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Kater Inc.

Transparent Financial Reporting Analysis Manual

SEC / Legal Entity SEC / Legal Entity / GAAP Focus

Business Units Accountable

Enterprise Product Profitability

Transparent Financ ial Reporting Analys is Manual A.doc,9/8/2006, 11:23 AM

Contents
Chapter 1 Introduction ............................................................................................ 1. Kater Methodologies ......................................................................................... 2. Aggregation Methodologies............................................................................... 3. Rate/Volume Concept ....................................................................................... 4. Commentary ..................................................................................................... 5. Roles & Responsibilities.................................................................................... Chapter 2 Form M Summary .................................................................................... Chapter 3 Foreign Currency Reconciliation .......................................................... Chapter 4 Sales Reconciliation ............................................................................... 1. Overview 2. Price Realization ............................................................................................... a. Foreign Currency b. Published Price ...................................................................................... c. Sales Discount ....................................................................................... d. Warranty e. Transfer Yield ......................................................................................... f. Physical Sales Volume........................................................................... 3. Base Period Variable Margin Percentage ......................................................... 4. Volume Impact on Margin ................................................................................. Chapter 5 Mix ............................................................................................................ 1. Overview 2. Geographic Mix................................................................................................. 3. Country/Region Mix .......................................................................................................... 4. Geographic Mix on Transfers ............................................................................ 5. Product Mix Impact on Sales 6. Product Mix between Product Lines.................................................................. 7. Product Mix within Product Lines ...................................................................... a. Revenue Sales b. Non-revenue Sales and Transfers Chapter 6 Variable Cost ........................................................................................... 1. Overview ..................................................................................................... 2. Cost of Sales..................................................................................................... 3. Transfer In/Inter-company Purchases............................................................... 4. Inventory Adjustments / RSSM s....................................................................... 5. Other Variable Cost........................................................................................... Chapter 7 Period Cost of Sales ............................................................................... 1. Overview ..................................................................................................... 2. Period Costs Incurred ....................................................................................... 3. Period Costs Inventory Effect............................................................................ 4. Variable Margin Percentage..............................................................................

Transparent Financ ial Reporting Analys is Manual A.doc,9/8/2006, 11:23 AM

Chapter 8 Parts Chapter 9

.....................................................................................................

Period SG&A / R&D ..............................................................................

Chapter 10 Other Income and Expense ................................................................. Chapter 11 The Chunk Chart................................................................................... Chapter 12 Contact Details ..................................................................................... Chapter 13 Glossary (Analysis) .............................................................................. Chapter 14 Glossary (TFR)......................................................................................

Transparent Financial Reporting Analysis Manual

Introduction: Kater Methodologies


In order to fully leverage the benefits of Transparent Financial Reporting, a comprehensive process for financial analysis was developed. The principles of this new process are: One tool for all analysis needs All business unit, product line and consolidated analysis will be performed using this process Highly mechanical Utilizing pre-populated templates and pre-defined calculations, manual input into the model has been minimized Mandatory and consistent methodologies The prescribed methodologies for calculations and aggregation must be followed or the mechanical process will not provide accurate and consistent financial analysis

Kater utilizes the Form M as the model to explain changes in results between comparison periods. The Form M explains changes in sales and changes in profit. Major drivers of both of these changes are illustrated in the overall structure of the Form M depicted below.

Form M Structure
Change in Corporate Profit

Sales changes Due to Currency impacts Price realization: 1) Published price 2) Sales discount 3) W arranty 4) Transfer yield Physical sales volume

Cost changes Due to Currency impacts Variable costs Mix Physical sales volume Period costs Other income/expense

The primary focus of financial analysis at Kater is to explain actual results both year over year and vs. plan, as well as RBM (Rolling Business Management) forecasts. Below is a summary of relevant comparison periods. YTD vs. YTD YTD vs. Plan Month vs. Plan Qtr vs. Qtr RBM Analysis (current vs. prior year, current vs. future year, current vs. plan)

This is not an all-inclusiv e list of analysis requirements. For instance to prove that current month results do not contain significant errors it is necessary to compare current month to previous month actual results.

Transparent Financ ial Reporting Analys is Manual A.doc,9/8/2006, 11:23 AM

Transparent Financial Reporting Analysis Manual

Introduction: Kater Methodologies


The final output of the Form M is a graphical depiction of changes in results for both sales and corporate profit. These charts, commonly referred to as chunk charts, are automatically created and are graphical models inherent in the Form M.
Sales & Revenues 1,130,675 1,006,675 124,000 Operating Profit 198,714 174,962 23,752 Accountable Profit 196,017 172,512 23,505 Corporate Profit 169,842 146,337 23,505

Current Period Base Period Change

300

86.6
250

0.1

(4.3) 3.0

(11.3) (49.9)

200

(5.0) 18.7 146.3

(12.4) (3.8) 2.0 (0.0) (0.2) 169.8

150

100

50

Base Period Vol/Mix Price Real Trans Yld Warr CCY Mat'l Cost Var Cost PCOS SG&A R&D Parts (McFee) Other Oper All Other Corp Burden Current Period

Profit Chunk
Sales & Revenues 1,130,675 1,006,675 124,000 Operating Profit 198,714 174,962 23,752 A ccountable Profit 196,017 172,512 23,505 Corporate Profit 169,842 146,337 23,505

Current Period Base Period Change

1,200

87 1,007 32

(4)

1,131

1,000

800

600

400

200

Base Period NS&T Volume Price Realization Warranty Currency Transfer Yield G eographic Mix Transfers Parts (McFee Related) Current Period NS&T

Sales Chunk

Transparent Financial Reporting Analysis Manual

Introduction: Kater Methodologies


The Kater financial analysis process flow is summarized in the following paragraphs and the attached flowchart. Essbase: The backbone of the analysis tool is Essbase. Essbase is a series of data cubes that allow for manipulation of significant amounts of data. Essbase collects data from multiple sources and pre-populates the analysis templates with data necessary to complete the Form M. After the monthly closing process is complete, actual data is loaded from the Accountable Data Cubes within the General Ledger System (GLS). Prior year actual data, business plan and RBM forecast data are loaded via RBM templates. The front end user-interface to Essbase is referred to as Catalyst Catalyst is an Excel add-in that allows users to send and . retrieve data to the Essbase data cubes. Business Unit Analysis: This analysis is completed by the relevant Business Manager, utilizing the pre-populated templates and supplemental calculations as required. Business Unit Form M are always subdivided by Product Line (effectively all Business Units will have s a Form M for each Product Line they support as well as a Consolidated Business Unit Form M). Commentary to support the Business Unit analysis is required as well. Once completed Business Unit analysis is submitted into Essbase to facilitate the creation of Product Line Form M s. Product Line Analysis: After all Business Unit (as well as by Product Line within Business Unit) analysis is complete, Essbase creates the Product Line Form M The Business Unit s. that houses the Global Product Manager will provide commentary to support the Product Line analysis. Once completed this analysis is submitted into Essbase to facilitate the creation of the remaining steps of the Product Line Cascade. Product Category and Sub-Line of Business Analysis: After the Product Line analysis is finalized the Product Category and Sub-Line of Business analysis will be mechanically generated. Principal Line of Business: At the Principal Line of Business level several Corporate variances that are not assigned at a lower level are added to the analysis; actual foreign exchange gains/losses, actuarial gains/losses on pension assets and LIFO variances, etc. These variances flow through to Consolidated analysis as well. On a forecast basis these items will be assigned by CAS.

Transparent Financial Reporting Analysis Manual

Introduction: Kater Methodologies


Overview of the Transparent Financial Reporting Analysis process

Accountable GLS Data Cubes

Business Unit Comparison Period Data Comparison period data pre-populated (ABP, Prior year actual or RBM)

Actual Data Replicated to Essbase

Essbase Data Cube

Loaded via RBM template

Business Unit
(By Product Line)

Form M with s Commentary

Essbase Data Cube

Product Line Form M with s Commentary

Product Category Form M s

Sub -Line of Business Form M s

Principal Line of Business Form M s

Consolidated Form M

Transparent Financial Reporting Analysis Manual

Introduction: Rate/Volume Concept


AGGREGATION Business Unit Form M
The calculations for the Business Unit Form M can be divided into three categories: 1. Additive Items; 2. Business Unit Calculations; and 3. Recalculated Items. Grouping calculations into these three categories facilitates achieving transparency between Business Unit analysis and Product Line analysis. These aggregation methodologies are predefined and cannot be deviated from. Additive Items: These items (see figure below) for the Business Unit Form M are add-ups of Product Line calculations. Calculations will be completed at the Product Line within Business Unit level and added together to arrive at the Business Unit total. Business Unit Calculations: These items (see figure below) for the Business Unit Form M are to be calculated at an overall Business Unit Level. The total Business Unit Form M variance will then be split by the Business Unit between the Product Lines within the Business Unit. Recalculated Items: The sum of total margin impact of physical sales volume and mix for total Business Unit and total Product Lines within a Business Unit are equal. However, as you aggregate from Product Lines within a Business Unit to total Business Unit, volume and mix must be recalculated. The form M calculates volume and mix by Product Line within Business Unit. It then recalculates volume at a Business Unit level. The difference between the additive volumes of the Product Line calculations and the Business Unit calculation is defined as mix between Product Lines
Business Unit Form M (e.g. TTT)
Price Realizatio n Pub lishe d Price Chan ge Sale s Varia nce Rat e Cha nge Pro duct Mix Imp act on Sales Mix b y Model Warranty In vento ry Ad ju stments/RSSM s Pe riod Cost s Pa rts Pro fit (McFee ) Othe r Op erating In c/Exp Othe r I nco me & Exp ense Corporat e Burden Items

Tran sfe r Yie ld Curre ncy Material Tran sfe rs In Va riable L abo r/Burden Othe r Varia ble Costs

Volu me Mix be twee n Pro duct Lines

Additive Items

BU Calcs.

