2011-11 plant accounting subfunction-screen02

Plant Accounting - Roles and Responsibilities- from a Financial Statements-lines perspective -

Eduardo Hernandez

Dow Corning Corp.

2012/11/15

1 / 52

Contents

1 Introduction

2 Line 147 Property, Plant and Equipment (PP&E)

3 Line 125 Inventory

4 Line 306 Cost of Sales (COS)

5 Line 313 Non Standard

6 Line316 Manufacturing Expenses - Support

7 Line 312 Manufacturing Expenses

8 Misc

9 Other Activities 2 / 52

Contents

1 IntroductionIntroductionPlant Accounting relationships







8 Misc

9 Other Activities

3 / 52

Introduction

The purpose of this talk is to convey to new Finance employees in Chinaan overview of the Plant Accounting (PA) or Manufacturing Accountingsubfunction in Dow Corning (DC).

We will cover here PA’s main Roles and Responsibilities, activities andrelationships with other parts of the organization, approaching this fromthe ’Lines’ in the Financial Statements to which PA is strongly related.

The purpose of this talk is not to provide very specific information in anyparticular topic, instead, the material is geared mainly to the show thewhat (activities) and sometimes its why (purpose). We will cover thehow (specif procedures) only to the extent that is pertinent.

Plant Accounting relationships

Plant Accounting interactsprimarily with the followinggroups:

Finance Function

LE controllers, CorporateAcctg (GAAP, LE Planning)

Local and Corporate Tax

Mfg Controller (Functionalexcellence: Cost Acctgmethodology, initiatives,guidance )

Internal Control, Auditors

Treasury, Insurance

Plant Accounting relationships...

Business

Business Controllers(FAs, EEs):Planning, MfgVariances, ProductCost

Business/ProductLine (PL) Mgrs


Mfg Eng Global Op (MEGO)

Plant Mgr and staff (Expmonitoring, planning, plantperformance)

Procurement, Logistics, A/P

Global Capital and Eng/Global MfgAutomation (GCE/GMA)


Others

HR

BP, IT (GBS)

Contents

1 Introduction

2 Line 147 Property, Plant and Equipment (PP&E)Capital Spending ProcessFixed Assets AccountingInternal Control






8 Misc

9 Other Activities

9 / 52

Capital Spending Process

Idea / Need

Capital Allocation Process

Portfolio of potential projects

CAR, EE, etc

Approval ? Assets Asset Class CIO Usable Life

Salvage Value CIO + XIO Settlement Rules

Expenses (L316) CC Work Orders XIO

PO_s (Matls, Serv) ERSA GI_s

PM_LABOR charges

Capital Planning

Captial Authorization

Asset Acquisition / Construction

Fixed Assets

Accounting

Fixed Assets Accounting

The values assigned to assets upon acquisition or construction are thosecollected under the respective CIO.

Fixed Assets values will always be denominated in the local currency of theentity under which they are being created with an equivalent value in the‘functional’ (or ‘group’) currency of such entity using the exchange rate‘M’ current at the time the transaction takes place.

VAT: Part of cost of acquistion?

Each asset will have attached various items of information like acquisitionor capitalization date, asset class, physical location, cost center, plant,starting depreciation date, method of depreciation (‘depreciation key’),useful life, salvage value, etc.

Fixed Assets Accounting: Depreciation Areas

SAP creates and maintains several’books’ for fixed assets, called‘depreciation areas’:

01 Book Depreciation US GAAPBasis (Loc. Cy.)02 Local Legal Depreciation (Loc.Cy.)10 Tax Depreciation...20 Insurance Replacement Value32 Book depreciation in (Group Cy.)33 Book depreciation in (Index Cy.)

01 = Management GL Acctbalances;02 = Legal;10 = Offline

Misc: Capitalization criteria (USGAAP, Local GAAP, Tax)

I/C transfers of Assets

Fixed Assets Accounting: Misc

Misc

Buy vs Lease

Capital vs Expense

Fixed Assets Accounting: Misc

Strategic or Critical Spares

“... are pieces of equipment, or major partsfor a piece of equipment, not readilyavailable on short notice.

