. and J.S. Dittoh (1985). Essential of Agricultural

Economics. Ibadan. Impact Publishers Nig. Ltd.
Anthonio B.O. and M. Upton (1965). Farming as Business. London.

Phillips T.A. (1961). Farm Management in West Africa. London.

Longman Group Ltd.
12
UNIT 3 SPECIAL CHARACTERISTICS OF

AGRICULTURE THAT AFFECT
MANAGEMENT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Risk and Uncertainty
3.1.1 Uncertainty
3.1.2 Risk
3.2 Types of Risk that Affect Farm Management
3.3 Management of Risks in Agriculture
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit 2, you read about the principles guiding the operation of a

successful farm business. Some of these principles include: planning
and control, organizing, co-ordinating and motivation. This unit will be
devoted to discussing the special characteristics of agriculture that affect
Farm Management.
2.0 OBJECTIVES
By the end of the unit, you should be able to:
• define uncertainty
• differentiate between risk and uncertainty
• explain five (5) major types of risks in agriculture that affect
management decisions
• identify and explain five (5) possible solutions to reduce the effect of
risks on the farm.
3.0 MAIN CONTENT
13
3.1 Meaning of Risk and Uncertainty
3.1.1 Uncertainty
This is a situation where an action has got a set of possible outcomes,

the probability of which is completely unknown. For example, no one
can assign probability to how many times he will fall sick within a year.
Farmers normally calculate his labour requirements on the ground that
his workers will be healthy throughout the year and that each labour will
supply at least eight (8) working hours per day. Similarly, no one can
precisely predict when he is going to die. Farm manager may project his
activity for the whole year and he may not reach the end of that year
before he dies. Any situation where one cannot predict what can happen
is normally regarded as uncertain situation.
3.1.2 Risk
Risk on the other hand is a situation where each action leads to one of a
set of possible outcomes, each outcome occurring with a known
probability.
Most economic activities assume that the future can be predicted with
some accuracy. This is not usually true most especially for agricultural
production. In fact, business is face with risks and uncertainties which
have some effects on management decisions.
3.2 Types of Risk That Affect Farm Management
There are many features of agricultural production which make farm

management operations very difficult unlike industrial enterprises. This
is due in most cases to the special characteristics of agricultural
enterprises. Some of these characteristics include:
i. Production Uncertainty
Farmers practice or operate in an environment which in most cases is

beyond their control. Varying weather conditions, crop failure and
animal diseases prevent timely execution of Farm Management.
Production uncertainty can manifest itself in various ways. For instance,

under rain fed agriculture, the yield of crops will depend upon the
amount of rainfall recorded at the period. Total crop failure can result if
rain does not fall at all or if it does not fall at the right time, on the other
hand, excessive rainfall can cause erosion and leaching of plant
nutrients. The vagaries of weather may also affect harvesting and
14
drying operations. There may be outbreak of disease which could

wipeout a whole livestock population on a farm. A good example is the
outbreak of avian influenza in Nigeria. All these have serious
implications on Farm Management decisions.
ii. Price Changes
The inputs which the farmer uses and the output which he produces are
both subjected to wide fluctuations in prices. Input prices really go
down but the prices of output can easily go down. Seasons and
overproduction affect the prices of output. Though, price fluctuations
occur in other enterprises, they are more difficult to deal with in farm
planning. For instance, increase in wages cannot easily be absorbed in
agriculture since farmers cannot easily increase his price to match the
new increase in costs. This is in contrast to a situation where the price
of petrol increase by 50 percent, the industrial sector will increase the
price of their products immediately to accommodate these additional
costs.
iii. Government Actions and Policies
Various Governments take actions, the effects of which are supposed to

be felt in farming. Usually, the farmer may be unaware of what
Government actions will be before a production season. There are
policies like guaranteed minimum prices, land use decree, agricultural
credit guaranteed scheme, the abolition of commodity marketing boards,
e.t.c. All these policies are important and management decisions must
be taken within this framework.
iv. Actions of other People
Agriculture is practiced by a large proportion of Nigerians. Most of

them operate on small holdings. These farms are scattered and two to
five farmers may have two hectares of farm land in the same area. If a
farmer controls pests in his farm or control diseases in his poultry farm
while others do not, then such a farmer is wasting his time, energy and
money as the pests or diseases from the uncontrolled farms would
spread to the farm that had been treated. The actions of one farmer will
therefore affect the farms of others. Actions of credit institutions with
regard to the amount of loan granted as well as the timely release of the
loan may also have effect on decisions of farmers; effect of which the
farmer may not envisage.
v. Health of Farm Workers
15
Another important factor that affect management of farm business is the

health condition of farm workers. The efficiency of the farm workers is
closely related to their state of health. At the beginning of planting
season farm manager will calculate the labour requirement for each
month based on the condition that the farm workers will be healthy
throughout the year. Death of farm workers and diseases like guinea
worm can take workers completely out of farm. Sickness and death of
farm workers can affect the achievement of labour objectives for the
year.
vi. Other Risks and Uncertainties
The greatest problems facing farmers, whether new or old, are the
problems of risks and uncertainties. Apart from the problem of
production uncertainty discussed earlier, there are others, for example
water shortage, power failure, change in technology, etc. which may
complicate the farmer’s decision process. Due to frequent vandalization
of electric cables in many parts of Nigeria, electricity supply is no
longer reliable. Any farm business that depend on electricity supply
may run into serious problem as the generating set that was designed
only to assist public power supply may eventually be the only source of
power supply. Similarly, inventions of new technology and methods of
farming may lead to obsolescence of production techniques and farm
equipment. This may have serious effect on the farm plan and
management decisions.
3.3 Management of Risks in Agriculture
The following methods can be used to reduce the effect of risks and
uncertainties in farming:
i. Flexibility
Flexibility means planning in such a way as to be able to shift interests

when favourable conditions or favourable opportunities arise. It will not
be advisable to have too rigid methods of production. Farmers normally
operate in a dynamic environment and information about improvements
in production methods often become available to them. Small changes
in prices of resources may need a re-combination of resources which
will allow the farmer to take advantages of greater profit.
Some examples of flexibility in farm organisation and production

methods include:
16
The proportion of fixed to variable cost on a farm enterprise can

influence the ease with which a farmer moves out of a particular
enterprise. The higher the proportion of fixed costs, the higher
the loss when conditions become unfavourable.
Businessmen who are uncertain of longtime investment could
invest in enterprises that yield results in short time. An example
of this is grain production as opposed to fruit tree.
ii. Diversification
Diversification is here defined as the involvement of farmer on more

than one enterprise at the same time. The basis of using diversification
as a strategy against risk is that the yields or prices of all chosen
enterprises are not likely to be adversely affected at the same time. This
combination of more than one enterprise can reduce loss of annual
incomes caused by damage to one of them.
Enterprises with the lowest correlation of net income can be combined.

For instance, to reduce variability of income resulting from crop
production, crops like yam and cassava should not be combined, since
both crops require almost the same resources. Incomes from these two
enterprises are likely to be affected by the same factors. On the other
hand, the income from poultry is not likely to be related to yam
production or even to maize production, except if maize grown is fed to
livestock. In order, to maintain a stable income therefore, crops and
livestock should be combined.
iii. Contracts
One way of diverting risk to others is by the use of contracts. Under this
strategy, a buyer assures a seller a fixed price in advance and goods are
delivered to the buyer at a future date. In this case, price uncertainty is
transferred to the buyer. Apart from taking care of price fluctuations, it
also assures the seller a market outlet.
Farmers can make arrangements for crops and livestock to be produced

and for inputs to be used during a production season. If prices fall, the
farmer will get the higher contracted prices for what he produces. If
however, prices increase, the farmer loses, but then, that is the cost of
risk. It however, ensures a relatively stable income. If the farmer is
certain that prices of output will increase, then he should only contract
for what he is to buy and not what he is to sell.
17
iv. Insurance
Another way of transferring risk to others is through insurance.

Insurance may be defined as the substitution of a certain small cost for
the possibility of a large but uncertain loss. Insurance may be used to
meet risks, such as the death of the businessman (life insurance), fire or
accidents (property insurance) or crop loss (crop insurance).
Insurance is a cost. The cost is referred to as a premium payment which

must be paid by the insurer before benefits can be collected. Insurance
is made possible because many people wish to avert risk and pay the
premium but fewer people actually claim the benefits. There may be
need to insure the farmer against death, accident, fire outbreak and other
hazards. This is why the Federal Government of Nigeria established
National Agricultural Insurance Company (NAIC), to safeguard farmers
against crop failure, disease outbreak or poor economic conditions.
v. Inventory Management
A good farm manager must be able to watch movement of prices. If

prices of his farm output are likely to rise, for instance, he should be
able to stock his warehouse and when prices are likely to fall, he should
stock less. Similarly, the farm manager can watch out for the movement
of prices for his farm inputs.
vi. Guaranteed Minimum Price
There are many programmes put in place by Government that are aimed
at helping the farmers. One of such programmes is buying the farmers’
crops at an agreed minimum price, if the farmer cannot sell the crops at
the current market price. For this to be effective, the minimum price
must be enough to cover the cost of production of such crops or
livestock and allow for normal profit.
1. Explain how the following problems can affect Farm

Management decisions:
a) Flood
b) Erosion
c) Drought
d) Outbreak of livestock disease
e) Health of farm workers
f) Inconsistent supply of electricity
g) Pests and diseases in crops.
18
4.0 CONCLUSION
In unit 3, we have discussed the special characteristics of agriculture that

affect farm management decisions. From our discussions, it was
concluded that prices of farm output cannot easily be adjusted like
industrial products to meet unforeseen circumstances. Therefore,
farmers should take precautions to reduce the level of risks and
uncertainties on the farm.
5.0 SUMMARY
In this unit, we have learnt that:
• When you take risk, you can predict the sets of possible outcomes.
• When operating under uncertainty, you cannot predict the outcome.
• Farm business operates under risk and uncertainties.
• Some of the risks in farm business that affect Farm Management
decisions include: production uncertainty, price changes,
Government actions and policies, action of other people, health of
farm workers and other risks and uncertainties.
• To avert risk and uncertainty:
• Be flexible in plans
• Diversify enterprises
• Transfer risk to others through contract and insurance
• Study the other party to avoid being cheated
• Seek knowledge.
1. a. Define:
i. Risk
ii. Uncertainty
b. Identify and explain any five (5) types of risks associated with
agriculture that affect Farm Management decisions.
2. a. Differentiate between risk and uncertainty.

b. Identify and explain any five (5) possible ways risks can be
minimized in farm business.
19
Adegeye, A.J. and J.S. Dittoh (1985). Essential of Agricultural

Castle, N.E. and H.M. Becker (1967). Farm Business Management.

New York. Macmillan Pub.
Heady, E.O. and R. Jensen (1984). Farm Management Economics.

Englewood Cliffs Prentice Hall Inc.
Upton M. (1993). Farm Management in Africa. London. Oxford

University Press.
UNIT 4 THE DECISION MAKING FUNCTIONS OF

FARM MANAGER
20
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Concept of Decision Making
3.2 Process of Decision Making
3.3 Types of Farm Management Decisions
3.4 Functions of Farm Manager
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The last unit discussed the special characteristics of agriculture that

affect management. In discussing the unit, we differentiated risk from
uncertainty. We also discussed the various types of risks associated
with farm business and how we can manage these risks so as to reduce
their effects on farmers. In this unit, we shall discuss the decision
making functions of farm managers.
2.0 OBJECTIVES
• explain the concept of decision making

• identify the essential steps in decision making process
• enumerate at least five decisions or problems confronting farmers on
the farm
• state at least five functions of farm manager.
3.0 MAIN CONTENT
3.1 The Concepts of Decision Making
Decision making is the process of thought or deliberation that results in

a choice. This definition implies that decision making involves making
a choice from possible alternative resources. Like in other businesses,
decision making in farm business is one of the most important activities
that a Farm Manager has to carryout. It is important that Farm Manager
should follow a gradual and sequential process in taking decisions. A
wrong decision at a particular stage in production process can lead to
21
total collapse of the farm business. The success of any farm manager
will depend to a large extent on the right type of decision he made.
3.2 The Process of Decision Making
There are seven essential steps that must be followed when making
decision in Farm Management:
i. Identify the Problem: A problem is identified as soon as the

farm manager discovered some deviations from the past
experience. Once the farm manager noticed any strange
happenings or unusual occurrence, then a problem is already
identified.
ii. Define the Problem: Definition of problem involved locating

the root course of the problem identified. This requires
establishing what is responsible for the problem identified.
iii. Suggest Solutions: After establishing the course of the problem,

you can now suggest some possible solutions to it.
iv. Analyse the Suggested Solutions: Analysis of the suggested

solutions involves getting the implications of each possible
solution. This involve getting the cost of each solution, the
resources required (both human and material resources) and
workability of the solutions.
v. Select the Best Solution: From the point of view of cost, human
resources, material resources and workability of the solutions, the
farm manager can now choose the best alternative solution.
vi. Implement Decision: The next step after choosing the best
alternative solution is to put the chosen solution into action.
vii. Evaluation: This is the last step in the process of decision

making. It involves comparing the result or performance of your
farming business at the end of the decision to the time before the
decision was taken.
3.3 Types of Farm Management Decisions
22
There are many decisions and/or problems confronting farmers on the

farm. The solutions to these problems will determine to a large extent
whether a farmer or farm manager is going to be successful or not. The
types of problems facing Farm Management include the following:
(a) What Size of Farm to Operate? The solutions to this will

depend on many factors like the type of crop cultivated or type of
animal reared, the amount of resources available, land tenure
system of the area, type of equipment available etc.
(b) What Combination of Crops and Livestock to Produce? The

solution to this will depend on whether the farmer wants to go on
mixed farming or mixed cropping, it will also depend on the
value system of the area and some other factors.
(c) What System of Farming should be Followed? The available

system of farming include: mono cropping, mixed cropping,
mixed farming. For animal rearing we have – intensive, semi –
intensive and extensive systems, etc.
(d) What is the most Profitable Method of Production given the

available Resources?
(e) What kinds of Machinery and Equipment to use and at what level
of Production do we substitute Machinery for labour.
(f) How much of Family Labour and how much of Paid Labour
to use? This will be determined by the total population of the
family and the number that will be available for farming at
various period of the year.
(g) What are the Appropriate Times to Produce Specific crops or

Livestock? Farmers need to decide whether to produce certain
crop or livestock during occasions when they will be highly
demanded. For example, poultry farmer can decide to target the
sales of his broilers during occasions like: New Year, Easter and
Sallah celebrations.
(h) How much of the crops and livestock to consume at home and
how much of these to sell?
(i) Selling price of the farm products and what are the problems of
marketing?
(j) What are the sources of credit open to a farmer and how can he
make proper use of the available credit.
3.4 Functions of Farm Manager
23
Given the problems and/or decisions faced in Farm Management, the

farm manager or management must be prepared to carry out the
following functions in agricultural production: planning, forecasting,
organizing, co-ordinating, staffing or personnel management, directing
and leading, communicating, motivating and supervising.
Which function is most important?
They are all important and emphasis should be laid on different aspects
according to need.
1. Forecasting
Once the idea of establishing a farm business is conceived, forecasting

begins in term of expected quantities to produce, the price to set, the
costs of farm inputs and the likely profits. Projections are also made on
the basis of economic indicators such as population, age distribution,
levels of income, government plans to increase employment or raise
incomes, tastes and preferences.
2. Planning
Forecasting is the beginning of planning which must be done. On the

basis of forecasts the farm manager can increase his output. The plan
which some people call budget, contain every detail of how much to
make, at what price to sell, what profits are expected, the obligations to
workers and consumers.
The annual budget is a general statement, but the monthly budgets are
more detailed. Planning sorts out who will do what and in planning, all
levels of workers must be involved.
3. Organizing
In organizing, responsibilities are defined and lines of authority are laid

down. Organisation involves delegating authority and holding specific
people responsible for making sure that specific things are done.
4. Co-ordinating
Co-ordination is essential since farm business is segmented into various

enterprises each doing its own bit. The work of all the segments must
be harmonized so that no section is delayed by lack of appropriate
activity in another section. Co-ordinating is done by bringing all head
of sections into the picture through communication. General meetings
24
are held at intervals in which new plan or changes in plans are

announced and discussed by the farm manager.
5. Motivation
In order to make the work of co-ordination and controlling easy, farm

workers must be properly motivated through humane treatment. As a
farm manager, you should always put yourself in the position of farm
workers. Take pains to explain what you want them to do. Make the
instructions clear and simple. Create the right atmosphere.
Motivation can be achieved in many ways. A simple note of

appreciation or praise (commendation) for a good job done will
encourage the workers to put more effort in future. Financial incentive
provides encouragement for harder work. Individuals may excel if
direct payments are made in recognition of their individual performance.
6. Staffing
This is a function carried out by the farm manager. It involves decision

on job content, qualification required, training on the job and evaluation
of performance in order to recommend for promotion or wage increase.
7. Directing and Leading
It is the duty of farm manager to lead the farm workers in the

implementation of the chosen plan. Leadership entails outstanding
character that commands the respect of all workers. A good leader must
be very knowledgeable, mature in thought and action with balanced
judgment and decisions which are generally satisfactory to most farm
workers. Leaders must accept responsibility for their actions and must
be firm.
8. Communication
Communication is an important aspect of Farm Management. The

function of communication involves passing information from the farm
manager to the farm workers and the general public. A clear channel of
communications must exist between the manager and the farm worker.
Instructions must be clearly given and feedback collected. In order to
avoid rumours and false information, it is the duty of farm manager to
ensure workers confidence by passing direct information to them.
9. Control and Supervision
25
After planning, the next most crucial function of farm manager has to do
with controlling and supervision. For any business to succeed, every
stage or activity must be controlled. There is production control,
inventory control, cost control, budgetary control and personnel control.
The process of controlling involves comparing plan with achievements.
1. Explain what is meant by decision making

2. Explain the role of farm manager in the following areas of
decision making:
a. Forecasting
b. Planning
c. Organizing
d. Co-ordinating
e. Directing
4.0 CONCLUSION
In Unit 4, we have learnt about the decision making functions of farm

manager. In conclusion, a farm manager should aim at making the
business of what the customer needs his priority and endeavour to
provide those things better than has been previously done by other
farmers. Any farm business which satisfies this will make profit as a
matter of course.
5.0 SUMMARY
In this Unit, we have learnt that:
• Decision making involves making a choice from the various lines of

action
• Decision making follows processes in Farm Management, decision
making process which involved seven essential steps.
• The steps in decision making process include: identify the problem,
define the problem, suggest solutions, analyse those solutions,
choose the best solution, implement decision and evaluate result.
• There are many decisions and or problems confronting farm
manager. These decisions require that he must have a good
understanding of the farm practices relevant to the enterprises he
wish to be involved in.
• Farm manager must be ready to draw up both short and long term
plan. This would include the objectives of the business, how
objectives will be achieved and the stages of business expansion.
26
• Farm manager must ensure that needed farm inputs – land, buildings,
machinery, etc, are available or can be obtained with cash resources
at his disposal.
• It is also the duty of farm manager to ensure that there is ready
market for the output of the farm business.
• Farm manager performed administrative functions such as – staffing,
motivation, communication, etc which are essential for the healthy
growth of the business.
1 a. Define decision making in farming.

b. Enumerate and explain the essential steps in decision
making process in farming.
2. What are the decisions facing the following groups of farmers in
their farm businesses?
a. Grain farmer
b. Poultry farmer
3. Identify and explain any six (6) major functions performed by

farm manager.
Adegeye A. J. and J.S. Dittoh (1985). Essentials of Agricultural

Akinwumi J. A. (1981). Business Management. Synoptic Lecture

Notes.
Anthonio B. O. and M. Upton (1965). Farming as Business. London:

Ayinde A.T. A. Abdul-Azeez and R.O. Adebayo (1999). Agricultural

Economics and Statistics. Ado-Ekiti. Adebayo Pub. Nigeria Ltd.
Castle N.E. and H.M. Becker (1967). Farm Business Management.

