Accounting for Breweries (#269)
/In this podcast episode, we discuss the accounting for breweries. Key points made are noted below.
Overview of the Brewing Process
I assume you’re generally familiar with how beer is made, so here’s just a short overview. The first step is malting, where barley or other grains are run through a process of heating, drying out and cracking, where the goal is to isolate the enzymes that are needed for the next step. Which is mashing, where the grains are soaked in hot water, which activates the enzymes in the grains that cause it to break down and release its sugars. The result is a sweet, sticky liquid called wort.
Next up, the wort is boiled, while hops and other spices are added. Hops add bitterness to balance out the sugar in the wort. After boiling, the wort is cooled, strained, and filtered. After that is fermentation, where the wort is put into a fermentation vessel, where yeast is added. During this time, the yeast eats the sugar in the wort and converts it into alcohol and carbon dioxide.
And finally, we get to bottling and aging, where the beer goes into cans, bottles, or kegs, sometimes with artificial carbonation. If there’s no artificial carbonation, then it may be aged for a while, to give it time to naturally carbonate. At this point, the beer production process is complete, but there’s also a lot of waste, which is called spent grain. Most breweries donate their spent grain to farms for animal feed, but it can also be used as compost, or as ingredients in baked goods, or even used to produce methane, which is then used to power the brewery.
Chart of Accounts Issues
So, what are the accounting issues? First of all, the chart of accounts is a bit different. Raw materials inventory is broken down into a bunch of accounts, including raw materials for malt, and hops, and chemicals, and packaging materials. Then finished goods might be broken down into pack types, such as packaged and kegged. And then on the income statement side of things, the main issues are to have separate accounts for every type of revenue and the cost of goods for each type of revenue, so that you can figure out the gross margin for each one. This means having separate accounts for things like kegged beer, packaged beer, growlers, and taproom sales. And in case you don’t know what a growler is, it’s a refillable jug used to transport draft beer. And if you don’t know what draft beer is, it’s beer served from a keg.
Marketing Expenses
A brewery is likely to have a lot of marketing expenses, one of which is somewhat unique to the industry. They usually have a line item for festivals expense, which is a great place to acquaint walk-by customers with the company’s beer offerings. Incidentally, marketing expenses can be anywhere from 20 to 30 percent of the total expenses of the brewery.
Merchandise Accounting
Another accounting issue is merchandise. The brewery probably buys T-shirts, hats, glassware, and so on from a supplier, and sells them on the premises. This is pretty much guaranteed profit, so it makes sense to set up a separate profit center to track it in the accounting system.
Taproom Accounting
And speaking of profit centers, there’s the taproom. It’s the area within a brewery where it serves beer to its customers. This can be a seriously profitable area, so it needs separate reporting. Which brings up an accounting issue. If you transfer beer from the brewery to the taproom at cost, then the taproom is going to report massive profits, while the brewery doesn’t get to report any profits at all. To get around this, some breweries transfer beer to the taproom at its wholesale price, which allows the brewery to participate in some of those profits.
Cost of Goods Sold
And what about the cost of goods sold? I won’t get into the usual materials and labor and overhead topics, but here are a couple of issues that are unique to breweries. First, there might be stale beer on the premises. If so, it’s charged to expense right away, through the cost of goods sold. Second, stale or unused beer may be returned by distributors, in which case it’s also charged to expense through the cost of goods sold. A larger brewery might even accrue for expected amounts of stale beer, which brings up one of the best account names ever, and I am not making this up – accrued stale beer.
Another interesting cost of goods sold item is yeast. It can be used over a number of batches, so theoretically its cost could be allocated out over those batches. But, since it’s not that expensive, a lot of breweries just charge it to expense as incurred.
As for the costing system used, production is usually valued with either a standard costing or average costing system. And for a smaller brewery with not much accounting support, it may use a modified system that’s really simple. In short, ending raw materials are valued at their most recent purchase costs, while work in process and finished goods are valued using a standard cost.
Outsourcing Issues
And to complicate matters, a brewery might outsource some of its production to another brewery, in which case the accountant needs to track the transfer of ingredients to the other party, and pay for the production costs billed back to the brewery. In some cases, the brewery may commit to using a certain percentage of the other party’s brewing capacity, which can involve paying extra fees for the capacity.
Fixed Asset Accounting
So, moving along to fixed assets, there’s lots and lots of equipment in a brewery – things like boil kettles, conditioning tanks, grain storage silos, keg washers, and water purification systems. There aren’t any special capitalization or depreciation rules here – just different types of assets.
One unusual type of fixed asset is kegs. A brewery may sell its beer to distributors and retailers in kegs. If so, it collects a refundable deposit on each one, which it pays back when kegs are returned. This means that the deposits appear on its balance sheet as a liability. Also, kegs can have hard lives, and so may be damaged. If so, the brewery will have to write them off – which doesn’t happen with most fixed assets.
Excise Taxes
And then we have excise taxes, which are charged straight to the brewery, not to customers. The brewery has to pay the federal government an excise tax on each barrel of production, and usually another excise tax to the state government. The state rates are wildly different, with some states like Wyoming charging next to nothing, and Alaska charging super-high rates. The main reporting issue for the accountant is the Brewer’s Report of Operations, which has to go to the Alcohol and Tobacco Trade and Tax Bureau – that may be a more important report for the accounting department than the financial statements. This report is used to track the amount of beer flowing through the brewery, and to impose the federal excise tax.
Distribution Channels
Another issue is distribution channels. In some states, breweries are required by law to sell through distributors, who take a massive cut from the retail price. Meanwhile, taproom sales can be quite high, and if direct distribution to retailers is allowed, then the brewery has a price point for them that’s somewhere between those two extremes. So, it makes a lot of sense to structure the financial statements to show profitability by distribution channel. It’s quite possible that a big increase in sales might have a minimal impact on profits, because the sales were through the least profitable distribution channel.
Brewery Metrics
Moving along to metrics, there are a couple of unique ones, such as revenue per barrel, which is watched pretty closely. But the one I like is keg cycle time – great name. This is the period of time during which a keg is in use, starting when it’s filled and ending when its later refilled. A brewery usually owns its own kegs, so compressing the cycle time for its kegs means that it has to invest in fewer kegs, which improves its cash flow.
Financial Statement Disclosures
And then there are financial statement disclosures. Larger breweries may enter into really long purchasing contracts for their ingredients – like, ten year contracts for hops – so that has to be disclosed as a long term commitment.