Though many strategic spares may neverbe utilized, having them on hand isconsidered essential to avoid serious delay inrestoring vital equipment in the event offailure.”

They are always Capitalized, but written upas ERSA for tracking purposes (due tomobility); lately, new Matl Type available(IBAU)

Fixed Assets Accountingexamples of thorny questions

Capital or Expense?

A plant uses certain gas as aprocess-aid. In order to have asecure supply, the plant purchases asignificant amount of this gas at arelatively low price and store it in acontainer. This gas will not have animmediate use; it is kept there forstrategic reasons. The gas wouldeventually dissipate over a longperiod if not used.

Should this be reported as capital orexpense?

Fixed Assets Accountingexamples of thorny questions

A big, expensive piece of an equipment orprocess was recently installed andexperienced a catastrophic failure renderinguseless. A new piece is brought in and thedamaged piece removed. There is thepossibility the damaged piece could berefurbished and kept as a strategic spare.

How should this be reported?

As a replacement of a damaged piece, restoring anequipment to its original capacity, therefore as anexpense (replacement like for like)? or Capitalizethe cost as an strategic spare?

Report the net book value of the original piece asscrapped and then capitalize only the refurbishmetcost? or Keep in the books the original asset recordand increase its value with the refurbishementcosts?

Fixed Assets: Internal Control

CAR : approved CAR; no expenditure w/o CAR;timely/correct recording of expenditures

Asset Record : correct creation/change asset records (depn key,asset class, etc)

Physical verification : also, identification of idle assets

Disposal : sale, removal, demolition, I/C sale

Contents

1 Introduction


3 Line 125 InventoryBasic ConceptsInternal Control





8 Misc

9 Other Activities

19 / 52

Line 125 - InventoryMaterial Types

Line 116 - Produced Goods InventoryHALB - ‘DC Produced’ (Finished and Intermediate)

Line 117 - Purchased Materials InventoryROH - Raw Materials (from third party vendors)

examples: Methanol (MeOH), Methyl Chloride(MeCl), Platinum, Fumed Silica, misc chemicals,packaging components (drums, IBCs, pails, boxes,etc)

Special casesSilicon Metal: purchased from third-parties (ROH)and from and produced by DC (HALB: CBCC, etc)

STC-TCS, other Silicone intermediates: producedby DC (HALB); sometimes, purchased fromthird-parties

Line 125 - InventoryMaterial Types

Line 118 - Maintenance and SuppliesInventoryERSA - Spare parts, supplies, process-aids

Line 119 - Inventory ReserveValuation allowances

Notes- All these materials at any moment could be in posessionof DC, vendors, customers, contract manufacturer,in-transit, DC managed warehouses, third-party managedfacilities. Also, it could be on status unrestricted (ok),blocked (obsolete/expired/damaged/etc), slow-moving,etc.- GL balances reconcile to PPC1 + legal uplift,capitalization/amortization of variances, etc

SAP - Other material types

IBAU : Strategic Capital Spares

LEIH : Returnable packaging

ZMAT : family of products

ZWER : DCC SEU Services

ZWST : Waste

These material types are used mainly to track physical quantities withlittle or non financial impact. We will not cover them in any detail in thispresentation.

Valuationmain cost estimates

PPC1: Management CostFundamental cost estimate by productused as ‘basis’ for other cost-estimates.

Main purpose is internal valuation ofInventory and Cost of Sales (COS) andBusiness Reporting.

ZPC1: Legal or Local CostBased on PPC1, except that some PPC1components are ignored here (certainAdditive Elements, Pooling, etc).

For materials purchased from other DCsubsidiaries, Transfer Price (TP) isconsidered rather than the underlyingMgmt cost.

Main use is to serve as basis forvaluation of Inventory and COS for localGAAP and tax purposes.

Valuationother cost estimates

TPC1: Internal Transfer Price(ITP)

Not longer maintained. Used forBusiness Reporting.

This has nothing to do with LegalTransfer Price used to value I/C sales.

Unit Cost And Capital (UCAC)

Used for Economic Evaluation (EE)purposes.

Not maintained in SAP.

These two are/were used for special purposes.

We will not cover them in any detail in this

presentation.

