1. Variance Accounting Using the Material Ledger – A Business Perspective Presented by: Mary L. Ruth – SAP Cost & Pricing Strategy Team Lead, McCormick Global Business Solutions May 20, 2003

2. Proprietary & Confidential - 2 - McCormick & Company Inc. - Confidential Agenda McCormick & Company, Inc. Overview Beyond 2000 (B2K) Project Overview Product Costing Implementation Why use Material Ledger? Lessons Learned Questions & Answers

3. Proprietary & Confidential - 3 - McCormick & Company Inc. - Confidential Strategic Partner Confidentiality The information contained in this presentation is confidential and proprietary information developed by McCormick & Company, Incorporated. Any disclosure, copying, distribution or unauthorized use of this information without the prior consent of McCormick is prohibited.

4. Proprietary & Confidential - 4 - McCormick & Company Inc. - Confidential Headquartered In Sparks, Maryland 8,100 Employees Worldwide 47 Plants/Laboratories In 17 Countries Operates In More Than 90 Countries Largest Spice Company In The World $2.4 Billion In Sales Traded Publicly On NYSE (MKC) Founded In 1889 "Make the best...Someone will Buy it“ “Deliver Consumer Preferred™ Flavors.” McCormick & Co., Inc. Flavor Solution Provider

5. Proprietary & Confidential - 5 - McCormick & Company Inc. - Confidential Marinades & Glazes, Batters & Breaders, Specialty Mixes Spices, Herbs, Seeds, Seasonings, & Blends ColorBits ® Tomato Powder Spice Alternatives Fruit Powders IQF Herbs, Soft Frozen Vegetables Flavors, Extracts, Oils & Oleoresins Vanilla Extract & Flavors Wet Sauces, Dressings, Condiments McCormick Products

6. Proprietary & Confidential - 6 - McCormick & Company Inc. - Confidential

7. Proprietary & Confidential - 7 - McCormick & Company Inc. - Confidential McCormick’s 14 Consumer Brands

8. Proprietary & Confidential - 8 - McCormick & Company Inc. - Confidential McCormick Mission Statement Our primary mission is to deliver Consumer Preferred™ flavor solutions

9. Proprietary & Confidential - 9 - McCormick & Company Inc. - Confidential Beyond 2000 Project Overview Objectives Organizational Structure Profit Center Scope SAP Modules Finance Implementation

10. Proprietary & Confidential - 10 - McCormick & Company Inc. - Confidential Beyond 2000 Is A Coordinated And Synchronized Approach To Major Improvement Opportunities Global Technical Systems Profitable Demand Creation Value Through Service Financial Reengineering Supply Chain Optimization BACKBONE: Enterprise Transactional Effectiveness Business process improvement enabled by information technology Common purchasing data and processes to sustain strategic sourcing benefits Supply chain integration and optimization across the enterprise Trading partner integration Automating and streamlining manual transaction processes Leveraged global technical capabilities eBusiness support platform (B- to-B, B-to-C, B-to-E)

11. Proprietary & Confidential - 11 - McCormick & Company Inc. - Confidential McCormick’s Organizational Structure Plant Hunt Valley Manufacturing Spice Mill Manufacturing Global Region USA Controlling Area Enterprise McCormick & Co. Global Region Canada – Phase 3 Global Region EUR –Phase 4 MGIL Procurement MGIL Procurement Salinas Manufacturing RM Storage Spices -East RM Storage Spices -East McCormick & Co. McCormick & Co. Global Region Cayman Island MD. Distribution Center MD. Distribution Center US Industrial HQ and Plants Phase 2: 6 Manufacturing 2 Distribution US Industrial HQ and Plants Phase 2: 6 Manufacturing 2 Distribution Company Code SAL. Distribution Center SAL. Distribution Center RM Storage Spices - West RM Storage Spices - West RM Storage Vanilla - East RM Storage Vanilla - East

