Inventory Costing: One of Cannabis’s Most Misunderstood and Financially Critical Business Processes

Cannabis Business Times (August 06, 2025)- Inventory costing remains one of the most misunderstood and financially consequential areas in the cannabis industry. For cultivators, the process begins in the soil. Costs start accumulating long before harvest, yet many fail to track expenses like nutrients, labor, and overhead as plants move through the stages of clone, veg, and flower.

A common issue for operators and cultivators is the lack of having a clear methodology for converting cultivation costs into finished goods. In other cases, cultivators may not realize that live plants in various stages of production should be considered raw material inventory before harvested.

Under general accounting guidance, inventory is initially valued at acquisition or production costs. These costs include purchase price, conversion (the cost to convert raw materials into finished products) and production, and other costs incurred to bring inventory to its present location and condition for sale. Production costs are also capitalized if they are related to the production process, such as depreciation of manufacturing equipment, factory utilities, maintenance of production facilities, production supervision quality control, and indirect labor (e.g., factory support staff).

Delaying the recognition of inventory throughout the various stages of the grow cycle until drying or packaging can result in understated inventory balances, incomplete balance sheets, and inaccurate cost of goods sold (COGS). This is a critical pain point. Without accounting for inventory throughout the various production stages, businesses risk missing key tax deductions under Internal Revenue Code Section 280E and risk distorting asset valuations, which can impact financial reporting, investor confidence, and compliance.