Industry Insights
The Business of Wine. Cost of Goods Sold
January 8, 2016
Only 10% of our time is spent actually making wine…
The reality of winemaking generally conforms to the 60/30/10 percent rule. Where 60% of our time is selling & marketing, 30% is paper work, and finally just 10% is what could be termed actual winemaking. Depending on the size of your winery, a good portion of that paper work is to determine Cost Of Goods Sold (COGS) or reporting to finance so they can work it out. They need this of course so they can offset revenue to get to some form of gross profit (hopefully not ‘loss’). Quite often we apply a simple basic formula of total costs divided by total number of cases produced, and sometimes we even go so far as to break out some differentiation between red and white wines (e.g. barrel/storage costs) but not much more complex than that.
Why traditional cost tracking is difficult.
The challenge is tracking applicable costs in the first place and applying them in a consistent system that reflects all the costs involved in producing a case of your wine. The most tedious tasks of cost tracking are generally at the lot/bulk wine level before it goes to bottle. It begins with tracking fruit costs by weigh tag relative to actual grower contracts or accumulated estate farming costs by area, and is conceivably a little easier to apply when making bulk wine purchases…but then you get that trucking invoice thirty days after the bulk wine is received and you’ve already blended that bulk into three or more separate lots, making the application of retroactive costs harder to ascertain. Then there are the consumables like KMBS or tartaric acid, or oak chips, etc. that conceivably are trackable by which lots we apply those too, but that’s a lot of paperwork and logistics to keep straight. Of course the more finite the method for tracking and applying costs, the more conceivable time consumed and potentially even more costs for staff to administer the process – there has to be a better way.
Therefore, any system to establish COGS has to have at least three methods for applying costs to satisfy the real situations we encounter at the winery:
Apportioned costing spread over many applicable lots that apply to our ‘search’ for certain attributes, e.g. labor costs associated with wines in the cellar during a specific period – last month, or
Transactional costs that are accumulated as we perform certain functions in the winery, e.g. lab costs, additions and treatments like filtration or cold stabilization, etc., or
Ad hoc costs that apply only to certain instances like the bulk wine shipping cost mentioned above.
A better, faster way.
Starting with grower/estate fruit costs, Vintrace winery production software utilizes a console to maintain contractual costs tied to a grower/vineyard/block on a weigh tag, applied as fruit comes in with additional logic available to hit bonus payments for yield, quality, brix, etc. – automatically! Those fruit costs are immediately available in the ‘Costs’ tab, Fruit category (with appropriate login permissions), displayed in the Block Overview, Seasonal tab, and via standard reports in Excel for reporting or additional analysis. The main concept is this category of costs are applied AS the fruit arrives, i.e. instantly – no weigh tag tracking, no searching through paper contracts, and easily available in report format for management with a few clicks as often as needed WITHOUT additional production crew involvement. I don’t know about you, but for some of the wineries I’ve worked at/run prior to Vintrace, this was an onerous task, often performed daily, that we likely saved until the end of the day when all fruit receivals are in and we’re dog tired but looking for numbers and data equaling significant opportunities for errors!
Apportioning by volume a) end of period, or b) times number of days to more accurately apply costs- Utilizes a strong filter search to get at just the applicable lots, and check-off for single lots for further refinement
- Defaults to weighting by gallons or exportable to apply your own weighting methodology and upload with those weightings
- Applicable to stock/finished goods, e.g. to apply offsite case good storage costs, etc.
- Any many more attributes…
Apportioning by volume a) end of period, or b) times number of days to more accurately apply costs
We also have to have the ability to apply costs as they attribute to a wine, e.g. trucking costs for a bulk wine purchase. These ‘one off’ or ad-hoc costs usually show up in AP after the actual transaction has occurred. It’s usually easy enough to find which lot of wine the cost applies too, but the real tricky part is now factoring how much of that cost applies to which wines that you’ve blended that bulk wine into. In reality this scenario applies to all the above scenarios – which we need these costs to apply as of a specific date and for them to ‘follow’ the gallons to their current destination from the date incurred. Fortunately, all COGS in Vintrace is set to a specific date, and the relevant costs apply to the gallons as of that date and ‘trickle’ into the current blend for an accurate COGS per gallon. E.g. 1,000 gallons of bulk wine receipt on May 1 via Cherokee trucking costs $750, but the invoice from Cherokee arrives May 18. We have since blended that bulk wine into three lots, with 500 gallons to blend A lot, and 250 gallons each to two other lots, blend B & C. Accordingly, vintrace will apply $375 or $0.75 per gallon to the 500 gallon portion of blend A, and $187.50 total each or $0.75 per gallon to blends B & C as well – AUTOMATICALLY. To be clear, this applies to apportioned and date specific transactional costs as well. This manner of date specific cost application is a huge efficiency gain for your accounting staff and easily tracked vie the costs tab in Vintrace.
As we hone the granularity of bulk wine COGS tracking, you start to see how those costs roll up to case good COGS. Both bulk wine (Professional Base Module) and packaging costs (Advanced Inventory Module) COGS can be tracked depending on the modules you have activated in Vintrace. You can also add the case good/Advanced Inventory module at a later date to extend bulk wine COGS tracking after the fact with retro dated costs. The Advanced Inventory Module has many other beneficial aspects for building and tracking finished case goods, but as a GM in charge of Gross Profit, the ability to easily track COGS by case good for different bottling runs, or manufactured lots with different components, e.g. different glass, label or closure components, was such a huge time saver that didn’t require more of my time or production staff time to track.
The practical merit of a COGS tacking system is its ability to report out and sync with your accounting/ERP system. Vintrace currently synchronizes with Xero accounting, and is easily exportable for asset and transaction costing tracking to other systems via spreadsheet format, with inclusion of your accounting systems account names and numbers.
Final thoughts
Lastly, since this level of COGS detail has thus far been painful at best and impossible at worst to track, we always recommend that you initially implement Vintrace COGS abilities in a manner that you currently track COGS so you can easily discern ‘reasonability’ from COGS outputs. After a period of time, perhaps a calendar or fiscal period to evaluate and compare COGS figures to establish a comfort level with the Vintrace produced COGS output, then you can increase the granularity of COGS tracking to include finer delineation of your costs down to a kilogram for additives, or separate cost tracking for filtration methods between in-house plate & frame pad filtration versus mobile cross flow filtration, etc. With better data comes better analysis capability and true Return On Investment (ROI) capabilities to possibly justify or negate that future expensive crossflow filtration capital expense, i.e. unleash some Business Intelligence data for improved profitability.
A little about me
After a successful career in corporate America, I transitioned to the wine industry and have become an industry veteran with 10+ years experience as a grower, winemaker, and winery General Manager.
My role as former General Manager for Carneros Vintners custom crush facility and sister facility Lodi Vintners, was the impetus for my investigation of winery production software options. My work with a variety of wineries exposed me to an array of winery software before deciding on the vintrace platform to run the custom crush facilities and since, a few small and larger boutique wineries. My hands on winery experience and real life use of vintrace are the foundation of my success representing the vintrace software platform in North America.