Recalculation Recalculation

Product Line Form M w/in Business Unit (e.g. Pipelayer w/in TTT) Product Line Form M w/in Business Unit (e.g. MTT w/in TTT) Product Line Form M w/in Business Unit (e.g. LTT w/in TTT)
Price Re aliza tio n Publishe d Price Chan ge Sale s Varia nce Rate Cha nge Pro duct Mix I mpa ct on Sales Ge ograph ic Mix C ount ry/Region Mix Oth er Sales Var. Rate Chan ge Mix by Mo del Warra nty In ve ntory Adjustme nts/RSSM s Period Co sts Parts Prof it (McFee) Othe r Ope ra tin g In c/Exp Other In come & Expe nse Corporate Bu rd en It ems

Transfer Yield Cu rren cy Ma teria l Transfers In Varia ble La bor/Bu rd en Ot her Variab le C ost s

Vo lume

Transparent Financial Reporting Analysis Manual

Introduction: Rate/Volume Concept


AGGREGATION Product Line Form M
The calculations for the Product Line Form M are fully mechanical, based on Business Unit inputs, and they can be divided into two categories: Additive Items and Product Line Calculations. Grouping calculations into these two categories facilitates achieving transparency between Business Unit analysis and Product Line analysis. Additive Items: These items (see Figure below) for the Product Line Form M are considered to be add-ups of the Product Line pieces calculated in the Business Unit Form M process. Each Product Line is fed Form M data via Essbase from one or more Business Units. The variances in the list below for the Product Line Form M are a summation of the variances fed from the Business Unit Form Ms. Product Line Calculations: Volume, Geographic Mix, and Mix will be completed at an overall Product Line level. All Product Line calculations are performed mechanically within the Form M.
Product Line Form M (e.g. LTT)
Price Realization Published Price Change Sales Variance Rate Change Product Mix Impact on Sales Geographic Mix Country/Region Mix Other Sales Var. Rate Change Transfer Yield Currency Mix by Model Warranty Period Costs Material Transfers In Variable Labor/Burden Other Variable Costs Inventory Adjustments/RSSM Parts s Profit (McFee) Other Operating Inc/Exp Other Income & Expense Corporate Burden Items

Volume Mix Geographic Mix

Additive Items

Product Line Form M w/in Business Unit (e.g. LTT w/in LACD)
Price Re alizati o n Pr ice Realization PPubductPLcinChangerm M w/in Business Unit (e.g. LTT w/in NACD) ro lished Line Fg is i h no Published r ice e ange ProductPrice ChaForm M w/in Business Unit (e.g. LTT w/in NACD) Sales Variance Rate Change Tr an sfe r Yield Transfer Yield Prroducet LiiineFo rrm M w //in Busiiness Unii t((e. g. LTT w //in TT T)) Productncy ne Form M w/in Business Unit (e.g. LTT w/in TTT) Cu r t L P od urre c n e Form w/in Business Unit (e.g. LTT w/in TTT) Produ rc n Line Fo m M w in Bu s nes s U n t e.g. L TT w in TTT Geographic Mix on Transfers Product Miric e Ra c tlioatiSa les P x Im p e a z n o n Volume y Pr el PuMiix bPdMedce a lih ang e bl she ric o iR e C z tion Mix Sales PWbilarn c eyR ateeChh an ge Vu r rsan t Pric C an ge a ai h ed Geographic Mix Sae rs Va riostce Rate Change P le io d C a nYield Transfer s Volume Pro duCtuMie nIcypa ct on Sales c ia l Ma te rrr x m Mix Va GeogTra nisfe rsgIron TraMix ra ph G Mix n phic nsfers V ro d c o a P ri Geographic Mix eographic au ct C ou Iotrr/y /uce g in SM ixs b le Mabn pa r de on ale L ix m BR t o Volume O er r S alb s V or sR OththeVairxaey M ao.elsate Change M i b le C d t Mix Inventory AdjuW a reansy YiSlM sT rarnstft /r S e d s tm n eR Geographic Mix Parts Pre rio(CCrostecy Mc re s P o f t d u F en ) Other OperaMntg bincMoxp ti e y Maix rI a l /E del Was n Other Incom e &fe rr rae nse Tra n s ExpIn ty Corp orr it e BuLer io dI/tBurste n rd b o e o d Va aab le P ae n r Cms s Other VariMalter ialsts ab e C o Inventory AdjTrans fn trs /R SSM us tme e s In s PaVa riPro fit Labo reeu rden rts a ble (M cF /B ) OtherO the r Va rg Inc/C op O pe ra tin ia ble Ex sts Inv nto ry Adju me e ss s Oth er P c om er ostE(Mn tneeS SM In r ts P & it xp cF /R f Corporate Bu rd en Ite mse) Other Operating Inc/Exp Other Income & Expense Corporate Burden Items

Transparent Financial Reporting Analysis Manual

Introduction: Rate/Volume Concept


For purposes of variable margin analysis the Form M separates total sales and margin between rate and physical sales volume. The illustration below using sample data highlights the rate/volume concept.
Illustration: Rate/Volume Concept
Net sales & transfers - base Net sales & transfers - current Total net sales & transfers change less: Currency movements Published price changes Sales discount changes W arranty Physical sales volume change Rate of growth of physical sales volume 1,000 1,200 200

(20) 50 10 30 130 13%


?

Price Realization

(Physical sales volum e change/ (base) Net sales & transfers x 100)

Margin change Base Period P&L 1,000 (700) 300 30% Current Period P&L 1,200 (850) 350 Change 200 (150) 50

Net sales & transfers Actual variable costs

Base margin

Therefore, change in cost due to change in physical sales volume must be? Physical sales volume change Costs as % of net sales & transfers (base) Change in variable costs due to physical sales volume change Gross variable costs - base period Gross variable costs - current period Total variable costs variance 700 850 (150) 130 70% (91)

(100% - base m argin, 30%)

----->

Volume change Remaining cost

(91) (59) (150)

Cost Assumption: Base Variable costs 700 Variable costs-flexed 700 Change in variable costs due to rate changes Current 850 791 ? based on +13% change in physical sales volume (59) [791 - 850]

This is a simplified example to illustrate the rate/volume concept only. For example, mix is assumed to be neutral for ease of illustration. The example above shows how a change in margin can be separated between rate and physical sales volume. The total change in margin is $50 (favorable) resulting from a $200 favorable change in sales and a $150 increase in associated costs. At the sales level, the change in physical sales volume is $130 (favorable). The remainder is due to currency, published price, sales discounts and warranty. The Sales Recon chapter contains further details on this area. On costs, the variance resulting from the increase in physical sales volume is a $91 increase in costs and the rate variance is $59 (unfavorable). See the Variable Cost chapter for more details.

Transparent Financial Reporting Analysis Manual

Introduction: Commentary
The Form M provides significant information on period-to-period change but does not provide the complete story. Critical to supporting the Form M is the business commentary provided by Business Units for both Business Unit and Product Line results. This commentary provides the root causes or business reasons which drive the Form M variances. The commentary should provide insight that is not evident through the numbers. Business Unit commentary will be utilized by Corporate Accounting (CAS) as the basis for results explanations that will be provided to the Administrative Council, Executive Office and the Board of Directors as well as for our external results communications.

Example 1: Insufficient: "SG&A decreased by $1 million" Sufficient: "SG&A labor cost decreased $4 million due to 6 Sigma-driven headcount reduction of 40 heads in process X. This was partially offset by increased local PINS ICP metric of $2,000 (base period factor of 0.9 v. current period factor of 1.0) and increased spending of $1,000 on consulting related to Project Y."

Example 2: Insufficient: "Sales discounts increased by 2%" Sufficient: "Market price actions from competitor X were resulting in significant PINS losses. Sales program A was launched on April 1, 200X to regain lost PINS; this program will expire on June 30, 200X and we will reassess the situation at that time." The Form M is the mechanism for Business Units to provide commentary for both Business Unit and Product Line results.

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Transparent Financial Reporting Analysis Manual

Introduction: Roles & Responsibilities


In order to enable this highly mechanized, disciplined approach to financial analysis, there are clearly defined roles and responsibilities. Business Unit Analysis: Business Managers are accountable for performing Business Unit analysis and providing commentary using the methodology described in this manual. As the entire process (Business Unit through Consolidated Results Analysis) is highly dependent on many different actions, Business Managers are also responsible to ensure all due dates are met. Product Line Analysis: Although Product Line Form Ms are completed mechanically, commentary to support the analysis will be required. Business Managers that support a Global Product Manager are responsible for completing this commentary and meeting all necessary due dates. Inter-company transactions: A necessary step in consistent, mechanical analysis is to ensure all transfer yield and transfer cost variances balance. In order for this to occur, it is necessary for one side of each transaction to have accountability for input into the Form M. Component Product Lines are responsible for populating the Transfer Price Indices for all of their respective transfers. Marketing Business Units are responsible for populating the Transfer Price Indices for all of their respective inter-company purchases.

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Transparent Financial Reporting Analysis Manual

Form M Summary
The next three pages contain a more detailed view of the Form M with summary level definitions of each major line item. The section on this page explains the sales & transfers impact.
NOTES

SALES & TRANSFERS IMPACT


Current Period Sales Base Period Sales Change Price Realization Transfer Yield W arranty Currency Parts Transfers (McFee) Physical Sales Volume Change

Sales & Transfers $ $ 1,130,675 1,006,675 124,000 20,865 130 (4,325) 4,950 5,000 $ 97,380

Net Sales & Transfers Change: the total change in sales, represented by the difference between current period sales and base period sales. See Ch 4. Price Realization: includes the impact of changes in published price, sales discounts, country/region, geographic and product mix (currency neutral). See Ch 4, Section 2. Transfer Yield: the impact from changes to the internal transfer prices (currency neutral). See Ch 4, Section 2.e. Warranty: the impact from changes in warranty costs (currency neutral). See Ch 4, Section 2.d. Currency: the net impact on the current sales value from currency movements. See Ch 4, Section 2.a. Parts Transfer (McFee): the differential between base and current P&L values. See Ch 9. Physical Sales Volume Change: represents the currency neutralized change in sales with the impact from published price, sales discount rate, transfer yield, warranty and parts transfers to MPCs removed. See Ch 4, Section 2.f.

