IMA EDUCATIONAL Case The Association of ima Accountants and Case Journal Study Financial Professionals in Business ISSN 1940-204X A Votre Sante (B): Process Costing and Decision Analysis in the Wine Industry Roopa Venkatesh Amy Fredin Jennifer Riley Associate Professor Associate Professor Associate Professor University of Nebraska - Omaha St. Cloud State University University of Nebraska - Omaha BACKGROUND two production departments, the Crushing and Fermenting department and the Bottling department. From her meetings, Myka Freven was recently hired as manager of A Votre Sante, she gathered that the company is using the weighted average a small independent Napa-Green-certified winery located in method of preparing production reports under a process costing the Napa Valley, California, American Viticultural Area (AVA) system. The managers in both departments consider all spoilage that is owned by her father, Jack Freven.* A Votre Sante (AVS), to be normal, and so, they ignore the costs of normal spoilage. which means "to your health" in French, has a reputation for This means no costs are added to goods that are spoiled, and producing quality chardonnay wine. In 2005, Jack expanded spoilage is not reported because the cost of normal spoilage is the family's grape-growing operations and founded AVS as a included in the cost of good units completed. means to involve his daughter in the wine business. Myka is a Furthermore, the managers noted that they have worked recent MBA graduate from the Haas School of Business at the hard to maintain the appropriate control measures and reduce University of California, Berkeley, and intends to take over the their abnormal spoilage to 0% in the last five years. So, they management of AVS in due time. inspect goods only at the end of the process in each department.Being Napa-Green certified, the region's land use and environmental certification program, AVS is diligent about WINEMAKING PROCESS assessing cellar operations, implementing practices to conserve resources, improving comprehensive water and energy use, and Harvest takes place in the late summer and early fall months; conducting audits along with a waste diversion assessment. typically, the time elapsed from harvest to final sale is about AVS buys chardonnay grapes from the family's grape- 11 months. The chardonnay grapes are purchased from AVS growing operations and processes the grapes into a chardonnay- Vineyards at US$1.34 per pound, instead of purchasing from estate wine. Local restaurants purchase AVS wine to serve to an outside vineyard. An important quality of Chardonnay their customers. wine is dependent upon the acidity of the grapes. So the During her first few weeks as manager, Myka met with the grapes are picked from AVS Vineyards two weeks earlier managers and learned that the average demand and sales for the than other producers. AVS Vineyard sells to other wineries in chardonnay estate was steady at 39,600 bottles of wine, and the the market at US$1.34 per pound, and transfers to the AVS average price was US$9.00 per bottle. The company, however, winery at the same market price of US$1.34 per pound.' On is experiencing declining net profits. Therefore, she decided to average a purchase of 40 pounds of grapes are required to revisit the company's costing and pricing policy. She also shared produce one case (12 bottles) of wine. In August 2017, AVS with the managers her goal of maintaining a gross profit of 50% purchased 382,836 pounds of grapes from AVS vineyards at to cover AVS administrative expenses, which is consistent with US$1.34 per pound. The following are the major processes operations of wineries. Myka met with the managers of the and departments in the winery: IMA EDUCATIONAL CASE JOURNAL 1 VOL. 12, NO. 2, ART. 2, JUNE 2019 @2019 IMACRUSHING AND FERMENTING Bottling: Approximately 200 pounds of crushed grapes are Crushing: The grapes are transferred to the winery for washing filled in a barrel of wine. Each barrel transferred to the bottling and crushing after harvest. The crushing process separates department can yield 11 cases or 132 bottles of wine. Bottling the juice from the pulp, skin, and stems. The juice is used is a very important process, and AVS takes every precautionary to make the wine; the pulp, skin, and stems are recycled as measure, such as proper sanitation, cleaning, bottle washing, compost onto the fields whenever possible or disposed of controlling sulfur dioxide depletion, and inspecting in order according to the Napa Green certified land program. to prevent contamination and inefficient operations. Spoilage Fermenting: The extracted juice is initiated into the is 10%, and the accountant and managers have determined fermenting process. An important factor in the final taste of that all spoilage is considered normal and is detected at the chardonnay is whether the juice is aged in oak. Chardonnay end of the production process. They insist that spoilage is fermented using oak barrels, which gives flavor to the final in the Bottling department is related to the technology of product. White wines have a shorter timeline for aging, and the machines used in the facility. Since AVS does not have they are barrel-aged because they are meant to be consumed state-of-the-art technology, there is some spoilage related to within five years. All fermenting takes place in a temperature- bottle cracking or breaking during the filling process.' The controlled environment; however, each fermenting method managers believe that this spoilage is unavoidable. They are results in some wine loss through evaporation. The expected considering making an investment in two years to update the loss in volume through fermentation is 10% and is considered technology in the Bottling department. Tables 1 and 2 show to be normal spoilage.