Industry Insights
Take control of your wine costing
September 25, 2014
Do you know the profit margin on each wine you produce?
While it’s easy to get an overall picture of the health of your business, it can be difficult to know what the underlying profitability is on a given wine. Imagine if you could get this information quickly and without complex spreadsheets: it would be much easier to set your wholesale and retail prices with confidence.
In this article we’ll examine the accounting pitfalls for the wines you produce and make some valuable suggestions so you too can have an accurate picture of your underlying margins.
In wine production, as in all manufacturing industries, you’re costs can be classified as direct or indirect. Direct costs are those inputs directly attributable to a particular lot of wine and may include:
Fruit
Bulk wine
Direct employee labor
Bottling materials and dry-goods
Chemicals and additions
Freight as it relates to sourcing
Third party lab work
Indirect costs are generally applied as overheads across all your products:
Utilities
Employee benefits
Purchasing costs
Handling and Storage
Depreciation
Rent
Taxes and Insurance
Chemicals such as Gas and Sulfur
You might be recording indirect costs across different expense or cost center accounts, but at some stage you’ll need to make a decision on how much to capitalize to your wine Work in Progress (WIP) asset accounts. The WIP accounts hold the value of those wines in production until they are released for sale, and with that, the value moves the Cost of Goods Sold on your balance sheet. How often you make the necessary capital adjustments can be dictated by your tax law but for accurate reporting information we’d recommend making them monthly.
General and Administrative (G&A) expenses such as those that are incurred in running your office or your tasting room should not be capitalized to your wine inventory. This means deciding on a costing methodology that allows you to fairly and accurately apportion indirect costs to your wines in production so as to comply with your applicable tax law. Under UNICAP and the IRS audit guidelines in the US it’s important to choose a costing methodology that is easy to explain but also takes into account both direct and indirect costs so that the amount capitalized to any given lot is not disproportionately too high.
Did you know? You may be exempt from UNICAP rules in the US. Businesses with revenue less than $10m USD for the past 3 years or using the cash method may qualify for an exemption.
For direct costs you can have these purchases link directly to appropriate capital expense accounts but for indirect costs the solution is less clear cut.
Assume you receive an electricity bill, for the past quarter (90 days) of usage, of $10,000. You allocate 90% of it for your wine production and the balance to the offices and tasting room. You can only capitalize the amount of that bill as it relates to wine production, therefore you can capitalize $9,000. Furthermore, you want to do this so we can see the cost impact on a per wine basis.
You could choose to do this based on the volume of each of the lots, but your 2013 Chardonnay was sold and shipped as bulk after 30 days of that quarter, so a simple volume based allocation isn’t going to be accurate. Instead what you need to do is to establish a multiplier that represents the Volume multiplied by the Days the wine was held at the winery. We refer to that as Volume Days. Let’s take a look at how this is calculated for your capitalization needs
In the above table you can see why it’s important to use Volume Days instead of a proportional calculation on volume alone. Take a look at the 2013 Syrah versus the 2014 Cabernet. Both have 500 gallons of volume but the Syrah was shipped out 30 days into the quarter. That makes a significant difference to your cost allocation of $225 compared to $675 respectively. Over time these impacts all add up to skew the true cost of your individual wines.
WIP Manual Journals in Xero
To track this in your accounting package you would need to have separate WIP accounts for each wine before calculating the allocation in Excel and making the journal entries from Utilities Expense account to the WIPs. Without this level of tracking you just can’t tell with any certainty what your individual wines have actually cost you to produce. Clearly that requires a lot of data entry and tedious calculations so there must be a better way… and there is.
While the capitalization problem can be managed, with the help of Excel and regular journal entries, the larger challenge is keeping track of the running cost of each of your lots through crush, maturation, blending and bottling.
In a busy winery environment, blending and topping across wines happens regularly and this has a significant impact on the final cost of each of those wines. Can you imagine tracking not only the composition of your lots for compliance but now also the cost changes? To do that in a regular accounting system you’d need to enter journals for practically every work order from the cellar. No wonder wineries have trouble getting detailed costing on each of their wines.
vintrace Accounting Flowchart
The better solution is to manage this whole process outside of your accounting system in a sub-ledger that integrates directly with your accounting package. vinrtrace provides this ability for you and integrates directly to
Xero, a leading Cloud accounting solution.
With vintrace you can centralize the entry of your work orders, purchases and sales and it will keep your general ledger in sync. vintrace also offers a powerful Cost allocation console for indirect costs and that removes the need to manage capitalization in Excel while giving you powerful per-lot or brand costing analysis at your fingertips.
vintrace has the added benefit of support for complex wine industry taxes including WET/GST in Australia, Excise in New Zealand and Sales tax in the US. vintrace is loved by winemakers the world over so now it’s time for your CFO or accountant to get on board.