12. Proprietary & Confidential - 12 - McCormick & Company Inc. - Confidential Profit Center Scope – Phase 1 US

13. Proprietary & Confidential - 13 - McCormick & Company Inc. - Confidential R/3 Client / Server ABAP/4 FI Financial Accounting CO Controlling AM Fixed Assets Management PS Project System WF Workflow IS Industry Solutions MM Materials Management HR Human Resourc es SD Sales & Distribution PP Production Planning QM Quality Management PM Plant Maintenance X X X =Out of Scope X ERP Backbone - SAP 4.6 C SAP Scope Business Warehouse APO Workplace Knowledge Warehouse Bolt-ons VISTA Trade Promotions Win CHEM New Product Development

14. Proprietary & Confidential - 14 - McCormick & Company Inc. - Confidential B2K ERP – FI/CO Implementation SAP 4.6C Finance Modules Financial Accounting – GL, AR, AP & Asset Accounting Controlling –Cost Center Accounting, –Product Costing – Activity Based Costing –Profitabiity Analysis (CO-PA) –Profit Center Accounting Material Ledger –Parallel Valuations –Actual Costing Reporting –Heavy focus on CO - PA for alternate PA views – ex: Global Customers, Customers serviced by multiple business units –Self Service reporting through BW and LIS

15. Proprietary & Confidential - 15 - McCormick & Company Inc. - Confidential McCormick SAP – FI/CO Implementation Key Design/Policy Decisions Single Instance – Single Controlling Area for Global McCormick Legal Entity – All McCormick US Business Units & Plants in a single Company Code EVA Balance Sheet used for Management Performance Indicators Previously separate Business Units with separate Financial systems & management Purpose of single Company Code –Reduce Intra-company transactions and reconciliation –Lay foundation for Financial Shared Services Hyperion will be used for Consolidation – no Special Purpose Ledger, no EC

16. Proprietary & Confidential - 16 - McCormick & Company Inc. - Confidential McCormick SAP – FI/CO Implementation Key Design/Policy Decisions Inter-company markups will be implemented to the extent required to meet Legal and Tax requirements All management reporting will exclude Inter-company markups – difference will be held at Corporate Parallel Valuations & Material Ledger implemented to exclude IC markup in Reporting Visibility to Inter-company markup at an item level desired to support Pricing Decisions Within McCormick US, all products will be transferred at Actual Cost Transfer Pricing module was not implemented All variances from purchasing and manufacturing are passed through to the selling profit center Services (such as R&D or Logistics) provided for divisions will be handled via CCA allocations Manufacturing facilities moving toward a Shared Services model (not fully implemented) All plants will implement Activity Based Costing methodology for Product Costing

17. Proprietary & Confidential - 17 - McCormick & Company Inc. - Confidential Parallel Valuation - Group Costing Hunt Valley Plant Virtual MGIL Plant Goods & Services US Company MGIL Company McCormick Group Company Valuation Legal View Group View Profit Center View Costing Type Materials are moved without Inter-company Profit Individual Statutory requirements are considered. Includes markups between trading partners Internal Profit can be calculated using Transfer Prices

18. Proprietary & Confidential - 18 - McCormick & Company Inc. - Confidential Product Costing – Process manufacturing with ABC Recipe Blend Sterilize Quantity Structure Production Order Material Cost Raw Materials $ Semi-Finished Materials $ Direct Cost of Production Blend Product$ Sterilize Product$ Indirect Cost of Production Quality Assurance$ Scheduling$ BOM CO-PC Product Costing ABC Activity based costing TestingQA Process (Activity)

19. Proprietary & Confidential - 19 - McCormick & Company Inc. - Confidential Standard Cost Estimate Material Master Material Ledger Document Overview Document items Source document Document header Accounting documents FI PPMM MMCO-PC CO CO- PA CO Receipts 100 10.0001.000110 Cumulative inventory 170 17.0003.400 120 Ending inventory 140 14.000100 Other receipts/consumption 50 5.0002.400148 Consumption 30 3.000 100 Beginning inventory 20 2.000100 Prel. val.Category Quantity Price diff. Price Actual Costing with Material Ledger

20. Proprietary & Confidential - 20 - McCormick & Company Inc. - Confidential Why use the Material Ledger? Raw Material Prices fluctuate and there is a need to track the the associated variances to the Finished Product Standard material prices require frequent manual updates due to fluctuating prices Plants produce products for many Selling Business Units and there is a need to distribute all costs appropriately Ability to track multiple valuations and/or currencies at the material level.

