The Wine Industry
OVERVIEW OF WINERY/VINEYARD OPERATIONS
FARMING
The initial step in the making of wine is growing grapes. Specific varieties of grapes are used in making premium wines, but any grape with sugar content can be fermented. Successful wine grape farming is dependent upon proper soil and climatic conditions. These particular geographic regions (appellations) can be conducive to the quality of a particular varietal or to wine grapes in general.
The first step in the development of a vineyard is land clearing. This may be as simple as plowing under existing vegetation to removal of trees and leveling the dirt. Vineyards planted on hillsides must be terraced. Rocks may need to be removed. Typical water sources include wells, above ground storage (ponds), or some form of irrigation district supply. The water is then delivered through sprinkler or drip systems.
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MANUFACTURING
The process of making wine is a manufacturing process. The winery takes one product (grapes) and transforms it into another (wine). Since this is a manufacturing process, the wineries must account for their costs as a manufacturer, either under the old full-absorption rules or for years beginning after December 31, 1986, the Uniform Capitalization (Unicap) rules under IRC section 263A. The following discussion of the manufacturing process will also consider how Unicap comes into play.
Generally speaking, the wine making process has four cost centers: crush/fermentation, aging/storage, general and administrative (G&A), and marketing/sales. Under Unicap, the process of cost accounting should include the following steps. First, all costs must be assigned to the appropriate cost centers. Second, G&A costs must be allocated to all the cost centers. Finally, production costs (crush, fermentation, and aging costs) must be capitalized to inventory while the balance of costs (remaining G&A and marketing) are expensed currently.
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