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Transparent Financial Reporting Analysis Manual

Form M Summary
The section on this page explains the Business Unit view of corporate profit impact.
Total Corporate Profit / (Loss) $ $ 170,308 146,372 23,936

NOTES Corporate Profit Change: the difference in corporate profit between the current and base P&L values (currency neutral). See Ch 4. Sales & Transfers Volume: the variable margin impact explained by the change in physical sales volume (currency neutral). See Ch 4, Section 4. Price Realization: includes the impact of changes in published price, sales discounts, country/region, geographic and product mix (currency neutral). See Ch 4, Section 2. Transfer Yield: the impact from changes to the internal transfer prices (currency neutral). See Ch 4, Section 2.e. Warranty: the impact from changes in warranty costs (currency neutral). See Ch 4, Section 2.d.

CORPORATE PROFIT IMPACT


Current Period Corporate Profit / (Loss) Base Period Corporate Profit / (Loss) Change

Volume/Price/Mix: Sales & Transfers Volume Price Realization Transfer Yield Warranty - Policy Warranty - Standard Mix - Between Product Lines Mix - Within Product Lines (by model) 41,759 20,865 130 (575) (3,750) 5,244 (6,200)

Manufacturing Cost: Variable Cost Material (External Suppliers Only) Transfers in / Intercompany Purchases Cost Variance Variable Labor / Burden Inv. Adj.'s / RSSMs Other Variable Cost Manufacturing Period Cost of Sales Period Cost Incurred Period Cost inventory effect Total Manufacturing Cost Total Gross Margin Change (Excl Fx & Parts) $ $ (13,629) 730 (22,527) 34,946 (4,074) (2,992) (2,689) 127

Mix Between Product Lines: represents the impact on variable margin (base vs. current period) driven by Product Line weighting of sales and transfers as a percentage of total Business Unit sales and transfers. See Ch 5, Section 7. Mix Within Product Lines: represents the impact on variable margin (base vs. current period) driven by model weighting of sales and transfers as a percentage of total Product Line sales and transfers. See Ch 5, Section 6. Variable Costs: represents the impact of changes from period to period in cost rates applied to current period volumes (currency neutral). See Ch 6. Period Cost of Sales: represents change in overhead costs from both the actual costs incurred and the impact of changes in production volume on period costs absorbed into inventory (currency neutral). See Ch 7. SG&A and R&D: represents the differential between base and current P&L values (currency neutral). See Ch 10. Parts Profit (McFee): represents the differential between base and current P&L values (currency neutral) . See Ch 9. Other Operating (Income)/Expense: represents the differential between base and current P&L values (currency neutral). See Ch 11.

Non-Manufacturing Period Costs SG&A R&D Total Period Cost Change Parts Profit (McFee) Other Operating (Income) / Expense: (11,900) (2,720) (14,620) 2,000 -

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Transparent Financial Reporting Analysis Manual

Form M Summary
This section on this page completes the Form M by explaining changes in non-operating and corporate burden items.
NOTES
(210) 1,400 $ 23,516

Other (Income) / Expense: Interest Expense Net Currency Impact Affilitate Income Other Income/Expense Change Corporate Burden: Reversal of BU Hedging Reversal of Parts Business Plan Profit Equalization Admin & Exempt Other Allocated Operating Costs Other Allocated Income/Expense Costs Total Corporate Burden Change in Corporate Profit / (Loss): $ 50 500 (150) 20 420 23,936

Interest Expense: represents the differential between base and current P&L values (currency neutral). See Ch 11. Net Currency Impact: represents the impact of foreign currency on P&L change and Business Unit hedging. See Ch 11. Affiliate Income: represents the differential between base and current P&L. See Ch 11. Other (Income)/Expense: represents the differential between base and current P&L values (currency neutral). See Ch 11. Corporate Burden: represents the differential between base and current P&L values.

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Transparent Financial Reporting Analysis Manual

Foreign Currency Reconciliation


Overview
Foreign currency impacts all P&L line items for many business units. For internal reporting to the Executive Office and Board of Directors as well as our external release we remove the foreign currency impacts by line item to achieve currency neutralized changes. This methodology enables focus on the drivers behind price and cost changes excluding foreign currency impacts. Foreign currency impacts are then aggregated and explained as a single net impact.

Calculation Theory
The Form M calculates the foreign currency impact by taking the change in the exchange rate between the current period and the base period for the Business Unit and applying that percentage change to current sales and costs. Current sales and costs must be used, as the currency neutralized current values are used as the starting point in the Sales Reconciliation (reconciles currency neutralized current sales with base sales). The simple example shown below illustrates two methods of calculating the impact of currency movements on the Business Unit profitability. These currency impacts are s manually inputted into the sheet and calculated outside of the Form M. FX
Illustration: Foreign Currency Impact
GBP Current exchange rate Base exchange rate [1-(Base exchg. Rate/Current exchg. rate)]
* GBP has appreciated against USD

Jan'X3 1.610 1.540 0.04348

Feb'X3 1.590 1.540 0.03145

Mar'X3 1.612 1.540 0.04451

USD
Sales Sales @ base rate Currency impact on sales Material purchases [(Current sales/Current exchg. rate) x Base exchg. rate] $40,000 $38,261 $1,739 $40,000 $38,742 $1,258 $45,000 $42,997 $2,003

Total $125,000

$5,000 ($50,631)

Purchases @ base rate Currency impact on purchase Alternatively Currency impact on sales

($17,900) ($18,000) ($14,731) [(Current material purchases/Current exchg. rate) x Base exchg. rate] ($17,122) ($17,434) ($14,075) ($778) ($566) ($656)

($2,000)

[Sales @ current rate x % chg. in exchg. rate] [Purchases @ current rate x % chg. in exchg. rate]

$1,739

$1,258

$2,003

$5,000

Currency impact on purchases

($778)

($566)

($656)

($2,000)

This example shows how the foreign currency impact on sales and purchases are calculated. Given a strengthening trend in British Pounds (the foreign currency), we expect a favorable impact on sales as sales denominated in Pounds are translated into more US dollars (value = $5,000) and an unfavorable impact on material purchases (value = $2,000).

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Transparent Financial Reporting Analysis Manual

Foreign Currency Reconciliation


To calculate the change, convert current period sales at the base period exchange rate. In Jan current sales are $40,000. W hen converted at USD 1.54 to 1 GBP (i.e. the base X3, period exchange rate), current sales in base currency terms, becomes $38,261. The difference of $1,739 [$40,000 - $38,261] represents foreign currency impact on current period sales in Jan X3. Alternatively, you may multiply current sales in base currency terms, by the rate of change from the base period exchange rate. In Jan X3, the exchange rate conversion factor is 0.04348. The impact of exchange rate movement on sales is, therefore, $1,739 [0.04348 x $40,000]. Note the results from both methods are the same. When entering the currency impact into the FXsheet, Business Units need to think of the impact as either favorable or unfavorable to profits and not how the impact is affecting the , particular Form M line item. Take the above illustration, for example, the upward movement in British Pounds increases both sales and material purchases. W hen entering the impacts into the FXsheet, however, the impact on sales should be entered as a favorable (i.e. positive) impact while the impact on material purchase should be an unfavorable (i.e. negative) impact.

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Transparent Financial Reporting Analysis Manual

Foreign Currency Reconciliation


Application
All foreign currency movements must be manually entered in the sheet, using the yellow FX shaded input cells in the sheet. Impacts must be entered for the Business Unit in total, and then split between the Product Lines within the Business Unit.
Net Change Currency Neutralized 125,000 (6,625) 5,000 123,375 (575) (3,750) (4,325)

P&L Change Gross Revenue Sales Excluding Parts Gross Revenue Sales - Parts Sales Discounts - Revenue Sales - Excluding Parts Sales Discounts - Revenue Sales - Parts Non-Revenue Sales & Transfers (Before Warranty) Total Sales & Transfers Policy Warranty Standard Warranty Total Warranty Material (External Suppliers Only) Transfers In / Intercompany Purchases Variable Labor Variable Burden Inventory Adj/RSSM's Other Total Variable Cost Period Cost of Sales Gross Margin Impact SG&A R&D Other Operating (Income)/Expense Net Currency Impact on Operating Profit (12,400) (3,720) 125,000 (1,625) 5,000 128,375 (625) (3,750) (4,375)

Currency Adj 5,000 5,000 (50) (50) (2,000) (2,000) $ 2,950 (500) (1,000)

Product Line A 3,000 3,000

Product Line B 2,000 2,000

Product Line C $ $ -

(40) (40) $ (1,500)

(10) (10) $ (500) (500) $ -

Business Unit level input

Product Line level input $ (13,629) $ (11,900) (2,720) $

(1,500) $ 1,460 (300) (600) 560 $ $

$ (13,629)

1,490 (200) (400) -

1,450

890 $

Other Income/Expense Net Currency Impact Before Hedging Business Unit Hedging Net Currency Impact Form M impact

$ $ $

1,450 (50) 1,400

$ $ $

560 $

890 $ (25) $ 865 $

(25) $ 535 $

The example above is an extract from the sheet in the Form M. The Business Unit must FX manually enter foreign currency impact by P&L line items as listed in the sheet. Note the FX sum of currency impact across all Product Lines should equal the Business Unit total. The analysis file will not submit to Catalyst until all check figures are less than +/-1. The foreign currency impact on Sales Discount Revenue Sales Excluding Parts is $5,000 at the Business Unit level. At the Product Line level, this impact is split into $3,000 and $2,000 for Product Line A and B, respectively. The currency neutralizednet change for Sales Discount Revenue Sales Excluding Parts at Business Unit level is, therefore, ($6,625) (vs. ($1,625) before adjustment). The currency neutralizedamount represents the change in currency terms of the base period. The net impact of all foreign currency impact is summed up, together with the Business Unit hedging, at the bottom of the sheet. FX

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Transparent Financial Reporting Analysis Manual

Foreign Currency Reconciliation

The net of all currency impact and Business Unit hedging as shown above is fed directly into the Form M as a single line item under the Other Income/ Expensesection as the extract from the Form M below illustrates.