New York. Macmillan Publishers.
MODULE 2 THE COMMON CONCEPTS AND TOOLS

IN FARM MANAGEMENT
27
Unit 1 Economic Principles and Farm Management

Unit 2 Farm Cost
Unit 3 Valuation and Depreciation of Farm Assets
Unit 4 Literate versus Illiterate Farmers in Farm Management
UNIT 1 ECONOMIC PRINCIPLES AND FARM

MANAGEMENT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Law of Diminishing Returns
3.2 The Principles of Substitution
3.3 Opportunity Cost
3.4 Diversification and Specialization
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Remember that you have learnt about the meaning, nature and scope of
Farm Management in module 1. We also treated the principles and
functions of Farm Management. In this module, you will learn about
some common concepts and tools in Farm Management. This unit is
specifically devoted to discussing some economic principles as it affect
Farm Management.
2.0OBJECTIVES
By the end of this unit, you should be able to explain the following
economic principles:
• diminishing returns
• substitution
• opportunity Cost
• diversification and specialization
3.0 MAIN CONTENT
3.1 The Law of Diminishing Returns
28
The law of diminishing returns is also known as the law of variable

proportions. Diminishing returns is the most observed phenomenon in
production for most inputs especially at normal production level.
The law of diminishing returns states that if the quantity of one variable
factor is increased by equal amount while the quantity of other factors
are kept constant, the corresponding increment to total product (output)
will start to increase up to a certain point (the point of inflection) and
will continue to decrease from that point. This certain point referred to,
is the maximum point on the marginal product curve which coincides
with the point of inflexion of the total product curve.
For instance, fertilizer, labour and planting materials are variable inputs
that can be combined with fixed input such as land to raise output. As
fertilizer application is increased, the total return will increase at first but
will eventually decline to a point where no extra return is obtained for
extra fertilizer applied.
The principle of diminishing returns is one of the most important

concepts in Farm Management; it is the principle that determines the
economic level of all production practices. This principle guides the
efficient allocation of resources.
As one of the aims of farm business is to make profit, every production

process needs to be considered in the framework of costs and returns.
The diminishing return principle implies that if fixed cost remain
constant, it is only profitable to increase the level of production if only
the marginal return is greater than the marginal cost. In other words, it is
better to employ additional fertilizer as long as the added return obtained
by the employment of additional fertilizer is greater than the additional
cost of employing the fertilizer. This is a technical way of saying that it
is profitable to spend one naira (N1) for a return of one naira fifty kobo
(N1.50k) but not for a return of fifty kobo (50k) only.
The table below shows the quantity of maize obtained in response to

fertilizer application. At what unit of fertilizer application does
diminishing return set in?
UNIT OF QUANTI MARGIN

FERTILI TY OF AL
ZER MAIZE PRODUC
29
T
0 20 -
2 38 9
4 52 7
6 58 3
8 60 1
10 60 0
12 54 -2
Hint
The point at which there is no further increase in marginal product, the
quantity/unit of fertilizer applied at that point will be the point of
diminishing returns.
3.2 The Principles of Substitution
The principle of substitution refers to the amount by which product A

changes in quantity when product B is increased by one unit while the
input remains constant. Farm manager is interested in the optimum
combination of products that will enable him maximize net returns. The
concept of Marginal Rate of substitution is central to choosing the
optimum production combination.
With the introduction of new technologies in agriculture, farmers are

exposed to different methods or combination of methods of farming.
The major objective behind the principle of substitution is either to
maximize output or minimize the cost of production. Farm manager
need to decide upon the best possible resource combination to achieve
maximum output at a given cost or to minimize the cost of producing a
given output.
Examples of resource combinations to achieve maximum output with

input use remaining constant include:
• Production of maize and poultry in a given plot of land.

• Production of grain and fruit crop in one hectare of land.
• Production of farm and non – farm products using the same number
of labourers. The above examples will show how to produce
maximum output where alternative products can be produced from
the same resources, subject to certain constraints.
The principle of substitution is also used to find out the least cost
combination of resources needed to produce a given output. Examples
include:
30
• Chemical and manual weeding in the production of a given quantity

of yam.
• Substituting tractor for hand tools in the production of a given
quantity of maize.
• Hay and maize combination for a constant output of milk.
• Combination of grain and hay for a given live weight gain.
The principle of substitution helps in choosing the most profitable

combination of two or more resources or products. Thus, farmers are
always faced with the decision on whether to employ one factor or the
other. Through this, farmers will be able to combine the factors of
production in the various proportions that would maximize his net
returns.
3.3 Opportunity Cost
The concept of opportunity cost is the economists’ way of expressing

the cost of present benefit in terms of forgone alternatives. The
opportunity cost of a Farm Management decision is the amount of
money which is given up by choosing one alternative rather than
another. Economic resources are scarce and the scarcity necessitates a
choice between alternatives. A choice means you have one thing or
another. It implies sacrificing one thing in favour of another. If you
decide to have more of one thing, then where there is an effective
choice, it will be necessary for you to have less of the other. The cost of
anything is not the money spent on it; it is the alternative, which was
most nearly chosen instead.
If a farmer decides to grow rice instead of maize, the opportunity cost of

rice he cultivated is not only the maize which he might have grown
instead, but also the market situation. The concept of opportunity cost is
of importance to him because it reveals the real cost of his decision to
grow the rice.
The application of the concept of opportunity cost to every economic

decision helps individual consumer to maximize their satisfaction. The
concept of opportunity cost is of importance in Farm Management
because it helps farmers in deciding which enterprise to go into, taking
into consideration some of the resources available. The concept is also
essential for working out efficient farm organisation for efficient
utilization of farm resources. The main point of the opportunity cost
concept is that alternative investments must be taken into consideration
if maximum returns on resources invested are to be obtained.
In Farm Management, for farmers to obtain maximum returns, the

money that is given up by choosing one alternative rather than another
31
must be less than the chosen enterprise. For instance, if the same
amounts of resources are available for the production of one hectare of
either maize or sorghum and the expected revenue from maize is N1000
while the expected revenue from sorghum is N800. If sorghum is
chosen instead of maize, i.e. we forego N1000 in order to obtain N800.
Here, the opportunity cost is positive and should be avoided if there is
no serious case against the production of maize. On the other hand, the
opportunity cost of cultivating maize rather than sorghum is negative i.e.
we forego N800 to obtain N1000 and thus a good decision.
3.4 Diversification and Specialisation
Specialization involves the production of one type of product. Farmer

may specialize in poultry production only, he may also decide to engage
in palm production only etc. By specialisation, the farmer may likely be
more efficient in his operations and techniques of the business.
However, specialisation is always accompanied with risks because once
the business fails; there is no other way of producing other products.
Failure can occur as a result of pest and disease outbreak, market
situation and some other factors.
Diversification on the other hand involves combination of two or more

products or enterprises in one operation. For instance, a farmer can
engage in the production of maize, sorghum and poultry at the same
time. He may also engage in the production of grain and oil palm
plantation, etc. The rule guiding the operation of diversification is that
the two enterprises must not be correlated in income. If two farm
enterprises require the same resources and are likely to be affected by
the same condition, a reduction in the gross margin of one enterprise
will imply a similar reduction in the gross margin of the other enterprise.
This is a situation of positive correlation. It is therefore, beneficial to
diversify into enterprises which have negative correlation coefficient of
gross margin. This is necessary to reduce the effect of risk and
uncertainty connected with farming. Diversification allows flexibility in
the use of resources and lowers income variability.
1. Distinguish briefly but clearly between opportunity cost and

money cost.
2. Differentiate between marginal cost and marginal returns.
32
3. Give five (5) examples of resources that can be combined to

achieve maximum output with input remaining constant.
4. Give five (5) examples of input resources that can be combined to
achieve least cost with output remaining constant.
4.0 CONCLUSION
In this unit, you have learnt about the economic principles that can be
applied to Farm Management. From the various discussions, we have
gathered that the sound knowledge of these principles are essential in
Farm Management. This is necessary to guide farmers in taking rightful
decisions in farm operations.
5.0 SUMMARY
• The concept of diminishing returns determines the economic level of

all production practices.
• The principle of diminishing returns guides in the efficient allocation
of resources.
• The principles of substitution helps farmers in deciding on the
optimum combination of products that will enable him maximize net
revenue.
• The concept of substitution aimed at both maximization of
production output as well as minimization of cost of farm inputs.
• The opportunity cost of a Farm Management decision is the amount
of money which is given up by choosing one alternative rather than
another.
• Specialisation involved the practice of one enterprise while
diversification involved the practice of two or more enterprises.
• Farmer will be more efficient in the use of resources under
specialisation but it amount to putting all his eggs in one basket.
• Diversification can guide against total failure if enterprises with
negative correlation in gross margin are combined.
1a. Define:
(i) Law of diminishing returns
33
(ii) Marginal rate of substitution.

b. With examples, show how the two principles can help in Farm
Management decisions.
2a. Explain the principle of opportunity cost.
b. How does the principle help in Farm Management decisions?
3a. Differentiate between specialisation and diversification of farm
enterprises.
b. Which one of them do you prefer and why?
Abbott J. C. and J. P. Makeham (1980). Agricultural Economics and

Marketing in the Tropics. Intermediate Tropical Agriculture
Series. London: Longman Group Ltd. Pp 67 – 129.
Arene C.J. and B.C. Okpukpara (2006). Economic of Agricultural

Production Resource Use and Development. Nsukka: Price
Publishers.
Nweze N. J. (2002). Agricultural Production Economics. Nsukka:

Apexpress Publishers Ltd.
Oji K.O. (2002). Basic Principles of Economics for Agricultural

Projects and Policy Analysis. Nsukka: Price Publishers Ltd.
Yang W.Y. (1985). Methods of Farm Management Investigation for

Improving Farm Productivity. Rome: Food and Agriculture
Organisation (FAO).
UNIT 2 FARM COST
CONTENTS
34
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Cost
3.2 Types of Cost
3.2.1 Variable Costs
3.2.2 Overhead (Fixed) Costs
3.2.3 Finance Costs
3.2.4 Capital Costs
3.2.5 Personal Costs
3.3 Average and Marginal Costs
3.3.1 Average Cost
3.3.2 Marginal Cost
3.4 Implications of Costs in Farm Management
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In the last unit, we discussed the economic principles that influence

Farm Management decisions. Such principles include: diminishing
returns, substitution, opportunity cost and specialisation and
diversification. In this unit, attempt will be made to define cost, explain
the various types of cost and discuss the implications of costs in Farm
Management.
2.0 OBJECTIVES
• define cost
• explain the different type of cost
• calculate the average costs of farm expenses
• classify the different farm expenses into fixed and variable costs
• identify the implications of costs in Farm Management.
3.0 MAIN CONTENT
3.1 Meaning of Cost
35
Costs or costs of production are payments or expenses made either

directly or indirectly to obtain the inputs utilized in production.
According to Nweze (2002) cost is a sacrifice that must be made for the
purpose of doing or acquiring something. The sacrifice that must be
made may be tangible or intangible, objective or subjective and may
take many forms such as money, goods, leisure time, income, security,
prestige, power or pleasure. Agricultural cost is referred to as the value
of agricultural inputs used in the production of agricultural output. That
is, the cost of producing a product such as yam, maize, eggs, goats,
cattle, etc. It is also known as expenses incurred in producing a
particular amount of product in a particular period. Hence, one can talk
of the cost of producing 100 tons of yams in a season or 2000 litres of
milk per week or 2000 crates of eggs per laying circle.
Cost of production can also be referred to as accounting cost, cost of

materials used in the production process such as labour costs, fertilizer
costs, feed costs, depreciation costs, maintenance and repair costs,
selling and administrative costs, taxes and interest payments on money
borrowed.
An agricultural economist view costs of production as embracing a

considerable alternative costs or opportunity cost. For instance, if a
farmer produces only commodity A and no B, the cost of producing
commodity A is the accounting cost plus the foregone return on
commodity B known as economic costs. Total cost can be calculated
thus:
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)
3.2 Types of Costs
In considering costs involved in agricultural production, Abbott and

Makeham (1980) identified five main farm costs. These are:
• Variable Costs
• Overhead (fixed) Costs
• Financial Costs
• Capital Costs, and
• Personal Costs
3.2.1 Variable Costs
36
Variable Costs are expenses which vary in size positively with variation
in output level. Variable Cost rises and falls with output and is zero
when the farmer is not producing. It is therefore sometimes called direct
cost.
Variable costs include: The raw materials, the cost of direct labour, the
running expenses of fixed capital such as fuel, ordinary repairs and
routine maintenance, insurance on crops and animals, etc.
Variables costs are directly associated with the level of intensity of each
activity, but may also determine the yield or level of output of the
activity. For instance, the amounts and kinds of fertilizer, seed and
cultivation in a crop enterprise, largely determines the crop yield.
Similarly, in an animal enterprise, the level and type of feed and

medicines used have a major effect on the productivity of any given type
of animal. Therefore, for a farmer to obtain high output on the farm,
requires that he must be ready to spend much money on variable cost
items.
The reason for identifying the variable costs of a farm business is to give
the farmer an idea of the size of the change in terms of cost which will
occur if he expands or contracts one or more of the enterprises.
Knowing the likely variable costs and gross income, the farmer is in the
position to make a quicker decision of the merit or otherwise of making
a change in the enterprise.
3.2.2 Overhead (Fixed) Costs
Overhead cost is also known as fixed cost. Fixed costs are costs which
do not vary with the level of output. In other words, fixed cost is the
same regardless of the level of production. Apart from being fixed,
another characteristic of fixed cost is that it must be incurred even when
no output is yet forthcoming. Thus, a businessman must erect a factory,
office buildings and hire staffs even before the factory starts production.
Abbott and Makeham (1980) identified three types of overhead costs to

include: total overhead, operating and activity costs.
i. Total Overhead Costs
These include the following: essential living expenses of the farmer,

wages and food for permanent workers, loan interest and repayments,
replacement of capital items such as plants, machinery, buildings, etc,
all taxes, repairs to water supply, insurance on employees, travel and
other business expenses.
37
The main advantages of farmer knowing the level of total overhead

costs are that: They are unavoidable costs which must be met every
year. Secondly, it is used to show the gross margin which must be
achieved for all farm activities in the planting season. Lastly, the total
gross margin is normally the only source other than additional
borrowing from which the overhead cost can be met.
ii. Operating Overhead Costs
According to Abbott and Makeham (1980), operating overhead costs are

used in calculating the true profit in an accounting sense. They are
overheads associated with the annual business operations of the farm.
The main component of operating costs include: Operator’s allowance,

depreciation of capital items such as buildings and machines, wages of
permanent workers, taxes but not income tax, repairs of water supply,
roads, buildings and structures, insurance on buildings, plant, fixed
structures, etc, telephone and business expenses.
iii. Activity Overhead Costs
These are costs which will not be incurred if the business is terminated.
Examples of such costs include: depreciation on equipment used. Costs
under this category are regarded as partly fixed and partly variable.
Even though they are classified as fixed costs, the amount to be fixed is
determined by the level of operation or use of the equipment.
3.2.3 Finance Costs
These covers the annual interests paid on borrowed money and the
repayment made on loans where hired purchases are made. These types
of costs are associated with loan repayment and insurance costs lumped
together in one sum.
3.2.4 Capital Costs
These costs are usually associated with costs incurred in the process of
providing capital assets used in farm production. Examples of these
costs include costs on capital project like building, machinery, land
purchase, land clearing, water supply, extra livestock and planting of
palm trees, rubber, and cocoa or fruit trees.
3.2.5 Personal Costs
38
Purchased food, clothing, medical expenses, school fees, and family

traveling costs are considered as personal costs.
In some cases, some of these items are directly related to the level of
output of the farm. For example, an ill or undernourished farmer is not
likely to have a high work output and money spent on food or medicine
is likely to have a direct effect on total farm output. The minimum total
living or personal costs of the farm are normally included in the total
overhead. When budgeting for family farm, they are one of the most
important and unavoidable items in the total farm costs.
3.3 Average and Marginal Costs
3.3.1 Average Cost
Average cost is the total cost of producing an output divided by the

number of output units.
Average Cost = Total Cost = TC
Total Product Q
Where:
TC = Total cost and Q = units of output produced
Average Cost is the sum of Average Fixed Cost (AFC) and Average
Variable Cost (AVC)
Average Cost = Average Fixed Cost + Average Variable Cost
AC = AFC + AVC
Average Fixed Cost (AFC) is obtained by dividing Total Fixed Cost

(TFC) by the unit of output associated with it.
Average Fixed Cost = Total Fixed Cost = TFC
Total Product Q
Where:
TFC = Total Fixed Cost and Q = units of output.
For example, with an output of 100 units and a total fixed cost of N300.
Average Fixed Cost = Total Fixed Cost = N300
Total Product N100
= N3
Similarly, Average Variable Cost (AVC) is obtained by dividing the

Total Variable Cost (TVC) by the units of output produced.
For example, if a farmer produced an output of 160 tons using a total

variable cost of N480. Calculate the average variable cost.
Answer:
Average Variable Cost = Total Variable Cost = N480
39
Units of Output 160

= N3.0
3.3.2 Marginal Cost
Marginal Costs (MC) also known as incremental costs refer to the

additional cost that can be incurred due to the production of additional
unit of output. It is the increase in total cost resulting from increasing
the output by one unit.
Marginal Cost (MC) = Change in Total Cost = ∆TC
Change in Total Product ∆Q
Hints
• Find the original cost = NA
• Find the new cost = NB
• Change in total cost = NB – NA
• Find the original output = X
• Find the new output = Y
• Change in total product = Y–X
You can now use the above formula on marginal cost to solve the
problem.
3.4 Implications of Costs in Farm Management
Usually, profit maximization is the motive of any farmer. Thus, profit is

obtained by subtracting costs from revenue. In this case, it is important
for farmer to understand the nature and structure of production costs and
how they affect the decision making process.
Secondly, cost functions usually help the producers to determine the

most profitable level of production i.e. the output which gives the
maximum profits as well as the level of output in which production
process depends.
Consequently, costs functions help the farmer to determine how much

variable factor to be employed in combination with fixed factors in the
production of an output for maximum benefit.
40
1. Given that fixed cost is N5000, variable cost is N1500 and output
is 50 units, what will be the average cost of producing one unit?
2. If as a result of increasing the output of cowpea from 10kg to 20
kg the total cost of production increased from N250 to N300.
Calculate the marginal cost of production.
4.0 CONCLUSION
In unit 2, we have discussed the various types of costs associated with

farm business. The conclusion that can be drawn from this unit is that
deep knowledge of farm costs is a must for all serious minded farmers.
No farmer can succeed without the knowledge of the various farm costs.
Without record of farm costs he will not be able to find his profit and
decisions will be difficult to make.
5.0 SUMMARY
i. Total Cost (TC) is a sum total of Total Fixed Cost (TFC) and Total
Variable Cost (TVC) i.e. TC = TFC + TVC.
ii. Total Variable Costs are the costs of production that varies
according to the level of production.
iii. Total Fixed Costs or Overhead Costs are the costs that remained
the same regardless of the level of production.
iv. Overhead Costs can be classified into three categories – Total
Overhead Costs, Operating Overhead Cost and Activity Overhead
Cost.
v. Average Cost is obtained by dividing Total Cost of an output by
the number of output units. Alternatively, Average Cost is the sum
total of Average Fixed Cost and Average Variable Cost.
vi. Average Fixed Cost is obtained by dividing Total Fixed Cost by
the unit of output.
vii. Similarly, Average Variable Cost is obtained by dividing the
Total Variable Cost by the unit of output.
viii. Marginal Cost or incremental cost is obtained by dividing the
change in Total Cost by the change in Total Product.
ix. The concept of farm costs is very important in taking decisions
about farm organisation.
x. Farm costs are also useful in farm planning, especially in the
determination of the gross margin and the farm profit which are also
important in farm budgeting.
6.0TUTOR-MARKED ASSIGNMENT
41
1. Explain the following types of costs associated with agricultural

production.
• Total Cost
• Variable Cost
• Fixed Cost
• Marginal Cost
• Average Cost
2. a. Identify the three types of Overhead Costs in agricultural

production.
b. What is the implication of cost of a farmer?