Valuation: PPC1 cost estimatecomputation methods (by matl type)

ROHs, ERSAsUnit Cost :

If no forecast MAP (PP2), then, these are valued at current MovingAverage Price (MAP)Duty and Freight not included (unless embedded in purchase priceunder appropriate delivery terms –ie, DDP, etc)

Process Cost : None

Facility OH Cost : None

HALBsUnit Cost : Bill of Material (BOM) ingredients (at PPC1, by cost components )

Process Cost : via Activity qty per Master Recipe by Resource at Std Activity Rate fromCost Center Plan (ie, forecast of Mfg Process Mfg LDO) + Process Cost ofBOM HALB ingredients

Facility OH Cost : Process cost multiplyed by Plant’s Facility OH factor + Facility OH Cost ofBOM HALB ingredients

Valuation, main cost estimatescost components

- PPC1 ZPC1Unit Cost Mgmt Cost for materials

+ local additive components(ie, D&F + Contr Mfg Fees+ Other)

ZPC1 cost for materials (ROHs = MAP,HALB = total cost; for materials from otherLEs, Transfer Price) + local additive com-ponents

Process Cost Forecast LDO Mfg expensesfor activities directly relatedto production + local addi-tive components

Forecast LDO Mfg expenses for activities di-rectly related to production + local additivecomponents (except Non Pilot OH, Pooling)

Facility OHCost

Forecast LDO Mfg expensesfor activities not directly re-lated to production + localadditive components

Forecast LDO Mfg expenses for activitiesnot directly related to production + localadditive components (except Non Pilot OH,Pooling)

Legal Costing: PPC1/ZPC1 differences...

- PPC1 ZPC1ROHs Forecasted MAP -PP2- (if null

value then MAP)Forecasted MAP -PP1- (if nullvalue then MAP)

HALBs from plantswithin same LE

PPC1 traced from sourcing site(broken by cost component)

PP3 = ZPC1 traced from sourc-ing site (not broken by costcomponent)

HALBs from plantsin different LEs

PPC1 traced from sourcing site(broken by cost component) +local Additive Cost Elements

Transfer Price (PP1) + localAdditive Cost Elements

Additive Cost Ele-ments

- All copied from PPC1 variant,except Non Pilot OH

‘Transfer Control’(TC)[1]

The system applies TC PC02,which specifies when pre-existing cost estimates may beused in the cost build up.

The system applies no TC; al-ways ‘explodes’ back.

[1] For ZPC1 cost estimates “... my understanding is that the system cannot take costs from upstream LEs, because there are

no transfer control. So, we have to put PP1 values for inter-company transferred materials.” (Kimura-san)

Inventory: Internal ControlSOx subprocesses: control activities

Receiving and Shipping : in and outs; adequate procedures, properrecording of transactions

Physical inventory (verification) : cycle count

Planning and Scheduling : proper classification of inventory, disposition ofbad material

Master Data : (1) accurate BOMs, Master-Recipes

Inventory Management : correct/timely recording of trans, monitor InvAdj, procedures for Vendor, Customer consigment, ContrMfg, Restricted access, physical security

Valuation : consistent methods, Std Cst Chg Analysis, Mfg VarAnalysis

(1) Also referred to as ‘Production Rrecording’

Contents

1 Introduction







8 Misc


Line 306: Cost of Sales (COS)

Management

PPC1 by Product –>ZMAT –>BPU –>PL –>BusGL Acct balances match PPC1

Legal

GL Acct balances does not match ZPC1instead PPC1 plus legal uplift, Inv Reserves,Capitalization/Amortization of Mfg Variances, etcIncludes Mgmt Lines 307, 312, 313, and 353

Contents

1 Introduction




5 Line 313 Non StandardNon Standard categoriesAccounting and Evaluation



8 Misc

9 Other Activities

31 / 52

Line 313 - Non Standard: main categories

Production Variance:

Usage - (Supply Chain) - BOM correctionPrice - (Procurement) - better fcst Std MAP

Inventory Adjustments:

Mov Type 7xx (Supply Chain); root cause inv (RCI), ie,missing GI, Inv Accuracy, tax deductibilityMov Type 55x (SC); scrap, RCIMov Type 309 (SC); TPV (diff Std Cst), Mat Conv PL(MCPL)Inventory Revaluation (Std Cst Chg Analysis)