21. Proprietary & Confidential - 21 - McCormick & Company Inc. - Confidential Why did McCormick chose to use the Material Ledger? Policy Decisions: Within McCormick US, all products will be transferred at Actual Cost –Purchasing & manufacturing variances passed on to selling Profit Ctr. Group Valuation will be used for all Management Reporting Raw and Packaging material costs are updated monthly to support gross margin analysis for complex products. Utilize system calculated PUP vs. manual updates. Visibility to both Group & Legal values at material level for Pricing McCormick US plants produce products for Multiple Profit Centers regardless of formal Reporting Relationship Enables Shared Services model for manufacturing Legacy system replacement for Corporate Owned Spice Mill Replaces “homegrown” mainframe application developed to support requirement to transfer all variances Manufacturing Shared Services model already implemented for this facility

22. Proprietary & Confidential - 22 - McCormick & Company Inc. - Confidential What does the Material Ledger Do? The Material Ledger is similar to a sub-ledger for all inventory related transactions. Transactions can be tracked in: multiple currencies (Company code plus 2 others) multiple valuations (legal, group, profit center) at actual cost for each material / plant. Actual costing functionality enables the distribution of variances (PPV and manufacturing) to semi-finished and finished product Revaluation variance is automatically recorded when the price for a material is updated. Revaluation is also tracked at the plant/material level through the material ledger. Automated calculation and capitalization of direct material variances

23. Proprietary & Confidential - 23 - McCormick & Company Inc. - Confidential Material Ledger/Valuation practices at McCormick At McCormick, two valuations are tracked in the Material Ledger Group Valuation – always USD, excludes Inter-company profit Legal Valuation – local currency At McCormick, Profit Center Accounting uses the Group Valuation from the Material Ledger During month end processing, Periodic Unit Prices (PUP) are calculated and variance distribution and capitalization is performed automatically. Variances related to Sales remain in the P&L as “net” amounts – not easily traceable New transaction for Not Included/Not Distributed amounts helps. System calculated PUP is used to update Raw and Packaging Standards for Future period

24. Proprietary & Confidential - 24 - McCormick & Company Inc. - Confidential McCormick Month End Process with Material Ledger The Standard Cost for Raw & Packaging materials is updated each month to equal the Periodic Unit Price. one-month lag between the price recalculation and price update. Standard Cost Estimates are generated monthly for all Semi-Finished and Finished Goods to incorporate: Raw & Packaging price changes Master Data, BOM & Recipe changes Currently, Labor, Machine Activity Types and ABC Business Process rates are updated annually or upon significant business change only Rate variances are not passed through to process orders or materials. Cost Center and ABC Business Process variances are analyzed off-line and manually distributed to selling Profit Centers.

25. Proprietary & Confidential - 25 - McCormick & Company Inc. - Confidential Reporting & Analysis with Actual Costing/Material Ledger Gross Margin analysis is focused on Actual Cost and Cost Component Analysis Direct material Variances within a period are minimized due to frequent updates. Planned price fields are populated with Annual standards developed during budget cycle and used for price change analysis. Cost Component structure incorporates Top 20 commodities to support price change analysis Reporting not developed yet – looking at BW as a source

26. - 26 - How Does Material Ledger work?

27. Proprietary & Confidential - 27 - McCormick & Company Inc. - Confidential Parallel Valuation – thru Material Ledger – Inventory values Prod. order Distribution center Sales order Finished product Raw materials Co Code 1101 - MGIL Plant 1010 - Virtual Plant 1000 Spice Mill Plant 1020 – MDC Cost center L $ 70 G $70 L $ 70 G $ 70 L 120 G 90 L 120 G 90 NB PO $100 Mfg CCtr $ 20 Mfg CCtr $ 20 L $120 G 90 - Plant-Plant trfr Co Code 1100 - US Both Values post to FI. PCA is recorded at Group Value only. Both Values are tracked for all transaction until inventory is sold (or Shipped to a unit not on SAP)

28. Proprietary & Confidential - 28 - McCormick & Company Inc. - Confidential Structured Value Chains – Periodic Unit Price 1000... 250... 30... 28.00... Cumulative inventory 2000 500 30 26.50 Other receipts/cons. 0 00 Preliminary valuation Quantity 1000 25025.00 Price difference Price Beginning inventory Receipts Production Purchase order Stock transfer Subcontracting

