Kunde Estate Winery: A case study in cost accounting
Lee, John Y, Jacobs, Brian Gray. CMA. Hamilton: Apr 1993. Vol. 67, Iss. 3; pg. 15, 4 pgs

Abstract (Summary)

Kunde Estate Winery, a small wine producer in California's Sonoma Valley, uses a relatively simple system to relieve its cost accounting problems. The cost accounting system is a hybrid between process costing and job costing. As each lot of wine in a given vintage may be processed differently, each can incur varying costs. Depreciation is allocated based on estimated usages of by process departments, including crush and ferment, tank aging, barrel aging, bottling, and general production. In controlling costs, Kunde considers the fact that production levels are fixed at the time of crush for a full year. A comprehensive budget and cash flow model is used, incorporating direct departmental expenses and other nonfinancial data to forecast a complete production cycle.

Cost accounting poses a challenge for more organizations. For small businesses constrained by size, budget and employee numbers, the challenge is particularly acute. This case study examines how Kunde Estate Winery, a small wine producer in California's Sonoma Valley, used a relatively simple system to relieve its cost accounting headache.

Before examining specific cost accounting issues, a brief primer on production at Kunde Estate Winery might be in order. The company has released only two vintages, Sauvignon Blanc and Chardonnay. both have won medals in competition and have been praised by wine writers. The Chardonnay received an "outstanding" review from the "Wine Spectator," an American industry publication, which stressed the product's value for pricing. Kunde's competitive strengths stem from three main factors, including the quality and value of its wines; its vineyard heritage; and ins "Estate Bottled" designation, granted by the federal government to wines containing at least 95 per cent grapes from vineyards owned or controlled by the winery.

Unlike other beverage manufacturing processes, wine making follows no set formula. vintners must apply their experience to a number of variables. Wine characteristics vary with the particular year's weather conditions, the growing microclimate, the harvest date, and production decisions made throughout the process.

At Kunde Estate Winery, grapes are dumped into a hopper, then fed to a stemmer-crusher machine that removes the stems and crushes the grapes. This process yields a must, or a slurry of skins, seeds and juice.

To make red wines, which derive their color from the grape skins, the must is pumped to stainless-steel tank fermenters. Yeast is added in order to convert the sugar in the must to alcohol. Carbon dioxide produced during this fermentation process causes the skins to rise to the top of the fermenter. Here another by-product of fermentation, heat, would ordinarily cause them to decay. In order to prevent decay, the clear 'juice-wine at the bottom of the tank is frequently pumped to the top of the tank, keeping the skins in suspension. Fermentation generally takes about 10 days. After all the sugar has been converted to alcohol, the must is pumped to a press, where the wine is separated out.

White wines do not require skin contact. The must is pressed immediately after crush or within one day of crush. Fermentation takes place in stainless steel tank or 60-gallon oak barrels.

Most wines at Kunde Estate Winery are aged in oak barrels. After fermentation and press, red wines are pumped into barrels in the caves. After about a month, the wines (including barrel-fermented white wines) are racked. Racking entails pumping the clear wine out of the barrels into a tank, leaving a small amount of lees, or wine containing suspended yeast and grape solids in the barrel. The lees are collected and filtered to remove the solid particles.

After the barrels have been washed, the wine is returned for further aging. White wines are aged until about April for a light vintage like Sauvignon Blanc or until June for Chardonnay. Red wines are aged in barrels for about 18 months.

During crush, grapes from different fields and harvest dates are fermented in individual lots. Various lots are then blended to make finished wines. A wine labelled as a varietal, such as Cabernet Sauvignon, must contain at least 75 per cent of that varietal. Better wines result from adding other varietals into the primary blend. A Cabernet will often include Merlot and/or Cabernet French wines, which add flavor and complexity. The wine maker begins blending about three months after the start of the wine-making process, and continues blending until bottling. Small lots of lees wine and unblended lots are sold on the bulk wine market.

After final blending, wines are fined and/or filtered to remove sediment before bottling. Done merely for esthetic purposes, this process applies mostly to white wines. The amount of final processing is important, as too much filtration can remove some of the wine's desirable characteristics. Wines are then bottled, corked, and labelled in sequence on a bottling line.

All bottled wines require aging, about two months for white wines and up to a year or more for some reds. The short aging period for white wines allows them to recover from bottle shock, a temporary change in flavor that results from the bottling process. Red wines continue to develop in the bottle.

THE COSTING SYSTEM

Cost accounting for wine making differs in several ways from the system used by other manufacturers. The system is a hybrid between process costing and job costing. As each lot of wine in a given vintage may be processed differently, each process can incur varying costs.

Process department costs are clearly identified. The key to costing wine inventory is to follow the wine's movements. Equipment and depreciation are identified by department where possible. Otherwise, depreciation is allocated based on estimated usages by process departments, including Crush and Ferment, Tank Aging, Barrel Aging, Bottling and General Production. Each department incurs costs that are periodically allocated. Allocations of process costs need only be applied to individual lots at bottling and at year end. Between applications of process costs to lots, the lot costs will change with blending activity and losses from it.

GRAPE COSTS

The winery purchases its grapes from a vineyard at market value. The must resulting from each delivery receives a lot number. More than one wine lot may be produced from each lot of must, depending on processing. Grape costs are allocated to the resulting wine lots based on gallons of wine produced.

