If you do not have the financial and production records necessary to develop an enterprise budget, you can begin by using budgets from other sources, such as the Texas Agricultural Extension Service, which can provide regional information for planning and decision making. If you use this method, you will need to adjust the budget to reflect your specific situation. As budgets are developed, costs are often categorized to make the information more useful to the decision maker. Costs are sometimes broken into two groups, referred to as variable and fixed costs, direct and indirect costs, or operating and overhead costs. The variable and fixed classification will be used here.
Variable costs occur because of the decision to purchase additional inputs for use in production.
In the long run all costs are variable, and at a point in time near the end of the production period, almost all costs are fixed. Producers who have already invested in land, machinery and buildings are committed to owning these resources for the upcoming production period or year. There are certain fixed costs associated with these resources that the producer will incur whether or not there is any production. Both fixed and variable costs are considered when deciding whether to continue production. Most producers will eventually face the problem of not covering all their costs for an enterprise.