Other (Income) / Expense: Interest Expense Net Currency Impact Affilitate Income Other Income/Expense

Directly from 'FX 'sheet

(210) 1,400 -

(210) 1,400 -

The total impact of foreign currency movements on P&L is represented by the caption Net Currency Impact on the Form M.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Overview


The first step in analyzing financial results for any comparison period is to explain the change in sales & transfers. The defined Kater methodology is to segregate changes in sales & transfers between physical sales volume, published price, sales discount, warranty, transfer yield and foreign currency variances. This breakdown is summarized in the diagram below.

BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS

Warranty (d) Tr ans f er Y ield ( e)

Sales Dis count ( c)

Publis hed Pric e (b)

Phys ical Sales Volume (f )

Foreign Cur rency (a)

Parts Transfers are analyzed discretely in the Form M and are therefore omitted from the Sales & Transfers analysis. The Sales Recon sheet in the Form M examines the total change in net sales and transfers in the following way: 1. Calculate the change in net sales & transfers (base and current) from the respective P&Ls 2. Remove any currency impact on net sales & transfers (a) 3. Reverse out the published price changes * (b) 4. Account for the impact of changes in sales discount rates * (including product, country/region and geographic mix) (c) 5. Remove the impact of changes in warranty * (d) 6. Remove any impact of transfer yield (e) 7. The remainder is the physical sales volume change (f)
* Note impacts are currency neutralized See sheet of the Form M for more details. . FX

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Overview


The next three pages contain a more detailed view of the Sales Recon sheet of the Form M with summary level definitions of each line item.

NOTES
Non-Revenue Sales & Transfers

Net Revenue Sales Net Revenue Sales Current Period Base Period Change Net Non-Revenue Sales & Transfers Current Period Base Period Change Total Net Sales & Transfers Current Period Base Period Change Warranty - Policy Warranty - Standard Currency (575) (3,750) 4,950 924,250 805,250 119,000

Net Revenue Sales: the total dollar value in sales revenue taken from the current and base P&L values. The change in value represents the total revenue sales variance that the Sales Recon sheet breaks down into the chunks used in the Chunk Charts. See Ch 4. Net Non-Revenue Sales & Transfers: represents the value of transfers out and non-revenue sales to other Business Units taken from the current and base P&L values. See Ch 4. Warranty: the impact from c hanges in warranty costs (currency neutral). See Ch 4, Section 2.d. Currency: the net impact on the current sales value from currency movements. See Ch 4, Section 2.a.

206,425 201,425 5,000

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Overview


NOTES

Price Realization (Currency Neutralized)


Price Index - Prime Product/Other (Current Back to Base) Price Index - Parts (Current Back to Base) Base Period Gross Revenue Sales - Excl Parts Gross Revenue Sales - Parts Sales Discount - Excl Parts Sales Discount - Parts Current Period Gross Revenue Sales - Excl Parts (@ base fx) Gross Revenue Sales - Parts (@ base fx) Sales Discount - Excl Parts (@ base fx) Sales Discount - Parts (@ base fx) Published Price Change Published Price Change - Prime Product/Other Published Price Change - Parts Total Published Price Change Sales Discount Rate Change Base Period Sales Discount Rate Current Period Sales Discount Rate Change Sales Discount - Product Mix Sales Discount - Country/Region Mix Sales Discount - Geographic Mix Sales Discount - Geographic Mix - PSMD & SOLAR ONLY Sales Discount - Other Sales Discount - Overall Product Line Rate Calc 400 2,500 N/A 1,849 4,749

Price Realization: includes the impact of changes in published price, discounts, country/region, geographic and product mix (currency neutral). See Ch 4, Section 2.
850,000 15,000 -

Published Price Change: the dollar value impact of the published price changes in the current period over base period. See Ch 4, Section 2.b. Sales Discount Rate Change: the overall impact of changes to the sales discounts offered between periods or the mix of products with differing discounts within a Product Line. See Ch 4, Section 2.c. Sales Discount Country/Region Mix: represents the mix created when products are sold to different countries or regions within a Geographic Region as defined in the Kater MD&A. See Ch 5, Section 3. Sales Discount Geographic Mix: represents the mix created when products are sold to different Geographic Regions as defined in the Kater MD&A. See Ch 5, Section 2. Sales Discount Other: changes in sales discounts that are not captured by country/region mix and geographic mix. See Ch 4. Sales Discount Product Mix: represents the mix created when sales of different product models change within a Product Line. See Ch 5, Section 5.

975,000 6,625 -

16,116 16,116

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Sales Reconciliation: Overview


NOTES

Transfer Yield Total Price Realization Parts Transfers to MPC's (McFee Related) Subtotal - Adjustments to Sales Physical Sales Volume Change $ 21,490 97,510 20,865

Transfer Yield: the impact from changes to the internal transfer prices (currency neutral). See Ch 4, Section 2.e. Parts Transfers to MPC (McFee Related): s represents the change in parts transfers to MPC between base and current P&L values. s These transfers are analyzed separately in the Parts Profit section of the Form M. See Ch 9. Physical Sales Volume Change: represents the change in sales with the impact from published price and sales discount rate removed. See Ch 4, Section 2.f.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Foreign Currency (a)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
War ranty (d) Tr ans f er Y ield ( e) Sales Dis count (c) Publis hed Price ( b) For eign Curr e ncy ( a)

Phy sical Sales V olume (f )

Overview
Sales & transfers, sales discounts and warranty for some Business Units may be denominated in foreign currencies. Changes to the exchange rates will affect the currency converted Business Unit value of sales & transfers, sales discounts and warranty changes. The impact of foreign exchange rates fluctuations on gross sales & transfers, sales discounts and warranty is separately identified and reversed from the current amounts to convert them back to their base period exchange rate. Before the sales variances are calculated, all foreign currency impacts are removed to achieve currency neutralized values - values expressed in current prices, but in the base U.S. Dollar exchange rate.

Calculation Theory
The Form M calculates the foreign currency impact by taking the change in the exchange rate between the current period and the base period for the Business Unit and applying that percentage change to current sales and costs. Current sales and costs must be used, as the currency neutralized current values are used as the starting point in the Sales Reconciliation (reconciles currency neutralized current sales with base sales). The simple example shown below illustrates two methods of calculating the impact of currency movements on the Business Unit profitability. These currency impacts are s manually inputted into the sheet in the Form M. FX This example shows how the currency impact on sales and purchases is calculated. Given a strengthening trend in British Pounds (the foreign currency), we expect a favorable impact on sales as the overseas prices in Pounds are lowered by the strengthening currency (value = $5,000).

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Foreign Currency (a)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
War ranty (d) Tr ans f er Y ield ( e) Sales Dis count (c) Publis hed Price ( b) For eign Curr e ncy ( a)

Phy sical Sales V olume (f )

Illustration: Foreign Currency Impact on Sales


GBP Current exchange rate Base exchange rate Currency Conversion Factor
* GBP has appreciated against USD

Jan'X3 1.610 1.540 [1-(Base exchg. rate/Current exchg. rate)] 0.04348

Feb'X3 1.590 1.540 0.03145

Mar'X3 1.612 1.540 0.04451

USD
Sales Sales @ base rate Currency impact on sales Alternatively Currency impact on sales [Sales @ current x % chg. in exchg. rate] $1,739 $1,258 $2,003 sales/Current exchg. rate) x Base exchg. rate] $40,000 $38,261 $1,739 $40,000 $38,742 $1,258 $45,000 $42,997 $2,003

Total $125,000 [(Current

$5,000

$5,000

To calculate the change, convert current period sales at the base period (or peg) exchange rate. In Mar current sales are $45,000. W hen converted at USD 1.54 to 1 GBP (i.e. the base period X3, exchange rate), current sales in base currency terms, becomes $42,997. The difference of $2,003 [$45,000 - $42,997] represents foreign currency impact on current period sales in Mar X3. Alternatively, you may multiply current sales in base currency terms, by the rate of change from the base period rate. In Mar the exchange rate conversion factor is 0.04451. The impact of X3, exchange rate movement on sales is, therefore, $2,003 [0.04451 x $45,000]. Note the results from both methods are the same. When entering the currency impact into the FXsheet, Business Units need to think of the impact as either favorable or unfavorable to profits Take the above illustration, for example. The upward . movement in British Pounds increases sales dollars, as sales denominated in Pounds translate into more US dollars. Therefore, when entering the impacts into the FX sheet, the impact should be entered as a positive impact.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Foreign Currency (a)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
War ranty (d) Tr ans f er Y ield ( e) Sales Dis count (c) Publis hed Price ( b) For eign Curr e ncy ( a)

Phy sical Sales V olume (f )

The second example shows the foreign currency adjustments as they are treated in the Form M once calculated.
Net Revenue Sales Current Period Base Period Change Position in Sales Recon sheet ---> $ 975,000 850,000 125,000 $ Currency Adjustments 5,000 5,000 $ Net Change Currency Neutralized 970,000 850,000 120,000

Net revenue sales

Currency
Represents the sum of the currency impact on: - gross revenues - sales discounts - warranty (policy and standard)

The foreign currency impact illustrated above is $5,000. This amount is to be manually entered onto the FXsheet in the Form M. Note that currency adjustments apply to the current period only, as the intent is to adjust line items from the current period exchange rates back to the base period exchange rates. Additional commentary on currency impact is shown in the Foreign Exchange Reconciliation chapter above.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Foreign Currency (a)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
War ranty (d) Tr ans f er Y ield ( e) Sales Dis count (c) Publis hed Price ( b) For eign Curr e ncy ( a)

Phy sical Sales V olume (f )

Application
All foreign currency movements must be manually entered in the sheet, using the yellow FX shaded input cells in the sheet. Impacts must be entered for the Business Unit in total, and then split between the Product Lines within the Business Unit.
Net Change Currency Neutralized 125,000 (6,625) 5,000 123,375 (575) (3,750) (4,325)

