With rising costs and complex supply chain, companies in the food and beverage (F&B) industry may find themselves at a disadvantage if they lose cost visibility and if the accounting system and operational controls aren’t tightly aligned.

Operating in a highly-competitive market and understanding your company’s cost structure is not just about financial reporting—it’s a strategic advantage.

Explore common cost accounting challenges that face the F&B industry and some practical ways to address them.

1. Volatile Raw Material Prices

Agricultural products like wheat, dairy, sugar, proteins, coffee beans, and cocoa can be highly volatile due to various factors that impact their price which can include climate conditions, regulatory changes, geopolitical situations, and currency fluctuations.

If not accounted for timely, these sudden price changes can distort the standard costing model, which can further compress the companies’ already thin product margins.

How to Address Volatile Raw Material Prices

Revisit your costing model to determine if more frequent updates to standard costs are needed or if changing from standard costing to average costing is needed to ensure costs of raw materials are captured accurately.

If using standard costing, implement a frequent price variance analysis, which aims to account for significant variances and determine the root cause and actions that may need to be taken, which may include implementing hedging strategies to effectively lock material prices when possible or through diversification of suppliers.

2. Supply Chain Disruptions

The COVID-19 pandemic and geopolitical tensions exposed the vulnerabilities in the supply chain affecting the F&B industry. These global disruptions can lead to increased costs for the company due to changing tariff rates, unexpected freight, and storage surcharges.

With perishability a main concern for F&B operations, delivery delays can result in inventory losses due to expiration or spoilage which directly impacts the costs of goods.

Tariffs increase the landed cost of imported goods, which impacts costs of raw materials, packaging materials, and processing equipment used in the manufacturing process.

How to Address Supply Chain Disruptions

Make sure landed costs are identified and recorded completely. These should include all freight, taxes and duties, insurance, and handling costs, which should be capitalized as part of product cost.

Additionally, revisit the safety stock requirements for each material to properly balance between the cost of ordering inventory against the cost of carrying it.

3. Labor Cost and Resource Management

In the F&B industry, labor costs generally fluctuate due to overtime, seasonality of demand, increasing employee insurance premiums costs, and minimum wage adjustments required by law.

Additionally, F&B manufacturing can be labor intensive, so inefficiency in the deployment of labor resources can increase the cost of production and quickly diminish the company’s margin.

How to Address Labor Cost and Resource Management Issues

Plan staffing based on forecasted production and demand for the product. Additionally, confirm your costing model has established a benchmark for both labor rates and labor hours either per activity driver, unit of production, or batches.

These labor rates should incorporate expected wage increases, including overtime rates and shift differentials. Consider performing time studies to determine the appropriate benchmark for labor hours.

4. Multiple and Complex Product Portfolio

Many companies in the F&B industry operate with an extensive product portfolio with stock keeping units (SKUs) of varying sizes, flavors, and formats. One of the challenges of having multiple products is determining the most appropriate basis to allocate overhead costs.

When not applied properly, the overhead cost allocations can result in over- or under-allocation, which can result in distortion of product margins and pricing errors.

How to Address Multiple and Complex Product Portfolio Challenges

Consider implementing Activity-Based Costing (ABC) methodology, which allocates costs based on the product consumption of resources. This can improve accuracy of product costing that can assist management to identify products that are more profitable than others.

5. Technology and Process Integration

Disparate and disconnected systems and processes between procurement, manufacturing operations, financial planning, sales, and accounting can result in untimely, inaccurate, or incomplete reporting of costs and profitability.

In an industry where products can expire quickly, having a system that can track aging of inventory is essential for compliance, operational efficiency, and proper valuation of inventory.

Often operating on a mix of standalone software, system tools, and spreadsheets, F&B companies frequently struggle to obtain and use the data needed to accurately capture and report inventory costs.

How to Address Technology and Process Integration Problems

Implement unified enterprise resource planning systems that can align procurement, warehouse management, production, sales, and accounting within a single data environment. A real-time dashboard can also help provide visibility to management that can provide insights into operations in a timely manner.

Communicating and understanding that product costing is not just an accounting issue but rather a responsibility of every department is imperative for the company to be successful.

We’re Here to Help

We provide companies with specialized cost accounting knowledge and expertise to help design and implement costing methodologies that follow industry practices and comply with accounting standards.

Our technology and data solutions teams can support integrating your methodology into leading software solutions, automate cost allocation, and improve data collection and reporting.

Beyond implementation, our industry-experienced professionals can offer strategic accounting, financial planning, and regulatory compliance support.

To learn more about cost accounting challenges and how to solve them, contact your firm professional.

Additional Resources

• Food & Beverage Practice
• Internal Audit Services