Marketing in the Tropics. Intermediate Tropical Agriculture
Series. London: Longman Group Ltd. Pp 67 – 129.
Arene C.J. and B.C. Okpukpara (2006). Economic of Agricultural

Production Resource Use and Development. Nsukka: Price
Publishers.
Castle E.N. (1983). Farm Business Management: The Decision

Making Process. New York: Macmillan Publishers.
Collinson M. (1982). Farm Management in Peasant Agriculture: A

Handbook for Rural Development Planning in Africa. New
York. Praeger.
Friedrich K. H. (1981). Manual for Farm Management Investigations

in Developing Countries. Rome: Food and Agriculture
Organisation (FAO).
Nweze N.I. (2002). Agricultural Production Economics. Nsukka:

Apexpress Publishers Ltd.
Olayide S. O. and S. M. Essang (1974). Intermediate Economic

Analysis. Ibadan: Aromolaran Company.
42
UNIT 3 VALUATION AND DEPRECIATION OF

FARM ASSETS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Farm Valuation
3.2 Definition of Depreciation
3.3 Methods of Estimating Depreciation
3.3.1 The Straight Line Method
3.3.2 The Declining Balance Method
3.3.3 The Sum of the Years-Digits Method
3.4 Appreciation
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit 2, we discussed the meaning of cost, types of farm cost and the
calculation of average and marginal costs. We further discussed why
the understanding of these cost are very important in Farm Management.
Another important tools in Farm Management that will be discussed in
this unit are farm valuation and depreciation of farm assets. In order to
calculate the estimates of depreciation charges, you will need a
calculator to assist you.
2.0 OBJECTIVES
• define valuation
• identify the common methods of valuation
• define depreciation charges
• explain the three common methods of estimating depreciation
• calculate depreciation charges.
43
3.0 MAIN CONTENT
3.1 Farm Valuation
Valuation involves setting value or attaching prices on property. When

applied to farm business, valuation means setting prices on farm assets.
Such assets may include: machines, buildings, livestock, growing crops
at the end of accounting period, farm output in the store and unused
farm inputs kept in the store. Valuation of farm assets is necessary to
enable the farmer calculate his net worth at the end of accounting period
or at any given period. Both the opening valuation and closing
valuation form the major part of profit and loss in farm accounting.
Methods of Valuation
Various methods of valuing farm assets exist. The choice of method

will depend on the purpose of the valuation. Farmer should be
consistent in their method of valuation as this will not only affect the
computed profit and loss but also the net worth of the farm.
The four most popular methods of farm valuation include:
• Valuation at cost: Computing with the actual cost of purchasing the

farm assets.
• Valuation at cost less depreciation charges: This method used
mainly for farm machineries and equipment.
• Valuation at market price: Computing with the current market
price of the farm asset.
• Valuation at cost or market price which ever is lower.
3.2 Definition of Depreciation Charges
Depreciation is the reduction in value of an asset through wear and tear.

While depreciation charges is the amount of money or an allowance set
aside annually on farm assets on the ground that the use of farm capital
assets is one of the costs of earning the revenues of the business.
Depreciation charge involves the spreading of the cost of an asset over
its useful life. It is considered an annual expense and as such is
regarded as variable cost. Depreciation charge is allowed according to
special rules by the tax authorities.
The major advantage of depreciation is that it enable farmer to replace

farm machines and equipment with ease i.e. without resulting into
borrowing. Another advantage is that since depreciation is regarded as
cost and is always made before the calculation of profit, it will seriously
reduce the amount of tax paid by the business.
44
3.3 Methods of Estimating Depreciation Charges
There are three common methods of estimating depreciation charges.

These include: straight line method, the declining balance method and
sum of the year digit method.
3.3.1 The Straight Line Method
Straight line method is also called the fixed – installment method. This
method of estimating annual depreciation charge involves deducting the
estimated residual or scraps or salvage value of an asset from its original
cost and the balance divided by the number of years of estimated life of
the asset.
Mathematically:
Annual Depreciation= Cost of Asset – Estimated Salvage Value
Estimated Number of years of Life of Asset
Salvage value also known as scrap or residual value is the estimated

value that an asset supposed to cost at the end of the year the asset is
expected to be in operation. For instance, a farm asset that is expected
to be totally discarded at the end of its useful life will have zero salvage
value.
Working Example:
If an asset costs N10,000.00 and can be sold off in the next ten years for
N2,000.00. Calculate the annual depreciation.
Answer:
Step 1: State the formula
Annual Depreciation = Cost of Asset – Salvage Value

The Expected Life of the Asset
Step 2: Find the value of the items in the formula
Cost of asset = N10, 000

Salvage value = N2, 000
Expected life of asset = 10 years
45
Step 3: Apply the formula
Annual Depreciation = N10, 000 – N2000

10 years
= N8, 000
10
= N800
What should be set aside every year for ten years = N800.
The major advantage of straight line method is that it is easy and straight
forward to calculate. However, the method is not very useful for assets
like machines and equipment in which the rate of turnover decreases
with age.
3.3.2 The Declining Balance Method
In the case of a reducing balance method of depreciation, the actual

depreciation expense is set at a constant proportion of the cost of the
asset. In other word, a certain percentage of depreciation is taken for
every year and is applied to the balance at the beginning of each year.
This results into a diminishing annual absolute amount.
The major advantage of this method is that it depreciates assets

according to the rate of their turnover. That is, depreciation charge is
high when the asset is still new and with less repair and maintenance
costs. However, there is usually problem of determining the exact
percentage to use. Secondly, the salvage value of the asset cannot be
determined before the expected life span of the asset.
Worked Example
If an asset costs N10, 000 and the rate of depreciation is 10 percent per
annum and the asset is expected to last for five years. Calculate the
annual depreciation charges.
Answer:
(i) Annual Depreciation for year 1

= 10% of N10,000
= 10 x N10000
100 1
= N1000
(ii) Annual Depreciation for year 2

Balance at the end of year 1 = N10000 – N1000 = N9000
= 10% of N9,000
46
= 10 x N9000
100 1
= N900
(iii) Annual Depreciation for year 3

Balance at the end of year 2
N9000 – N900 = N8100
= 10% of N8100
= 10 x N8100
100 1
= N810
(iv) Annual Depreciation for year 4

N8100 – N810 = N7290
= 10% of N7290
= 10 x N7290
100 1
= N729
(v) Annual Depreciation for year 5

N7290– N729 = N6561
= 10% of N6561
= 10 x N6561
100 1
= N656.1
Salvage Value
The salvage value is whatever is left at the end of its useful life i.e.
N6561 – N656.1 = N5904.10.
3.3.3 The Sum of the Years –Digits Method
This method like the declining balance method distribute depreciation

expense more heavily in the early years of use and more lightly in later
years. However, it has some advantages over declining balance method.
It avoids an undistributed balance at the end of the useful life and
depreciates the investment to the scrap value assigned.
Sum of the year digits method involves working out a fraction with a
denominator and a numerator which is applied to the value at the
beginning of each year.
47
Finding the Denominator
For instance, if the life span of an asset is expected to be five years, the
denominator will be the addition of the number of years i.e.
1 + 2 + 3 + 4 + 5 = 15
In this case, the denominator is 15.
Finding the Numerator
The numerator of the fraction is the number of years remaining at the

end of the accounting period. From the above example, in year 1 – the
numerator is 5 and the denominator is 15. in year 2, the numerator is 4
and the denominator is 15. Year 3, the numerator is 3 and the
denominator is 15. In year 4, the numerator is 2 and in year 5 the
numerator is 1. The denominator remains 15 throughout the period.
Work Example
If an asset costs N17, 000 and can be sold off in the next five years for
N2000. Calculate the annual depreciation using sum of the year digits
method.
Answer:
Step I: Getting the Denominator
1 + 2 + 3 + 4 + 5 = 15
Step II: Get the Fraction for Each Year
1 = 5/15 2 = 4/15 3 = 3/15 4 = 2/15 and 5 = 1/15
Step III: Calculate the Annual Depreciation
Value of Asset = Original Cost – Salvage Value

= N17,000 – N2,000
= N15,000
Year 1: 5 x N15, 000

15 1 = N5000
Year 2: 4 x N15, 000

15 1 = N4000
Year 3: 3 x N15, 000

15 1 = N3000
48
Year 4: 2 x N15, 000

15 1 = N2000
Year 5: 1 x N15, 000

15 1 = N1000
Total Depreciation = N15, 000
Total Value = Total Depreciation + Salvage Value

N15,000 + N2000
= N17, 000
3.4 Appreciation
Appreciation is the antonym of depreciation. Appreciation occurs as a

result of increase in the value of an asset. Appreciation may occur
through rising prices as a result of inflation, scarcity of the asset or
increase in earning power. If after adding all the annual depreciation
charges to the salvage value, the total value of the asset is more than the
original cost, we have a case of appreciation of asset. If the addition of
all the annual depreciation charges with salvage value is equal to the
original cost then appreciation is zero i.e. there is no appreciation.
Conversely, the replacement cost of an asset may be very much greater

than its original cost. This problem is dealt with by revaluing assets at
intervals or even annually using special capital cost indices and
adjusting depreciation charges accordingly. This is called replacement –
cost depreciation.
1. A tractor was purchased by a farmer in 1998 for N6000, 000.00.

In 2007, the tractor was sold off for N150, 000.00 when it was no
longer economical to maintain. Calculate the tractors:
(i) Salvage Value

(ii) Total depreciation
(iii) Annual depreciation.
(iv) Appreciation.
2. A fiat tractor was purchased by a farmer in 1996 for N12000.00

in 2005; the tractor was sold off for 3000.00 when it was no
longer economical to maintain it. Calculate the:
(i) Salvage Value of the tractor

(ii) Total depreciation
49
(iii) Annual depreciation.

(iv) Appreciation.
3a. A motorized sprayer was purchased at N2000 and sold at N500

after 3 years. Calculate the annual depreciation of the sprayer
using sum of the year digits method.
b. Calculate the salvage value of a tractor with depreciation value of
N10, 580.00 and initial cost of N50, 000.00 after one year of use.
4.0 CONCLUSION
In this unit, you have learnt the meaning of valuation and the various
methods of valuation. You have also learnt the meaning of depreciation.
You have seen how to estimate depreciation charges using the three
common methods. The knowledge of depreciation is very essential for
farm business as this will guide him in future replacement of his farm
assets. The knowledge of depreciation will also reduce the amount of
tax paid by farmers on their farm business.
5.0 SUMMARY
You have learnt in this unit that:
• Valuation involved attaching prices to farm assets.

• There are four methods used in setting prices to farm assets. These
include: valuation at cost, valuation at cost less depreciation,
valuation at current market price and valuation at cost or market
price which ever is lower.
• The method of valuation adopted will depend on the situation at
stake.
• Depreciation represents the cost of wear and tear of an asset as a
result of its operation.
• The three most popular method of depreciation include: straight line
method, declining – balance method and sum of the year digits
method.
• Sum of the year digits method combines the advantages of straight
line method and declining balance method.
• Appreciation occurs if the sum of the depreciation value and salvage
value is more than the original cost.
• Replacement – cost depreciation is necessary to take care of increase
in the price of asset as a result of inflation.
• Depreciation is regarded as cost and therefore reduces the tax
payable by farm business.
50
1a. Define farm valuation

b. Discuss the various ways of valuing farm assets
2. Explain the meaning of the following terms:
a. Depreciation
b. Salvage value
c. Appreciation
3. Discuss three methods of estimating depreciation highlighting the
merits and demerits of each method.

Marketing in the Tropics. London: Longman.
Adegeye A.J. and J.S. Dittoh (1985). Essentials of Agricultural

Economics. Ibadan: Impact Publishers Nig. Ltd.
Ayinde A. T. A. Abdul-Azeez and Adebayo R.O. (1999). Agricultural

Economics and Statistics. Ado–Ekiti: Adebayo Printing Nig.
Ltd.

New York: Macmillan.
Hopkins O. and E.O. Heady (1982). Farm Records and Accounting.

Iowa: State University Press.
Upton, M, and Q.B.O. Anthonio (1981). Farming as a Business.

London: Oxford University Press.
Sturrock F. (1982). Farm Accounting and Management. London:

Pitman & Sons Ltd.
51
UNIT 4 LITERATE VERSUS ILLITERATE FARMERS

IN FARM MANAGEMENT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Concepts of Literate and Illiterate Farmers
3.2 Characteristics of Nigerian Agriculture
3.3 The Effects of Illiteracy on Farm Management
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit three of this module, we explained the meaning of the concept

valuation and the various methods used in the valuation of farm assets.
We equally defined depreciation and discussed the three most common
methods of estimating depreciation. We worked through examples
under each method. Finally, we differentiated appreciation from
depreciation. In this unit, we will look at the issue of literate and
illiterate farmers and their implications in carrying out Farm
Management functions.
2.0 OBJECTIVES
• state the meaning of illiterate farmer

• explain who is a literate farmer
• list the characteristics of Nigerian agriculture
• discuss the implications of farmer’s education on Farm Management
functions.
3.0 MAIN CONTENT
3.1 Concepts of Literate and Illiterate farmers
Illiteracy is the inability to read or write. Illiterate farmers therefore, can

neither read nor write.
52
On the other hand, literacy refers to the ability to read, write and decode
symbolic representations in order to ease communication between
communicators irrespective of distance. It is the acquisition of the
literacy skill that gives people real share of Western Education. Literacy
limited to reading, writing and numeracy is generally regarded as
traditional literacy. It is the most common or orthodox form of literacy.
As a rule, any farmer who attended schools and obtained a minimum
qualification of primary school certificate or its equivalent may be
regarded as literate farmer.
3.2 Characteristics of Nigerian Agriculture
Farming which is regarded as the art of tending crops and rearing

animals is the major occupation of most rural communities in Nigeria.
The following are the major characteristics of Nigeria agriculture:
• High Level Illiteracy
Nigerian agriculture is characterized by high level illiteracy. A greater

population of Nigerian farmers can neither read nor write. This high
level of illiteracy posed a great problem in the area of extension service.
Hence, this slow down the rate of development as it has been established
that there is positive relationship between the level of education of the
populace and the rate of development. Illiteracy affects the adoption of
new innovations and new technologies.
• Small Farm Size
Another important characteristic of Nigerian agriculture is the small size

of the farmland per farmer. Over 70 percent of Nigerian farmers have
an average farm holding of less than 5 hectares. This is called
subsistence agriculture. With the small nature of the farm holdings
farmers can only produce for himself and the family consumption with
very little for market. Apart from the small size of the farm holding,
farmers equally engaged in the planting of many crops depending on the
need of the family. This small size impedes the mechanization of
farmland.
• Fragmented Farmland
It is a common practice in Nigeria for farmers to own up to three or

more farmland. These farmlands are scattered all over different
locations. A typical Nigerian family may have an early yam and rice
plots in the fadama, grains and late yam in the upland.
53
• Poor Technology
Nigerian agriculture is characterised by the use of crude implements.

Most Nigerian farmers depend on the use of hoe and cutlass to cultivate
their farmland. Farm mechanization is still largely restricted to
Government farms and some few wealthy individuals who can afford it.
Modern farm inputs are still beyond the reach of poor farmers. This
explains why most Nigerian farmers still practice subsistence
agriculture.
• Low Level of Investment
Low level of investment is one of the major characteristics of

subsistence agriculture. Traditional farmers depend mostly on family
lab our, crude implements and the little savings at their disposal to
produce. Due to their high level of illiteracy, most of them have no
access to formal credit institutions. To compound the situation, the little
credit available to them often diverted to non-farm uses.
• Low Level of Output
The small size of traditional farms, coupled with poor technology and
low level of input collectively contributed to the low level of production
output. Farmers produced mainly for domestic use and little for export.
Farmers’ output is subject to his farm size, family labour and the type of
farm implements used. Since most farmers are poor, the level of
investment in agricultural production is generally low and therefore,
their output will equally be low.
3.3 The Effects of Illiteracy on Farm Management
We have already seen that subsistence agriculture is peculiar to illiterate

farmers while commercial agriculture is synonymous with literate
farmers. Most of our discussions could best be applicable to
commercial agriculture where profit is the ultimate goal of the farm
enterprise.
Some of the effects of illiteracy on Farm Management include the

followings:
• One of the characteristics of illiterate farmers is the small

farmholding. This small farm size posed a serious problem in Farm
Management in the area of determining the level of production, farm
labour to employ and farm inputs to use.
54
• Another effect of illiteracy on Farm Management is the low level of

technology and over dependence on the traditional method of
farming. Modern commercial agriculture demands the use of
modern farm inputs and new technology. For farm plan and
decisions to work perfectly well, modern methods of farming must
be adopted.
• Most illiterate farmers do not want to take any costly risk and
therefore, do not put their savings in long-term investments such as
plantation agriculture. This will affect decisions on how to select the
best combinations of activities to produce the food supply and cash
incomes needed to cover essential household needs.
• Illiterate farmer produces mainly for his family use only and only
little for sale. This has serious effect on the volume of farm product
for sales and even the type of farm product to produce.
Discuss the effects of illiteracy on Farm Management functions.
4.0 CONCLUSION
In this unit, you have learnt the meaning of literacy and illiteracy as they
apply to farmers. We also discussed the characteristics of Nigerian
agriculture and the effects of illiteracy on Farm Management functions.
It was then concluded that, illiteracy has serious effect on Farm
Management decisions.
5.0 SUMMARY
• Those who could neither write nor read are regarded as illiterate.
• Literacy is the ability to read, write and understand symbols.
• Nigerian agriculture is characterised by high illiteracy level.
• Most Nigerian farmers own small plots of farmlands and scattered in
different locations.
• Nigerian agriculture still depends largely on the use of crude
implements.
• Most Nigerian farmers produced only for his family consumption
with very little for sales.
• Illiteracy affects management decisions and therefore, affects the
achievement of goals of Farm Management.
55
a. Differentiate between literate and illiterate farmers.

b. List and discuss the major characteristics of Nigerian agriculture.
Abbott J.C. and J.P. Makeham (1980). Agricultural Economics and


Ayinde A. T., A. Abdul-AZEEZ AND R. O. Adebayo (1999).

Agricultural Economics and Statistics. Ado–Ekiti: Adebayo
Printing Nig. Ltd.
MODULE 3 FARM INPUTS MANAGEMENT
56
Unit 1 Land
Unit 2 Capital
Unit 3 Labour
Unit 4 Entrepreneur
UNIT 1 LAND
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Land
3.2 Characteristics of Land
3.3 Land Quality and Location
3.4 Land Management Practices
3.5 Land Cost
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit 4 of module 2, we discussed the relationship between literate and

illiterate farmers in carrying out Farm Management functions. In the
unit, attempt was made to differentiate between literate and illiterate
farmers. We also discussed the characteristics of Nigerian agriculture.
We finally looked at the effects of illiteracy on Farm Management
decisions.
2.0OBJECTIVES
• define land resources

• list the characteristics of land
• describe land management practices
• explain why there is variability in land cost.
3.0 MAIN CONTENT
57
3.1 Definition of Land
Land could be defined as a farm resource given by nature. Land

resources include the following: Soil, minerals, forests, fishing grounds
and climates. All resources that exist naturally and contribute to the
production of farm output are classified as land.
From the point of view of agriculture, land is the most important factor
of production. No agricultural production can take place without land.
3.2 Characteristics of Land
• Land is a gift of nature: Land exists naturally without the effort of

human being. Since it is the gift of God, man did not spend any
amount to bring it into existence.
• Land is relatively immobile: Land cannot be moved from one
place to another. That is why land is generally scarce in urban
centres and in less demand in rural areas.
• Land is fixed in supply: Since land cannot be produced by man,
land supply is therefore fixed. It cannot be increased to meet the
rising demand.
• The reward for land is rent: The cost of producing land is zero
since it is the gift of nature. However, the money paid for the use of
any parcel of land is what we call rent.
• Land value varies according to location: The denser the
population of an area, the greater the demand for land and hence, the
higher the value. Therefore, land in urban areas commands a higher
price than land in rural areas.
3.3 Land Management Practices
Two major steps are usually taken to maintain the productivity of land:
a. Physical Measures: These consist of construction of ridges or

contours and planting of crops or trees on these ridges.
b. Cultural Measures: These measures include the avoidance of
vulnerable areas like bank of rivers, steep slopes e.t.c, planting of
cover crops and shade trees, crop rotation, application of fertilizers
and compost manure, e.t.c.
Land for the production of crops and rearing of animals is not however,
homogeneous. What can be produced from a particular piece of land
depend on a number of factors namely:
• The climatic condition of each area especially rainfall distribution.
58
• The nature of the fertility of the soil, this explains why in the same
area, maize do well on some plots of land and perform poorly on
other plots.
• The topography of the area.
• Cultural practices of the people.
• The quantity and quality of the resources applied.
• The position of the area in relation to the market for the product.
All these factors affect farmer’s decision on what to produce and the
farming system to adopt. That is why we have variations in livestock
and crop production across the country.
3.3 Land Cost
The cost of producing land is zero because it is the gift of nature.

