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Why Cost Matters - Accounting Solutions for Managing Your Winery

10/11/2008


As an owner-manager, one of the many challenges of operating a small or medium sized winery is getting your head around the accounting requirements. And while wine may be your passion, the myriad of accounting processes that go along with your business may not bring you as much enthusiasm.

Making wine is a manufacturing process. As a result, the cost of the process must be traced from raw materials inventories, to wine-in-production, to bottled wine and then charged to income in the period the wine is sold. In addition, direct overhead costs and the cost of production and storage equipment should be allocated to the process. The cost of the wine making process can be measured at varying levels of precision: by vintage year, by red or white, by individual varietal, or any combination of these. In general, the greater the level of precision you have, the more complex accounting system you need to track and capture costs.

Faced with this challenge, you might be tempted to ignore the issue of inventory and process costing altogether but there are several important reasons why these processes should not be overlooked:

  1. Lenders or investors may require a review or audit of your financial statements. This means that you must calculate your cost of sales in accordance with Canadian generally accepted accounting principles (GAAP). These principles require that the cost of producing wine be inventoried and then charged to income in the same period the wine is sold.
  2. The Income Tax Act also requires that you follow GAAP when calculating your taxable income for the year.
  3. Knowing your cost to produce a particular wine product provides key information in determining your prices. Without an accurate cost, it is impossible to determine whether you are charging enough for your wine to cover your fixed costs and generate a satisfactory profit.
  4. Accurate costing facilitates good management decisions. Management can focus production efforts on products that generate the best margins.
  5. Focusing on costs can uncover hidden savings. You can track your cost components over time to see if certain elements are increasing. Maybe you can reduce shipping costs without a decrease in service by simply changing carriers. Perhaps there is new labeling technology available which can decrease cost without loss of quality.
  6. Accurate production cost budgeting and monitoring allows management the opportunity to take corrective action in real time, rather than waiting for the damage to be done. In addition, employees can be rewarded for staying on budget without sacrificing the quality of the end product.
  7. You may require an operating line of credit for your winery. Lenders will base part of their decision about how much credit to extend on the value of your inventory. If you expense all your costs as they are incurred, you may be inadvertently limiting your short-term borrowing capacity.

The good news is that a carefully planned and implemented accounting system can make the accurate tracking of costs a straightforward process. Most accounting software packages on the market today can handle the basics. A qualified accountant and business advisor with a good working knowledge of the wine industry can help tailor a process costing system to meet your specific information and reporting needs.

Geoff McIntyre, CA is a Business Advisor with Meyers Norris Penny LLP. He can be reached at 250-763-8919 or [email protected]