Inventory & Cost Accounting Expertise
Serving Fortune 1000 & Cannabis Industries:
Maximize Cost of Goods Sold to Reduce Tax Impact & Keep Profits in Your Pockets
How Cost Accounting Experts Turbo-Charge Your Business
Benefits of Well Developed Cost Structure
A robust, defensible cost structure is the lynch pin in underlying product line profitability reporting and Inventory valuation. A well-established cost structure is indeed crucial for accurately capturing and documenting the expenses associated with the transformation of raw materials into finished goods.
Lynchpin for Profitability Reporting and Inventory Valuation:
- A strong cost structure serves as the linchpin, indicating its central and critical role in ensuring accurate profitability reporting and valuation of inventory.
Precision in Documenting Transformation Expenses:
- The cost structure is designed to capture and document all expenses associated with the transformation process, starting from raw materials and extending to the production of finished goods. Precision in this documentation is emphasized, indicating a thorough approach.
Best Practice Consulting:
- The service model includes best practice consulting, suggesting that your approach is aligned with industry best practices in the realms of cost accounting, inventory management, and product costing.
ERP/GL System Configuration for Costing:
- The service includes expertise in configuring Enterprise Resource Planning (ERP) and General Ledger (GL) systems specifically for costing purposes. This ensures that the technological infrastructure supports accurate cost tracking and reporting.
Proprietary Unit Cost & Allocation Software - Subscription Service:
- Dynamus Valor is a proprietary Unit Cost & Overhead Allocation tool. Using your company data Dynamus Valor creates a financial model of your business that channels all product related expenses to COGS, especially difficult to justify values like Executives' time, HR expenses, and IT expenses to name a few. The software creates month end journal entries as well. The software is available by subscription, no programs to buy.
White Paper Topics: Cannabis & Cost Accounting
Cost Accounting Masters - Setting 'The Standard' In All Industries
Findings from the 2023 AICPA Conference on Agriculture & Cannabis: Most CPAs Can't Stand (or know) Cost Accounting
In August 2023, the AICPA hosted their 3rd annual conference on Agriculture & Cannabis in Boston.
We asked CPA's working in the Cannabis Industry how they felt about Cost Accounting. Most respondents answered with a strong level of emotion. These are the top categories of answers:
- "That is the class that destroyed my GPA one semester in college. I know enough to get by (90%)."
- "I need to ask for help when I encounter inventory accounting (10%)."
- "My first job at a big accounting firm out of college was physical inventory & price testing for products. I never want to work with inventory valuation or cost accounting ever again (99%)."
Ironically, one respondent who "knew enough to get by" was the CPA for her husband's Cannabis business. They were filing for bankruptcy because the business wasn't profitable.
Cash & Tag Control vs. Inventory Control in Cannabis
The Cannabis companies created from first legalization established accounting practices to track cash and seed-to-sale requirement.
While processes around cash control are generally robust, the related inventory control processes have generally not been addressed.
Cash is usually counted under a camera. There is some effort to link the batch number of the sale to the transaction on the sales floor. However, once product is issued to the sales floor, it is seldom, if ever, counted and compared back to stock reports.
As an example, the company discussed in the "All I Need is a Number" article ended up firing the entire staff at one of their dispensaries because of organized theft that went on for months because there was no policy to count floor stock.
Receiving procedures may overlook inventory control. Inventory in transit may not be tracked. Robust cycle counting & physical inventory controls may not be in place. Insufficient inventory controls can lead to massive write-offs (and regulatory fines) for Cannabis businesses.
"All I Need is a Number" - How Supply Chain Systems Can Create Financial Reporting Nightmares
(This is one of my favorite stories from Cannabis consulting.)
I was contracted by a newer cannabis company to compile GAAP compliant inventory valuation for year-end financial statements. The management team consisted of members from another multi-state cannabis operator who cashed out of their first "harvest" and were starting a new venture.
The VP of Supply Chain was leading the production system implementation. On a call about production overhead and labor rates, the Supply Chain executive stated, "all I need is a number to put in the system. The system won't work if the rate is zero. The rate has to come from Finance."
The newly hired controller did not know about manufacturing rates since she had no experience with MRP systems.
Neither leader realized that rate field in the system drives the system generated journal entries for inventory valuation, unit cost, and Cost of Goods Sold that feed into financial statements.
They also fail to realize the MRP system, and how it feeds the General Ledger system, is the key to reporting profitability by product, something their CFO the CEO was keenly interested in but now will never realize except in Excel spreadsheets.
Allocations & Profit Manipulation Between Legal Entities: Common Problems Shared by the Banking & Cannabis Industries
The Office of the Comptroller of Currency was preparing to issue cease and desist orders for a 10-billion-dollar regional bank operating with multi-state operations.
The regulators charged that the allocation model used to allocate support department overhead expenses to revenue centers enabled the bank management to manipulate profits across legal entities.
This is a similar challenge faced by Cannabis Companies and the IRS today. Allocation models used by many Cannabis companies are indefensible in an audit due to specious documentation underlying their overhead allocation methodologies.
Cost Accounting Masters deployed our Dynamus Valor cost accounting system to all back-office bank departments, creating a per-unit consumption-based allocation methodology, complete with defensible audit support documentation.
The OCC audited & validated the Dynamus Valor model, congratulating the bank management on exemplary cost traceability. The bank was allowed to continue operating.
Cost Accounting Expertise & Scarcity in Industry
Reasons Why Qualified GAAP Cost Accountants Are Rare
- Cost Accounting as a career path diminished as U.S. companies outsourced manufacturing to low labor cost countries.
- Most CPA's do not have manufacturing experience, which is the natural home of inventory & cost accounting.
- GAAP compliant inventory & cost accounting are very different from A/P, A/R, cash, and general accounting (see 2023 AICPA Conference white paper topic).
Dynamus Valor: The "Dynamic Value" Process
Cost per Service Model & Overhead 'Direct Allocation' Engine
Dynamus Valor is a proprietary system that applies manufacturing costing principles to services rather than physical products.
All services offered by companies, as well as services provided by support departments within companies, have a cost to produce.
For support departments within a business, for example Human Resources or IT Support, the Dynamus Valor process converts these costs from lump sum department expenses into unit costs per service provided. These per unit costs can be directly charged to the department consuming the service based on unique cost drivers.
For example, Human Resources department provide services such as Hiring New Employees, Terminating Employees, and Benefits Administration. Departmental expenses are separated into pools of cost for these services. Next a unit cost is calculated based on measurable cost drivers. A per unit cost for hiring new employees will be charged directly to the department the new employee works in. This direct linkage of expense related to the activity replaces the "percentage guestimate" used by most organizations to allocate support costs. The service of Benefits Administration would be charged out to departments based on headcount, since each employee of the company drives the expense.
The same process of associating cost drivers to expenses incurred is applies to all overhead departments including Accounting, Executive, Legal, and so on. The Dynamus Valor model calculates month end journal entries. These entries replace percentage allocation guestimates with direct cost association.
This is particularly useful for increasing profits in the cannabis industry which is subject to IRS 280E. Regulation 280E restricts cannabis companies deducting certain expenses from taxable income, which is unique to the industry. The direct association of overhead expenses to product cost is the only vehicle available to cannabis companies to lower taxable income.
Unlike percentage allocation models, the Dynamus Valor process directly associates overhead expenses to salable products with a direct association based on cost drivers. Percentage allocation models are difficult to defend in IRS audits where the direct association of expense via cost drivers is easily defensible....and documented.
Dynamus Valor is not a software package your company must purchase and install. It is a turn-key service available by subscription.