Therefore, when we talk of cost of land, we are talking about the rental
value i.e. the money paid for using a piece of land. Land cost varies
from one location to the other. Generally, land cost more around urban
areas and the cost reduces as we move away from the urban areas.
Land cost formed a small part of the fixed cost of farm budget in
Nigeria. Land cost in most cases, determines the combination of
enterprises that will be practiced in the area. Where the rental value is
high, farmer will like to make the maximum use of the land by
producing combination of enterprises that will bring maximum output.
However, land tenure problem in Nigeria often prevent farmers from
putting the best of their resources on the farm.
In general terms, efficient use of the land in areas where land is costly
and in limited supply can be achieved by growing more profitable crops
or rear animals with high gross margin. Farmers can also practice
multiple cropping or even mixed farming and can reduce the length of
fallow period by applying fertilizers to the land.
List and discuss the factors that can determine what can be produced
from a particular plot of land.
4.0 CONCLUSION
In this unit, you have learnt about land resources. We discussed the
meaning and characteristics of land. The unit further explained the
management practices of land and the cost of land.
5.0 SUMMARY
59
• Land is the gift of nature

• Land comprises of soil, climate, forests, fishing – ground and
mineral ores.
• Land is fixed in supply.
• Land is not homogenous – it varies from place to place.
• Land is immobile – cannot be moved from place to place.
• Land has no production cost.
• The money we paid for the use of land is what we call rent.
• Rent form part of fixed cost of farm budget.
• It is possible to improve on the quality of land either through
physical or cultural measures.
a. Define land.
b. List the characteristics of land and explain two methods by which
land productivity can be maintained.
Adegeye A. J. and J.S. Ditoh (1985). Essentials of Agricultural

Economics. Ibadan: Impact publishers Nig. Ltd.

Philips T. A. (1961). Farm Management in West Africa. London:

Longman Group Ltd.
60
UNIT 2 CAPITAL
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Capital
3.2 Characteristics of Capital
3.3 Types of Capital
3.4 Sources of Capital
3.5 Importance of Capital
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit 1 of module 3, we defined land. We also discussed the

characteristics of land and management practices of land. In this unit,
emphasis will be on capital, characteristics of capital, sources and
importance of capital.
2.0 OBJECTIVES
• define capital resources

• list the characteristics of capital
• describe the types of capital available on the farm
• identify the sources of capital available to farmers
• explain the importance of capital in Farm Management.
3.0 MAIN CONTENT
3.1 Definition of Capital
Capital is defined as the produced means of production. In essence,

capital represents resources that are not needed for their own sake but
they are needed for the production of other goods. Unlike land, capital
is produced as a result of human efforts. Examples of farm capital
include: Farm buildings, farm machineries and equipment, fertilizers,
farm land, seeds and planting materials, breeding stock, crops, simple
farm tools and more importantly, cash. The reward of capital is interest.
61
3.2 Characteristics of Capital
• One of the major characteristics of capital is that it is man-made.

• Capital assets normally lose value with years. the lost in value is as
a result of wear and tear due to its use.
• Capital asset is used to acquire other goods.
• Capital asset can be stored.
• Capital asset can be classified into fixed or variable capital. It can
also be classified into short, medium or long-term capital.
3.3Types of Capital
There are many ways of classifying capital. Some of the classes of

capital include the following:
i. Fixed Capital: The demand for this group of capital remained

constant irrespective of the level of production. Fixed capital
refers to such farm assets that are acquired for the farm operation
irrespective of the level of production. Such capital include –
farm building, tractor and implements and other farm
machineries.
ii. Variable Capital: This form of capital is acquired based on the

level of farm operation. The more the size of the farm, the more
of such capital will be needed. Examples of variable capital
include: cash, seeds and planting materials, fertilizers, e.t.c.
iii. Long Duration Capital: Most of the fixed capital belongs to

long duration capital. In addition, any capital that stretched
beyond five years may be regarded as a long-term capital.
Examples of such resources include: landed properties, farm
buildings, perennial crops, e.t.c.
iv. Medium Duration Capital: Any farm asset whose life span
stretched between two to five years is normally classified as
medium-term capital. In this group, we have heavy movable
farm assets such as farm machineries, tractor, farm equipment
and breeding stock.
v. Short Duration Capital: These are capital needed for a short

period on the farm. This capital is completely consumed within a
year of production cycle. Examples of short-term capital include:
planting materials, fertilizers, chemicals, feed, annual crops, fuel,
e.t.c.
62
vi. Constant Flow Capital: This type of capital generates cash for
the farm business on daily basis. Examples of such capital
include dairy cattle for the production of milk, layers for the
production of eggs and vegetables.
vii. Monetary Capital: This refers to the raw cash used for the
purchase of necessary materials and for the day to day running of
the farm business. Because of this, money capital is at times
refers to as circulating or floating capital.
3.4 Sources of Capital
The various sources of acquiring capital for farm operations include the
following:
a. Personal Savings: From the income generated, farmers can re-

invest to generate more income.
b. Friends and Relatives: Friends and relatives can assist farmers,

especially new entrants to acquire farm assets. This source of
capital is however not very reliable.
c. Money Lenders: Money lenders constitute one of the major

sources of capital to farmers in Nigeria. Even though money
lender is a reliable source of capital, the interests charged are
usually too high. The high interest rate is because of high rate of
default.
d. Cooperative Societies: Cooperative societies are now becoming

a very popular source of acquiring capital in Nigeria. The
interest charged are usually small but the major problem of
cooperative is the small amount of loanable compare to the
number of people that wants to borrow.
e. Commercial Banks: Commercial Banks are another major

source of capital to farmers in Nigeria. With the various
programmes that the Government put in place to guarantee the
farmers, banks are no longer afraid to lend money to local
farmers.
f. Other Banks: Apart from Commercial Banks, there are other

banks that grant credit to farmers to set up farm business. Such
banks include: Agricultural and Rural Development Bank,
Community Banks and Development Merchant Banks. Most of
them are established partly to assist farmers acquire farm capital.
63
g. Government Institutions: Some states established agricultural

credit corporations to assist farmers acquire farm capital for the
operation of their farms. National Directorate of Employment is
another important Government institution put in place to assist
young men going into farming to acquire farm capital. There are
other Poverty Alleviation Programmes by different state
governments that are designed to assist farmers in acquiring farm
capital.
3.5 Importance of Capital
Capital is very important in agricultural production because of the

following reasons:
• Capital enables farmers increase production of agricultural goods

and services. That is, without capital no output can be produced by
farmer.
• Capital enables farmers to hire additional labour to increase output.
• Capital also improves the standard of living of farmers. The use of
capital saves farmers time and increase their output substantially.
The job that will take ten men about one month to accomplish can be
done by tractor in one day.
• Capital improves upon the efficiency of other factors of production.
With capital, labour is able to work efficiently on the land.
Increasing capital resources is the ultimate goal of any Farm Manager.

Discuss.
4.0 CONCLUSION
In this unit, we defined capital and list the characteristics of farm capital.
We further explained the various types of farm capital available to
farmers. We also discussed the sources of acquiring farm capital and in
the concluding part of the unit; we explained the importance of capital in
agricultural production.
5.0 SUMMARY
64
This unit is devoted to farm capital and in the unit we learnt that:
• Capital is the produced means of production.

• The reward of capital is interest i.e. what is paid for the use of capital
is interest.
• Capital is man-made, it depreciates, can be stored and can be
classified.
• Capital can be classified into fixed, variable, long-term, medium
term, short term, constant flow and monetary capital.
• The sources of acquiring farm capital include – personal saving,
friends and families, money lender, cooperative societies, banks,
Government institutions among others.
• Farm capital is very important in farm operation for the efficient
utilization of resources.
1. a. What do you understand by farm capital?

b. List and discuss types of capital used in agriculture.
2. State eight (8) sources of farm capital and briefly discuss any
four.


Ayinde A. T., A. Abdul-Azeez and R. O. Adebayo (1999). Agricultural

Economics and Statistics. Ado-Ekiti: Adebayo Printing Nig.
Ltd.
David T. J. (1990). The Business of Farming. London: Macmillan

Publishers Ltd.
David W. D. and P.E. Steven (1987). Agribusiness Management. New

York: McGraw–Hill Book Company.
65
UNIT 3 LABOUR
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Labour
3.2 Characteristics of Labour
3.3 Supply of Labour
3.3.1 Types of Labour
3.3.2 Sources of Labour
3.4 Efficiency of Labour
3.4.1 Definition
3.4.2 Factors Affecting Labour Efficiency
3.5 Measurement of Labour and Machine Efficiency
3.6 Division of Labour
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
You remember that this module is devoted to discussing the factors of

production. The last unit of the module discussed capital as a factor of
production. In continuation of our discussion on the factors of
production, this unit is devoted for discussing labour resources. Under
labour resources, we shall look at the meaning of labour and sources of
labour supply. Other areas include: Efficiency of labour, measurement
of efficiency of labour and division of labour.
2.0 OBJECTIVES
• define labour resources

• list the sources of labour supply
• list the factors that affect the efficiency of labour
• explain how to measure the efficiency of labour
• describe division of labour
• list the disadvantages of division of labour.
66
3.0 MAIN CONTENT
3.1 Definition of Labour
Labour may be defined as all human effort which may be physical or

mental, skilled or unskilled used in the production process. Labour as a
factor of production involves human being. The rewards for the use of
labour are wages and salaries. Labour in combination with other factors
of production is utilized to produce product. Labour is almost the most
difficult among the factors of production to deal with because it involves
man. In agriculture, skilled workers include farm manager, Extension
Officer, horticulturist, agronomist, animal scientist, e.t.c. The unskilled
workers perform general services such as farm attendants, gardeners and
messengers.
Farm manager is interested in both the quantity and quality of labour.

The quantity of labour refers to the total supply of labour while the
quality of labour determines its efficiency.
3.2 Characteristics of Labour
• No two individuals have equal productive ability. It is therefore,

generally accepted that labour varies in quality from one person to
the other.
• Labour can be classified into productive and non-productive.
Productive labour refers to any human effort that could change the
forms of raw materials thereby creating utilities out of them. Non-
productive labour are those that engage in handling goods that were
already produced.
• Another important characteristic of labour is that it is perishable.
• Labour productivity varies with time because of age and length of
working.
• Labour is mobile. People move from one place to the other in search
of job.
• Labour has feeling and its consent must be sought before it is used in
production.
• Labour cannot be stored like capital.
• Unlike land, labour is not fixed. The quantity and quality of labour
can be increased depending on the level of business operation.
3.3 Supply of Labour
67
The supply labour will be discussed under the types of labour available
and sources of labour supply.
3.3.1 Types of Labour
Labour may be skilled, semi-skilled or unskilled. Skilled labour

involved the use of mental efforts in carrying out productive activities.
These groups of workers are those with high educational qualifications.
Examples are agricultural officers, engineers, lawyers, doctors,
accountants, e.t.c.
Semi-skilled labour involves the combination of both physical and

mental efforts in carrying out productive activities. It includes workers
with little education and training. They perform such work as clerical
job, typist and such other middle level manpower.
Unskilled labour involves those workers with no education who use

physical energy in carrying out their production activities. The
categories of workers that fall under unskilled labour include
messengers, cleaners, security guard and others that do not require
mental efforts to perform.
3.3.2 Sources of Labour
In almost all Nigerian small farmer communities, one can distinguish

between three sources of labour for farm operations:
• Family labour
• Hired or paid labour
• Exchange or communal labour
In the peasant societies labour is provided by farmer and his family and
this is one of the reasons for having many wives so as to help on the
farm. The size and type of farm depend on the number of people in the
family.
Occasionally, there is communal labour before the advent of hired

labour. Usually, wages is determined by the type of farm operation
embarked on.
The overall labour supply is affected by the following factors:
68
• The total population in the area

• The proportion of the population that is available for employment.
• The number of hours worked by each person per year.
• The level of economic activities of the area.
3.4Efficiency of Labour
3.4.1 Definition
Labour efficiency is the ability to achieve a greater output in a shorter

period of time and without any reduction in the quality of the work. In
other words, efficiency of labour refers to the ability to increase
productivity per man employed.
3.4.2 Factors Affecting Labour Efficiency
The efficiency of labour force depends on a number of factors which

include:
• Climate: This is an important factor in agricultural production. It

influences the willingness to work. Extreme temperature or high
humidity are not conducive to work. Rainfall is another important
climatic factor that can influence efficiency of labour as most
farmers will not be willing to work under heavy rainfall.
• Health of the Worker: The efficiency of the worker is closely

related to his state of health which in turn depends on his being
adequately fed, clothed and housed.
• Peace of Mind: Anxiety is detrimental to efficiency. A social

security scheme relieves people from worry about the future by
providing for them in times of sickness, unemployment, and old age.
Whatever situation that can cause anxiety, fear and unrest in the
mind of farmer will affect his general performance on the farm.
• Working Conditions: The general condition under which people

work can influence the efficiency of labour. For workers to be
efficient in the performance of their duties if require motivation and
encouragement. It also requires regular payment of their wages and
salaries as at when due. Their annual increment and promotions
must also be given to them at the appropriate time. Overtime and
bonuses can be paid to motivate them to do more. Other steps that
can be taken to improve efficiency include granting of vehicle and
housing loan.
69
• Education and Training: This factor has three aspects – general

education, technical education and training-on-the-job. A high
standard of general education is essential for developing intelligence
and providing a foundation upon which more specialized vocational
training can be based. Technical education is available to most
people only in their own time, generally by attendance at evening
classes. Vocational education consists chiefly of subjects related to
the profession or trade of student. The third type of training is
known as training on the job and each firm must undertake this for
its own employees.
• Efficiency of other Factors: The productivity of labour will be

increased if the quality of the other factors is high. The more fertile
the land, the greater will be the output per man, other things being
equal.
• Nature of Farm Layout: How crops and/or livestock are combined

influences labour utilization from day to day and from season to
season. Fragmented fields and poor layout can result in an
inefficient use of labour.
• Management and Supervision of Labour: The way labour is

managed and supervised makes a given supply of labour more
effective on one farm than the other. Others are the ways workload
is planned, the type of incentive given or the wage rate paid.
3.5Management and Supervision of Labour
There are many methods of measuring labour efficiency. Realistic

assessment of labour use must take care of family labour, valued at the
current wage rate. If an adult man works on the farm for a whole day, it
is valued as one manday. If it is an adult woman, it is valued as two-
third manday and children are valued as one-third manday. The
following are the methods of measuring labour and machine efficiency:
• By Observation: By observation, you can compare known optimum

efficiency with the performance on the farm. Balance of seasonal
labour requirement on the farm is an aspects which can pinpoint
local weakness in the use of labour.
• Calculating Labour Cost per Hectare: This is not a reliable

method but quick to measure efficiency. Increases in labour input
are economically justified so long as the result in addition to output
exceeds the value to cost of extra labour. This depends on the
intensity of farming – very intensive farm carries higher labour cost.
70
High output per man may be achieved at the expense of other farm
resources. That is why this method is not very reliable.
• Labour Efficiency Index: This method compare the calculated man

days requirement of the farming system with the actual man-day
used.
The step used in the calculation is as follow:
• Step I: Estimate the normal labour requirement in man days

using a standard table of man-day requirement for each crop and
livestock
• Step II: Find 15 – 20 percent of this total man-day requirement.

That is devoted to works of general nature.
• Step III: Subtract this 15 percent from the total man-day

requirement to obtain the annual labour requirement in man-day.
• Step IV: The annual labour obtained for the farm now valued
based on the current wage rate in the area and at the rate of working
8 hours per day.
• Step V: The resulting figure is then compared with annual

labour cost including an allowance for paid family labour.
Mathematically:
Labour Efficiency Index (LEI) – Estimated Manday x 100

Actual Manday used 1
A result of over 100 indicates a better than average Labour Efficiency

Index.
3.6Division of Labour
The first stage in the division of labour occurred when one began to
specialize in particular crafts instead of doing everything for themselves.
The term is however, more particularly applied to specialisation of
processes where the production of a commodity is divided into a number
of separate processes each of which is performed by a different man.
Traditionally, there is division of labour between domestic and farm
activities. Subsistence crops which require little work are looked after
by women while the cash crops which require more work are usually
looked after by men.
71
Some of the advantages of division of labour are as follows: men

acquire greater skills when they specialize in single operation, it reduces
the waste of time that occurs when men have to change from one
process to another, it also pave way for the introduction of machinery.
Disadvantages of division of labour are that the work become more
monotonous, a decline in craftsmanship occurs and specialists find it
more difficult to obtain work if they become unemployed. The extent to
which division of labour can be carried out is limited by the extent of the
market for the commodity.
1a. What is division of labour?

b. Discuss the advantages and disadvantages of division of labour in
farm business.
2. Explain in detail any three methods of measuring labour
efficiency
3. List and explain any five factors affecting the supply of farm
labour.
4.0 CONCLUSION
You have noted that labour is human effort and the rewards paid for the
use of labour are wages and salaries. We looked at the characteristics of
labour and supply of labour. We further discussed the factors affecting
the efficiency of labour and measurement of labour efficiency.
5.0 SUMMARY
In this unit, you have studied labour resources as a factor of production.

In this regard you have learnt that:
• Labour could be physical or mental, skilled or unskilled and

productive or non-productive.
• Labour is perishable and it varies from one person to another and
with time.
• Labour can be grouped into skilled, semi-skilled and unskilled.
• In traditional agriculture, there are three sources of labour supply –
family labour, hired or paid labour and exchange or communal
labour.
• Labour efficiency means increased productivity per man employed.
• Climate, health of worker, peace of mind, education and training,
working conditions, efficiency of other factors of production e.t.c. all
influence the efficiency of labour.
72
• We can measure labour efficiency through observation, calculation

of labour cost per hectare and calculation of the labour efficiency
index.
• Man acquires greater skills and reduces time wastage in farm
operations through division of labour.
• Work becomes monotonous as a result of division of labour. There
is also decline in craftsmanship.
1a. What is labour?

b. Discuss the supply of labour stressing its characteristics as a
factor of production.
2.a. What is labour efficiency?
b. List and discuss any five factors that influence the efficiency of
labour.

Anthonio B. O. and M. Upton (1965). Farming as Business. London;


Economics and Statistics. Ado-Ekiti: Adebayo Printing Nig. Ltd

Publishers Ltd.

