Full Absorption Costing for Cannabis CPA Firms

For cannabis CPA firms, one of the most difficult challenges is guiding clients through full absorption costing—the process of assigning both direct and indirect costs to the products being cultivated, processed, and sold. While the concept is straightforward in traditional industries, cannabis introduces layers of complexity that make accurate costing exceptionally difficult.

The Stakes: Why Full Absorption Costing Matters

Under IRS 280E, cannabis companies cannot deduct most ordinary business expenses. The only real deduction available? Cost of Goods Sold (COGS).

Full absorption costing ensures that not only direct costs (like labor and materials), but also indirect costs (utilities, depreciation, facility overhead) are properly captured in COGS. For CPA firms, accurate absorption costing directly impacts:

  • Tax liability (avoiding overpayment or audit disputes)
  • Profitability insights (knowing which SKUs or batches are profitable)
  • Compliance confidence (audit-ready allocations that withstand IRS scrutiny)

Yet, most CPA firms struggle to deliver this consistently for cannabis operators.

Why Cannabis CPAs Struggle

1. Seed-to-Sale Systems Aren’t Built for Costing

State-mandated systems like Metrc or BioTrack track compliance, not financials. They log movements, not costs. CPAs are left with a compliance record, but no financial backbone.

2. ERP Platforms Are a Poor Fit

Generic ERP systems (like NetSuite or SAP) weren’t designed for cannabis production. They’re expensive, complex, and force CPAs to wedge cannabis operations into a framework that doesn’t map well to cultivation or processing stages.

3. Indirect Costs Are Especially Hard to Allocate

Utilities, facility depreciation, shared labor, and equipment costs rarely get tied back to specific batches or process stages. Without a consistent allocation method, CPAs either:

  • Over-allocate to COGS (risking IRS disputes), or
  • Under-allocate (causing clients to pay more tax than necessary)

4. Operators Rely on Spreadsheets

Most cannabis businesses still run costing on spreadsheets. CPAs then inherit inconsistent, error-prone data, forcing them to spend hours “backing into” COGS numbers with limited defensibility.

5. Lack of Standardization Across Operators

Every cultivator and manufacturer has different workflows. Without industry-standard costing models, CPAs face constant customization, making it harder to apply consistent principles across clients.

The Result

  • Inefficient workflows → CPAs spend more time cleaning data than advising.
  • Higher tax bills → Clients under-capture legitimate costs.
  • Audit exposure → Inconsistent allocations leave firms vulnerable if challenged.
  • Lost advisory opportunities → CPAs can’t confidently move beyond compliance into strategic guidance.

The Path Forward

To overcome these challenges, cannabis CPA firms need:

  • Automated cost capture at the batch and process stage level.
  • Clear allocation methods for indirect costs that align with IRS guidelines.
  • Audit-ready reporting that ties every cost from input → batch → COGS → P&L.
  • Standardized frameworks that work across clients, reducing time spent on manual reconciliations.

This is why solutions like BatchNav are gaining traction: they eliminate guesswork, provide real-time costing, and give CPAs the tools to defend allocations confidently.

Conclusion

Full absorption costing is not just an accounting exercise in cannabis—it’s the key to reducing tax burdens, defending compliance, and driving profitability.

But without the right tools, CPA firms are left stitching together compliance systems, spreadsheets, and workarounds that drain time and increase risk. By adopting purpose-built solutions, CPA firms can move from reactive compliance to proactive strategic advisory—helping their clients thrive in one of the most complex industries in the world.