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Archivescost management Archives — C. Lynn Northrup, CPA, CPIM
Cannabis Cultivation Cost Management
June 17th, 2021
Tracking and managing the cost of growing cannabis is essential to maximize profitability. You are flying blind when the cost of growing cannabis isn’t matched with the yield harvested. Cost accounting can be confusing plus most cannabis business owners haven’t had the benefit of cost accounting training. Our objective is to explain, document, and clarify the steps required to develop good cannabis cost data.
Cannabis costs that should be tracked include:
- Labor required to grow and produce saleable product.
- Raw material including seeds, clones, and grow supplies.
- Grow equipment including lights and a hydro system.
- Cost of lighting.
- Packaging supplies.
These are direct costs and will be variable with growing and harvesting of cannabis products.
Direct costs of production results in more effective cost measurement. Inclusion of overhead costs using complicated allocation methods can produce misleading results. A direct cost approach captures just the variable costs of production and excludes selling expenses, office supplies, rent, marketing, and administrative costs. For the purpose of determining yearend inventory valuation allocation of overhead costs could be necessary depending on the valuation methodology that is used.
This direct cost approach should track the progress of production (grow) in specific units broken down into steps to match the cycle of the growing and harvesting process. Your grow schedule might look something like the following:
|Flowering||8 – 9 weeks||64|
|Harvest||1 – 3 days||3|
|Curing||1 – 2 weeks||14|
|Trimming Ready for Sale||5 days||5|
It is important to realize that plants in the cultivation process will have different maturity dates. Accordingly, tracking the progress of your production should be done using specific and consistent equivalent units of measure. In order to keep it simple, use an average yield per plant. Using this metric, you can convert your plants into equivalent units based on the stage of growth or percentage of maturity. Cultivation should be converted into equivalent and measurable units for the average yield per plant which can be used to measure your actual yield.
Assuming that one plant yields .5 pound in equivalent units at harvest maturity, this metric can be used to determine the expected yield for the entire cultivation. This is where you utilize the grow schedule to determine the number of plants at each stage of the grow process. Here’s is what it might look like:
|Plants||% of Completion||Equivalent units||Yield/ LBS.|
|Trimming Ready for Sale||30||1.0||.5||15|
|Total Current Yield||60||78|
If your total direct cost of per pound of yield is $1,000 then your existing inventory cost has a value of $78,000. This is an accurate way of tracking costs as it addresses only the costs of cultivation that are variable and excludes allocation of overhead.
Under ideal conditions, a cultivation can expect a yield of 500 grams or 17.5 oz. of marijuana per plant. This assumes that adequate space (6.5 feet), water, nutrients, and effective control of pests and diseases. Containers need to be 15 gallons in size for indoor cultivation.
This process can be utilized for keeping metrics on yield produced from your cultivation together with the direct controllable costs of production. The yield in pounds per plants and associated costs can provide a foundation for effective management and is one way to monitor efficiency of the cultivation.
According to the IRS pursuant to Treas. Reg. 1.471-11, cost of goods sold for producers includes direct material cost, e.g., marijuana seeds or plants; direct labor costs, e.g., planting, cultivating, harvesting, sorting; and indirect costs. Indirect costs may include repair expenses, maintenance, utilities, rent, indirect labor and production supervisory wages, indirect materials, tools, and cost of quality control.
Other Factors Impacting Yield
Light, nutrients, and genetics are all major factors that determine and affect cultivation yield.
Light can be measured in grams per watt providing an accurate measurement of production quantity as well as profitability. This measurement considers the amount of energy (watts) used to produce a gram of product. The higher the production output per watt, the greater efficiency that is produced. The calculation is determined by multiplying the total yield in grams times the total draw in watts to determine grams per watt. Square footage is also an important factor in determining efficiency and potential profitability. Therefore, yield per square foot is an important metric. It should be noted that some strains will yield varying amounts making it important to measure the yield per strain. Nutrients are another factor in determining yield and developing yield measurements compared to the cost of nutrients can help determine the most efficient combination to produce the best yield. Finding the best combination of yield measurement will be a process of experimenting to find the best combination of all the factors that produce the most efficient and profitable yield results.