29. Proprietary & Confidential - 29 - McCormick & Company Inc. - Confidential Price Differences # External procurement (PO value / invoice value) # In-house production (settlement of process orders) # Initial entry of Inventory balances (external value posted) # Transfer price variance (stock transfer – plant to plant) # Subcontracting # Debit / credit of material (MR22) # Revaluation due to a Price Change (CK24, CKME) Material Ledger – transactions that impact valuation

30. Material consumption VB3250 Material Inventory 3250VB BI 2500 ZU 2500 GR/IR allocation RE26002600ZU Vendor 2800 Price difference ZU 100 RE200 Posting Example: Purchase Price Variance GR IR CNS GR Standard price: 25 $ per EA Periodic unit price: 26.50 $ per EA Beginning inventory (BI): 100 EA / 2500 $ Goods receipt/purchase order:100 EA / 2600 $ Invoice receipt: 100 EA / 2800 $ Consumption: 130 EA / 3250 $ Ending inventory: 70 EA Receipts -PO 100 250010026 Cumulative inventory 200 5000300 26.5 Ending inventory 70 175026.5 105 Receipts-Invoice 0 0200 Consumption 130 3250 25 Beginning inventory 100 250025 Prel. val.Category Quantity Price diff. Price

31. Proprietary & Confidential - 31 - McCormick & Company Inc. - Confidential Period 1 Period 2 Period 1:Prel.Valuation InventoryPrice Dif Period 1: Act.Costing InventoryPrice Dif + BASIC CONCEPT: Allocation of Price Differences

32. Proprietary & Confidential - 32 - McCormick & Company Inc. - Confidential Costing Cycle with Material Ledger (ML) Day 0 Open New Period (MMPV) Day 0 Open New Period (MMPV) Day 0 Release new Cost Estimates& (Material Prices (CKME) (Post Reval to new Period) Day 0 Release new Cost Estimates& (Material Prices (CKME) (Post Reval to new Period) Day 1 (PM) Perform OH Allocation ABC Templates Day 1 (PM) Perform OH Allocation ABC Templates Day 2 (PM) Settle Process Orders (ML updated with variances) Day 2 (PM) Settle Process Orders (ML updated with variances) Day 3 Execute CCA Allocations Day 3 Execute CCA Allocations Day 2 (PM) ML Single Level Settlement Day 2 (PM) ML Single Level Settlement ML Mark Future Raw & Pkg Material Prices (CKMPRP) ML Mark Future Raw & Pkg Material Prices (CKMPRP) Pre-close Create Std. Cost Estimates (CK40N) Pre-close Create Std. Cost Estimates (CK40N) Day 3 (PM) ML Multi Level Settlement Day 3 (PM) ML Multi Level Settlement Day 4 Manual variance Closeout Day 4 Manual variance Closeout Day 4 (PM) Post ML Closing (Capitalization) Day 4 (PM) Post ML Closing (Capitalization) Close Complete 1 month lag For PUP update

33. Proprietary & Confidential - 33 - McCormick & Company Inc. - Confidential Material Ledger- Actual Costing Preliminary Valuation at standard and recording price differences Price determination: Calculation of Periodic Unit Price Period End Closing: Revaluation of materials with Periodic Unit Price Three Steps in Actual Costing

34. Receipts Cumulative inventory 1000 25,00025.00 Ending inventory 1000 25,00025.00 Other receipts/consum Consumption Preliminary valuation Quantity Beginning inventory 1000 25,00025.00 Price difference Price Differences between Standard Price and actual price Real time valuation with Standard Price Average Actual price PERIOD 1 - Beginning inventory Value PERIOD 1 - Beginning inventory Value ML STATUS – PERIOD OPEN (MMPV)

35. Receipts 1000 25,000 3000 28.00 Cumulative inventory 2000 50,000 3000 26.50 Ending inventory 700 17,50025.00 Other receipts/consum 0 00 Consumption 1300 32,50025.00 Preliminary valuation Quantity Beginning inventory 1000 25,00025.00 Price difference Price Beginning Inventory + all Goods Receipts Average Actual price Differences between Standard Price and actual price PERIOD 1 – Transactions PERIOD 1 – Transactions ML STATUS – Quantities and values posted

