How to Calculate Machinery Ownership and Operating Costs

Machinery ownership and operating costs represent a substantial portion of total production expenses for South Dakota producers. Production practices today require increasingly specialized machinery and equipment and producers have to give more attention to the economics of their machinery investment alternatives. Large amounts of capital are invested in owning and operating farm machinery. Producers need to take time to manage their machinery investment to insure that they are achieving the desired return and efficiency. Machinery costs make up a significant part of the fixed and variable costs of any farm operation. However, they are sometimes difficult to calculate, particularly for individual enterprises or operations. Effective machinery management is essential to maintaining profitability in production agriculture. This publication is designed to aid producers in estimating the costs of machinery ownership and operation, and to assist in making machinery management decisions. Producers need to evaluate how much machinery should be owned and what size it should be. They need to consider different alternatives such as machinery ownership, machinery leasing, or custom hiring. Sound management requires decisions about those issues prior to actually acquiring the machine or its use. Producers can find guidance to these management decisions by calculating the costs of operating and owning farm machinery. The best source of information to budget farm machinery costs is actual farm-level records. In the absence of farm records, calculation methods can be used to estimate the costs. The estimates discussed in this publication use an economic engineering approach. The information presented is prepared as a guide to estimating machinery costs. It is not intended to recognize or predict the costs for any one particular operation