York: McGraw – Hill Book Company.
UNIT 4 ENTREPRENEURSHIP
CONTENTS
1.0 Introduction
73
2.0 Objectives
3.0 Main Content
3.1 Definition of Entrepreneur
3.2 Why Entrepreneur is separated from Labour
3.3 Farm Organizational Chart
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In Units 1, 2, 3 and 4 of this module, we have discussed the

management of farm inputs used in the production process. The farm
input discussed include – land, capital, labour and entrepreneur. We
discussed the meaning of these factors of production and their
characteristic features. We further discussed their importance in Farm
Management. The last unit of this module is devoted for entrepreneur.
2.0 OBJECTIVES
• define entrepreneur
• explain why entrepreneur is separated from labour
• describe the organizational structure of a typical farm business.
3.0 MAIN CONTENT
3.1 Definition of Entrepreneur
Entrepreneur or Enterprise or Organization describes the function of

taking decision about what to produce and who combines the other
factors of production to produce what has been decided on. He
combines and organises land, labour and capital in such a way as to
obtain maximum production of goods and services at minimum costs.
The entrepreneur is normally the person who risks his capital in
establishing a business whose profitability cannot be determined at that
time. The reward for entrepreneur is profit or loss.
3.2 Why Entrepreneur is separated from Labour
Entrepreneur which is the fourth factor of production involve human

efforts similar to labour and yet it is separated from labour as a factor of
production. The reason for separating entrepreneur from labour is based
74
on the crucial functions which entrepreneur performed which labour

does not perform. These functions are as follows:
• Provision of Capital: This is one of the most important functions

performed by entrepreneur which labour does not perform. He
provides the capital for the formation of the business. He also
provides capital for carrying out production activities of the business.
It is from this capital provided that other factors of production like
labour can function.
• Risks Bearing: Entrepreneur bears all the risks that occur in

business. As the provider of capital if the business fails, he bears the
loss all alone. That is why his reward is either profit or loss. It is
pertinent to mention here that labourers will collect their wages
whether the business succeeds or not, he does not share in the risk of
the business.
• He Takes Decisions: Decision taking is another important function

of entrepreneur. There are many decisions confronting business
organization. In farm business, entrepreneurs are confronted with
such decisions as what to produce, how much to produce and how to
produce. The success or failure of the business depends greatly on
the good or bad decisions taken by the entrepreneur.
• Co-ordination of Other Factors: The entrepreneur combines and

co-ordinates other factors of production in order to achieve
meaningful production. He determines the quality and quantity of
these other factors of production that will be enough for productive
purposes.
• Efficient Management: The entrepreneur also plays the role of

maintaining efficient management in production lines. He directs
where workers should work and delegate authority to his assistant for
the efficient and effective management of their limited resources.
• Miscellaneous Functions: These functions include determination of

the price of goods produced, ensuring good working condition for
the workers, determining the scale of production, whom to employ
and retrench or retire, e.t.c.
3.3 Farm Organisational Chart
Agricultural businesses are made up of people working together toward

a common purpose. As soon as the agribusiness involves more than one
person, a variety of organizational, personnel, leadership and
motivational issues inevitably arises. The larger the organization, the
more complex and critical the issues become.
75
A Typical Farm Organisational Structure
General Manager
Asst. General Manager
Financial Livestock Crop Director of

Controller Manager Manager Administration
The typical farm organisational structure above provides a cordial

relationship between Farm Management and farm workers. The highest
authority in a farm organisation is the General Manager who may be the
owner of the business or employed to perform the duty. Next to him is
the Assistant General Manager. After the Assistant General Manager,
the running of the business is divided into various units. The Finance
Department is headed by the financial controller and administrative
department is headed by Administrative Manager. Depending on the
complexity of the business, the core units can be divided into crop and
livestock each headed by a manager. All the workers under each unit
are answerable to their sectional head who will in turn take instructions
from above.
No organisational structure is better than the people of whom it is

composed. Their understanding of the structure and their willingness to
work within it are essential to its effectiveness. Even when people are
trying to make it work, problems arise. People have emotions and
misunderstandings especially during seasonal peaks of farm production
and emotionally tired. At this point and at all stages of farm production
only an honest and effective communication can resolve any problem
that may arise between the farm workers.
Describe with the aid of a sketch diagram an organisational structure of

a poultry farm.
4.0 CONCLUSION
76
In unit four, we discussed the entrepreneur as a factor of production. In

this unit, we defined entrepreneur and justified why entrepreneur is
separated from labour as a factor of production. We finally described
the organisational structure of a typical farm business.
5.0 SUMMARY
• Entrepreneur combines and organises other factors of production to

produce maximum output with minimum cost.
• Entrepreneur is also known as enterprise or organization.
• The reward of entrepreneur is either profit or loss.
• Both entrepreneur and labour involve human efforts but
entrepreneur is different from labour because the two perform
different functions.
• Entrepreneur provides the capital used in forming the business as
well as the capital needed for the day to day running of the business.
• The entrepreneur bears the risks of the business alone and takes
decisions all alone. Therefore, all the profit or loss also belongs to
him alone.
1a. Define entrepreneur

b. Why is entrepreneur separated from labour as a factor of
production?


77

Economics and Statistics. Ado-Ekiti: Adebayo printing Nig. Ltd

Publishers Ltd.

York: McGraw – Hill Book Company.
MODULE 4 FORMS OF BUSINESS OWNERSHIP
Unit 1 Single Proprietorship

Unit 2 Partnership
Unit 3 Corporate or limited liability Company
Unit 4 Cooperative Societies
78
UNIT 1 SOLE OR SINGLE PROPRIETORSHIP
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Single Proprietorship
3.2 Characteristics of Single Proprietorship
3.3 Advantages of Single Proprietorship
3.4 Disadvantages of Single Proprietorship
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In module 3, we discussed the factors used in the production of farm
output. In Unit 1, we defined land stressing its characteristics and
management practices. In unit 2, we defined capital, characteristics of
capital, types and sources of capital. We discussed labour in Unit 3
stressing its characteristics, supply and efficiency of labour. In that unit,
we further discussed measurement of labour efficiency and division of
labour. Finally, in Unit 4, we discussed entrepreneur and differentiated
entrepreneur from labour as a factor of production. This module is
devoted for discussing the forms of farm business ownership. The
module is divided into four units – sole proprietorship, partnership,
cooperative and corporate business or enterprise.
2.0OBJECTIVES
• explain the meaning of sole proprietorship

• list the characteristics of sole proprietorship
• list the advantages of sole proprietorship
• list the disadvantages of sole proprietorship
3.0 MAIN CONTENT
3.1 Meaning of Single Proprietorship
The simplest form of business in farm organisation is the one-man

business or sole proprietorship. It exists where the whole business is
owned and controlled by one person. He bears all the risks alone and
79
this form of business has unlimited liability. He however, enjoys all the
profits alone. This type of business has no legal existence i.e. it is not a
legal entity.
3.2 Characteristics of a Single Proprietorship
The main features or characteristics of single or sole proprietorship

include the following:
• Forms of Ownership: It is owned and run by one person, though he

may have employees.
• Type of Liability: He has unlimited liability. Therefore, the failure
of the business could lead to the sale of his personal assets.
• Source of Capital: He provides the capital required for starting and
running the business either from personal saving or loan from other
sources.
• Motive of its Formation: The motive of forming the business is to
make profit. If the business succeeds, he makes profit, but if the
business fails, he sustains a loss.
• The Legal Status: The business is not a separate legal personality.
The law does not distinguish between the business and the owner.
• Method of Withdrawing Capital: The business is controlled and
managed by the sole proprietor himself. Therefore, the owner does
not consult anybody before withdrawing capital.
• Nature of the Business: The one – man business is the oldest,
simplest and most common type of business organisation. Many big
business concerns which exist today started as sole – proprietorship.
3.3 Advantages of Sole – Proprietorship
1. Establishment: It comes into existence with great ease. This is

because it requires small capital and it does not require all the
formalities and legal processes undergone by other forms of
business.
2. Capital Requirement: Sole proprietorship requires small capital

to operate. Because of this advantage, it is the commonest and
most popular form of business ownership in Nigeria.
3. Decision making: Decision taking is quick. This is because the

sole-proprietor does not need to consult anybody before taking
decision.
4. Business Management: This form of business is easy to manage

because of its small size and small number of workers involved.
80
It has a simple organizational structure which makes it easy to

manage.
5. Business Environment: The sole proprietorship is suitable

where there is a need for special products and a small market for
goods and services. Where special products are required, the
one-man business is very suitable since production is usually on a
small scale. Large business organisations produce standardized
goods and are therefore, hardly suitable for providing special
products.
6. Share of Profit: Since the business owner contributes all the

capital used in establishing and running the business alone, all the
profits also belong to him alone.
7. Existence of Privacy in the Business: The sole proprietor can

keep his business affair secret. No law compels the owner of the
business to submit his audited balance sheet to the registrar of
companies.
8. Relationship between the Owner and the Employees: As a

result of the small nature of sole-proprietorship, the employees
are personally known to the proprietor. This makes supervision
easy and ensures effectiveness of business operations.
9. Multiple Occupations: It is possible for the sole-proprietor to

operate more than one occupation at a time. The owner can
combine two or more types of occupation as a result of the
flexibility of his business.
10. Withdraw of Asset: In case the owner is no longer interested in

the business, he can easily withdraw his assets without consulting
anybody. As it is easy to form the business, it is equally easy to
close the business.
3.4 Disadvantages of Sole-Proprietorship
1. Limited Capital: There is limited capital to finance the

business. This is as a result of the fact that the capital used in
running the business comes from one man. As a result, lack of
enough capital limits the rapid expansion of the business.
2. Limited Ability: As a result of the fact that the business

revolves around one man, its progress depends on the ability of
the proprietor alone.
81
3. Unlimited Liability: He bears the entire risk of the business

alone. If the business fails, he bears the entire loss and his
personal belongings may have to be sold to pay his creditors. His
liability is not limited to the amount of capital he has invested in
the business.
4. The Business is not a Legal Entity: The owner is not distinct

from the business. This means that if the business is taken to
court it is the owner that is also taken. The business cannot sue
or be sued in its own right.
5. Lack of Continuity: The business has uncertainty of continuity.

The exit of the owner may end the business. If the sole proprietor
dies, the business may die with him either because he has no
reliable somebody to continue the business or his
children/relations lack interest in the business.
6. Low Competitive Ability: This is because of limited capital and

limited ability of the owner. The owner of the business does
everything alone. Therefore, his ability to compete effectively
with other similar business is highly limited to whatever the
owner can offer.
7. Inadequate Leisure Time: There is no period of rest or break

for the business owner. The proprietor has no leave and no
retirement age. He continues to work day and night for success
of the business.
Why is single or sole proprietorship a very popular form of business

ownership among the Nigerian farmers?
4.0 CONCLUSION
In Unit 1 of this module, we have discussed single or sole proprietorship

as a form of business ownership. The unit is divided into four sections.
The first section explains the meaning of one-man business; the second
section discussed the characteristics features of sole or single
proprietorship. Sections three and four highlighted the advantages and
disadvantages of sole proprietorship respectively.
5.0 SUMMARY
82
a. In single proprietorship, the business is owned and controlled by

one person.
b. It is the most common and simplest form of business ownership
among the rural people in Nigeria.
c. The highlights of the characteristic features of single
proprietorship include:
• Form of business ownership,

• Type of liability,
• Source of capital,
• Motive of its formation,
• The legal status,
• Method of withdrawing capital and nature of the business
d. The areas touched under the advantages of single proprietorship
include:
• Ease of establishment,
• Small capital requirement,
• Quick decision taking
• Easy management of the business can be operated under
special demand,
• Shares profit alone and
• Existence of privacy in the business, e.t.c.
e. The major disadvantages highlighted
• Limited capital,
• Limited ability,
• Unlimited liability,
• The business is not a legal entity,
• There is lack of continuity in case of death of the owner and
• Low competitive ability.
1a. What is single-proprietorship?

b. Discuss the advantages of single-proprietorship over other forms
of business ownership.
2. Discuss the meaning of single – proprietorship stressing its
characteristics features.
83
Anyaele J.U. (1990). Comprehensive Economics for Senior Secondary

Schools. Lagos: Johnson Publishers Ltd.
Anyanwuocha R. A. E. (2001). Fundamentals of Economics for Senior

Secondary Schools. Onitsha: Africana – FEP Publishers Ltd.
UNIT 2 PARTNERSHIP
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Partnership
3.2 Types of Partnership
84
3.3 Characteristics of Partnership

3.4 Advantages of Partnership
3.5 Disadvantages of Partnership
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In Unit 1 of this module, we discussed the most popular form of

business ownership among the farmers – sole proprietorship. Issues
raised in the unit include: meaning of sole proprietorship,
characteristics of sole proprietorship, advantages and disadvantages of
sole proprietorship. This unit is devoted to discussing partnership form
of business ownership. The area covered include: meaning of
partnership, types of partnership, characteristics of partnership,
advantages and disadvantages of partnership
2.0 OBJECTIVES
• explain the meaning of partnership

• describe the various types of partnership form of business ownership
• list the characteristics of partnership
• list the advantages of partnership
• list the disadvantages of partnership business organisation.
3.0 MAIN CONTENT
3.1 Meaning of Partnership
Partnership is a relationship which exists between two or more persons,

who by an agreement decided to run a business together and share the
risks and profits of the business. Generally, the number of partners may
vary from a minimum of two to a maximum of twenty.
People wishing to form themselves into a partnership should draw up a

Deed of Agreement or Article of Partnership which sets out in written
form, the terms and conditions of the partnership. The Deed is not a
legal necessity but it has the advantage of containing a written
agreement should dispute over the terms of the partnership arise in
future. The partnership Deed usually contains the following:
• Names of the partners
85
• Name and nature of the business formed.

• Amount of capital contributed and the rate of interest to be paid on
the capital invested in the business.
• Distribution of the partnership
• Duration of the partnership
• Amounts that can be withdrawn by the partners from the partnership
for their private use since they do not receive salaries.
• The procedure of liquidation or what happens after the death of a
partner.
3.2 Types of Partnership
There are two major types of partners:
• Ordinary or Active Partners: In this type of partnership, all

members contribute equal capital and take active part in the
organisation and management of the business. All the partners have
equal powers, unlimited liabilities and profits are shared equally.
• Limited or Sleeping Partners: A sleeping partner on the other

hand is someone who contribute capital but takes no active part in
the organisation and management of the business. As the name
implies, a limited partner has a limited liability. This partner does
not receive any salary as he does not take part in the organisation and
management of the business. He receives a fixed rate of interest on
his capital.
3.3 Characteristics of Partnership
The main features or characteristics of partnership include the

followings:
• The Legal Status: The business is not a separate legal entity and
cannot therefore sue or be sued in its own name.
• Types of Liability: Partners have unlimited liability.
• Source of Capital: The partners contribute capital/skill according to
the agreement reached. In return, each of them receives a proportion
of the profits as agreed.
86
• Motive of its Formation: The motive of forming partnership is to

make profit.
• The Legal Status: The business is not a separate legal entity and
cannot therefore, sue or be sued in its own name.
• Nature of the Business: The business has no board of directors.
The control and management of the business is in the hands of the
active partners.
• Method of Withdrawing Capital: Withdrawal of capital must be
approved by other partners as laid down in their partnership deed.
• Mode of Operation: The partners usually take the major decisions
together. They also bear the risks of the enterprise together.
3.4 Advantages of Partnership
a. Capital Supply: This form of business ownership offered better

resources for starting and running a business than the sole
proprietorship. This is because partnership required two to twenty
people pooling their resources together. In addition, it will be easier
for a group of people to borrow money in the bank to finance the
business than individuals. This is because the group will be able to
offer better collateral security than individuals.
b. Decision Making: There is the likelihood that better decisions

would be taken. Since decisions are jointly taken, each partner will
contribute his own ideas. The better ideas are taken since two heads
are better than one.
c. Sharing of Risks and Liabilities: Business risks are shared among

all the partners. Each partner is jointly liable with other members of
the business for all the debts of the partnership. This reduces the
liability of each partner in the event of business failure.
d. Prospect of Business Continuity: Unlike sole proprietorship, the
death of one partner may not lead to a total dissolution of the
business since the other partners can continue the business.
Furthermore, a partner may take rest due to illness without adversely
affecting the business.
e. Existence of Privacy in the Business: Like the single

proprietorship, the partnership can keep its business affairs private
since it is not required to make its accounts available for public
inspection.
f. The Relationship between the Partners and the Customers:

There is still personal contact with both the customers and the
employees of the business. This is because of the small size of the
business when compared with corporate business.
87
g. Multiple Occupations: Like the single proprietorship, partnership

is allowed to set up more than one small business. In addition, each
of the partners could still run another small business on his own.
h. Specialization and Division of Labour: As a result of different

skills and talents possessed by partners, application of division of
labour is possible. There could be specialisation among the partners
in the organisation and management of the business. Some partners
may specialize in production, marketing and administration of the
business.
i. Employment Opportunity: In comparison with the single

proprietorship, the large size of the partnership made possible by its
enough capital, make it possible to offer more employment to
people.
3.5 Disadvantages of Partnership
1. Limited Capital: Unlike the limited liability company, the

partnership has no legal right to obtain more capital through
shares from members of the public.
2. Unlimited Liability: If the business goes into liquidation, the

partners will lose all the capital they contributed and if not
enough, they will sell their personal properties in order to offset
the remaining debts.
3. Partnership is not a Legal Entity: The business is not a

separate legal entity. A partnership cannot sue or be sued in its
own right. The partners can be sued separately or jointly as a
result of any breach of contract on the part of the business.
4. Disagreement between Partners: Disputes and arguments may

arise among the partners especially if it is felt that some members
are not contributing enough to the success of the business.
Quarrels may lead to litigation which could eventually cause a
total dissolution of the business.
5. Slow Decision Making: Decisions take a longer time to be

reached than in the single proprietorship. This is as a result of the
fact that many people must be consulted before any major
decision or policy is taken.
6. Exit of a Partner may end the Business: The death or

withdrawal of a partner may lead to the end of the partnership. If
88
a partner dies, his relatives may want to withdraw his share in the
business. Therefore, the continuity of the business may be
adversely affected.
7. Decrease in Personal Interest: The interest the partners will

show in the business will be minimal because the business is not
one person’s affair.
8. Lack of Mutual Trust among Members: It is difficult to

obtain, and subsequently difficult to maintain the mutual
confidence so essential for this type of business enterprise.
1. Prepare a comprehensive deed of agreement between you and

your friend who wants to form partnership with you in
establishing a poultry farm.
2. Compare single proprietorship with partnership.
4.0 CONCLUSION
In this unit, we have discussed partnership as a form of business

ownership. Under this section, we explain the meaning of partnership
and the types of partnership. We further describe the characteristics
features of partnership. In addition, we highlighted the advantages and
disadvantages of partnership as a form of business ownership.
5.0 SUMMARY
• Partnership is a relationship which exists between two or more

persons carrying on business with a view to making profit.
• The number of partners may vary from a minimum of two to a
maximum of twenty.
• People wishing to form themselves into partnership should draw up a
deed of agreement or article of partnership.
• There are two major types of partners: ordinary or active partners
and limited or sleeping partners.
• The characteristic features of partnership highlighted include: Form
of ownership, type of liability, source of capital, motive of its
formation, the legal status, method of withdrawing capital and nature
of the business.
89
• The areas touched under the advantages of partnership include:

capital supply, quality of decision making, fair sharing of risks and
liabilities, prospect of business continuity, existence of privacy in the
business, cordial relationship between partners and their customers
and employees, possibility of multiple occupations, possibility of
specialisation and division of labour, e.t.c.
• The major disadvantages highlighted in this unit include: Limited
capital, unlimited liability, partnership is not a legal entity,
possibility of disagreement between partners, slow decision making,
exit of one partner may end the business, decrease in personal
interest and lack of mutual trust among members.
1. List and discuss five merits and five demerits of partnership form
of business ownership in agriculture.
2. Explain briefly but concisely the following terms:
a) Partnership
b) Partnership deed
c) Ordinary or active partners
d) Limited or sleeping partners


90
UNIT 3 CORPORATE OR LIMITED LIABILITY

COMPANIES
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Limited Liability Company
3.2 Characteristics of Corporate Business or Limited Liability
Company
3.3 Formation of Limited Liability Company
3.4 Advantages of Limited Liability Company
3.5 Disadvantages of Limited Liability Company
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit 2 of this module, we discussed partnership form of business

organisation. Under partnership we discussed the meaning of
partnership, types of partners and characteristic features of partnership.
Other areas discussed are: advantages and disadvantages of partnership.
In this unit, we shall discuss corporate organisation or Limited Liability
Company. Under Limited Liability Company, emphasis will be on the
type of Limited Liability Company, characteristics, formation,
advantages and disadvantages.
2.0 OBJECTIVES
• explain the meaning of Limited Liability Company

• list the characteristics of Limited Liability Company
• explain the formation of Limited Liability Company
• list the advantages of Limited Liability Company
• list the disadvantages of Limited Liability Company.
91
3.0 MAIN CONTENT
3.1 Meaning of Corporate Organisation or Limited Liability

Company
Limited Liability Company is an expansion of the partnership principle.

