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Cannabis Cost Accounting and COGS Optimization
Cost pools, allocation bases and written methodology — the unglamorous work that determines the tax bill.
COGS optimization is not a loophole. It is the correct application of inventory costing rules to a business that the tax code otherwise treats harshly.
We design the cost pools, select allocation bases that reflect how the facility actually operates, and write the memorandum that explains both.
Designing the cost pools
Every facility has a different mix of production and non-production space, and the allocation base has to match reality. A square-footage split that ignores an unused mezzanine is an easy adjustment for an examiner.
- Facility mapping and production versus non-production square footage
- Direct and indirect labor identification with task-level coding
- Utility, rent, insurance and depreciation allocation methodology
- Quality control, testing and compliance cost classification
- Written cost accounting policy refreshed as the operation changes
Documentation is the deliverable
The number on the return is worth exactly as much as the file behind it. We build a contemporaneous record — floor plans, time studies, payroll mapping and the policy memorandum — so the position can be explained by anyone, at any time.
Reviewing an existing methodology
We regularly review cost accounting built by prior advisors. The two most common findings are absorption rates that were never updated after the facility changed, and capitalization of costs that are plainly selling or administrative.
Both are correctable, and correcting them before an examination is dramatically cheaper than defending them during one.
Frequently asked questions
How often should absorption rates be updated?
At least annually, and immediately after any material change in facility layout, headcount or production process.
Can administrative salaries be capitalized?
Only the portion attributable to production supervision, supported by a documented allocation. General management, selling and marketing salaries cannot.
Is a cost accounting memorandum really necessary?
It is the difference between a position and an assertion. Examiners ask how you arrived at the allocation; the memorandum answers that question without relying on memory.
Have your cost methodology reviewed
Send your current allocation schedules. We will tell you what we would defend, change or remove.