Duty and Freight: Actual vs Capitalized (Logistics)

Contr Mfg: Similar to Production Variance

Others: Export VAT, etc

Line 313 - Non Standard: Accounting and Evaluation

Assignment

Cost Center type ‘X’; GL accounts 4xxx-xxx (see Rpt ZFI00124)

Automatic assignment based on Mov Type; Plant; Matl BPU

Plant Accountants (PA) assist in the case of manual transactions

Evaluation

Ideally, balance should be zero

For Mgmt purposes, this is reported and tracked (by plant, BPU,Business, Exp Category)

For GAAP and Tax purposes, this is capitalized to inventory andamortized according to inventory turnover(except Inv Adj –not Reval–, Export VAT, etc; GBPD FM.STD.00066- CAPITALIZATION OF VARIANCES –gone?–)

Line 313 - Non StandardAccounting and Evaluation

Actual Standard

‐ Actual Duty & Freight ‐ Estimate D&F capitalized to Inventory

‐ Cost of Inventory Writte Offs

‐ Cost of Inventory Scrap

‐ Actual Contr Mfg costs: ‐ Materials ‐ Contr Mfg Fees ‐ Freight Costs

‐ Actual Internal Production costs: ‐ Materials ‐ Process Costs (Act Rates) ‐ Facility Costs

Line 313 ‐ Non Standard

‐ Std Cost of Contr Mfg Production

‐ Std Cost of Production

Contents

1 Introduction





6 Line316 Manufacturing Expenses - SupportAccounting and Evaluation


8 Misc

9 Other Activities35 / 52

Line 316 Non Abs or Support Mfg Expenses

Assignment

Cost Center type ‘N’; GL accounts 5xxx-xxx (LDO: Labor,Depreciation and Other)

Not allocated to products (ie, not capitalized to inventory)

Manual assignments to Cost Center (CC) and Cost Element (CE),most of the time, are made by end-users, with assistance, guidancefrom PA

Criteria for inclusion

Examples: engineering department when strongly aligned with GMA/GCE,Idle Assets, A/P, Procurement, XIO costs, removal/demolition, etc

Line 316 Non Abs or Support Mfg Expenses

Hours worked on Capital projects (CIOs/XIOs), or regular work orders(PM, reliability activites, etc) are credited via Cost Elements 99xxxxx thruStd Activity Rate for PM Labor (only visible in Mgmt books)In a way, these are handled as internal consultants who charge expenses toother CCs in the plant, or to any other ‘cost collector’ for that matter.

Evaluation

Business (Financial Analyst -FAs-) monitors vs Budget

Plant Mgmt monitors vs Budget and/or vs historical trends (SPC -Statistical Process Control)

Line 316 - Mfg Expenses (Support)Accounting and Evaluation

Actual Standard

‐ Actual Expenditures (GCE/GMA): ‐ Labor ‐ Depreciation ‐ Others

‐ Actual Expenditures: ‐ Depreciation IDLE assets ‐ Demolition, removal ‐ Procurement, A/P, etc

Line 316 ‐ Mfg Expenses ‐ Support

‐ Std Activity Rate x Hours charged out

Contents

1 Introduction






7 Line 312 Manufacturing ExpensesDefinition and AccountingOver/Under AbsorptionP+L Items: Evaluation and Control

8 Misc

9 Other Activities

39 / 52

Line 312 Mfg Expenses (Over/Under Abs)

Assignment

Cost Center type ‘M’; GL accounts 5xxx-xxx (LDO)

Allocated to products (ie, capitalized to inventory) via Std ActivityRates and Std Resource Quantities -from Mstr Recipe-

Manual assignments to Cost Center (CC) and Cost Element (CE),most of the time, are made by end-users, with assistance, guidancefrom PA

Criteria for inclusion

Regular Expenses directly related to mfg activities at a plant, includingsupport functions such as Utilities, Waste Disposal, QA, EHSS, PlantMgmt and leadership, Plant Accounting, etc


Usage of Resources are reported by Production Order based on StdQty per the Mstr Recipe (although some sites report Actual Usage,eg, Machine-Hours). The monetary equivalent of this usage (plusFacility OH) is credited to L312. The difference between these Stdvalues and Actual spending constitutes the Over/Under Abs for theperiod...

which can be analyzed in terms of efficiency, volume, etc. But,assuming the Amounts and Quantities in the CC plan were correct(realistic/attainable), by definition all the Over/Under Abs reportedis attributable to Efficiency or Volume; usually lower productionvolume delivered due to efficiency issues at the plant or due toconscious decision to respond to sudden changes in the businessenvironment.One last reason might be completely unexpected adverse events (eg,catastrophic failure of an equipment, force majeure, raw materialsupply disruptions, etc).


