Inventory costings are often an afterthought left to accountants, but they should be a key management tool to drive better decisions.
Good costings can highlight margins within a product range, and successful businesses make calculated decisions around those findings. Specific product costs provide insight that supports sales and growth strategies and the strategic deployment of capital.
Insightful costings require forethought, effort, and CPA-level experience. It is common that small- and medium-sized wineries don’t have this experience in-house, so they leave costings to their tax accountants at year-end. The tax accountants are usually pressed for time and focused on getting tax filings right. They can get these right with a simple, quick costing, but the winery loses an opportunity to acquire insight into its business.
Simple (and unhelpful for management, but sufficiently accurate for the IRS) costings typically take a variant of the same shortcut – treating all wines alike, and just dividing total costs by total production. (Some may be slightly more detailed, but still suffer from the same principle.) However, we know all wines are not created or made alike.
Fruit costs, winemaking costs, barrel costs, and packaging costs for each wine are different, and management needs to know the specific costs of each SKU.
With this detailed knowledge, management can:
- Accurately know the true profit margins for each wine
- Focus sales and production on the most profitable wines
- Conduct a profit sensitivity analysis while evaluating sales and production strategies for future vintages
- Evaluate the return on capital used to expand a specific product line
A proper process for each of these topics merits its own discussion, as well, but these management functions can’t be effectively completed without accurate, product-specific costings. We have seen wineries set prices incorrectly (and not maximize profit), waste precious working capital on production on their less-profitable wines, and lose money on wines because they set marketing and programming budgets using a simple average cost, rather than a product-specific cost.
An insightful costing requires advance coordination between management and accounting in order to establish the procedures for tracking each cost item and knowing how to specifically allocate it to a particular product.
To gain insight into costs, establishing a clear tracking procedure is key for management and accounting teams. This will help to track each cost item and understand how to specifically allocate it to a particular SKU. It is always easier, cheaper, and faster to perform a costing when most of the work has been done in advance. Waiting until after the wine is bottled to sift through invoices with a tax or other deadlines looming is a recipe for average (or worse) results.