Isolating the costing pools at various stages of production aids in allocating period overhead costs more precisely and allows for more accurate tracking of the component costs of blended wines. Grape costs may be recorded in a separate account initially, but these costs become part of the bulk wine inventory along with additional crush, fermentation, and cellar costs. The bulk wine cost with additional storage and overhead is combined with the cost of packaging materials used along with bottling labor to derive the individual unit cost of the finished wine.
Cost for inventory may use several methods to best match the production processes, including the following.
Specific Identification (SPID)
Under this method, the cost of each inventory item is tracked from the time of purchase or production through the time the wine is bottled. It relies on accurate data input and recordkeeping to trace costs through the manufacturing process. This method calculates exact juice or wine yields for each vintage for each wine grape varietal—sometimes even by vineyard and vineyard block—and tracks the individual barrels used for each wine lot, parsing and combining as barrels are blended to their final form.
First-In First-Out (FIFO)
This method assumes that items flow through inventory in the order they were purchased or produced. In other words, the oldest vintages are sold first. However, this is not always the case with wine.
This method values inventory based on the average cost of all similar items available during the period. When costs aren’t easy to trace, it may be preferred to use an average, weighted average, or other ratio for applying costs. This method is also appropriate for consumable supplies, such as yeast and sulfur, or general costs, such as storage, utilities, and labor.
Last-In First-Out (LIFO)
This method assumes the most recently purchased or produced inventory items are the first items to be sold. This is unrealistic for most wineries because wine is typically vintage-dated, with older vintages sold before newer ones.
In order for a winery to use LIFO for tax purposes, it is also required to use it for financial reporting purposes. Typically, wineries utilizing LIFO initially utilize SPID or FIFO for internal, managerial accounting purposes and record a LIFO reserve to adjust to LIFO for financial reporting and tax purposes.
Choosing the Method for Your Winery
SPID and FIFO costing are the most common methods used in a winemaking environment, especially because wine is typically vintage-based and tracked down to the individual wine stock-keeping unit (SKU).
As mentioned above, a significant number of wineries cost their wine using the SPID method for management purposes, then convert to LIFO for financial reporting and tax purposes. Changes to tax code in 2017 now allow expensing for many winemaking costs and therefore creating greater disparity between U.S. GAAP and tax-basis financial recordkeeping, so it’s useful to discuss this with your CPA.
Major Cost Categories
The Financial Accounting Standards Board (FASB) definition of inventory costs explicitly states that “determination of inventory costs involves many considerations.” These considerations include actual raw materials as well as other input costs and allocations of overhead costs directly related to the production of the inventory, such as labor, benefits, depreciation on production equipment, facility costs, and other shared costs of business operation that support production. The key phases of wine production are crush and ferment, cellar (and/or barrel) aging, and bottling. Each phase has unique processing activities and costs, and each activity is made up of at least three types of costs: direct materials, direct labor, and overhead. These are outlined below.
There are several ways to allocate costs, but regardless of the method used, it’s important to apply it consistently. Consistency is required by U.S. GAAP and it also makes it easier to spot variances when they do occur. Once a methodology is determined and adopted, a winery can fine-tune its data capture and reporting procedures to ensure the information used to cost its products are accurate.
Accounting for materials is typically straightforward in that the cost equals the price paid to acquire the materials, including tax and shipping costs to bring the materials to the production location.
Materials include the following:
- Cost of grapes purchased or grown
- Bulk wine purchases
- Packaging materials, such as glass, corks, and capsules or screw caps, labels, and boxes
Note that packaging materials should be applied to the cost of finished goods inventory as used and may be specifically assigned to wines or allocated to all wines bottled in the period.
Labor is essential for turning materials into a finished product. This includes salaries and wages as well as related costs, such as benefits and payroll taxes, for employees involved in the following:
- Grape production
- Maintaining production facilities
Owner, founder, and executive compensation is a difficult expense to classify because these individuals often work in many areas around the winery. Estimating the amount of their time spent with each department and applying the appropriate percentage of expense accordingly is a common approach.
Classification of overhead costs can vary, depending on the size of the facility and whether there are shared uses of facilities by other revenue streams, such as facility rental or custom crush services.
Costs most often identified as overhead are those associated with running the production facilities assuming the facility is being run at normal capacity. These often include, but are not limited to, the following production and storage facilities and equipment related costs:
- Rent or depreciation of production facilities and equipment
- Property taxes
- Repairs and maintenance
- Lab fees, general production and cleaning supplies, and services