Cost of producing milk can be divided into variable and fixed components. The largest variable costs typically include feed, labor, and replacements. Fixed costs include depreciation, interest, insurance and taxes.
To calculate cost of production, the best place to start is a good double-entry accounting system. One popular alternative is to use the information on costs and returns contained in the "Schedule F" from federal income taxes. Income taxes are cash based, though, so that accrual adjustments (for changes in inventories) must be made to get an accurate cost. Another issue is allocation as most dairy farms have other crop and livestock enterprises. If whole-farm costs are used, this assigns all of the gain or losses from these other enterprises to the dairy herd (e.g., losses from a cash grain operation are assigned to the milking herd as a cost). Needless to say, this approach can often give misleading results. To overcome the allocation issue, one alternative is to use enterprise accounting when costs are recorded to assign the cost to the appropriate enterprise.
Cost of production generally declines with herd size because of the large amount of fixed costs involved in dairy production (e.g., facilities investment). Variable costs are often similar across herd size for efficient operations.
