Determining Inventory Costs

Since Bridge West started working with cannabis companies in 2009, one of the most difficult accounting issues has been determining inventory costs.  Determining the cost of the inventory is a very complex and difficult issue for most operators because there are no legacy cannabis accountants to help them determine inventory costs.  This issue becomes even more difficult for vertically integrated operators because they potentially have three types of accounting methods in one business:  Agricultural accounting for the cultivator; manufacturing accounting for the processor; and retail accounting for the dispensary.

Bridge West receives many inquiries from both operators, accountants and/or their CPAs with questions regarding how to value the inventory for the cultivator, the processor and/or for the dispensary, especially if the operating is producing the finished goods.  Below are examples of costing methods that are typically used in determining costs for the following type of operators:

• Cultivator – (a) plants have no value regardless of how many plants are in the grow. The reason they have no value is because you can’t sell the plant; therefore, there is no market value; (b) the plant values are estimated based on a rough estimate of how much yield will be derived from the plant and an estimate cost-per-yield; and (c) the cost of the yield is calculated by operations on certain cultivation costs.
• Processor – (a) the operator will develop a Build of Material (BOM) for each product using standard costs without regard to actual production activity or cost; (b) product costs were determined by discounting the wholesale price based on a margin to be realized and (c) no inventory costs applied to inventory quantities at all.
• Dispensary – (a) cost is determine by discounting of the retail pricing.

None of the above costing methods will help to determine the actual total gross margin or the gross margin by product, which is key to the success of a cannabis company.

The cannabis industry has experienced a lot of merger and acquisition activity over the last twelve months.  Inventory and inventory costs have been a significant issue.  Bridge West has helped both buyers and sellers resolve the issue to keep M&A deals moving forward.

Bridge West continues to be the leader in helping cannabis companies determine their actual inventory costs and gross margin, whether they are a cultivator, processor, and/or a dispensary.

If you are interested in learning more about how we can help your cannabis company determine your inventory costs, and your real gross margin, please contact Cory Parnell, CPA, Chief Operating Officer of Bridge West, CPAs and Advisors to the Cannabis industry, at cparnell@bridgewestcpas.com.