These amounts are credited to L312 via Cost Elements 99xxxxx (onlyvisible in Mgmt books)

Evaluation

For Mgmt purposes, this is reported and tracked.

Business (Financial Analyst -FAs-) monitors vs BudgetPlant Mgmt monitors vs Budget and/or vs historical trends (SPC)

For GAAP and Tax purposes, this is capitalized to inventory andamortized according to inventory turnover (except when attributableto unplanned events: ( PD.PRC.01625 - PRODUCT COSTING - SFAS 151

COMPLIANCE PROCEDURE )

http://corpnt4c/gbpd/scripts/viewdoc.asp?dctm_object_name=PD.PRC.01625

http://corpnt4c/gbpd/scripts/viewdoc.asp?dctm_object_name=PD.PRC.01625

Line 312 - Manufacturing ExpensesAccounting and Evaluation

Actual Standard

‐ Actual Expenditures (Process): ‐ Labor ‐ Depreciation ‐ Others

‐ Actual Expenditures (Facility): ‐ Labor ‐ Depreciation ‐ Others

Line 312 ‐ Manufacturing Expense (Over/Under Abs)

‐ (Std Activity Rate) x (Resource Qty charged to Prodn Orders)

‐ (Std Process cost charged to Prodn Orders) x (Std Facility OH factor)

P+L Items: Evaluation and Controlvs predetermined values: Budgets, etc

How realistic/attainable are the budgeted figures?How much ‘ownership’ those managing the expenses have with respect tothe budgeted amounts?

P+L Items: Evaluation and Control...vs ‘historical values’: SPC -Statistical Process Control-

Contents

1 Introduction







8 Misc


Fixed Expenses Accountingexamples of thorny questions

An old equipment breaks down and we find difficulty in fixing it. Not eventhe manufacturer can provide guidance. We hire the services of an retiredemployee who is apparently the person that best know these equipments.We hired him for this project that last 3 weeks, we pay him a fee for hisservices (he is not a professional engineer) plus travel and lodging.

How should we report these expenditures?

As ’maintenance-services’ cost?As ’Outside services’?As Temporary Labor?

Plant Accounting - LE accounting issues?

PM Labor charges across LEs; recommended mechanic:

if ‘significant’, PA to charge post expenditures within sourcing LE, inCC aligned to receiving plant’s CC-Group;

if necessary, LMAC to charge out amount via P+L Line 345 forLegal/Tax purposes on quarterly basis, under TP agreements,documentation, etc.

Line 119 - Inventory Reserves: local PA should use LGL accounts;why?

Corp Acctg posts Global reserves using MGT accounts. If LM Accountsare used at the LE level, this causes duplication.

Contents

1 Introduction







8 Misc


Plant Accounting Other Activities

Planning : 5Yr Plan, Budget, Forecast

Internal Control : coordinate SOx compliance efforts, coach Supply Chainpersonnel, consult with Int Ctrl/Audit, coordinate audits,follow up on audit findings

Ad Hoc : Plant performance tracking/evaluation (vs Bdgt, vsTrends); Productivity (L&O/Kg); 6Sigma Financial Impact,KPI/Scorecard, Cost of (poor) Quality, Headcount

Month End : accruals, reconciliation

External Reporting : Tax, Statistical, LMAC support, etc

Thank you!

Any question ?

52 / 52

2011-11 plant accounting subfunction-screen02

Documents

inventory4 line

cost of sales cos5 line

equipment ppe3 line

52contents1 introduction2

plant accounting pa

plant accounting roles

manufacturing expenses8

cost acctgmethodology