This article is part one of a three-part series on the cost of goods sold—a key metric that can help wineries understand their profit margins. In this article we provide an overview of how to calculate the cost of goods sold (COGS) and why it matters. In the second article we dive into steps for setting up a system and best practices to derive this metric, and in the final article we discuss specific COGS insights for wineries by case volume. Understanding the principles of accrual accounting gives you a solid foundation in better winery accounting.

Management of Inventory/Stock

Crush and ferment costs, which may include payroll, supplies, allocated overhead, and depreciation or rent related to crush equipment, should winery accounting only be allocated to the current vintage crushed. On the other hand, cellar aging costs are typically shared by all wines in the cellar. These are most commonly allocated to the wines based on a weighted average number of gallons in the cellar. 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. Transparency in financial reporting builds trust with consumers, investors, and regulatory bodies.

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These two categories represent ends of a spectrum; it is possible for a winery to primarily be vertically integrated, yet also acquire a portion of its required grapes from outside growers. Regardless of their origin, harvested grapes are weighed at a certified weigh station so that a record is available about tonnage, grape varietal, and vineyard origin. Such records provide important ongoing accounting and internal control data about the grapes throughout the production process. Meanwhile, CRM integration allows wineries to connect financial data with customer interactions.

• Classes and tags in QuickBooks Online (QBO) accounting software give you X-ray vision into your winery’s finances.
• Managing them strategically gives you a crystal clear picture of your winery’s financial health.
• When using the cash basis for tax, the tax prepreparer has more flexibility in applying tax regulations to your situation to ensure you are minimizing your tax liability.
• The wine industry faces unique compliance challenges due to the nature of its product and the stringent regulations governing its production and sale.
• For example, a winery can defer taxes by delaying invoicing or accelerating expenses, thus only recognizing income for tax purposes when the income is actually received and expenses when they are paid.

What are the key components of wine accounting for a winery?

• Here are some examples of common overhead expenses of this kind and how they’re typically broken down.
• This method is often used in more basic costing models and for smaller wineries; however, it can still be used in more complex costing models of larger wineries.
• Absorption costing ensures that all manufacturing costs, including both fixed and variable overheads, are allocated to the cost of producing wine.
• Professional wine accounting services, like those offered by Protea Financial, provide expert guidance in managing complex financial aspects of the wine business.
• Calculating the appropriate cost of production of a bottle of wine is crucial for this industry.

Our expertise in winery accounting empowers you to make the most of your financial data. Classes and tags in QuickBooks Online (QBO) accounting software give you X-ray vision into your winery’s finances. Over time, they reveal hidden insights that lead to smarter business decisions.

In contrast, management reporting analyzes department performance as well as its relationship to expenditures and returns on investment (ROI). In other words, management reports are the diagnostics on your winery’s financial health. Take for instance a winery that has similarity and consistency across all departments and square footage allocation that reasonably reflects utilization derived by each department. If that winery has 10,000 total square feet and 6,000 is used for production, 60% of the facilities rent and facilities insurance costs could be allocated to wine production based on square footage. Utilities, on the other hand, should be allocated based on an estimate of usage.

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In some cases, certain expenditures may or may not be classified as winemaking costs; it really depends on the situation. This Grocery Store Accounting method is often used in more basic costing models and for smaller wineries; however, it can still be used in more complex costing models of larger wineries. 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.

Given the long production cycles and significant capital investment involved, accurate financial management helps wineries allocate resources efficiently and plan for the future. One of the primary reasons why accounting is so vital in the wine industry is the long production cycle. Unlike many other industries where goods are produced and ledger account sold relatively quickly, wine production can take several years from grape cultivation to bottling and sales.

How can understanding the cost of goods sold (COGS) benefit a winery?

These are known as COGS (cost of goods sold) and COGP (cost of goods produced). One of the major accounting complications faced by wineries is extensive regulatory compliance (and its changes). These corporations must abide by various rules and laws, far more than any other industry. If you’re also struggling with numbers, go over this article to learn more about the wine industry’s accounting complications. One of the most common questions winery owners have is how to structure their compensation.