It aims at securing a better method of mobilizing financial resources.
The company come into existence when a number of persons join
together to invest their money in a common enterprise. The liability of
each investor for the debts of the business is limited to the amount of his
capital invested in the company. The profits of the company are
distributed in proportion to the shares subscribed and paid for. The
limited liability company is owned and controlled by the shareholders.
Each shareholder receives a share of the profits called the Dividend.
Limited Liability Companies are of two types – the private liability

company and the public limited liability company or the joint-stock
company. The two types are essentially the same. The major difference
between them is that in private limited liability company, the number of
owners who are shareholders ranges from two to fifty. In public limited
liability company, the minimum number of shareholders is seven and
there is no maximum number. In addition, private limited liability
company is called private or closed because purchase of shares is
restricted to only the founders. In contrast, public limited liability
company is open to everybody in the society who is interested in the
ownership of the company.
3.2 Characteristics of Limited Liability Company
1. Number of Shareholders: For private limited liability company,

the number of shareholders range from two to fifty. For public
Limited Liability Company, the number of shareholders starts
from seven and no maximum.
2. Separate Legal entity: The business is a separate legal entity. It

is recognized as a personality in law. The business can sue and
be sued in its own name, without involving the owners. It is
registered as a corporate body.
3. Limited Liability: The shareholders have limited liability. In

the event of business failure, the amount which a shareholder can
loose is limited to his share or capital he has invested in the
business. His personal assets are protected by the law.
92
4. There is Continuity of Business: The withdrawal or death of a

shareholder may not affect the existence of the company.
5. Board of Directors: There is Board of Directors who controls

the business of taking most of the major day to day decisions.
6. Acquisition of Capital: Capital is raised through the issue of

shares. Capital can also be raised through borrowing from
financial institutions and issuing debentures.
7. Publication of Accounts: Corporate business organisation must

have its account publicized usually annually. It must submit an
audited balance sheet to the Registrar of Companies for
inspection.
3.3 Formation of a Limited Liability Company
A. Filing of Documents with the Registrars: The first step in the

formation of a Limited Liability Company involves filing of
documents with the Registrar of Companies. Such documents
include:
i. Memorandum of association
ii. Articles of association
iii. Names of the company directors, and
iv. Letter of undertaking.
The memorandum of association will include:
• The relationship of the company with outside world

• Name of the company
• The business address
• Objectives of the company
• The nature of the shareholders’ liabilities
• The amount and type of shareholders’ capital, e.t.c.
The articles of association give the rules and regulations guiding the
operation of the company. The document provides information on the
following areas:
• The duties, rights and position of each member of the company

• Method of the appointment of directors
• The rights and powers of the directors
• How dividend are to be shared
• How general meetings are to be held
93
• Method of electing directors

• Voting rights of shareholders during elections
• Method of auditing the account of the company
B. The second step after the preparation and submission of the

documents to the registrars of companies involved preparation of
certificate of incorporation. If the registrar is satisfied that the
business has met the necessary requirements for company
formation, the registrar will then send a certificate of
incorporation. The certificate of incorporation shows that the
business has been recognized as a legal entity.
C. The third step is the submission of the company prospectus to the

registrar of companies. The prospectus shows how the company
has raised or wants to raise its capital.
D. The last step is the preparation of certificate of trading by the

registrar of companies. The business can start functioning as
soon as they receive trading certificate from the registrar of
companies. All these legal procedures are necessary in order to
protect the interested shareholders from being defrauded by a
group of dubious people.
3.4 Advantages of Limited Liability Company
1. Legal Entity: The business has a separate legal entity and as a

result, it is distinct from the owners. It can therefore, sue and be
sued in its own right.
2. Limited Liability: In the event of business failure, the

maximum amount a shareholder can loose is the amount of
capital he has contributed to the business. His personal assets are
protected by law.
3. Large Capital: The business has large resources of capital

because of the large number of shareholders in the company. The
company also finds it easy to borrow money because of its many
assets which can be used as collateral.
4. Sure of Continuity: There is continuity of the business on the

death or illness of a shareholder. The misfortunes of a
shareholder do not affect the existence of the company and its
operations.
5. Transfer of Capital: The shares of a public Limited Liability

Company are easily transferable for cash. This form of business
94
ownership has the advantage of allowing the shareholders to

transfer their capital at will if they feel dissatisfied with the
company.
6. Specialisation is Possible: Division of labour is possible under

this system of business ownership. Due to large number of
people involved in running the business, the organisation is
divided into various Departments. This leads to greater
efficiency.
7. Risks Reduction among Owners: The business risks are shared

among a large number of persons. The wider spread of risks
results in reduced loss for each shareholder, in the event of
business failure.
3.5 Disadvantages of Limited Liability Company
a. Difficult to Establish: Due to Government interest in this type

of business organisation, the formalities for its establishment are
usually very complicated. A number of requirements must be
fulfilled before the business is registered as a company.
b. Required Large Amount of Capital: Apart from the

formalities required, to establish the business, company also
required huge amount of capital to start the business.
c. Delay in Decision Making: There is delay in taking decisions

because of the relatively large size of the business. Before any
major policy change can be adopted by the manager, a meeting of
shareholders or the board of directors has to be convened. All
these may take quite a long time.
d. Lack of Privacy: It is required by law for the company to make

public all the financial activities and operations of the business.
All vital documents and information concerning the business are
also sent to the registrar of companies for inspection. At times,
annual report of the company is published in the dailies.
e. Ownership is Separated from Management: Since the

shareholders who are the owners of the business are separated
from the management of the business, there may be a negative
attitude among the managers towards the interest of the
shareholders. The managers may embezzle the company’s fund
since the business is not their own.
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f. Lack of Cordial Relationship between Employers and

Employees: Unlike single proprietorship and partnership, the
size of this company makes cordial relationship with employers
and customers/employees impossible. The shareholders may not
know each other. The owners may range into thousands and are
scattered throughout the country.
g. Decrease in Personal Interest: The type of interest, zeal and

enthusiasms found in a business owned and controlled by one
man is lacking in a Limited Liability Company. This is because
the ownership is separated from the management.
1. Differentiate between Limited Liability Company and partnership

form of business ownership.
2. Describe the process involved in the formation of a Limited
Liability Company.
4.0 CONCLUSION
In this unit, we have discussed the meaning of a Limited Liability

Company. We also discovered the two types of Limited Liability
Company. The characteristic features of corporate business were also
highlighted. In this unit, we also further highlighted the advantages and
disadvantages of Limited Liability Company.
5.0 SUMMARY
• Corporate business is an association of individuals who agree to and

jointly pool their capital together in order to establish and own a
business.
• There are two types of Limited Liability Company – private Limited
Liability Company and public Limited Liability Company.
• The characteristic features or Limited Liability Companies
highlighted include: the number of shareholders, separate legal
entity, limited liability, business continuity, there is board of
directors, acquisition of capital and publication of accounts.
• There are four essential steps in the formation and establishment of a
Limited Liability Company – filing of documents with the registrar
of companies, preparation of certificate of incorporation, submission
of company’s prospectus and preparation of certificate of trading.
96
• The important areas touched under the advantages of corporate

business include: legal entity, limited liability, large capital,
prospect of continuity, transfer of capital, possibility of
specialization and reduction in risks among owners.
• The major disadvantages highlighted include: difficult to establish,
required large amount of capital, delay in decision making, lack of
privacy, lack of cordial relationship between employer and
employees, and decrease in personal interest.
1a. What is a Limited Liability Company?

b. Describe the characteristics of a Limited Liability Company.
2. List and discuss five advantages and five disadvantages of a

Limited Liability Company.



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UNIT 4 COOPERATIVE SOCIETY
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Cooperative Society
3.2 Characteristics of Cooperatives
3.3 Types of Cooperative
3.4 Advantages of Cooperative
3.5 Disadvantages of Cooperative
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit 3 of this module, we discussed Limited Liability Company as a

form of business ownership. In the unit, we defined Limited Liability
Company and identified the two major types of such organisation. We
also looked at the characteristics of Limited Liability Company that
distinguished it from other forms of business. We further discussed the
processes involved in the formation of corporate organisation. Finally,
we discussed the advantages and disadvantages of such business
organisation. In the last unit of this module, we are going to concentrate
our efforts in discussing cooperative as a form of business organisation.
The topics covered include – the meaning of cooperative, characteristics
of cooperative, types of cooperative, advantages and disadvantages of
cooperative.
2.0 OBJECTIVES
• define cooperative society

• list the characteristic features of cooperative societies
• describe the various types of cooperative societies
• list the advantages of cooperative societies as a form of business
• list the disadvantages of cooperative societies.
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3.0 MAIN CONTENT
3.1 Meaning of Cooperative Society
Cooperative is a form of business voluntarily owned, organised and

upgraded by members for their mutual benefits. Unlike corporate
business, the control is on their members and no individual is allowed to
have controlling share. It is expected that most of the business of
cooperative should be carried out with the member’s patron, therefore,
after paying all costs, the profit or surplus is returned to members in the
form of patronage refund. If cooperative operate along such lines, they
obtain certain kind of assistance from Government and they are usually
exempted from taxes. The primary purpose of a cooperative business is
to give good service to its members and to return any surplus or profit
arising from this operation to its owners.
3.2 Characteristics of Cooperative Societies
1. Open Membership: This principle implies that cooperative

business should be opened to all those who are interested. There
is no limit to the size of its membership. It is usually opened to
persons with similar interests who wish to join.
2. Democratic Control: This principle implies the concept of one

man one vote. Each member has one vote only and can stand for
election into any office. They have equal rights. All the
members take part in any major decision taking.
3. Limited Return on Capital: Cooperative societies exist

primarily to provide services to their members at the lowest
possible cost, hence, cooperators should not expect to make large
returns on their invested capital.
4. Patronage Dividend: Profit made are shared to members

according to their share contributions. This is meant to encourage
people who are able to contribute more in the society to do so.
5. Cash Transaction Only: Members of the cooperatives are

expected to purchase or sell produce strictly on cash basis. This
means that no credit is allowed.
6. Religious or Political Neutrality: This implies that membership

of cooperative society should be opened to all irrespective of
religion, political or ethnic differences. This principle
demonstrates the role of cooperative as a unifying factor in the
society.
99
7. Constant Education of Members: Members could be trained

on simple farm hygiene, livestock management, new production
techniques like yam, fish farming, e.t.c. Cooperative education
also helps to enlighten members on the importance of
cooperation.
3.3 Types of Cooperative Society
1. Producers Cooperative Society: Producers cooperatives or

group farming cooperatives are organised in order to enable small
farmers reap the benefits of large scale farming, collective
purchase and use of heavy machinery and other equipments.
Through such societies, improved farming methods can be
practiced. Members of this society contribute money in order to
buy or hire equipment, machinery and raw materials at reduced
rates meant for the promotion of their productive activities.
2. Consumers Cooperative Society: These are more concern with

the sales of manufactured good to members at minimum cost.
Members pool their resources together in order to buy goods in
bulk from the manufacturers. They by-pass the middlemen in
order to get these goods at cheaper rates and then distribute to
their members.
3. Marketing Cooperative Society: The main objective of this

society is to arrange for the sale of members’ produce to
encourage members to produce crops of high quality and promote
cooperative spirit among the members. In addition, marketing
cooperatives also provide loans and savings facilities to their
members.
4. Thrift and Credit Cooperative Society: The aims of thrift and

credit Cooperative Society are the provision of savings facilities
and the granting of loans to members. Credit limits are fixed for
all members in relation to their savings. The rate of interest
charged on loans varies but are generally low.
5. Multipurpose Cooperative Society: As the name implies, these

types of organisation discharge two or more functions. Most
multipurpose cooperatives assist members to purchase farming
tools and other essential materials. They serve as village banks
where members can keep savings and obtain loans. They also
serve as agents for the distribution of fertilizers and improved
seeds and seedlings. Some of them combine production with
marketing and processing.
100
6. Other Cooperative Society: Other forms of cooperative

societies exist, they include: agricultural processing
cooperatives, fishery cooperative society, farmers consumer
cooperative society, service cooperative society, e.t.c.
3.4 Advantages of Cooperative Societies
a. Encouragement of Savings: Cooperative thrift and credit

societies encourage their members to save their money. This
function is very important in Nigerian rural areas where
commercial banks are very few. Left on their own, the
individuals may not be able to save enough money for investment
purposes.
b. Provision of Loans: Cooperatives can raise loans for

agricultural practices or other forms of production easily and at
low interest rates. Cooperatives can borrow money more easily
in bank than individual farmers. This is because they are in a
better position to offer more collateral than individual farmers.
c. Education and Training of Members: Cooperatives educate

their members in the area of production, distribution,
consumption and marketing of goods and services.
d. They are Democratic in Nature: All members of the

cooperative society have equal right to vote and be voted for.
They have equal right to say how the society should be organised.
In this way, cooperative society provides training in self-
government and business management for its members.
e. They Prevent Price Fluctuation: The motive of forming

cooperative society is not to make profit but to protect the welfare
of their members. They buy most of their products in bulk and
sell to members at low costs. This results in low prices of goods.
f. Avoidance of Cheating and Hoarding: Cooperative societies

are known for open service. The satisfaction of members is the
ultimate goal of cooperatives. Since their members are their
immediate customers, they can not afford to cheat their members.
Hoarding is also avoided by the society.
g. Increased Standard of Living: Through cooperative societies,

farmers have access to loans to increase their production capacity
as well as to purchase essential items for the family.
Cooperatives also purchase some manufactured goods and
101
distribute same to members. All these are aimed at improving the

living conditions of members.
h. Promote Unity Among Members: Members of cooperatives are

known to each other. They meet regularly and take decisions
collectively. This personal interaction between members
encourage inter- personal relationship among them.
3.5 Disadvantages of Cooperatives
i. Low Capital Base: This problem arises because of the poor

background of most rural farmers who form the bulk of these
societies. Another problem is the unwillingness of members to
pay-up their subscriptions.
ii. Political Influence: Even though cooperatives are not supposed

to be in politics. Many of the societies have found their ways
into politics. Some were forced to declare for a particular
political party as against the wish of some members thereby
causing conflict and rifts among them.
iii. Illiteracy of Members: Most members of cooperative societies

in Nigeria are illiterates. The result is that most of them may be
ignorant of the potential gains of cooperative. Apart from the
gains, illiterate members may not understand the working and
principles of these societies.
iv. Weak Management: Cooperative officers are drawn from

among members who are mainly farmers; they may lack
administrative and managerial competence to handle the business
efficiently.
v. Possibility of Embezzlement: Reports of embezzlement of

cooperative fund is very rampant. Some cooperative officers
connive to use societies’ money for their selfish benefits.
vi. High Rate of Loan Default: Occurrence of loan default is very

common among cooperative members. Loan default occurs
within the societies as well as the loan guaranteed by the societies
from the banks. Most loans granted through cooperative societies
are usually without much collateral security. Most members
usually enjoy the loan but only few pay back the money in full.
vii. Low Membership: Unlike Limited Liability Company, there is

still low membership of cooperatives in Nigeria. Even though
there is no limit to the number of shareholders, only few people
102
join cooperative business. This problem is probably due to lack

of proper understanding of the principles and ideals of
cooperatives.
1. Distinguish cooperatives from other forms of business

organisation.
2. Describe the steps you would take to form a multi-purpose
agricultural cooperative society.
4.0 CONCLUSION
In this unit, we have discussed the meaning of cooperative society. We

have also discussed the characteristics of cooperatives that distinguish it
from other forms of business. The various types of cooperative societies
available were also discussed. The benefits derived from joining
cooperatives were highlighted. Finally, the problems associated with
cooperative movements were equally highlighted and discussed.
5.0 SUMMARY
• Cooperatives are business organisations jointly organised, funded

and operated for the mutual benefits of members.
• Some of the features of cooperatives that distinguish it from other
forms of business organisations include: open membership,
democratic control, limited return on capital, dividend based on
patronage, cash transaction only, religion and political neutrality and
education of members, e.t.c.
• Many types of cooperatives exist. They include: Producers’
cooperatives, consumers’ cooperatives, marketing cooperatives,
thrift and credit cooperatives, multipurpose cooperatives, e.t.c.
• Some benefits of joining cooperatives include: encouragement of
savings, provision of loans, education and training of members,
cooperative is democratic in nature, they prevent price fluctuations,
they avoid cheating and hoarding of goods and improve the standard
of living of members.
• The major disadvantages discussed include: low capital base,
political influence, illiteracy of member, weak management,
embezzlement of members’ fund, high rate of loan default and low
membership.
103
1a. What is cooperative?

b. List and discuss any five types of agricultural cooperatives
known to you.
2a. Discuss any five benefits a farmer will enjoy from joining a
cooperative society.
b. Discuss any five problems facing agricultural cooperatives in
Nigeria.
Adegeye A. J. and J. S. Dittoh (1985). Essentials of Agricultural



Ayinde A.F., A. Abdul-Azeez and R. O. Adebayo (1999).Agricultural

Economics and Statistics. Ado–Ekiti: Adebayo Printing Nig. Ltd.
104
MODULE 5 FARM RECORDS AND ACCOUNTING
Unit 1 Concepts of Farm Record and Accounting

Unit 2 Farm Record Designs
Unit 3 Benefit Cost Analysis of Agricultural Projects
Unit 4 Financial Statements
UNIT 1 CONCEPTS OF FARM RECORD AND

ACCOUNTING
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Farm Record
3.2 Meaning of Farm Account
3.3 The Importance of Keeping Farm Records and Accounts
3.4 Types of Farm Record and Accounting
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In the last module, we learnt about the forms of business ownership.

