Brewery Cost Analysis

As manufacturing operations, breweries are ideal candidates for cost analysis. Standard costing is a way to identify and measure any variances from expected costs. Analyzing cost variances can help a brewery make decisions about ingredients, packaging and labor to increase its bottom line. When conducting cost-variance analysis, be sure to talk to employees working on the front line. It's possible that these employees have already noticed inefficiencies and can help identify potential solutions.

The first step in analyzing costs is creating a standard to measure your actual results. Managers usually create standards on an annual basis. Work with an accountant to project what your costs should be based on your expected production and product mix. Use past analysis and current price lists to set your expectations. You can either create an ideal budget that assumes no problems or set an attainable budget that leaves room for occasional unexpected costs.

Direct labor variance helps managers understand how their workforce affects their costs. Direct labor generally only includes individuals directly involved in creating the product. This would include the staff involved in cooking, brewing, bottling, labeling and packaging. Labor rate variance is the difference between the budgeted pay rate and the actual. For example, if you expected to pay staff an average of $10 an hour for 500 hours but actually paid $15, the hourly variance would be $2,500 unfavorable. Multiply the variance by the number of hours worked to determine total rate variance for the period.

Direct materials include the the raw materials and products used in production. For a brewery, this would include items such as hops, barley, yeast, bottles, bottling equipment, kettles, and fermenters. As with direct labor, you can determine your direct material price and usage variance. Direct material rate variance is the difference between the actual quantity purchased at the actual rate versus the expected price. For example, if you expected to purchase 200 gallons of hops at $30 per gallon but instead paid $40, you would have a $2,000 unfavorable price variance.

Once you've calculated variances, evaluate the results for extraordinary differences. Keep in mind that not all variances indicate a problem and it's generally not worth investigating small variances. If you do find extraordinary variances, talk with managers regarding possible causes. For example, a negative labor efficiency variance could be caused by inefficient scheduling or a wave of newly hired workers. Look for variances that could influence on another. For example, low-quality materials could create a labor inefficiency variance.