* At the end of this process, each barrel the information for August 2017. of wine is one awit. The department manager classifies all spoilage as normal, related to loss from fermentation.Table 1: Data for the Crushing and Fermenting Department for August 2017 Physical units Direct Conversion barrels) materials costs Work in process, August 1 200 $68,400 $58,120 Degree of completion of beginning work in process 100% 70% Started during August 2017 1,500 Completed during August 2017 1,200 Work in process, August 31 500 Degree of completion of ending work in process 100% 60% Total costs added during August 2017 $513,000 $436,000 Now: All monetary values are in US dollars. Table 2: Data for the Bottling Department for August 2017 Physical units Direct Conversion (barrels) Transferred-in materials costs Work in process, August 1 250 $100,000 $7, 105 Degree of completion of beginning work in process 100% 0% 70% Transferred-in during August 2017 ? Completed during August 2017 300 Work in process, August 31 1,150 Degree of completion of ending work in process 100%% 0% 60% Total costs added during August 2017 ? $18,400 $14,025 Note: All monetary values are in US dollars. IMA EDUCATIONAL CASE JOURNAL 2 VOL. 12, NO. 2, ART. 2, JUNE 2019REQUIREMENTS: US$400, respectively. Wine grape prices and production were up throughout California in 2016. The supply levels of 1. Production Report Analysis: Prepare production reports grapes and the amount of juice generated from the grapes under the weighted average as well as the FIFO method. are dependent on the yearly climatic conditions and other What is the cost per bottle under each method? What is factors, such as temperature, rootstock, and fertilizers used. considered as normal and abnormal spoilage, respectively For more, see: 2017 Report - Sonoma and Napa Premium in the wine making process? How are the costs associated Wine Grape Prices 2016, Vintroux, March 2017, http:/ with normal and abnormal spoilage treated? Is it vineyardandwinerysales.com/blog/2017-report-sonoma= appropriate to ignore the cost of normal spoilage because napa-premium-wine-grape-prices-2016/. all spoilage is normal? *Bacterial spoilage could also occur in the fermentation 2. Decision Analysis: Myka would like to maintain a 50% stage, because oak barrels are a specific source of bacteria. gross profit to cover AVS's administrative expenses of The correct operational protocol with sterile filtration US$125,000 and target a 15% net profit. What should the procedures followed by the addition of sufficient sulfur target cost per case be in order to achieve these goals? dioxide should prevent potential spoilage from bacteria. Does the current production report in AVS help achieve The department managers have assessed that the these targets? Does your final production report show procedures in the Crushing and Fermenting department costs per case that will lead to achieving these targets? follow the correct protocols to prevent such inefficiencies resulting in spoilage. 3. Ethical Implications: What are the possible reasons for managers to state that all spoilage is normal? What The industry is moving toward low-weight glass bottles additional information would you request from managers with resistance to breakage. AVS purchases the best quality to confirm that there is no abnormal spoilage and that all glass bottles but does not have state-of-the-art technology spoilage is normal? to fill the bottles. The pressure the glass encounters from the filling machine during the filling process leads to breaking of bottles, which is unavoidable. ENDNOTESENDNOTES 1 #A Votre Sante (B): Process Costing And Decision Analysis In The Wine Industry" is an extension of Priscilla S. ABOUT IMA" (INSTITUTE OF MANAGEMENT ACCOUNTANTS) Wisner, "A Votre Sante: Product Costing and Decision IMA, the association of accountants and financial professionals Analysis in the Wine Industry," IMA Educational Case in business, is one of the largest and most respected associations Journal, June 2011. www.imanet.org/-/media/08756f85afc34f focused exclusively on advancing the management accounting fd9c23b33ba5dfba4b.ashx. profession. Globally, IMA supports the profession through research, the CMA" (Certified Management Accountant) AVAs are wine grape-growing areas established by the program, continuing education, networking and advocacy Department of the Treasury's Alcohol and Tobacco Tax of the highest ethical business practices. IMA has a global network of more than 100,000 members in 140 countries and and Trade Bureau. AVAs are established to help vintners 300 professional and student chapters. Headquartered in better describe the origin of their wines. As of December Montvale, N.J., USA, IMA provides localized services through 2018, there are 242 AVAs in the United States; the Napa its four global regions: The Americas, Asia Pacific, Europe, Valley AVA consists of 16 sub-AVAs, each determined by and Middle East/India. For more information about IMA, geographical boundaries. please visit www.imanet.org. 3"The average market price is from the 2016 grape crush report published in March 2017. Chardonnay average price per ton is US$2,673 in 2016. Commonly, grape purchase agreements between growers and wineries use the weighted average price per ton as a baseline for setting the contracted price per ton. The high and low per ton of chardonnay grape prices in 2016 were US$12,574 and IMA EDUCATIONAL CASE JOURNAL 3 VOL. 12, NO. 2, ART. 2, JUNE 2019