As breweries work to put out a wider variety of beers while increasing production, some questions
should arise: Am I costing these products correctly? Is my inventory valued appropriately? Do I know my margin by product lines? Am I losing money on every bottle sold of my best-selling beer?
There are three main components to the cost of product and inventory - raw materials and packaging, labor, and everything else, which falls under the heading of overhead. Raw materials and packaging are typically the easiest pieces to quantify. There is a standard recipe and the price of malt, hops and any adjuncts is known. Crop prices can impact this, but again it is a known amount and often these crops are locked in for the year at a specified price.
Labor can be a little trickier but is still a fairly easy number to grasp. If the quantity produced over a specified time period and the number of production labor hours is known, it should be a simple equation to figure out the allocation of labor to each batch. However, different beers should probably not have the same labor hours allocated to them. A 90-minute boil will have a higher labor allocation than a 60-minute boil. A cellared beer may have additional labor hours, etc.
The hardest item to account for is overhead. Overhead consists of expenses like utilities, depreciation of production equipment, rent, etc. that need to be allocated into product cost and inventory values. Overhead is typically applied using a standard rate due to fluctuations in costs and the total expense is brought to the correct balance at period end. Similar to labor, not every product line will have the same overhead allocation. For example, any beer in an aging program should probably have a higher level of overhead assigned to it during its cellaring process. To add to the complexity of overhead costing, the IRS has different rules for tax purposes as mandated by code section 263A. This code section dictates that additional general and administrative costs not generally included in inventory for financial purposes must be capitalized into inventory at year end for tax reporting.
So, if you are including the correct amount of raw materials, labor and overhead in inventory and since there is no impact to the total bottom line, why should you care about allocating correctly between product lines? Because it is important to know your profit margin by products. It could be that you are making a large margin on one product but losing money on every bottle sold of another. Without knowing your product costs, you are guessing at your sales price, or just following the pricing of other breweries. This assumes that the other breweries have the exact same costing structure and have gone through the process of understanding their product costs. One or both of these is probably an incorrect assumption.
Consider all of the factors of inventory costing the next time you are valuing your inventory for tax and other reporting purposes and think about whether you know your real margin. You may need to consult with your internal and external financial team to retool your costing structure.
This information was provided by Matthew Diment, of Kernutt Stokes, CPAs and Consultants. Matthew and a team of professionals serve the craft brewing industry.
For questions or more information, contact Matthew at 541.687.1170 or email@example.com.