P&L Change Gross Revenue Sales Excluding Parts Gross Revenue Sales - Parts Sales Discounts - Revenue Sales - Excluding Parts Sales Discounts - Revenue Sales - Parts Non-Revenue Sales & Transfers (Before Warranty) Total Sales & Transfers Business Unit level Policy Warranty input Standard Warranty Total Warranty Material (External Suppliers Only) Transfers In / Intercompany Purchases Variable Labor 125,000 (1,625) 5,000 128,375 (625) (3,750) (4,375)

Currency Adj 5,000 5,000 (50) (50) (2,000) -

Product Line A 3,000 3,000 $ (40) (40) $ (1,500) -

Product Line B 2,000 2,000

Product Line C $ -

(10) (10) $ (500) -

Product Line level input

The example above is an extract from the sheet in the Form M. The Business Unit must FX manually enter foreign currency impact by P&L line items as listed in the sheet. Note the FX sum of foreign currency impact across all Product Lines should equal the Business Unit total. The analysis file will not submit to Catalyst until all check figures are less than +/-1. The foreign currency impact on Sales Discount Revenue Sales Excluding Parts is $5,000 at the Business Unit level. At the Product Line level, this impact is split into $3,000 and $2,000 for Product Line A and B, respectively. The currency neutralizednet change for Sales Discount Revenue Sales Excluding Parts at Business Unit level is, therefore, ($6,625) (vs. ($1,625) before adjustment). The currency neutralizedamount represents the change in currency, in terms of the base period exchange rate. The net impact of all foreign currency impact is summed up, together with the Business Unit Hedging, at the bottom of the sheet. FX

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Published Price (b)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Trans f er Y ield (e) Phys ical Sales Volume (f ) Foreign Curr enc y (a) Warr anty (d)

Sales Disc ount (c )

Publis he d Price ( b)

Overview
This section calculates the impact on Sales & Transfers from changes to the Published Prices from the base period to the current period. The calculation converts the current published price to the base price equivalent for each Product Line to isolate this rate variance within the total sales revenue variance in the Form M.

Calculation Theory
Price indices are populated in the Form M, based on input received from the Business Units at the beginning of each year. A Published Price Index for each Product Line within Business Unit is locked throughout the reporting year. Changes required due to mid-year published price changes can only be made by and with the approval of Corporate Accounting. Should a mid-year price change occur, contact CAS for further details. Published price indices are weighted average indices and are entered into the Form M for each Product Line applicable to the Business Unit. Where a Product Line consists of a series of models (e.g. different Large TTTs models) the average published price of the whole Product Line is entered into the Form M. Do not include Sales Discounts in these entries as Sales Discounts are considered in Section (c) below. Each Product Line has space for an input for the published price index for both Prime Product and Parts and both should be completed where applicable. Where a current published price is $22 and the base published price is $20, the published price adjustment in the Form M ( Sales Recon sheet) rolls the current published price back to the base period price level (i.e. $22/$20 x 100 = 110). This is the number that should be entered in the Form M. Example: Published prices remain unchanged from base level Published prices fall 10% from base level Published prices rise 10% from base level Published price index = 100 Published price index = 90 Published price index = 110

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Published Price (b)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Trans f er Y ield (e) Phys ical Sales Volume (f ) Foreign Curr enc y (a) Warr anty (d)

Sales Disc ount (c )

Publis he d Price ( b)

Illustration: Published Price Index Change

Base period gross revenue sales excluding parts Current period gross revenue sales excluding parts
CHANGE

$1,100 $1,408 $308 $20 $22 110.000 $1,280 [$22/$20 x 100] [$1,408/(110/100)]

Base published price Current published price Published price index Published price index adjusted current gross sales => Change explained by movements in the published price

$128

[$1,408 less $1,280]

The illustration above shows how current period Gross Sales are converted back to the base period equivalent, being $1,280. The difference between the current period Gross Sales and the base period equivalent represents the change in Gross Sales due to movement in published price. The published price index is locked at the beginning of the period at 110.000. Assuming there is no change to the index during the period, the impact of published price change on Gross Sales is $128. This is the difference between the current period Gross Sales, $1,408, and the base period equivalent, $1,280.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Published Price (b)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Trans f er Y ield (e) Phys ical Sales Volume (f ) Foreign Curr enc y (a) Warr anty (d)

Sales Disc ount (c )

Publis he d Price ( b)

Application

Net Revenue Sales

Non-Revenue Sales & Transfers

Total Sales & Transfers

Price Realization (Currency Neutralized)


PriceIndex - Prime Pro duct/Other (Current Back to Base) PriceIndex - Parts (Current Back to Base) Base Pe riod Gross R evenue Sales - Excl Parts Gross R evenue Sales - Parts Sales Discount - Excl Parts Sales Discount - Parts Current Pe riod Gross R evenue Sales - Excl Parts (@base fx) Gross R evenue Sales - Parts (@base fx) Sales Discount - Excl Parts (@base fx) Sales Discount - Parts (@b fx) ase Published Price Change Published Price Change - Prime Prod uct/Other Published Price Change - Parts Total Published Price Cha nge 16,116

Product Line Product Line Product Line A B C Total ** Price Index to be calculated at base period peg rates 1 02 102 98 1 00 1 02 102

8 50,000 -

15,000 -

15,000

850,000 500,0 00 7,5 00 --

100,0 00 250,000 5,000 -

850,000 -

2,5 00 -

15,000 -

9 75,000 6,625 -

975,000 6,625

-650,0 00 6,7 50 --

250,000 3,000 -

75,0 00 1,8 75 -

975,000 6,625 -

16,116

-16,116 45 12,7

4,902

31) (1,5

16,116 16,116

Above is an extract from the Sales Reconsheet in the Form M. The published price index for Prime Product/Other of Product Line A, shown on the top left corner (i.e. 102), represents a 2% increase in prices [(102/100 -1] that the Form M uses to adjust the current price back to base price equivalent. The Form M automatically calculates the impact of published price change in the Sales Reconsheet to be $12,745 [$650,000 ($650,000/(102/100)]. The Business Unit impact is calculated by adding up all of the Product Line calculations.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Sales Discount (c)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Phy sic al Sales V olume (f ) Foreign Currency (a) Published Pr ice (b) Transf er Yield (e)

Warranty (d)

Sale s Dis count (c)

Overview
This section calculates the impact of a change in sales discounts on the sales value.

Calculation Theory
The sales discount rate change represents the overall impact of changes to discount levels between comparison periods. This change in sales discounts is driven by a change in country/region, geographic, or product mix as well as the general level of discounts offered. Sales Discounts Country/region mix on sales represents the mix created when products are sold to different countries or regions within Geographic Regions as defined in the Kater MD&A. Country/region mix is calculated by region at the model level within Product Line. The Product Line calculations are then added up to arrive at a Business Unit level Country/Region mix. See the chapter on Mix for further detail on the calculation methodologies. Sales Discounts Geographic mix on sales represents the mix created when products are sold to different Geographic Regions as defined in the Kater MD&A and is only appropriate for Business Units with world-wide marketing responsibilities, such as PSMD and Solar. Geographic mix is calculated by region at the model level within Product Line and added up to arrive at the Business Unit mix amount. See the chapter on Mix for further detail on the calculation methodologies. Sales Discounts Product mix represents the mix created when sales of different product models change within a Product Line. This mix is calculated at the Product Line level and added up to arrive at the Business unit mix amount. See the chapter on Mix for further detail on the calculation methodologies. Sales Discounts Other represents the difference between the overall sales discount rate calculation and the calculations of country/region, geographic and product mix.

The calculation of the sales discount variance compares: Current sales discount as a percentage of current sales revenue (adjusted for published price
changes) - against Base sales discount as a percentage of the base sales revenue.

The change in sales discount rate is applied to current period gross sales adjusted to base period prices. The sales discount rate calculations are performed at the Product Line level. The Product Line calculations are then added to arrive at the Business Unit level impact. The illustration below shows a simplified sales discount variance calculation.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Sales Discount (c)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Phy sic al Sales V olume (f ) Foreign Currency (a) Published Pr ice (b) Transf er Yield (e)

Warranty (d)

Sale s Dis count (c)

Illustration: Sales Discount Variance


BASE

Gross sales value ** Sale discounts Net sales


Sales discount rate CURRENT

$1,100 ($110) $990 10.00% [ $110 / $1,100 ]

Gross sales value ** Sale discounts Net sales


Sales discount rate

$1,408 ($220) $1,188 17.19% [ $220 / $1,280 ** ] $1,280 -7.2% [ Change in sales discount rate x Current sales (less published price change) ]

Current sales value (less published


price change) **

Change in sales discount rate

Sales discount variance

($92)

[ -7.2% x $1,280 ]

** The base period sales and current period sales values are continued from the published price index section.

The above example assumes no currency impact (accounted for in part (a) of the pie chart) and illustrates how the change in Net Sales can be explained by sales discount. The example above shows the discount rate for the base period as 10% [$110/$1,100], being the base period sales discount divided by gross sales value. For the current period, the sales discount is calculated as current period sales discount divided by current period sales value minus published price change, 17.19% [$220/$1,280]. The example follows the change in sales discount, -7.2%, which is multiplied by current period sales value minus published price change to arrive at the impact of change in sales discount, ($92) [-7.2% x $1,280].

Application
The Sales Discount amounts in the Form M are automatically populated. The movement in total of the discount percentage between the base and current values is also automated. In the Sales Reconsheet, the sales discount variance is calculated using the methodology that is illustrated in the Calculation Theory section above. If appropriate, sales discount should also be split between Country/region, Geographic and product mix.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Sales Discount (c)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Phy sic al Sales V olume (f ) Foreign Currency (a) Published Pr ice (b) Transf er Yield (e)

Warranty (d)

Sale s Dis count (c)

Below is a sample extract from the Sales Recon sheet of the Form M.

