Disproportionate Allocation of Indirect Costs at Individual-Farm Level Using Maximum Entropy

Abstract

This paper addresses the allocation of indirect or joint costs among farm enterprises, and elaborates two maximum entropy models, the basic CoreModel and the InequalityModel, which additionally includes inequality restrictions in order to incorporate knowledge from production technology. Representing the indirect costing approach, both models address the individual-farm level and use standard costs from farm-management literature as allocation bases. They provide a disproportionate allocation, with the distinctive feature that enterprises with large allocation bases face stronger adjustments than enterprises with small ones, approximating indirect costing with reality. Based on crop-farm observations from the Swiss Farm Accountancy Data Network (FADN), including up to 36 observations per enterprise, both models are compared with a proportional allocation as reference base. The mean differences of the enterprise's allocated labour inputs and machinery costs are in a range of up to ±35% and ±20% for the CoreModel and InequalityModel, respectively. We conclude that the choice of allocation methods has a strong influence on the resulting indirect costs. Furthermore, the application of inequality restrictions is a precondition to make the merits of the maximum entropy principle accessible for the allocation of indirect costs.

Economic potential of milk production strategies with restrictive use of concentrated feed—An experiment on 36 family farms in the pre‐alpine region

“…This Excel-based tool also included the averaged data of the control group, which were filtered internally from the Farm Accountancy Data Network data pool according to the structure of the set-up farm types. In this way, the data of the farm types could be assigned directly to the appropriate control group for the comparison, while joint cost allocation for both groups was based on the same methodology (Lips, 2017;Lips et al, 2018).…”

Application of territorial emission factors with open-access data—a territorial LCA case study of land use for livestock production in Wallonia

“…Crop-specific information, e.g., fertilizer application rate on field peas, can hardly be calculated with public version FADN. Nonetheless, it should be noted that such crop-specific input data can be estimated with the confidential version of FADN (can be achieved through requesting) with the methods such as Maximum Entropy (Louhichi et al 2012;Lips 2017) and Highest Posterior Density (Britz and Witzke 2015). However, the major drawback of the FADN data is that it primarily expresses variables in economic rather than physical units, which can hinder environmental analysis accuracy (Andersen et al 2007).…”

Forecasting costs and risk of corn and soybean crops through Monte Carlo simulation

“…According to current projections, it is likely that the high prices of soybeans and corn will continue during the marketing period of the 2022/2023 crops [6]. Given this scenario, analyses, comparisons, and forecasts of production costs in agribusiness have been utilized as tools for decision-makers [7][8][9]. Pitrova et al (2020) [10] and Amorim et al (2020) [11] mentioned that computational simulation has proven to be an appropriate support tool for decision-making on rural properties.…”