36. Proprietary & Confidential - 36 - McCormick & Company Inc. - Confidential Multi-Level Actual Costing (Overview) Preliminary Valuation at standard and recording Price Differences Price determination: Calculation of Periodic Unit Price Period End Closing: Revaluation of materials with Periodic Unit Price Three Steps in Actual Costing

37. PERIOD 1 – Closing – PUP determination Single Level Price Determined PERIOD 1 – Closing – PUP determination ML STATUS – Single Level Price Determined - Standard price: $25.00 -Periodic Unit Price: $26.50 = $53,000 (Preliminary Valuation at STD + Price Diff) 2,000 (Cumulative Inventory) Receipts 1000 25,000300028.00 Cumulative inventory 2000 50,000300026.50 Ending inventory 700 17,50025 Other receipts/consum 0 000 Consumption 1300 32,50025 Preliminary valuation Quantity Beginning inventory 1000 25,00025.00 Price Diff. Price

38. PERIOD 1 – Closing – single level price determination Single Level Price Determined PERIOD 1 – Closing – single level price determination ML STATUS – Single Level Price Determined - Standard price: $25.00 - Inventory value: $17,500+ $1050(period end) - Periodic Unit Price: $26.50 Receipts 1000 25,000300028.00 Cumulative inventory 2000 50,000300026.50 Ending inventory 700 17,50026.50 1050 Other receipts/consum 0 0026.50 Consumption 1300 32,50025 Preliminary valuation Quantity Beginning inventory 1000 25,00025.00 Price Diff. Price Not Distributed 1950

39. PERIOD 1 – Closing – Multi-level price determination PERIOD 1 – Closing – Multi-level price determination ML STATUS – Multi-level price determined -Standard price: $25.00 -- Inventory value: $17,500 + $1050 (period end) - Periodic Unit Price: $26.50 Receipts 1000 25,000300028.00 Cumulative inventory 2000 50,000300026.50 Ending inventory 700 17,50026.50 1050 Other receipts/consum 0 0026.50 Consumption 1300 32,500 195026.50 Preliminary valuation Quantity Beginning inventory 1000 25,00025.00 Price Diff. Price Consumption Multi-level settlement

40. Proprietary & Confidential - 40 - McCormick & Company Inc. - Confidential Multi-Level Actual Costing (Overview) Preliminary Valuation at standard and recording Price Differences Price determination: Calculation of Periodic Unit Price Period End Closing: Revaluation of materials with Periodic Unit Price Three Steps in Actual Costing

41. Proprietary & Confidential - 41 - McCormick & Company Inc. - Confidential Period 1Period 2 Price Control During Period: Preliminary Valuation Price (S) After Closing Entries: Periodic Unit Price (V) For Period 1: Price Control: S For Period 2: Price Control S For Period 1: Price Control V For Period 0: Price Control V Revaluation: Change of Price Control

42. Financial Postings –Period 1 InventoryPayables Vendor ProcedureInventory Inventory value$Standard Begin. inventory: 1000 EA at$2$ 100025,00025 Goods receipt : 1000 EA at 28$ 200050,00025 Consumption: 1300 EA at 25$ 70017,50025 Invoice receipt : 1000 EA at 28$ 70017,50025 ML Closing : 700 EA at 1.5 $ 70018,550 25 (PUP 26.5) BI GR CNS BI 25000 1050 GR 28000 GR CNS 28000 IR Consumption 32500 IR CL 32500 CNS IR Inventory GR/IR Account Price difference CL 1050 GR 3000 CL Variance (P&L)

43. Receipts Cumulative inventory 700 17,50025.00 Ending inventory 700 17,50025.00 Other receipts/consum Consumption Preliminary valuation Quantity Beginning inventory 700 17,500 25.00 Price difference Price PERIOD 2 – Day 0 - Open period – (MMPV) PERIOD 2 – Day 0 - Open period – (MMPV) ML STATUS – Period open

