• LinkedIn
  • Facebook
  • Twitter

CPAs & Advisors to the Cannabis Industry Since 2009 Schedule An Appointment

Bridge West LLC
  • About Us
    • Firm Overview
    • Leadership
    • Our Companies
    • Industry Affiliates
    • International Affiliations
  • Services
    • 280E Mitigation
    • IRS and State Audit Assistance
    • Advisory Services
    • License Application Advisory Services
    • Business Valuation
    • Financial Statement Audit and Other Attest Services
    • Tax Compliance
    • Outsourced Accounting Services
    • Investment Advisory
    • Technology Services
  • Industries
    • Cultivator
    • Processor
    • Dispensary
    • Vertical
    • Hemp
    • CBD Retail and E-commerce Operators
  • Events
  • Cannabis News
    • CannaBlog
    • Podcast
    • Webinar
    • Videos
  • Client Access
  • Careers
  • Contact
  • Menu Menu

Home > CannaBlog > Determining Inventory Costs for Your Cannabusiness

Determining Inventory Costs for Your Cannabusiness

Since Bridge West started working with cannabis and hemp companies in 2009, one of the most challenging accounting and tax issues has been determining inventory costs.

Determining the cost of inventory is a very complex and difficult accounting and tax issue for most operators because there are no legacy cannabis accountants to guide clients in calculating accurate inventory costs.  This issue becomes even more complex for vertically integrated operators because there are potentially three types of accounting methods in one business: agricultural accounting for the cultivator; manufacturing accounting for the processor; and retail accounting for the dispensary.  Because most states have mandated inventory tracking software, new operators typically don’t think about using an integrated ERP system that tracks both financials and operations, like a typical manufacturer would. As a result, accountants need to merge financial data with production data.

At Bridge West, we have reviewed many cannabis and hemp companies’ financial statements and/or tax returns.  Below are examples of different methods that we have seen used in determining costs for the following type of operators:

  • Cultivator – (a) plants have no value regardless how many plants are in the grow. This is because the Company can’t legally sell the plant therefore, it has no value; (b) plant values are calculated based on an estimate of how much yield will be generated from the plant and an estimated cost per gram of yield; and (c) the cost of the yield is calculated by operations on certain cultivation costs which does not include all indirect costs.
  • Processor – (a) the operator will develop a Bill of Material (BOM) for each product using standing costs without regard to actual production activity or labor / overhead costs; (b) product costs are determined by discounting the retail price by a margin to be realized; and (c) no inventory costs are applied to inventory quantities at all.
  • Dispensary – (a) cost is determined by discounting of the retail pricing by the expected margin; (b) a Bill of Material (BOM) is developed for each product, using standing costs without regard to actual production activity or labor / overhead cost

Unfortunately, none of the above costing methods will accurately calculate your inventory costs, which means your companies’ total gross margin and gross margin by product is unreliable.  Understanding your gross margin is key to the success of your cannabis or hemp company.

Also, most of the above methods have not held-up to various IRS or State income tax audits.  Bridge West has handled some IRS audits for clients that had previously their tax return prepared by someone else and were notified that their taxable income was understated because of too low or no inventory value.  The penalties were significant.  In other situations, where we reviewed tax returns prepared by other firms that had identified this issue, we spread the understatement over a four-year period by using Section 481 adjustment.

We have seen significant progress in ERP systems for the cannabis and hemp industries that can provide better Supply Chain Management, as well as, a fully integrated accounting system.

If you have any questions or would like to learn more about determining inventory costs in the cannabis industry, contact Cory Parnell at cparnell@bridgewestcpas.com.

Newsletter Registration

Recent Posts

  • 2023 Farm Bill
  • Cannabis C-Corps: Filing Requirements & Penalties for Not Extending
  • Minnesota Cannabis Updates 2023: Current License Holders
  • Why You Should Outsource Accounting for Your Cannabis Business
  • Updated Cannabis Industry Events

Services

280E Mitigation

IRS and State Audit Assistance

Cannabis and Hemp Advisory Services

Cannabis License Application Advisory

Business Valuation

Audit and Assurance

Tax

Outsourced Accounting Services

Investment Advisory

Technology Services

Resources

Contact

Events

CannaBlog

Leadership

Client Access

Serving all cannabis legal states

Headquarters:
7900 International Drive, Suite 800
Bloomington, MN 55425
(303) 651-0304
View Map >

© Bridge West LLC™ 2023 Privacy Policy
  • LinkedIn
  • Facebook
  • Twitter
Interview of COO Cory Parnell from MJBizCon2018 in Las VegasHow to Survive in a Cannabis Market with Falling Prices
Scroll to top

This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.

OKLearn more

Cookie and Privacy Settings



How we use cookies

We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.

Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.

Essential Website Cookies

These cookies are strictly necessary to provide you with services available through our website and to use some of its features.

Because these cookies are strictly necessary to deliver the website, refusing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.

We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.

We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.

Other external services

We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.

Google Webfont Settings:

Google Map Settings:

Google reCaptcha Settings:

Vimeo and Youtube video embeds:

Privacy Policy

You can read about our cookies and privacy settings in detail on our Privacy Policy Page.

Privacy Policy
Accept settingsHide notification only