Page 8 - Beverage Master_JuneJuly 2021

Finance

stand how they work together. Next, you under- If you haven’t heard of it, the 80/20 rule, other-
stand how you can influence those costs, so that wise known as the Pareto principle or law of the
you can gain control of expenses and improve prof- vital few, says that, for many events, roughly 80% of
itability. the effects come from 20% of the causes. I estimate
that 80% of your product cost effects (improve-
As your business grows and the numbers become ment) will come from these two causes.
larger this concept becomes more important. Set
the foundation now. Know your costs. The 80/20 of Product Costs

The Building Blocks of Product Costing 1. Calculate your Standard Costs
2. Count your inventory on a regular basis
As noted above, breweries are small manufac- 3. Calculate Standard Cost
turers, so a basic understanding of manufacturing
accounting is required to know your costs. Don’t Standard costs are the expected costs to make and
panic, I will explain this in common sense language. package your beer. You can also think of this as the
No accounting mumbo jumbo. average cost of your beer. The actual cost will vary
somewhat from batch to batch, but standard cost
The building blocks of your product costs: direct is intended to provide a good average. This gives
labor, direct material, and overhead. In a nutshell, you a benchmark understanding of what your beer
these represent the cost of ingredients and packag- costs.
ing, the time to put it all together, and the overhead
costs to make sure the operation runs smoothly. With standard cost, there is no need to record all
the time and materials every time you brew a batch
DIRECT LABOR: This is the amount of time and pay- of beer, just do it once, and calculate your Standard
roll it takes to make your beer. Add up how much Cost. The simplest approach is to capture the total
time it takes to make the beer and multiply by the costs associated with a brewing and packaging
pay rate of the folks making the beer. cycle, and then present the costs however they are
most meaningful.
DIRECT MATERIAL: This is the cost of water, malt,
hops, and other ingredients that make up the beer. For example, if a 15-barrel batch of kegged beer
It includes the cost of bottles or cans, carriers, and costs $750, this works out to a standard cost of
other materials used in packaged beer. $50 per barrel. This cost per barrel is useful when
pricing your kegs for sale. Packaged beer will have a
OVERHEAD: This is the cost of everything else need- different standard cost to include the cost of cans or
ed to produce your beer. Examples include the cost bottles, carriers and cartons, and other packaging.
of utilities, water/sewer, lease expense, and a por-
tion of the cost of your brewing equipment (based To calculate standard costs, begin with the build-
on the depreciation expense). ing blocks: direct labor, direct material and over-
head. Add them all up, and this is your standard
All of these items taken together make up what’s cost. Direct labor + Direct material + Overhead =
called the bill of materials – the beer recipe, and the Standard cost
time needed to make it. Tracking all this may seem
like a lot of work. Below I’ll cover two easy steps to Count Your Inventory Regularly
get you started.
Regular and consistent counts of your inventory
How to Implement a Simple are among the most important things you can do to
Product Costing System control your product costs. Counts ensure that the
materials you think are there are actually there.
Do these two things to start: calculate your stan-
dard costs and count your inventory regularly. Counts also ensure you don’t end up with a nasty
These two things are like the 80/20 rule of under- surprise in the form of missing inventory. Missing
standing and staying on top of your product costs. inventory equals a write off. A write off is an
expense that lowers your net income. It’s bad for

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