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)

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• 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

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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

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