Overhead costs are defined as costs that do not change as livestock numbers or crop acres change. While economists call these fixed costs that are independent of number of animals and crop acres, these costs can indeed be changed and reducing overhead is certainly one of the three effective ways to increase profits. If you want to know where you are making your profits in your farm or ranch business, break your farm or ranch business into its profit centers and treat each profit center as a stand alone business. Gross margin is a measure of the economic efficiency in your livestock and cropping profit centers. Gross margin is calculated for each profit center by subtracting the direct costs of production in that profit center from the gross income of that profit center.
Gross profit is the sum of all profit centers' gross margins added together.
Profit or loss is determined by subtracting overhead costs from gross profit. Instead of calculating gross margin for each enterprise, let's calculate a gross margin for the total business and express it in terms of profit per dollar of gross income generated. The fifth article in this series went into detail on this per-dollar analysis. Overhead costs on the study farm consisted of depreciation and family living draw as a proxy for labor and management wage. In planning for today's markets and beyond, I strongly encourage you to calculate what your gross margin is for each dollar of gross income generated on your farm or ranch.