1. Arcelor Mittal Accounting System Analysis Ana Cervantes Yu Chen Anne Dubost Francesca De Girolamo Melvin Soh

2. Overview Company World's number one steel company 1 Merger between Arcelor and Mittal Steel in 2006 Strategy –Product diversity 2 –Integrated business model –Geographic reach 3 –Based on subsidiarity –Investments & Innovation 2 Iron & Steel Industry Growing demand 4 Risk of overcapacity and regional imbalances Oligopoly Market 5 Low Margin 6 Standard Product 7 Complicated Process 8

3. Divisionalized Organization 3 Six divisions based on geography and products 1 Under each division, there are subsidiary companies 2 Each subsidiary company is owned by ArcelorMittal in different percentages 3 Intercompany shipments and transactions Possible performance indicator: ROI 4 Other indicators: Profit, Net margin, Production, Shipment, Number of Employees

4. Costing system 1 Process costing (rather than job costing) 2 → cost per unit of output (€/tons ?) Target costing 3 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 4

5. Responsibility centres Cost Centres 1 – Discretionary: HR, raw material purchasing – Standard: product lines, factories different levels of aggregation 2 Problem: unify criteria and centralised decisions and control 3 Revenue centres: regional sales divisions 4 Profit and Investment centres: highest levels of management 5 5

6. Costs Allocation 1 R&D activities expenditures Materials, direct labour, allocated overheads 2 To income statement as incurred 3 To corresponding cost centres (divisions, factories) if: 4 – Technical and commercial viability – Enough resources Cost drivers: 5 – New or substantially improved product: volume 6 – New or substantially improved process: machine-hours 7 6

7. Volume decision Oligopoly with no obvious dominant firm 1 Follows the Kinked Demand Curve Model 2 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 term 3

8. 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

9. Investment evaluation criteria Strategic investments with high ROIC: return on invested capital 1 The capacity of the investment for increasing the ROIC is evaluated through the NPV 2. Each investment is evaluated on the base of its own profitability 3. Qualitative aspects are also fundamental 4.

10. Conclusions Why ArcelorMittal 1 – 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