CRUSH AND FERMENTING COSTS

Crush and fermenting costs are allocated annually to all wine lots crushed in the vintage. As each grape varietal produces a different yield, crush costs are allocated based on tons crushed and fermented. Average gallon yield per ton by varietal is calculated and multiplied by the gallons in each lot to arrive at "tons crushed," the basis of cost application. The average yield is used to simplify calculations, as any differences are not material. Blending eliminates differences within a particular varietal.

WINE AGING

Cellar work orders are issued by the wine maker for all operations, including racking, blending and movements between locations. The winery takes a monthly physical inventory of all wines for federal government reporting purposes. Lots of wine are also updated monthly for movements and blending. The lots and related costs are adjusted for blending and shrinkage. Monthly cost adjustments are made as of the latest cost application.

TANK AGING

The winery allocates department costs based on gallons in stainless steel tanks after fermentation. As all tanks are emptied before crush to make room for the coming vintage, tank aging allocations begin after fermentations are completed.

The allocation of tank aging costs to a lot of wine is based on the formula:

* (Lot gallons x months in storage)/(Sum of gallons per month for all months in period) x Costs

Multiplying the number of gallons in the lot by the number of months (gallon-months), then dividing by the total gallon-months in the department for the allocation period, produces the allocation rate. The department costs for the period are charged for the rate applicable to each lot.

Because of evaporation, workers must top up the tank in order to eliminate air, which would promote the growth of bacteria that turn wine into vinegar. After that point, wines aging in tanks will require little labor. Tank aging costs accordingly include period costs of depreciation and utilities. Utilities are stable in processes other than crush.

BARREL AGING

Barrel aging is the most complex costing component. A 60-gallon French oak barrel costs $500 to $600. An oak barrel will impart flavor to wine for about three years after purchase. wines are aged in a mix of old and new barrels.

Barrels are depreciated over three years. The winery maintains barrel depreciation records to allow application of a given year's depreciation to a specific vintage. As wine evaporates through the wood, the barrels must be topped regularly.

Racking wine in barrels is a labor-intensive operation. Each barrel must be emptied, moved and cleaned, and then refilled individually.

The caves at Kunde Estate Winery require only lighting, as the temperature and humidity are very conducive to aging wine. The 90-per-cent humidity reduces wine evaporation loss by about 200 per cent compared to evaporation loss in a refrigerated warehouse, partly compensating for the increased handling costs.

Barrel department costs are allocated using barrel months in a similar fashion to tank aging. Some utilities and cave depreciation are first allocated to the barrel storage for other wineries that lease part of the facility.

BOTTLING

Bottling costs can be easily identified with each lot that is bottled, and are applied directly to such lots. Purchases of standard items like glass, corks and foils are held in inventory and applied based on usage.

BOTTLE AGING

Bottle aging is applied to unreleased wines as a cost of production, and expensed to cost of sales for released wines. Wines held at the winery get allocations of depreciation and utilities. Wines are transferred in large numbers to an outside warehouse for storage and shipment to customers.

LABOR AND GENERAL PRODUCTION

Labor and benefits are charged to the general production department. Each month, the wine maker and the cellarmaster review the work performed and report to accounting the percentage of each employee's time spent in each department. These estimates provide the basis of allocation for labor.

The general production department is the overhead department for wine making operations. The wine maker's salary and benefits, and insurance, laboratory and administrative expenses, are collected here for allocation to the process departments, based on estimates of activity by the wine maker.

PRODUCT COSTING ISSUES

Now that Kunde is entering its second vintage, or wine made from its second crop season, two issues arise. wines in the new vintage are racked more frequently, and undergo more blending operations. and white wines fermented in barrels require more attention than either red or white vintages that are transferred to barrels after fermentation. The winery expects to account for a greater number of transactions for these extra tasks, resulting in higher cost allocation in the costing process. The press and lees wines are not costed using bi-product costing. The bulk wine market fluctuates substantially, and the winery's history of bulk sales is insufficient to establish a reasonable standard.

Standard costing is appropriate for bottling costs. Using standard costs can produce benefits if the bottling operation is relatively stable.

Inventories are classified as bulk or bottled (finished goods). Bottled wines may continue to receive storage costs. As raw materials (grapes) are processed immediately, materials inventories, consisting of bottling materials, are minimal. Industry accounting practice considers wine inventory a current asset, regardless of the stage of production.

COST CONTROL ISSUES

According to one industry expert, wine making is more capital-intensive per dollar of sales than automobile manufacturing. Much of the specialized production equipment and plant are used for about months of the year during crush. Besides the capital requirement for plant and equipment, the extended production cycle of up to three years from crush to release for red wines causes a tremendous cash flow burden.

In controlling costs, Kunde considers the fact that production levels are fixed at the time of crush for a full year. A comprehensive budget and cash flow model is used, incorporating direct departmental expenses and other non-financial data to forecast a complete production cycle. The model includes departmental budgets and projected financial and cash flow statements.

At Kunde, the only function requiring a flexible budget is marketing, which is linked to sales. Most costs are fixed capital costs. Because the production level is fixed, labor is easy to control. Oak cooperage and bottling materials present some problems. Oak cooperage from France is subject to wild fluctuations of the dollar, which can be partially mitigated by purchasing franc-de-nominated futures. Controlling bottling materials costs is difficult, as cork and neck foils are also imported.

Many managerial accounting issues besides the design and implementation of the cost accounting system have been explored in this case study. Small businesses, especially those in process industries, could benefit from Kunde's simple systems in their efforts to come up with a cost accounting regime that meets their needs.