Net Revenue Sales

Non-Revenue Sales & Transfers

Total Sales & Transfers

Product Line Product Line A B

Product Line C

Price Realization (Currency Neutralized)


Price Index - Prime Product/Other (Current Back to Base) Price Index - Parts (Current Back to Base) Base Period Gross Revenue Sales - Excl Parts Gross Revenue Sales - Parts Sales Discount - Excl Parts Sales Discount - Parts Current Period Gross Revenue Sales - Excl Parts (@ base fx) Gross Revenue Sales - Parts (@ base fx) Sales Discount - Excl Parts (@ base fx) Sales Discount - Parts (@ base fx) Published Price Change Published Price Change - Prime Product/Other Published Price Change - Parts Total Published Price Change Sales Discount Rate Change Base Period Sales Discount Rate Current Period Sales Discount Rate Change Sales Discount - Product Mix Sales Discount - Country/Region Mix Sales Discount - Geographic Mix Sales Discount - Geographic Mix - PSMD & SOLAR ONLY Sales Discount - Other Sales Discount - Overall Product Line Rate Calc 400 2,500 N/A 1,849 4,749

** Price Index to be calculated at base period pe 102 102 98 102 102 100

850,000 15,000 -

850,000 15,000 -

500,000 7,500 -

250,000 5,000 -

100,000 2,500 -

975,000 6,625 -

975,000 6,625 -

650,000 6,750 -

250,000 3,000 -

75,000 1,875 -

16,116 16,116

16,116 16,116

12,745 12,745

4,902 4,902

(1,531) (1,531)

Enter Mix impacts by Product Line 400 2,500 N/A 1,849 4,749

0.0150 0.0106 0.0044 300 1,500

0.0200 0.0122 0.0078 300 1,000

0.0250 0.0245 0.0005 (200)

1,009 2,809

602 1,902

238 38

The sales discounts feed into the Form M sheet as part of the overall Price Realization variance. The change in sales discount rates for Product Line C is 0.0005 and the current sales adjusted for published price change is $76,531 [being $75,000 ($1,531)]. The Form M automatically calculates the impact of sales discount change for Product Line C to be $38 [$76,531 x 0.0005]. The Business Unit impact is calculated by adding up all of the Product Line calculations. Business Units must also enter, if appropriate, any product mix impact on sales by Product Lines in the yellow shaded cells as shown above.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Warranty (d)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Foreign Cur rency (a) Published Pric e (b) Phy sical Sales V olume (f ) Transf er Yield (e)

Sales Discount (c)

War r anty (d)

Overview
There are two types of warranty: policy warranty and standard warranty. Policy warranty and standard warranty are calculated at the Product Line level in the Form M ( Base P&Land Current P&Lsheets) for the Product Lines relevant to the Business Unit. The total warranty amounts for all Product Lines is summed to arrive at a Business Unit level amount.

Calculation Theory
The change in warranty impact is calculated by comparing the change in P&L values from the base period to the current period. This change is further adjusted for impacts of foreign exchange rates fluctuation to arrive at a currency neutralized amount. The warranty change is adjusted to reflect the exchange rate in the base period.

Application
The total warranty costs are used in the Form M as follows: a). Base period and current period warranty values are prepopulated at a Product Line Level in the Base Period and Current Period P&L tabs. b). Product Line warranty break down is totaled at a Business Unit level on P&L tabs. c). The total warranty values feed into the sheet. FX d). The foreign currency impact is removed on both the Business Unit level in total and on an individual Product Line level to obtain currency neutralized warranty values. e). The currency neutralized values feed into the Sales Recon and Form M.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Warranty (d)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Foreign Cur rency (a) Published Pric e (b) Phy sical Sales V olume (f ) Transf er Yield (e)

Sales Discount (c)

War r anty (d)

Both types of warranty are automatically imported into the Base P&Land Current P&L sheets in the Form M.
Product Line A Current Period 650,000 Gross Revenue Sales (USDN) Machines Engines Other Total Sales Discounts - Revenue Sales Machines Engines Other Total Price Structure (as included above) Policy Warranty Standard Warranty $ 16,625 - Parts 16,625 8,313 4,875 29,250 $ $ 975,000 - Parts 975,000 9,750 9,750 4,875 3,250 19,500 $ 5,000 5,000 $ 2,500 1,250 7,500 1,875 1,875 938 375 2,250 $ 650,000 $ 250,000 250,000 $ 75,000 75,000 Product Line B Product Line C

The illustration above is an extract from the Current P&L Both types of warranty are . summed up across all relevant Product Lines to arrive at the Business Unit level amounts $4,875 and $29,250 for policy warranty and standard warranty, respectively. The change in warranty is calculated in the FXsheet in the Form M as the difference between the current period and the base period P&L values.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Warranty (d)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Foreign Cur rency (a) Published Pric e (b) Phy sical Sales V olume (f ) Transf er Yield (e)

Sales Discount (c)

War r anty (d)

P&L Change Policy W arranty Standard W arranty Total Warranty (625) (3,750) (4,375)

Currency Adj (50) (50)

Net Change Currency Neutralized (575) (3,750) (4,325)

Product Line A

Product Line B

Product Line C -

(40) (40) $

(10) (10) $

The example above is an extract from the FXsheet. The changes in policy warranty and standard warranty are automatically calculated as ($625) and ($3,750), respectively being the difference between the current period values shown above and the Base Period. The example also illustrates how the warranty is adjusted for foreign exchange rates fluctuations (refer to the Foreign Exchange Reconciliation section for more information on foreign currency impact calculations). The foreign currency impact on the policy warranty costs to Product Line A and Product Line B are ($40) and ($10), respectively. The warranty costs adjusted for foreign currency impact (currency neutralized) are automatically linked to the Sales Recon sheet in the Form M.
NonRevenue Sales & Transfers

Form M impact Warranty - Policy Warranty - Standard

Net Revenue Sales (575) (3,750)

Total Sales & Product Line Product Line Product Line Transfers A B C (575) (3,750) (710) (4,500) 10 125 750

The above example is an extract from the Sales Recon sheet in the Form M and illustrates the currency neutralized warranty costs from the sheet. These amounts would then flow FX from the Sales Recon sheet to the Form M as shown below.
Total Corpora te Profit / (Loss) Change Excluding 6 Sigma Benefits

CORPORATE PROFIT IMPACT


Volume/Price/Mix: Sales & Transfers Volume Price Realiza tion Transfer Yield Warranty - Policy Warranty - Standard Mix - Between Product Lin es Mix - Within Product Lines (by mod el) Directly from 'Sales Recon' sheet

**6 Sigma**

41,759 20,865 130 (575) (3,750) 5,244 (6,200)

4 1,759 2 0,865 130 (575) (3 ,750) 5 ,244 (6 ,200)

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Transfer Yield (e)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Publis hed Pric e (b) Foreign Currency (a) Phy sic al Sales V olume (f ) Trans fe r Yie ld (e )

Sales Dis count (c)

War ranty ( d)

Overview
While the Price Realization calculations cover variances on sales made externally by a Business Unit in the Form M, internal transfers and inter-company sales are dealt with separately in the Transfer Out/Inter-company Sales sections. Across all Business Units, on a consolidated basis, all transfer yield and transfer cost variance will total to zero. An individual Business Unit Form M will show a variance that will be offset in opposite variances by another Business Unit. Transfer yield represents a portion of the change in non-revenue sales that can be explained by changes in internal transfer prices charged by a Business Unit on internal sales to other Business Units. The Form M uses a matrix in the Xfers-Intercosheet to capture the transfer price changes between Units. Each Business Unit will have a transfer price index relating to both internal purchases from, and internal sales to, all other Business Units. Component Product Lines are responsible for providing the index for all of their respective sales and transfers. Marketing Business Units are responsible for providing the index for all of their respective inter-company purchases (purchases from product groups). Each Business Unit will have a transfer price index relating to both internal sales and purchases. The transfer yield forms part of the total Price Realization in the Form M.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Transfer Yield (e)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Publis hed Pric e (b) Foreign Currency (a) Phy sic al Sales V olume (f ) Trans fe r Yie ld (e )

Sales Dis count (c)

War ranty ( d)

Calculation Theory
Step 1: The Transfer Price Matrix The transfer yield and transfer cost variance calculations center around the matrix in the Xfers Intercosheet. This matrix is pre -populated in the Form M and captures all the transfer price indices between the Business Units. Using a two-dimensional matrix ensures that one Business Unit yield is another Business Unit cost. s s A simplified example is shown below using two Business Units.

Illustration: Inter-company Transfers


BUA BUA BUB 103.00 BUB 110.00

For BU B

Transfer Price $ value


$10,000 $10,000

Current inter-company sales - to BUA


For BU A

Index
103.00

Adj'd value
$9,709 $9,709 $291

Transfer Price $ value


$13,000 $13,000

Current inter-company sales - to BUB

Index
110.00

Adj'd value
$11,818 $11,818 $1,182

The indices shown are used by the Form M to roll current transfer prices back to base period levels. These transfer price indices are very similar to the factors used in adjusting current published prices to base period published prices. The transfer price index of 110 in the example shown above converts a current internal sales value of $13,000 to a base period equivalent of $11,818 [$13,000/(110/100)]. This conversion results in a transfer yield of $1,182 attributable to the internal transfer for BUA. Meanwhile BUB will have a transfer cost variance of $1,182.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Transfer Yield (e)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Publis hed Pric e (b) Foreign Currency (a) Phy sic al Sales V olume (f ) Trans fe r Yie ld (e )

Sales Dis count (c)

War ranty ( d)

Where a current transfer price is $22 and the base transfer price is $20, the transfer price index is 110 (i.e. $22/$20 x 100). Example: Prices remain unchanged from base level Prices fall 10% from base Prices rise 10% from base Transfer Price Index = 100 Transfer Price Index = 90 Transfer Price Index = 110

In total, the consolidated profit figure will not be affected by transfer price changes. Each Business Unit profit figure will be affected by both transfer yield and transfer cost variance. s Step 2: Current Period Transfers Out / Inter-company Sales In the Trans-Interco - Yieldsheet, the Business Unit must enter the level of inter-company sales and transfers made to each of the other Business Units. Many of the input cells will be zero. The inputs should represent current period inter-company sales, before any currency impact adjustment. Inter-company sales to Business Unit 1 Business Unit 2 Current Value $100,000 $50,000 $150,000 Price Index 110 110 Base Value $90,909 $45,455 $136,364

Transfer yield variance

$13,636

The total transfer yield of $13,636 feeds into the Form M summary. Step 3: Transfer Yield split by Product Line The total transfer yield ($13,636 in the example above) is further split across the relevant Product Lines in each Business Unit according to the Product Line mix of internal transfers.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Transfer Yield (e)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Publis hed Pric e (b) Foreign Currency (a) Phy sic al Sales V olume (f ) Trans fe r Yie ld (e )

Sales Dis count (c)

War ranty ( d)

Application
Step 1: The Transfer Price Matrix Shown below is an extract from the Transfer Price Matrix in the Form M. Note that the sheet will highlight in yellow, the row and column applicable to the facility submitting the analysis. In the example below, Business Unit 2 is selected as the submitting facility. In the calculation of transfer yield, the Form M reads across the highlighted row. For example, assume that Business Unit 2 transfers to Business Unit 1. The Form M will read across the Business Unit 2 row, to the column where Business Unit 1 intersects it. The index that will be used is circled below.
* Screenshot from the Xfers Interco sheet.

