So your brewery produces great craft beer, the tasting room is running smoothly, your distribution is growing, but the financial reporting is not giving you a complete or accurate picture of how the brewery is actually performing due to limitations in the cost accounting system.
The key areas involve the tracking of the cost of materials (grains, hops, yeast & adjuncts), work in process (the batch from mash to kegging/packaging) and finished goods (finished beer in kegs, tanks, cans, bottles, etc.).
The following is a typical progression of brewery cost accounting methods used to report in the balance sheet and income statement:
Cost flow = (purchase cost and direct labor) >> cost of goods sold or expense accounts (regardless if sold or not)
At this stage breweries often use Quickbooks or a similar system that is not designed for manufacturing. The brewery labor and materials are recorded to cost of goods sold or expenses without regard to the amounts held in inventory. There is no perpetual or point-in-time inventory tracking. While this is a simple approach, the income statement will not correctly show gross margins or profitability.
Cost flow = (purchase cost and direct labor + month-end adjustment) >> cost of goods sold (approximates the cost of beer actually sold)
The next stage is to record a physical inventory as of month-end by using a spreadsheet that summarizes the units and costs of materials and finished goods inventories. A month-end journal entry is recorded to adjust the inventory accounts on the balance sheet with an offset to cost of goods sold in the income statement. This will allow for correct reporting of gross margins and net income, but it does not provide tracking for on-hand inventories on a perpetual day-by day basis.
Cost flow= labor to cost of goods sold as paid. Purchase cost to materials inventory + net WIP adjustment >> finished goods inventory>> cost of goods sold (when sold)
The next stage of system development is to maintain materials and finished goods inventories on a perpetual basis, but not track work-in-process inventories. The materials pulled from materials inventory into the brewery area are expensed to cost of goods sold in the Income Statement and when the beer is finished and kegged/packaged, that value is recorded to inventory with a credit to cost of goods sold.
Cost flow = purchase cost to materials inventory + direct labor + overhead rate >> work in process inventory >> finished goods inventory >> cost of goods sold (when sold)
Using an accounting system that supports manufacturing, the costs of materials (grain bill) flow into inventory and are tracked on a perpetual real-time (or near real-time) basis, production orders are used to track the materials issued and labor consumed for a beer batch. When the production order for the beer batch is completed, the costs flow to finished goods inventory and manufacturing variances against a standard are calculated and yields determined. The costs flow to the income statement as sold. The more advance systems using standard costs report many variances including as materials purchase price, material usage, labor efficiency, labor rate, lot size, overhead, and others)
Until next time, Cheers!
Greg Leiser, Pro Back Office Consulting CFO