Track the changing value of your herd when full cost accounting and recordkeeping is impractical.
This is part four of our four-part series on inventory valuation. Be sure to also read part one “The cost method,” part two “The lower of cost and market method” and part three “The ‘farm-price’ method.”
For livestock producers with sizable herds, identifying and recording costs for every single animal can be impractical. To help alleviate this recordkeeping burden, agricultural producers have access to two special inventory valuation methods that aren’t available to main street producers: the farm-price method and the unit-livestock-price method.
The unit-livestock-price method values livestock based on the various stages of maturation it goes through and the average cost of raising it to that point, allowing producers to account for the value of their herd without having to track every individual cost.
Here we’ll discuss how it works, what you need to know before applying it to your livestock inventory, and what it means for your operation’s profitability, finances and taxes.
What is the base value or ‘unit-livestock-price’ method?
Accrual-basis agricultural producers have numerous methods available to them for valuing that inventory on the balance sheet.
Also sometimes referred to as the ‘base value,’ ‘unit price’ or ‘unit price base’ method, the unit-livestock-price method is a special inventory valuation method available only to livestock producers.
Under this method, all livestock is grouped or classified according to kind, sex and age, and a standard unit price or “base value” per head–based on a reasonable estimate of the normal costs of raising that livestock–is applied to each class of animal.
This method bridges the gap between cash and accrual accounting, allowing farmers to reflect the changing value of their livestock without having to track every individual cost (feed, nutrients, veterinary care, labor, etc.) that goes into raising each animal.
How does it work?
Under the unit-livestock-price method, each category of livestock (e.g., calves, heifers, cows) is assigned a “base value” — usually an estimate of what it costs to raise the animal to its current stage.
Once tracking groups and base value estimates are determined, changes to each group are tracked and logged week to week, and journal entries are created on a monthly basis. When animals move from one category to another (e.g., from heifer to cow), or the number of raised replacements increases, those increases in base value are recorded as income.
When animals are sold or die, the base value of those animals is subtracted from cash receipts to find the true gain or loss on sale. (If your records don’t show which animal was lost or sold, the first in, first out assumption applies.)
Your operation might already have dedicated livestock management software to help you track these kinds of changes, but if you don’t, we’ve also created a Managerial Stock Flow Workbook to help you get started.
Read more: Tracking & Valuing Breeding Stock
When should I use the unit-livestock-price method?
The unit-livestock-price method is useful when full cost accounting for your livestock is impractical–for example, when managing a large commercial herd or if you’re a new producer who’s just getting started. If you do use the unit-livestock-price method, according to the IRS you must apply it to all livestock raised, whether it’s held for sale or held for draft, breeding or dairy purposes.
When should I use a different inventory valuation method?
One potential downside of the unit-livestock-price method is that you must use the base values and categories you set up in the first year for each subsequent year, unless you get approval from the IRS to change them.
If the actual costs of feeding and raising your livestock increase substantially in that time, using fixed base values may result in undervalued inventory and distortion in income.
Ambrook takes the guesswork out of profitable ranching
Ambrook’s enterprise tags correspond to the animal categories you’re tracking as part of your managerial bookkeeping, making it easy to allocate overhead expenses by animal categories and track changes in asset values to get a truly holistic managerial income statement, and a useful P&L statement even during the parts of the year where there is little cash basis activity.
With time-saving bookkeeping automation features, automatically-generated financial reports, streamlined bill pay and invoicing, and other powerful accounting and financial management tools, Ambrook takes the guesswork out of running your business. Want to learn more? Schedule a demo today.
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This resource is provided for general informational purposes only. It does not constitute professional tax, legal, or accounting advice. The information may not apply to your specific situation. Please consult with a qualified tax professional regarding your individual circumstances before making any tax-related decisions.