BUs I/Co PU RCHASES

With Facility

Business Unit 1

Business Unit 2

Business Unit 3

Form M Facility Transfers Out (sales to other BUs) Business Unit 1 Business Unit 2 Business Unit 3

110.0000 110.0000 110.0000

110.0000 110.0000 110.0000

110.0000 110.0000 110.0000

BUs I/Co SALES

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Transfer Yield (e)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Publis hed Pric e (b) Foreign Currency (a) Phy sic al Sales V olume (f ) Trans fe r Yie ld (e )

Sales Dis count (c)

War ranty ( d)

Step 2: Current Period Transfers Out / Inter-company Sales Business Units should enter the Transfers Out/Inter-company Sales into the yellow cells in the Transfers-Interco Yieldsheet. The Transfers Out/Inter-company Sales values should be entered before currency adjustments. The currency impact on Transfers Out/Inter company Sales is captured on the FXsheet (see detailed description in sub-section (a) above). This only impacts transactions that are non USD based. Transfer yield calculations for transfers to each relevant Business Unit is defined as:
Current period transfers out [Current period transfers out / (Transfer price index / 100)]

The Business Unit impact is the addition of all transfer yield calculations, adjusted for currency movements. An example is provided below.
* Example screenshot from the Form M: Inter-company sales

Transfers Out / Current Period Transfers Out / Intercompany Sales Intercompany Sales Factor Form M Transfer Yield

Articulated Truck Asia Pacific Div Admin BCP Carter Machinery Cast Metals Cat Log Client Services Cat Logistics FT Services Track-Type Tractors Central Legal Entity Control Subtotal Transfers Within Business Unit

150 700 200 375 1,425 -

110.0 110.0 110.0 110.0 110.0 110.0 110.0 110.0 110.0

14 64 18 34 130 -

Total Per P&L's Check (must = 0) Currency Adjustment Net Form M Impact

1,425 Form M Impact 130

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Transfer Yield (e)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Publis hed Pric e (b) Foreign Currency (a) Phy sic al Sales V olume (f ) Trans fe r Yie ld (e )

Sales Dis count (c)

War ranty ( d)

The value circled in red flows into the Form M sheet. It represents the total Business Unit impact from changes to the transfer prices charged to other Business Units in the current period. This value is currency neutralized i.e. all values are adjusted to the base period exchange rate in the sheet prior to this transfer price calculation. FX Step 3: Transfer Yield split by Product Line The total transfer yield value calculated by the Business Unit must be manually split by Product Line according to the Product Line mix of internal transfers, and entered into the Sales Recon sheet of the Form M.
Non-Revenue Sales & Transfers

Net Revenue Sales Sales Discount Rate Change Base Period Sales Discount Rate Current Period Sales Discount Rate Change Sales Discount - Product Mix Discount - Country/Region Mix Sales Discount - Geographic Mix Sales Discount - Geographic Mix - PSMD & SOLAR ONLY Sales Discount - Other Sales Discount - Overall Product Line Rate Calc Transfer Yield 400 2,500 N/A 1,849 4,749

Total Sales & Transfers

Product Line A

Product Line Product Line B C

0.0150 EnterTransfer Yield by Product Line 400 2,500 N/A 1,849 4,749 130 130 1,009 2,809 110 0.0106 0.0044 300 1,500

0.0200 0.0122 0.0078 300 1,000

0.0250 0.0245 0.0005 (200) Sales

602 1,902 10

238 38 10

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Physical Sales Volume (f)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Sales Discount (c) Published Price (b) Foreign Currenc y ( a) Phys ical Sale s Transf er Yield (e) Volum e ( f)

War ranty ( d)

Overview
Physical Sales Volume represents the change in sales with the impact from Published Price and Sales Discount Rate removed.

Calculation Theory
Illustration: Physical Sales Volume Change
Net sales & transfers - base Net sales & transfers - current Total net sales & transfers change Less: Currency impact Published price change Sales discount variance Warranty Physical sales volume change 1,000 1,200 200

(20) 50 10 30 130

Price Realization

In the above example, there is a favorable change in net sales and transfers of $200 [$1,200 current period vs. $1,000 in the base period]. The net impact of foreign currency movements and price realization is a $70 [($20)+$50+$10+$30] favorable impact. The Physical Sales Volume change is $130 [$200 - $70].

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Physical Sales Volume (f)


BREAK DOW N OF CHANGES IN NET SALES & TRANSFERS
Sales Discount (c) Published Price (b) Foreign Currenc y ( a) Phys ical Sale s Transf er Yield (e) Volum e ( f)

War ranty ( d)

Application
The Physical Sales Volume Change is automatically calculated in the Sales Reconsheet in the Form M.

Net Revenue Sales Total Price Realization Parts Transfers to MPC's (McFee Related) Subtotal - Adjustments to Sales Physical Sales Volume Change $ 21,490 97,510 20,865

Non-Revenue Sales & Transfers 130 5,000 5,130 $

Total Sales & Transfers 20,995 5,000 26,620 97,380

Product Line A 15,664 5,000 18,414 $

Product Line Product Line B C 6,814 2,000 10,814 (8,814) $ (1,482) (2,000) (2,607) (22,893)

(130) $

129,086 $

The example above is an extract from the Sales Reconsheet. The following two sections will illustrate how Physical Sales Volume Change is used in the calculation of Volume Impact on Margin in the Form M.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Base Period Variable Margin Percentage


Overview
Once the physical sales volume change is calculated, the base period variable margin percentage is applied to the change to arrive at the Volume Impact on Margin.

Calculation Theory
The Form M uses base period Net Sales & Transfers and Gross Margin as the starting point in calculating the base period Variable Margin Percentage that will be applied to the change in physical sales volume. Several adjustments must be made to each of these figures prior to calculating the Variable Margin Percentage. W arranty and Parts Transfers to MPC's are removed from Net Sales & Transfers. Each of these items is analyzed discretely in other areas of the Form M, and thus should not be included in the calculation of the Variable Margin Percentage. Multiple adjustments are made to gross margin as well. The impact of Warranty, Inventory Adjustments, RSSM's, Period Cost of Sales, and Parts Margin are all removed from Gross Margin. Once these adjustments are complete, the Variable Margin can be calculated. It is important to emphasize that the Variable Margin calculated in the Form M has been adjusted to exclude certain variable items that are analyzed discretely elsewhere in the Form M.

Application
The base period Variable Margin Percentage for the overall Business Unit and for all Product Lines relevant to the Business Unit are calculated automatically in the Volumesheet in the Form M, a screen shot of which is shown below.

Base Period Base Period Variable Margin Rate Net Sales & Transfers Add Back: W arranty Parts Transfers to MPC's (McFee Related) Net Sales & Transfers before W arranty and Parts Transfers Base Period Variable Margin Base Period Gross Margin Total W arranty Inventory Adjustments/RSSM's Period Cost of Sales Incurred Period Cost Absorbtion Impact on Margin Rate Parts Margin (McFee Related) Variable Margin Base Period Variable Margin % $ $ 1,006,675 $

Product Line A

Product Line B

Product Line C

600,950

286,725

119,000

29,750 (200,000) 836,425 $

17,500 (125,000) 493,450 $

8,750 (50,000) 245,475 $

3,500 (25,000) 97,500

326,100 29,750 850 102,086 (110) (100,000) 358,676 42.9%

210,333 $ 17,500 500 58,593 (220) (62,500) 224,205 $ 45.4%

86,018 $ 8,750 300 30,106 (25,000) 100,174 $ 40.8%

29,750 3,500 50 13,388 110 (12,500) 34,298 35.2%

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Base Period Variable Margin Percentage


The above is an extract from the Volumesheet. In the calculations for the base period Variable Margin Percentage, W arranty costs, Inventory Adjustments, RSSM Period Cost of Sales Incurred, s, Inventory Period Cost Effect, and Parts Cost of Sales are all removed from Gross Margin to arrive at a Variable Margin. The base period variable margins are then divided by the Net Sales & Transfers before Warranty and Parts Transfers to derive the base period Variable Margin Percentage. In the example, the overall Business Unit percentage is calculated as 42.9% [$358,676 variable margin/$836,425 net sales]. The Base Period Gross Margin values are taken from the automatically populated Base P&L sheet. Variable Margin is calculated at both the Business Unit level and the Product Line level for use in the volume and Mix between Product Lines calculations which are detailed in the following chapter on Mix.

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Transparent Financial Reporting Analysis Manual

Sales Reconciliation: Volume Impact on Margin


Overview
The profit impact from changes in physical sales volume is an important piece of the explanation of changes in results. This profit impact represents the margin impact from increasing or decreasing sales.

Calculation Theory
The calculation of the Volume Impact on Margin is the product of the Physical Sales Volume Change and the base period Variable Margin Percentage. See the screen shot in the Application section below.