We identified four different types of business organisations – single
proprietorship, partnership, corporate organisations and cooperative
societies. For each of these organisations we discussed the meaning,
characteristics, advantages and disadvantages among other things. This
module is devoted to farm records and accounting and this unit is
centred on the concepts of farm records and accounting.
2.0OBJECTIVES
• define farm record

• define farm account
• give at least five reasons for keeping farm records and accounts
• explain the various types of farm records and accounts that are
available.
105
3.0 MAIN CONTENT
3.1 Meaning of Farm Records
Farm records are the written records or documents of activities on the

farm. Records of farm activities are kept on daily basis. From the daily
records, the weekly summaries are prepared and the weekly summary
provides information for the monthly and subsequently yearly
summaries. All daily activities including performance of crops and
livestock, symptoms of diseases observed, farm operations, and other
happenings must be recorded promptly and accurately in the farm record
book.
3.2 Meaning of Farm Accounts
Farm accounts are the financial records of what the farmer spends or
receives on the farm. The systematic way of recording financial
business transaction is what is normally referred to as farm accounting.
Farm accounts are usually designed to show two major financial

statements. First is the capital position or net worth of the farm i.e.
balance sheet. Secondly, the income and expenditure i.e. profit or loss
in the farm business.
3.3 The Importance of Keeping Farm Records and Accounts
1. Calculation of Profit Margin: Farm records and accounts

involve keeping of all the expenses incurred on the farm and the
records of all the income in the operations of the farm. If the
total income is more than the total expenditure on the farm, the
result is profit and if the reverse is the case it results into losses.
2. Progress Report: Some of the important records kept on the

farm are profit and loss, crop yield and livestock performances.
Since the records are kept on yearly basis, the farmer can easily
compare the progress made on yearly basis. Through these
records, farmers can determine if there is increase in his farm
size, livestock population, crop yield, e.t.c. over the years. This
will enable him determine the progress he has made over the
years.
3. Easy Access to Credit Facilities: One of the major problems

facing credit institutions in Nigeria is to determine the
appropriate credit suitable to each farmer. Proper records of farm
account will eliminate this problem as the record will show the
106
level at which the farmer is operating. Granting appropriate

credit will also reduce the problem of credit diversion by farmers.
4. Determination of Appropriate Tax: Farmers supposed to pay

taxes based on the profit realised on their farms. If records and
accounts are not properly kept, Government will decide to fix any
amount which may lead to either over-tax or under-tax payment.
5. Determination of Insurance Premium: With the establishment

of National Agricultural Insurance Company, it is now
compulsory for any farmer taking agricultural loan to produce
insurance cover for his farm business. Just like the taxation of
farm business, insurance premium paid by farmer is also based on
the volume of farm business. The amount of crop or livestock
insurance to be paid is determined from the farm records and
accounts kept by farmers. When records are not available, the
insurance company can decide to fix any amount they so desired.
6. Guide in Decision Making: A good farm records and accounts

will guide farmers in decision making process. A comprehensive
record of farm activities will bring out clearly the area of
weaknesses and strong points in Farm Management. A good
farm records and accounts will show which enterprise is making
progress and which one to be discarded. On the basis of resource
allocation, farm records and accounts can reveal the level of
fertilizer used on the farm or the rate of feed consumption by the
livestock. This can lead to a decision on whether to reduce or
increase the level of resources used on the farm.
7. For Planning and Budgeting Purposes: Farm records and

account kept for many years will provide both the farmers and
government information for planning purposes. Based on the
past records and accounts both farmers and government can
prepare accurate budget estimate for the next farming season.
Past records and accounts will show clearly the amount spent on
the various farm operations and the resources required from these
records, the expected revenue can be projected for planning
purposes.
3.4 Types of Farm Records and Accounts
There are many ways of presenting farm records and accounts. The
method adopted depends on individuals and the type of business
organisation involved. Generally, there are four different groups of farm
records and accounts that are used by most farmers. These include:
107
• Production records
• Income and expenditure records
• Inventory records, and
• Miscellaneous records.
a. Production Records: Production records are the records of

physical activities on the farm. In crop production, all farm
operations involving inputs and outputs from land clearing to the
harvesting stage are recorded under the production records.
Similarly in livestock production, all operations from the
introduction of the new breed up to maturity are recorded here.
Production records may be presented under different classes
depending on the type of farm enterprise and the choice of farm
manager. In crop production we may have separate records for
hectares of land under various crops; chemical used in various
crops, family and hired labour used, crop yields, e.t.c. For
livestock production, we identify such classes as quantities of
feeds consumed by the various types of livestock, record of
medical treatment, the weight gains of the various livestock,
number of eggs collected, amounts of milk produced per animal,
number of piglets furrowed per sow, e.t.c. All these records fall
into production record.
b. Income and Expenditure Records: All the money values of

input under production records are recorded as expenditure
records. Similarly, all the money values of output under
production records are recorded as income records. Therefore,
income and expenditure records are derived from production
records. All purchases and wages paid on labour are recorded as
expenditure while all the sales made on the farm are recorded
under income. Income and expenditure provides the summary of
financial transactions under the production record. Income and
expenditure could be prepared for each enterprise on the farm
while the income and expenditure for the entire farm is prepared
from the individual enterprises.
c. Inventory Records: Inventory records involved taking stock of

all assets and liabilities on the farm at a specific date. In stock
taking all the assets and liabilities are physically counted and
valued so that the financial position or net worth of the farm can
be seen at that particular point. In addition, the record will reveal
all the unused inputs and unsold farm outputs at that point in
time.
108
Inventory records involve two major steps. The fist step involves the
physical count of the assets and liabilities. Physical counts involve mere
listing the assets and liabilities of the farm. Examples of such list
include the total size of the farm, the crops grown and the number of
stands or hectarage devoted to each crop, buildings and the use of such
buildings, fences and dams. Other assets that could be listed include:
Machinery and equipment such as tractors and their implements,
cutlasses, hoes, e.t.c. Supplies such as ropes, chains, fertilizers, seeds,
medicines, e.t.c. are also listed. A physical count of livestock should
include the type and class of livestock, the age, sex as well as the
number and weight of the animals.
The second step in inventory record is the valuation of the assets and
liabilities already listed. We have already discussed the various
methods of valuing farm assets in unit 3 of module 2. Such method
include: valuation at cost or using the actual cost price, valuation at cost
or market price which ever is lower, valuation at current selling price
and valuation by reproductive value or replacement cost.
d. Miscellaneous Records: Any important record which cannot be

placed under production or income and expenditure and
inventory records are put together under miscellaneous records.
Some people referred to it as special records while others call it
supplementary records. Some of the important records under this
category include certificate of occupancy of the land, the soil
map, farm layout as well as other legal documents pertaining to
the farm like the business registration, tax payment, insurance,
e.t.c. These documents are necessary for the smooth running of
the farm business. At times, government and other relevant
agencies demand for some of these documents before any further
improvement or assistance can be allowed on the farm.
1. List twenty (20) inventory assets that can be found in farm

business.
2. Name a farm enterprise and prepare production record for the
enterprise.
4.0 CONCLUSION
In this unit, you have learnt about the meaning of farm records and
accounts, the importance of keeping farm records and accounts and the
types of records and accounts kept in farm business. The conclusion
that can be drawn from this unit is that no farm business can progress
without proper records and accounts of its operations.
109
5.0 SUMMARY
i. Farm records are the records of physical activities on the farm

ii. Farm accounts are the records of financial transactions on the
farm
iii. Some of the advantages of keeping farm records and accounts
include:
• For the calculation of profit margin

• To produce progress report
• Easy access to credit facilities
• Determination of appropriate tax
• Determination of appropriate insurance premium
• Guide in decision making and
• For planning and budgeting purposes.
iv. There are four major types of farm records and accounts which
include:
• Production records
• Income and expenditure records
• Inventory records, and
• Miscellaneous records
1a. Explain the term farm records and accounts

b. List and discuss the importance of farm records and accounts in
farm enterprises.
2. Enumerate the classes of farm records and accounts and write
explanatory note on any two of them.

Marketing in the Tropics. London. Longman.


Economics and Statistics. Ado – Ekiti. Adebayo Printing Nig.
Ltd.
110

New York. Macmillan.
Gittinger P. (1981). Economic Analysis of Agricultural Projects.

Baltimore. John Hopkins University Press.

Iowa State University Press.
Jeffery A. G. (1963). Records and Accounts for Farm Management.

UNESCO Bulleting No. 176.

London. Oxford University Press.
Sturrock F. (1982). Farm Accounting and Management. London.

Pitman & Sons Ltd.
111
UNIT 2 FARM RECORD DESIGNS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Sample of Farm Record for Crop Farm
3.1.1 Cropping Record
3.1.2 Machinery and Equipment use Record
3.1.3 Labour Record
3.1.4 Chemical Input Use Record
3.1.5 Harvest Record
3.1.6 Sales Recods
3.2 Sample of Farm Record for Poultry
3.2.1 Poultry Feed Record
3.2.2 Other Costs Record
3.2.3 Labour Record
3.2.4 Flock Number Record
3.2.5 Egg Production Record
3.2.6 Egg Sales Record
3.2.7 Chicken Sales Record
3.3 Sample of Farm Record for Ruminants
3.3.1 Feed Record
3.3.2 Labour Record
3.3.4 Livestock Number Record (E.g. Cattle)
3.3.5 Meat (Beef) Sales record
3.3.6 Milk Production
3.3.7 Milk Sales Record
3.4 Principles of Farm Records and Accounts
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
In unit one of this module we discussed the concepts of farm record and
account. Under the concept we explained the meaning of farm record
and account. We further listed and explained the importance of keeping
farm record and account. Finally, the four major types of farm records
and accounts were explained in this unit, effort will be made to design
112
farm records and accounts for crops and livestock enterprises. We will
also identify the principles behind farm records and accounts.
2.0 OBJECTIVES
• design a farm records and accounts for a named crop enterprise

• design a farm records and accounts for a poultry farmer
• design a farm records and accounts for other enterprise
• state the basic principles of farm records and accounts.
3.0 MAIN CONTENT
Introduction
The design of farm records and accounts combines the records of

production and income and expenditure on the farm. The nature of the
design will depend on a number of factors, which among others include:
• The type of crop enterprise

• Type of livestock enterprise
• Interest of the farmers or farm managers.
Generally, any design adopted should be simple, precise and

comprehensive enough to accommodate all necessary information about
the enterprise. A typical farm record and account is normally presented
in columns as shown below:
Column i Column ii Column iii Column iv Column v
3.1 Sample of Farm Record and Account for Crop

Enterprise
Some of the essential records in a crop enterprise include:
• Cropping record
• Machinery and equipment used record
• Labour record
• Chemical input used record
• Crop harvest record
• Crop sales record
113
3.1.1 Cropping Record
Some of the essential columns in a cropping record include:
• Column i Types of crop

• Column ii Date of planting
• Column iii Quantity of seed planted
• Column iv Crop yield (bags or kg e.t.c)
• Column v Remarks (if there is any)
3.1.2 Machinery and Equipment Use Record
The essential columns that should be present in this type of record

include:
• Column i Date of operation

• Column ii Type of operation
• Column iii Type of machinery and equipment used
• Column iv Total area covered (Hectares)
• Column v Cost of service (Naira)
3.1.3 Labour Record
Labour used record should be designed to have the following columns:

• Column ii Types of operation
• Column iii Amount of hired labour used (No.)
• Column iv Amount of family labour used (No.)
• Column v Total amount of labour used
• Column vi Wage rate (Naira)
• Column vii Total cost of hired labour (Naira)
• Column viii Total value of family labour (Naira)
3.1.4 Chemical Input Use Record
The essential columns that must be present in this type of record

include:
• Column i Date of application

• Column ii Types of fertilizer or agro-chemicals
• Column iii Quantity applied
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• Column iv Cost per unit (naira)

• Column v Total cost (Naira)
3.1.5 Harvest Record
• Column i Date of harvest

• Column ii Quantity harvested
• Column iii Quantity of crop after drying and threshing of milling
3.1.6 Sales Record
A typical sales record should have the following columns:
• Column i Date
• Column ii Quantity sold (kg)
• Column iii Price per unit (Naira)
• Column iv Total sales (Naira)
• Column v Quantity given out as gift (kg)
• Column vi Value of the gift (Naira)
3.2 Sample of Farm Record and Account for Poultry

Enterprise
Some of the essential records in a poultry enterprise include the

followings:
• Feed record
• Other cost record
• Flock number record
• Egg production record
• Egg sales record
• Chicken sales record
3.2.1 Poultry Feed Record
Some of the essential items under poultry feed records include the
followings:
• Column i Date of purchase

• Column ii Description of feed
• Column iii Weight in kg
• Column iv Price per unit
• Column v Total value (Naira)
115
3.2.2 Other Costs Records
All other costs apart from feed which carries the major aspect of poultry
running cost can be grouped into one item. the essential columns under
this record include the following:
• Column i Date
• Column ii Description of items
• Column iii Quantity of items
• Column iv cost of items
3.2.3 Labour Record
Labour record may have a separate heading or if the farmer desires it

can be presented along other costs. If separated, it should have the
following columns:

• Column iii Amount of labour used (Hired/family)
• Column iv Total amount of labour used
• Column v Wage rate (naira)
• Column vi Total cost of hired labour (naira)
3.2.4 Flock Number Record
The essential columns under flock number record include the following:
• Column i Date
• Column ii No. of birds at the beginning
• Column iii No. of dead birds
• Column iv No. of birds removed
• Column v No. of birds remaining
• Column vi No. of birds added
• Column vii No. of birds in hand
3.2.5 Egg Production Record
Egg production records are essential if only layers are involved. Some
of the important columns under this record include the following:
• Column i Date of collection

• Column ii No. of eggs collected
116
• Column iii No. of bad eggs

• Column iv Total number of good eggs
3.2.6 Egg Sales Record
Sales of eggs are an important record that must be kept in poultry

enterprise that involves layer’s production. The essential columns that
must be present include the following:
• Column i Date
• Column ii No. of eggs sold (crates or dozens)
• Column iii Total value of eggs sold (naira)
The eggs may be sorted into small and large sizes in which case there
will be separate columns for them under the number sold and the value
of eggs sold.
3.2.7 Chicken Sales Record
Record of chicken either broiler; cockerel or spent layers must be

properly kept. The essential columns under this record include the
followings:
• Column i Date
• Column ii Number of birds sold
• Column iii Total value of birds sold (naira)
3.3 Sample of Farm Records and Accounts for Other

Livestock (Ruminant) Enterprise
The type of farm records and accounts kept under ruminant enterprise
will depend on the type of the animal produced – sheep and goat, beef
cattle, dairy cattle, e.t.c. Generally, the following records and accounts
can be identified in a comprehensive livestock enterprise embracing
meat and milk production:
• Feed record
• Labour record
• Other costs record
• Livestock number record
• Meat (beef) sales record
• Milk production record
• Milk sales record
117
3.3.1 Feed Record
The important columns under feed record include:
• Column i Date
• Column ii Description of feed
• Column iii Weight of feed (kg)
• Column iv Price per unit
• Column v Total value (Naira)
3.3.2 Labour Record
Labour record under ruminant production is similar to the labour records

under poultry production. The essential columns under such records
include:
• Column i Date
• Column iii Amount of labour used (hired/family)
• Column iv Total amount of labour used (Manday)
• Column v Total cost of hired labour (Naira)
This is also similar to other costs under poultry production. Such

records include:
• Column i Date
• Column ii Description of items
• Column iii Quantity of items
• Column iv Cost of items
3.3.4 Livestock Number Record (E.g. Cattle)
The essential columns include:
• Column i Date
• Column ii No. of cattle at the beginning
• Column iii No. of dead cattle
• Column iv No. of cattle removed
• Column v No. of cattle remaining
• Column vi No. of cattle added/born
118
• Column vii No. of cattle at hand
3.3.5 Meat (Beef) Sales Record
The design of this record depends on whether the cattle is sold live or
slaughtered. The suggested formats are presented below:
• Column i Date
• Column ii Number of cattle sold or
• Column iii Quantity of beef sold (kg)
• Column iv Total value of cattle/beef sold (Naira)
3.3.6 Milk Production
If the ruminant enterprise involved dairy production, milk production

record is very essential. Some of the important columns under this
record include:
• Column i Date
• Column ii Number of cattle milked
• Column iii Total quantity of milk (litres)
3.3.7 Milk Sales Record
The design of milk sales record should have the following Columns:
• Column i Date
• Column ii Quantity of milk sold (Bottle/lt.)
• Column iii Total value of milk sold (naira)
3.4 Principles of Farm Records and Accounts
The general principles guiding the keeping of farm records and accounts
include the following:
i. Farm records and accounts must be comprehensive, neat and

accurate: All records and accounts must be comprehensive
enough for peop0le to understand. The record must be neatly
kept and must also be accurate. Since account involves the use of
figures, it must be properly recorded.
ii. Another important principle of farm records and accounts is that

the record of all transactions must be kept immediately. Due to
loss of memory if records of transactions are not kept
immediately, there is the tendency for the farmer to forget some
119
of the transactions and this will make the record for the day
incomplete. Omission of an important transaction may affect
some major decisions on the farm.
iii. Another important principle of farm records and accounts is that

all income and expenditure must be recorded in cash account.
This must be recorded on daily bases to give on the spot
information about the progress of the farm business.
List and explain four factors that will guide a farmer in the design of a
farm record and account for a particular farm enterprise.
4.0 CONCLUSION
In this unit, you have learnt about the various designs of farm records
and accounts that can be used in farm enterprise. Samples of farm
records and accounts were designed for crop farm, poultry farm and
cattle production. It is generally agreed that no one acceptable method
can be used in presenting farm records and accounts. The design or
method adopted depends on a number of factors. The general principles
guiding the use of farm records and accounts were also highlighted.
5.0 SUMMARY
• The design of farm records and accounts depends on a number of

factors among which include: the type and size of crop or/and
livestock enterprise, the choice of farmer or farm manager and the
complexity of the farm.
• The various items under a typical crop farm record and account
include: crop population, machinery and equipment, labour,
chemical used, harvest and sales.
• In a poultry production enterprise the essential farm record and
account identified include: Feed, labour, other costs, flock number,
chicken sales, egg production and egg sales.
• For other livestock like cattle, important items in a typical farm
records and accounts include: Feed, labour, other costs, livestock
population, meat sales, milk production and milk sales.
120
Design farm records and accounts for:
a. A named crop
b. A named livestock
Note: Prepare your designs in a tabular form.



Economics and Statistics. Ado-Ekiti: Adebayo Printing Nig.
Ltd.


Baltimore: John Hopkins University Press.




Pitman & Sons Ltd.
121
UNIT 3 BENEFIT–COST ANALYSIS OF

AGRICULTURAL PROJECT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Costs and Benefits
3.2 Classification of Costs and Benefits
3.3 Identification of Costs
3.4 Identification of Benefits
3.5 Analysis of Costs and Benefits
4.0 Conclusion
5.0 Summary
7.0 References /Further Readings
1.0 INTRODUCTION
In unit 2 of this module, we discussed farm records and accounts

designs. Sample of three farm enterprises were taken. We designed
farm records and accounts for a crop farm, poultry enterprise and cattle
production. In Unit 2, we also explained the basic principles guiding the
keeping of farm records and accounts. This unit of the module is
devoted to discussing benefit – cost analysis of agricultural enterprises.
2.0 OBJECTIVES
• identify benefits in agricultural projects

• identify costs in any farm enterprise
• define benefits in agricultural project
• define costs in agricultural project
• classify the various items and operations in agricultural activities into
benefits and cost.
3.0 MAIN CONTENT
3.1 Meaning of Costs and Benefits
Benefits mean any increase in production or any gain in goods, materials

and services which emanate from the project.
122
Cost means the expenditure or consumption of goods, materials and

services for the construction and maintenance of the project.
Benefit – cost analysis is the term used to refer to the decision – making
process for the production of public goods (agricultural goods). In this
type of analysis the benefits and costs of agricultural project are
calculated and compared. The project is economically acceptable only if
its benefits are greater than or equal to its costs.
If the benefits associated with any agricultural good are greater than its
costs, then it is also true that the ratio of the benefits of the project to its
costs is greater than one. The ratio of the benefits to the costs of a
project is called the benefit – cost ratio. Any agricultural project is
acceptable as long as its benefit – cost ratio is greater than one.
3.2 Classification of Costs and Benefits
Benefits and costs can be divided into two types:
a. Intangible
These are benefits or costs to which no monetary value can be assigned;

e.g. benefit from prevention of loss of lives as a result of flood control;
reduction in yellow fever as a result of constructing a canal, e.t.c. In the
case of intangibles these should be expressed in qualitative terms e.g.
number of people affected or size of areas involved, e.t.c.
b. Tangible
Tangible benefits and costs are those which can be expressed in

monetary terms. Tangible benefits and costs can be further subdivided
into primary (direct) and secondary (indirect).
(i) Primary (Direct) Benefits and Costs
Primary benefits represent the value of the immediate goods and

services which emanate from the project e.g. in irrigation, it is the
increase in the annual crop production.
Primary costs on the other hand, represent the value of the materials and
services used for undertaking the project. Primary costs sometimes can
be further subdivided into project costs and associated costs.
Project costs represent the value of goods and services used for the
establishment, maintenance and operation of the project.
123
Associated costs are those incurred over and above the project
costs in order to make the expected benefits accessible to the
beneficiaries.
(ii) Secondary (indirect) Benefits and Costs
Secondary benefits represent the added value over and above the
immediate products and services which the project induces e.g. in
irrigation project, they are the increases in the earnings of
processing, manufacturing and business undertakings resulting
from the increase in agricultural production.
Secondary or indirect costs are those incurred in securing the

secondary benefits e.g. in irrigation project those costs incurred
by the processing, manufacturing, transporting and marketing
agencies in handling the increased agricultural output.
In project analysis, the numerical calculation and ranking is

usually based on the primary costs and benefits only. Estimation
of secondary costs and benefits are difficult and tend to be
inaccurate. Therefore, these and other intangible benefits are
usually noted but not empirically estimated.
3.3 Identification of Costs in Agricultural Projects Cost means the

expenditure or consumption of goods, materials and services for
the construction and maintenance of the project. In almost all
project analysis, costs are easier to identify than benefits.
i. Goods and Services: Costs of goods and services are easier to

identify e.g. concrete for irrigation wells, bulldozers for land
clearing, e.t.c.
ii. Labour: The labour component of agricultural projects is also

easy to identify. The major problem is the valuation especially in
case of unskilled and family labour where shadow pricing may be
appropriate.
iii. Cost of Land: Proper value to place on land in an agricultural

project is often a complicated subject because land markets are
not perfect. Three alternatives are used to value the land in the
economic analysis of projects – value the land at its purchase
price or value the land at its rental cost or value the land at an
estimate of the net value of production forgone or opportunity
cost of return each year.
124
iv. Taxes: Taxes are a transfer payment which requires special

treatment in project analysis. These are payments from the
project to whole society.
v. Subsidies: Subsidies are transfer payment to the project or to the

farmers in a project from the rest of the society. A subsidy on
fertilizer reduces its cost to the farmer and thereby increases his
income. In economic analysis, if subsidy operates to reduce input
costs, then we must add the subsidy to the market price of the
commodity.
3.4 Identification of Benefits in Agricultural Project
Benefits in agricultural projects can arise either from an increased value

of output or from reduced costs. The specific forms in which benefits
appear are not always obvious and valuation may be difficult.
A. Increased Value of Output

