Page 8 - Beverage Master_JuneJuly 2021
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               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

               6     June - July  2021     BEVERAGE MASTER

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