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Arcelor MittalAccounting System Analysis
Ana CervantesYu Chen
Anne DubostFrancesca De Girolamo
Melvin Soh
Overview
Company
• World's number one steel company1
• Merger between Arcelor and Mittal Steel in 2006
• Strategy– Product diversity2
– Integrated business model– Geographic reach3
– Based on subsidiarity– Investments & Innovation
2
Iron & Steel Industry
• Growing demand4
• Risk of overcapacity and regional imbalances
• Oligopoly Market5
• Low Margin6
• Standard Product7
• Complicated Process8
Divisionalized Organization
3
• Six divisions based on geography and products1
• Under each division, there are subsidiary companies2
• Each subsidiary company is owned by ArcelorMittal in different percentages3
• Intercompany shipments and transactions
• Possible performance indicator: ROI4
• Other indicators: Profit, Net margin, Production, Shipment, Number of Employees
Costing system1
Process costing (rather than job costing)2
→ cost per unit of output (€/tons ?)
Target costing3
• Starting point: target selling price (fixed by the market)• Profit Margin determined by corporate decision• Target cost deducted from the calculation
→ : future actual cost < target cost
4
cost + profit = price
Step 1
Step 2
Step 3
Step 4Rolling
Continuous Casting
Steel Making
Iron Making
Responsibility centres
Cost Centres1
– Discretionary: HR, raw material purchasing– Standard: product lines, factories
• different levels of aggregation2
• Problem: unify criteria and centralised decisions and control3
Revenue centres: regional sales divisions4
Profit and Investment centres: highest levels of management5
5
Costs Allocation1
R&D activities expenditures• Materials, direct labour, allocated overheads2
• To income statement as incurred3
• To corresponding cost centres (divisions, factories) if:4
– Technical and commercial viability– Enough resources
• Cost drivers:5
– New or substantially improved product: volume6
– New or substantially improved process: machine-hours7
6
Volume decision• Oligopoly with no obvious dominant firm1
• Follows the Kinked Demand Curve Model2
• Different situation for different market segments (e.g. Automobile)
7
• Volume decision is easier for big players
– Influence in price setting
– Geographic and product diversity provides hedge against economic cycle and regional imbalance
– Long term contracts
– Inelastic demand in short term3
Investment Decisions
8
The Arcelor Mittal Strategy is focused on its investments’ policy.
Investments’ aims:• Increase scale and synergies• Increase annual revenues• Low cost profile and high growth
prospects from developing markets• Leading position across a range of
key product segments• Ability to supply customers on a
global basis • Increase the dividends• Reduced volatility through geographic and product diversification• Security of long-term contracts through high value-added products• Reach the market leadership
Investments' composition
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Investment evaluation criteria • Strategic investments with high ROIC: return on invested capital1
The capacity of the investment for increasing the ROIC is evaluated through the NPV2.
• Each investment is evaluated on the base of its own profitability3.• Qualitative aspects are also fundamental4.
Conclusions• Why ArcelorMittal1
– Big multinational company (merger)– Cost cutting programme going on
• Possible accounting features proposed– Divisionalized organization (intersectional sales)– Cost allocation: Process costing (factories)– Pricing strategy: Target costing – Different responsibility centres at different levels of the
organization– Volume decision based on external environment (steel
market price)– Investments seeking synergy
10
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