The most common of benefits in agricultural projects is an
increase in output. This can arise in a number of ways including:
i. Greater physical production. Benefits can arise from increased

physical production of a crop or livestock product provided the
market and price relationship are such that greater production
does not bring a fall in prices.
ii. Quality improvement. A benefit from an agricultural project may

take the form of a quality improvement. Most often in
agricultural projects, both increased output and quality
improvements are expected but it may not always be the case.
iii. Changes in form. Changes can occur in form of grading and

processing. This situation generally arises from projects for
agricultural industries. Farmers sell paddy to millers who, in turn
sell polished rice. The benefits arise from the change in form.
Other examples are canning of fruits, grading of fruits, eggs, etc.
iv. Changes in location and time of sale. This type of benefits can
arise from projects improving marketing and storage facilities.
B. Cost Reduction
In addition to increased value of output, benefits in agricultural projects

may be from a reduction in costs, examples are:
125
i. Gains from farm mechanization. Reduction in costs of

production, through mechanization may increase benefits; even
total production may not increase provided that any labour
displaced can be productively employed elsewhere.
ii. Reduced transportation cost. Better transportation may reduce

the cost of moving produce from the farm to the consumers.
Such benefits are very common in agricultural marketing
projects.
iii. Losses avoided. One kind of cost reduction benefit may arise
because of a loss avoided. Examples of such benefits are storage
projects, irrigation system, maintenance and soil conservation
through prevention of water losses and soil erosion.
iv. Other kinds of direct benefits. Such benefits may come as a

result of increased saving capacity of individuals, improve
education and training, better health working conditions, e.t.c.
3.5 Analysis of Costs and benefits
A. Costs
1. Costs of Crop Production
Some of the costs items under crop production include the followings:
a) Cost of fertilizers, pesticides, seeds, e.t.c. with any subsidies

removed to reflect the true economic price.
b) Cost of irrigation water other than supplies by project facilities e.g.
canal water, private tubewell water, e.t.c.
c) Farm machinery should be evaluated at rental cost.
d) Animal power may be treated as a rental cost.
e) Electricity
f) Labour cost
g) Farm improvement
h) Land should be valued at purchase price
i) Infrastructures
j) Credit
2. Costs of Livestock Production
Animal husbandry is an important part of many farm budgets in Nigeria.

Where farm animals exceed a pair of bullocks for draft power, the cost
of animal husbandry sector is to be developed.
126
a. Land for fields to grow fodder and for pens building

b. Labour costs for maintenance and production of livestock
c. Veterinary services and supplies
d. Concentrates, minerals and salts.
3. Project Costs
It is important that all project costs are identified and accurately

accounted for.
a. Capital costs
All capital costs of the project works are to be listed by items, quantities
and unit cost. Some of the capital costs include:
• Replacement costs
• Electrification costs
• Transfer payments such as interest on the investment, custom duties,
sales tax, e.t.c.
• Subsidies
• Contingencies = 15 to 20 percent of capital cost
• Land acquisition which is the actual cost of the land
b. Operational and Maintenance Costs
These items generally include the following:
• Personnel costs should include all management and labour costs

• Equipment and supplies to run the project
• The cost of energy
• Gas, oil, diesel, e.t.c. to run the vehicle and machinery.
B. Benefits
i. Primary and Tangible Benefits
• Agricultural production: Agricultural production should be

estimated for each of the two conditions i.e. without project and with
project. An analysis period of 25 years is ample for determining the
economic worth of an agricultural project.
• Gross value of production: Gross Value of Production (GVP)

should be determined on the basis of farm-gate prices multiplied by
total production year-by-year for the project analysis period.
127
• Net Value of Production: The Net Value of Production (NVP) is the

gross value of production less the costs of production other than the
costs of the project itself.
ii. Secondary and Intangible Benefits
• Aside from the additional employment created for farm production

there will be many secondary benefits and intangible benefits and
that should be enumerated even though they are not quantified and
their values are not included in the analysis.
1. List five examples each of tangible and intangible benefits in

agricultural project.
2. List five examples each of tangible and intangible costs in
agricultural project.
4.0 CONCLUSION
In this unit, we have learnt about the benefit – cost analysis of

agricultural project. In our discussion, we have been able to
differentiate costs from benefits in agricultural project. We further
classified costs and benefits into tangible and intangible. Tangible costs
and benefits were further subdivided into primary or direct and
secondary or indirect. We equally identified all the various costs and
benefits of agricultural project. Those costs were analysed under crop,
livestock and projects. While benefits were analysed under agricultural
production, gross value of production and net value of production.
5.0 SUMMARY
• Benefits mean any gain in goods, materials and services.

• Costs means expenditure of goods, materials and services
• Intangible benefits or costs carries no monetary value
• Tangible benefits or costs can be expressed in monetary terms
• Primary benefits are the values of goods and services which emanate
from the project
• The added value over and above the values of goods and services
which emanate from the project are called secondary benefits
• Values of the materials and services used for undertaking the project
are called primary costs.
• Secondary costs are costs incurred when securing secondary benefits
128
• Some of the costs identified in agricultural projects include: labour,

goods and services, land, taxes, subsidies, e.t.c.
• Some of the benefits identified in agricultural projects include:
increased value of output, greater physical production, quality
improvement, changes in form, reduction in costs, e.t.c.
1a. Define:
i. Costs and
ii. Benefit of agricultural project
b. Discuss the two major classes of costs and benefits of agricultural
projects.
2. Identify and discuss any four (4) major costs and four (4) major
benefits in agricultural projects.



Economics and Statistics. Ado–Ekiti: Adebayo Printing Nig.
Ltd.




Maqsood A. (1978). The Economic Analysis of Agricultural Projects.

Zaria: Agricultural Extension and Research Liaison Service.
ABU Extension Bulleting No. 26.

129
Sturrock F. (1982). Farm Accounting and Management. London:.

Pitman & Sons Ltd.
UNIT 4 FINANCIAL STATEMENTS
130
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Assets and Liabilities
3.1.1 Meaning of Assets
3.1.2 Meaning of Liabilities
3.2 Balance Sheet
3.3 Net Worth and Accounting Ratios
3.3.1 Meaning of Networth
3.3.2 Accounting Ratios
3.4 Profit and Loss Account
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Remember that this is the last unit of module 5. This module is devoted
to issues related to farm records and accounts. In unit1 we discussed
some concepts of farm records. Some of the concepts discussed include:
meaning of farm records and accounts, reasons for keeping farm records
and the types of farm records. In unit 2, we tried to design farm records
and accounts for crop, poultry and other livestock enterprises. In unit 3,
we have discussed the benefit - cost analysis of agricultural projects. By
now you should be able to explain the meaning of costs and benefits.
The unit further classified costs and benefits into tangible or primary
(Direct) and intangible or secondary (indirect). The unit also identified
the various costs and benefits of agricultural projects.
2.0 OBJECTIVES
• define assets
• define liabilities
• prepare balance sheet for a commercial farm
• calculate net worth from balance sheet
• prepare profit and loss account for a commercial farm.
3.0 MAIN CONTENT
131
3.1 Assets and Liabilities
3.1.1 Meaning of Asset
Anything or value possess by the business or any claim to value on

possession to others. In agriculture farm assets refers to all materials i.e
goods and services owned by the farmer and used in the production
process.
Assets could be classified into fixed, working and current assets.
3.1.2 Meaning of Liability
Liabilities in accounting mean any claim which people outside business

have against the business. In farm business, liabilities refer to goods and
services which the farm owes to others.
Liabilities are usually classified into long term liabilities, medium term
liabilities and short-term liabilities or current liabilities. The
classifications are however, not foolproof as the decision to which class
to put a particular asset or liability depend to some extent on the farmer
or farm manager. Nevertheless, there are some assets and liabilities that
fit neatly into the classes.
3.2 Balance Sheet
The best possible measure of capital position of the farm at any given
time is shown by the yearly balance sheet. The balance sheet shows the
assets and liabilities of the farm business at a specified point in time-
usually the last day of financial year.
To illustrate balance sheet or Net worth statement accounts consider the

farm business of S.J. Ibitoye Farm Ltd for the year ended 31st May,
2007.
Example 5.1 Balance Sheet of S.J. Ibitoye Farm as at 31st May 2007.
Liabilities Assets
132
Current liabilities N Current assets N

Debt due for payment 500 Cash in hand 500
Stock for sale 1,400
Acct. receivable 1,100
Medium term liabilities Working assets
Debts due for payment in about 2 years 12,900 Feed in stock 500
Supplies 200
Harvested crops 9,200
Long term liabilities Fixed assets
Mortgages 5,300 Buildings 13,000
Debts for payments in long term 19,900 Machinery & 15,000
Equip.
Land with crops 3,000
Dairy cow and 15,000
breeding stock
Total liabilities 38,600 Total Assets 58,900
Networth 20,300
Networth = Total assets – Total liabilities

= N58,900 – 38,600
= N20,300
3.3 Netwoth or Net Capital
3.3.1 Meaning of Networth
Networth or Net capital is the amount by which total value of assets

exceed the total value of liabilities within a period of time. This implies
that Networth value is calculated from the balance sheet account. In
farm business, networth or net capital is used to determine the overall
performance of a farm at a given period of time.
Net capital shows how much the business worth if it has to be sold at
that point in time. It is thus the best possible measure of the farmer’s
financial position and its growth is a direct measure of the growth of the
business. It shows at a glance whether or not the farmer is credit worthy.
Networth statement is only very useful when compared to past values.
The previous values will show whether the farm business is progressing
or not.
Calculation of Networth from example 5.1
133
Total assets = N58,600

Total liabilities = N38,600
Networth= Total assets -Total liabilities =N58,900 –N38,600 = N20,300
: . Networth value = N20,300.00
3.3.2 Accounting Ratios
The accounting ratios that can be obtained from the statement of balance
sheet include.
a. Net capital ratios (NCR)

b. Working capital ratio (INCR)
c. Current capital ratio (CCR)
(a) Networth Ratio (NCR)
The net capital ratio is a measure of the degree of safety for the entire
business. It is the ratio of total assets to total liabilities. The greater the
figure above one the safer the farm business financially.
NCR = Total Assets

Total Liabilities
From example 5.1,

Total assets = N58,900
N58,900
N38,600
= 1.53
This figure (1.53) when expressed in ratio is about 11/2:1. Which means
that assets are about one and a half times the value of liabilities? There
is no one acceptable level of financial safety, it is left to individual
farmer to determine the safety for his farm business.
(b) Working Capital Ratio (WCR)
This is also known as intermediate ratio. Working capital ratio measures

the degree of financial safety of the farmer over an intermediate period
of time (about 1-3 years).
Mathematically;
Working Assets + Current Assets

WCR = Medium Term Liabilities + Current Liabilities
From example 5.1
134
1. Working assets = N9,900

2. Current assets = N3000
Addition of working assets and current assets N9,900 + N3000
= N12,900
3. Medium term liabilities = N12,900
4. Current liabilities = N500
Add N0. 3 + No. 4
N12,900 + N500 = N13,400
N12,900
: . WCR = N13,400
= 0.96
The value (0.96) indicates that the farm is less financially safe in the
shorter term than in the long run.
(c) Current Capital Ratio (CCR)
Current capital ratio measure the ability of the farm to meet current
financial obligations. It measures the degree of solvency of the farm
business.
Mathematically,
CCR = Current Assets
Current Liabilities
From table 5.1
Current assets = N3000
Current liabilities = N 500
CCR = N 3000
N 500
= 6
The current capital ratio 6:1 means that the farm can meet its current
financial obligations six times over. This figure can be compared with
previous figures for better judgment about the performance of the farm.
The Balance sheet statement of S. Ibitoye farms Ltd as at 31 st December,

2006 is given as follows:
Valuation of livestock and crops N10,000

Machinery and equipment N1000
135
Raw materials N500

Debt receivable N600
Cash in hand N2000
Debts payable N1000
Loans N500
Bank overdraft N1000
a. Use the information above and draw up a balance sheet account

b. From the account prepared, calculate:
(i) Networth or Net capital

(ii) Net capital ratio(NCR)
Hints
Note that total assets = N14,500
Networth = N12,000
3.4 Profit and Loss Account
The ultimate goal of any business is to make profit. One of the best
ways of assessing how well the business is progressing is by preparing a
profit and loss account for the business.
There are three essential components of profit and loss account:
A. Total Product on Return
This is recorded as income or receipts or credit in a profit and loss

account. It is the income obtained from sales and other sources together
with valuation on hand at the end of accounting period.
Some of the essential items under this component include:
• Closing valuation of output resources

• Income during the year
• Debtor at the end of the year
B. Total Expenditure
This is recorded as purchases or expenses or debts in a profit and loss

account. It is the sum of the expenditure items and valuation of the input
resources at the beginning of accounting period.
Some of the essential items under this component include:
136
• Opening valuation of input resources

• Expenses during the year.
C. Profit or Net Farm Income
Net farm income is the amount by which the value of total product
produced in the accounting period exceed the value of total resources
used during the same period i.e
Profit = total value of product – total expenses. It is regarded as profit if

the total value of product is more than the total expenses. It is however
regarded as a loss if total expenses are more than the total value of
product. Profit is recorded under debt while loss is recorded under
income.
Example 5.2: Profit and Loss Account of S. Ibitoye Farms as at 31st

May, 2007.
Debt (Expenses) N Income Valuation N

Opening valuation 3,200 Closing valuation 11,600
Day old chicks 1,400 Eggs 6,000
Seeds 1,200 Cull Birds 4,000
Feeds 1,100 Other sales 4,000
Fertilizer 1,800 Home use 3,100
Labour 1,100 Loss -
Depreciation 1,300
Miscellaneous 1,700
Sub total 12,800
Profit 15,900
Grand total 28,700 Grand total 28,700
Prepare a profit and loss account for Mal. Bello Farm as at 31st May…
from the following information:
i. Maize seed for planting N25,000

ii. Fertilizer used N14,800
iii. Pesticides N20,000
iv. Purchases of yam seed N50,000
v. Tractor hire N60,000
vi. Transport cost N10,000
vii. Workers wages N40,000
viii. Sale of maize cobs N250,000
ix. Yam tubers sold N200,000
x. Opening valuation N440,000
137
xi. Closing valuation N200,000
4.0 CONCLUSION
In this unit, we have learnt the meaning of assets and liabilities. We also
illustrated how we can prepare a balance sheet account. From the
statement of balance sheet we calculated the Networth and financial
ratios. The financial ratios calculated from balance sheet account
included: Net capital ratio, working capital ratio and current capital
ratio. We finally illustrated how we can prepare a profit and loss
account.
5.0 SUMMARY
• Farm assets are goods and services owned by the farmer and used in
the production process.
• Farm liabilities are goods and services which the farmer owes to
other
• Farm assets are classified into three: current, working and fixed
assets
• Farm liabilities are classified into three: current, medium and long
term liabilities.
• Balance sheet statement contains assets and liabilities of the business
at a specified point in time.
• Networth or net capital is total assets minus total liabilities.
• Net capital ratio = Total Assets
Total Liabilities
• Working capital ratio = Working Assets + Current Assets
Medium Term Liabilities + Current Liabilities
• Current capital ratio = Current Assets
Current Liabilities
• Profit and loss account contains income and expenses statement of a
business over a given period of time.
• The three main components of profit and loss account are:-
expenditure, income and profit.
• In profit and loss account, opening valuation and profit are recorded
under expenditure column while closing valuation and loss are
recorded under income column.
138
1. Write explanatory notes on the importance of the following terms

in farm accounting:
a. Networth or Net Capital

b. Net Capital Ratio (NCR)
c. Working Capital Ratio (WCR)
d. Current Capital Ratio (CCR)
2a. Prepare a profit and loss account for St. Joseph Farms for the year
ending 31st December…using the following information:
i. Cost of maize seeds N1,500

ii. Cost of fertilizer N 1,600
iii. Cost of insecticides N 1000
iv. Tractor Hiring N 1000
v. Cost of Herbicides N 1,200
vi. Cost of cassava stem N 1,300
vii. Sales of maize N 30,000
viii. Sales of yam tuber N 10,500
ix. Sales of cassava tubers N 15,000
x. Transportation cost N1,500
xi. Cost of processing cassava tubers N 2,500
xii. Sales of cassava stems N 2,500
xiii. Wages of workers N 8000
xiv. Miscellaneous expenses N 2000
xv. Maize consumed N 500
xvi. Yam consumed N 8,000
xvii. Opening valuation N 45,000
xviii. Closing valuation N 15,000
2b. What is the net profit or loss of the farm?
139



Economics and Statistics. Ado-Ekiti. Adebayo: Printing Nig.
Ltd.






Pitman & Sons Ltd.
140

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AEC 308 COURSE GUIDE

Course Developer/Writer Dr. Stephen J. Ibitoye

Programme Leader Prof. Afolabi Adebanjo

Course Coordinator Dr. N.E. Mundi

NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria

All Rights Reserved

Agricultural economics involves the application of economic principles in

Farm management is a science which deals with proper combination and

This course is designed to provide essential skills needed in farm business.

What You will Learn in this Course

Principles of farm management are presented under five modules; Module

any successful farm business. Another important aspect of this module is

Module two discussed the common concepts and tools in farm

• Define farm management

• Identify the type of farm business organization and list their

The textbook prepared for this course by National Open University of

At the end of each unit, there is a list of recommended textbooks which

In addition to above materials, it is very essential for you to buy calculator.

Module 1 The Meaning, Principles and Functions of Farm Management

Unit 1 Nature and Scope of Farm Management

Module 2 The Common Concepts and Tools in Farm Management

Unit 1 Economic Principles and Farm Management

Module 3 Farm Inputs Management

Module 4 Forms of Business Ownership

Unit 1 Single proprietorship

Module 5 Farm Records and Accounting

Unit 1 Concept of Farm Records and Accounting

Unit1 which is the first under module 2 discussed economic principles as it

In unit 1 of module 3, you will be exposed to the meaning and

Module 4 which comprises of unit1; single proprietorship, unit 2:

Text Books and References

As earlier discussed, AEC 308 is an introductory course to farm

Abbott J.C. and J.P. Makeham (1980). Agricultural Economics and

Adegeye A.J. and J.S. Dittoh (1985). Essentials of Agricultural Economics.

Upton M. (1993). Farm Management in Africa. London Oxford University

Uptom M. and Q.B.O. Anthonio (1981). Farming As a Business. London:

There are two components of assessment for this course:

• Tutor-Marked Assignment (TMA)

The TMA is the continuous assessment component of this course. It

Final Examination and Grading

This examination concludes the assessment for the course. It constitutes 70

AEC 308: Principles of Farm Management is designed to provide

• What is farm management?

• List the advantages and disadvantages of the following forms of

Course Code AEC 308

Course Title Principles of Farm Management

Course Developer/Writer Dr. Stephen J. Ibitoye

Programme Leader Prof. Afolabi Adebanjo

Course Coordinator Dr. N.E. Mundi

NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria

All Rights Reserved

Module 1 The Meaning, Principles and Functions of

Unit 1 Nature and Scope of Farm Management……………. 1

Module 2 The Common Concepts and Tools in Farm ………. 28

Unit 1 Economic Principles and Farm Management……….. 28

Module 3 Farm Inputs Management ……………………….. 57

Module 4 Forms of Business Ownership ……………………. 79