44. Price change 700 Cumulative inventory 700 18,200 26.00 Ending inventory 700 18,200 26.00 Other receipts/consum Consumption Preliminary valuation Quantity Beginning inventory 700 18,200 26.00 Price difference Price PERIOD 2 – Day 0 -Standard Price Change to $26 (Based on info from periods prior to period1) PERIOD 2 – Day 0 -Standard Price Change to $26 (Based on info from periods prior to period1) ML STATUS – Price change complete Receipts

45. Price change 700 Cumulative inventory 700 18,200 350 26.50 Ending inventory 700 18,200 26.50 350 Receipts Consumption Preliminary valuation Quantity Beginning inventory 700 18,200 26.50 350 Price difference Price PERIOD 2 – Day 4 – Period 1 closing posted PERIOD 2 – Day 4 – Period 1 closing posted ML STATUS – Quantities and Values entered ML Closing 350

46. Financial Postings –Period 2 (no change in standard price) ProcedureInventoryInventory value$Standard Begin. inventory: 700 EA at 25$ 70017,50025 ML Closing (per1) : 700 EA at 1.5 $ 70017,50025 (PUP 26.5) BI 17,500 + 1050 Revaluation CL Inventory Price difference CL 1050 CL 1050 Capitalization auto reverses in next period

47. Financial Postings –Period 2 ProcedureInventoryInventory value$Standard P 1 Begin. inventory: 700 EA at $25 70017,500$25 Change Std to PUP: 700 EA at $26 70018,200$26 ML Closing (per1) : 700 EA at $1.5 70018,200$26 (PUP 26.5) BI 17,500 + 1050 Revaluation CL1 RV Inventory Price difference * CL1 1050 CL RV 1050 RV 700 CL2 700 Capitalization auto reverses in next period

48. Material Ledger Costing Run Summary Actual Costing Run: Process Steps  Selection:Selects all Materials with Price Determination 3  Determine sequence:Determines the sequence in which Materials are costed and assigns all Materials to a Costing Level  Single-LevelCalculates Actual Prices based on Single-level Price Determination:Price Differences  Multi-LevelCalculates Multi-Level Actual Prices, including roll-up of PriceDetermination:Price Differences  Post closing:Closes Period (Material Ledger) and Revaluates Inventory with Periodic Unit Price  Mark material prices:Marks Periodic Unit Price for usage as Standard Price in a Future Period  Release Future price : Releases the price marked above as the new standard at the start of the new period- Inventory revaluation takes place. Done at the start of the new period.

49. Proprietary & Confidential - 49 - McCormick & Company Inc. - Confidential Lessons Learned Invalid MM transactions and PO price errors will create issues with Periodic Unit Price Similar to issues experienced with Moving Average Cost MR22 and MR11 corrections do not always pass thru Material Ledger Settlement as expected due to Price Limiter function Multiple valuations require postings in both values Learning curve is significant. Incorrect postings to one valuation can be difficult to correct if not detected before closing of Material Ledger Currently, business is taking extra time to review single level and multilevel price differences during month end At Go-live significant PPV and PPV correction errors occurred Reliability of data has increased due to up front controls implemented in Purchasing Anticipate eliminating extra time in closing after Industrial Implementation

50. Proprietary & Confidential - 50 - McCormick & Company Inc. - Confidential Lessons Learned When analyzing variance for profit centers/materials, need to consider all variance cost elements. Look at total impact – incurred PPV,TPV, Process order variances, revaluation and capitalization It is helpful to assign a separate cost element to Material Ledger settlement postings Co-products required user exit for variance distribution Variance analysis is complicated when Fixed Price Co-Products are used. Standard Cost/Material Price updates should be analyzed prior to release Standard cannot be updated after material movements or ML Closing entries have been performed.

51. Proprietary & Confidential - 51 - McCormick & Company Inc. - Confidential Lessons Learned Moving from Traditional Standard Cost to “Actual” Costing requires change in mindset for Plant & Operations Controllers: Focus shifts from variance analysis to total cost analysis Learning curve can be significant for businesses accustomed to Once a Year standard cost updates Monthly Forecasting process may change Business may desire to post manual adjustments – this should be avoided except in case of clear error Complex process – yet it works!!! Need to develop analytical reporting in BW to increase understanding of results

52. QUESTIONS?

53. Thank you for attending! Please remember to complete and return your evaluation form following this session. Session Code: 1706