Application
The Volume Impact on Margin is calculated automatically in the Volumesheet in the Form M. An example extract from the Volume' sheet is as follows:

Base Period Base Period Variable Margin Rate Net Sales & Transfers Add Back: Warranty Parts Transfers to MPC's (McFee Related) Net Sales & Transfers before Warranty and Parts Transfers Base Period Variable Margin Volume impact on margin = Base Period Gross Mar gin Total Warranty Inventory Adjustments/ physical sales volume change RSSM's (from the ales Recon?sheet ) Period Cost of Sales In curred x Period Cost AbsorbtionImpact on% (preceding section, margin Margin Rate Parts Margin (McFee R elated) 42.9%) Variable Margin Base Period Variable Margin % Volume Impact on Margin (Form M - Overall Business Unit) $ $ 1,006,675

Product Line A

Product Line B

Product Line C

$ 600,950 $

286,725 $ 119,000

29,750 (200,000) 836,425

17,500 8,750 (125,000) (50,000) $ 493,450 $ 245,475 $

3,500 (25,000) 97,500

326,100 29,750 850 102,086 (110) (100,000) 358,676 42.9% 41,759

210,333 $ 86,018 $ 17,500 8,750 500 300 58,593 30,106 (220) (62,500) (25,000) 224,205 $ 100,174 $ 45.4% 40.8%

29,750 3,500 50 13,388 110 (12,500) 34,298 35.2%

The Volume Impact on Margin is calculated by Product Lines within Business Unit and total Business Unit. It feeds directly into the Form M as a contribution to the overall change in the Business Unit profitability. s The difference between Overall Business Unit and Additive Product Line volume impact on margin is the Mix between Product Lines. Mix between Product Lines represents the impact on variable margin (base vs. current period) driven by Product Line weighting of sales and transfers as a percentage of total Business Unit sales and transfers. The following chapter examines Mix in detail.

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Transparent Financial Reporting Analysis Manual

Mix: Overview
Mix is central to the analysis of the performance of Business Units that sell multiple products or operate in a number of different markets. A Mix captures how the performance of a Business Unit is affected when the Unit sells more or less of each product or to each geographic region or country. There are a number of categories of Mix used in the Form M. Individual Business Units may or may not be exposed to each type. The Form M examines 6 mix types in two categories, as follows: Sales Discount related 1. Country/Region Mix: represents the mix created when products are sold to different countries or regions within a Geographic Region as defined in the Kater MD&A.

2. Geographic Mix: represents the mix created when products are sold to different Geographic Regions as defined in the Kater MD&A. 3. 4. Geographic Mix on Transfers: represents the mix created when products are tranferred to different Geographic Regions as defined in the Kater MD&A. Product Mix: represents the mix created when sales of different product models change within a Product Line. Product Mix Impact on Sales is considered physical sales volume in the Form M.

Margin related 1. Mix Between Product Lines: represents the impact on variable margin (base vs. current period) driven by Product Line weighting of sales and transfers as a percentage of total Business Unit sales and transfers.

2. Mix within Product Line:


a. Business Units with Revenue Sales: represents the impact on variable margin (base vs. current) driven by model weighting of gross sales as a percentage of total product line gross sales. Business Units with Non-revenue Sales & Transfers: represents the impact on variable margin (base vs. current period) driven by changes in both model and geographic weighting of sales and transfers as a percentage of total product line sales and transfers.

b.

Each type of Mix is discussed in detail in the sub-sections below.

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Transparent Financial Reporting Analysis Manual

Mix: Sales Discount - Geographic Mix


Overview
Geographic Mix represents the mix created when products are sold to different Geographic Regions as defined in the Kater MD&A. Geographic Mix is a sales-related mix as it captures the impact of different pricing strategies for the same product sold into different Geographic Regions. With a few exceptions, geographic mix does not exist within the Marketing Business Units. Note, however, PSMD, Solar and other similar Business Units with world-wide marketing responsibilities are the only Units that may have Geographic Mix at the Business Unit level.

Calculation Theory
Geographic Mix is defined as:
Sum of the Change in weight x Sales discount rate gap x Total Model current Gross salesfor each Geographic Region * Note: All current period amounts must be reflected at base period currency terms and price levels.

The mix calculations are best described using the illustrative example included below.
Illustration:Geographic Mix
TOTAL MODEL
$100,000 $11,000 $89,000 11.000% 100.00%

* (GR deno tes Geog raphic Reg io n ) Cu rrent Gross sa le s a Sales discount Net sales
a

GR A
$50,000 $7,500 $42,500 15.000% 50.00%

GRB
$10 ,000 $1 ,500 $8 ,500 15.000% 10 .00%

GRC
$40,0 00 $2,0 00 $38,0 00 5.00 0% 40.0 0%

Sales discount rate W eight - sales Base Gross sa le s a Sales discount Net sales
a

$20,000 $2,000 $18,000 10.000% 20.00%

$60 ,000 $12 ,000 $48 ,000 20.000% 60 .00%

$20,0 00 $1,0 00 $19,0 00 5.00 0% 20.0 0%

$100,000 $15,000 $85,000 15.000% 100.00%

Averag e sales discount rate for the model

Sales discount rate W eight - sales


a

denot es price has been adjusted for changes in published price.

Mix Calculatio ns Base perio d sales discount rate Avera ge sales discount rate for the Mode l Sales discount rate gap [Avg. rate - Ba se rate] Base weight Current we ig ht Change in weigh t [Curr. weight - Base weight] Gro ss sa le s a (Model) Mix

10.000% 15.000% 5.000% 20.00% 50.00% 30.00% $100,000.00 $ 1,50 0.00

20.000% 15.000% -5.000% 60 .00% 10 .00% -50 .00% $1 00,00 0.00 $2,500.00

5.00 0% 15.00 0% 10.00 0% 20.0 0% 40.0 0% 20.0 0% $100,000.00 $2,000.00 $ 6,000 .00 The product line tota l is th e sum of all mod els within a product line

The example above considers a Model with sales to three Geographic Regions, GRA , GRB and GRC, and assumes no currency and published price variance.

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Transparent Financial Reporting Analysis Manual

Mix: Sales Discount - Geographic Mix


Mix Calculation The combination (mix) of gross sales in each Geographic Region has changed in the current period from the mix in the base period. This change is shown as the Change in weightof 30.00%, -50.00% and 20.00% for the three Geographic Regions, respectively. The differences ( Sales discount rate gaps between the base period discount rates for each ) region and the model as a whole are also calculated. Sales discount rate gaps for GRA, GR B and GRC are 5.000%, 5.000% and 10.000%, respectively. Using the methodology outlined above, the Geographic Mix for GRA, GRB and GRC are calculated to be $1,500.00, $2,500.00, $2,000.00, respectively. The resulting Geographic mix impact on the model as a whole is $6,000.00. The Mix result shows the Business Unit in the illustration has sold relatively more in GRA and GRC in the current period than in the base period. Both GAA and GRC have base period discount rates that are lower than the overall model base period discount rate. Selling relatively more in the two lower-than-average discount rate regions results in a favorable Geographic mix impact of $1,500.00 and $2000.00, respectively. Finally, the Business Unit sold relatively less in GRB , which has a base period discount rate greater than the base period overall model average. This also results in a favorable Geographic mix impact of $2,500.00. The resulting impact is a positive Geographic mix of $6,000.00 for the model as a whole in this example. This calculation is applied to all models within a product line.

Application
The numeric illustration above demonstrates how the Geographic Mix is calculated for a single model. Business Units must calculate the Geographic Mix for each Product Line by model and enter the results manually in the yellow shaded cells in the Form M as shown below.

Net Revenue Sales

Non-Revenue Sales & Transfers

Total Sales & Transfers

Product Line Product Line Product Line A B C ** Price Index to be calculated at base period pe

Price Realization (Currency Neutralized)


Sales Discount Rate Change Base Period Sales Discount Rate Current Period Sales Discount Rate Change Sales Discount - Product Mix Sales Discount - Country/Region Mix Sales Discount - Geographic Mix Sales Discount - Geographic Mix - PSMD & SOLAR ONLY Sales Discount - Other Sales Discount - Overall Product Line Rate Calc Transfer Yield Total Price Realization 20,865 400 2,500 N/A 1,849 4,749 130 130 Enter Geographic Mix by Product Line 400 2,500 N/A 1,849 4,749 130 20,995

0.0150 0.0106 0.0044 300 1,500

0.0200 0.0122 0.0078 300 1,000

0.0250 0.0245 0.0005 (200)

1,009 2,809

602 1,902

238 38

110 15,664

10 6,814

10 (1,482)

The example extract is taken from the Sales Reconsheet in the Form M. calculations are included in the Price Realization line item in the Form M.

The mix

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Transparent Financial Reporting Analysis Manual

Mix: Sales Discount - Country/Region Mix


Overview
Country/Region Mix represents the mix created when products are sold to different countries or regions within a Geographic Region as defined in the Kater MD&A. Country/Region Mix is a sales-related mix as it captures the impact of different pricing strategies for the same model sold into different countries or regions. Marketing divisions sell within their own geographic region. However, different countries and regions exist within each geographic region. Country/Region mix may result from different sales discounts being offered to different national or regional markets. Within EAME, for example, sales discounts or variances may vary between regions (Europe and the Middle East) and countries (e.g. U.K. and Italy).

Calculation Theory
Country/Region Mix is defined as:
Sum of the Change in weight x Sales discount rate gap x Total Model current Gross salesfor each Country/Region * Note: All current period amounts must be reflected at base period currency terms and price levels.

The calculations are best described using the illustrative example included below.
Illustration:Country/Region Mix
TOTAL MODEL
$1 00,00 0 $ 11,00 0 $ 89,00 0 1 1.000 % 1 00.00 %

* (CTRY d enote s Country) Current Gross salesa Sales discount Net sales
a

CTRY A
$35,000 $5,250 $29,750 15.000% 35.00%

CTRY B
$25 ,000 $3 ,750 $21 ,250 15.000% 25 .00%

CTRYC
$4 0,000 $ 2,000 $3 8,000 5 .000% 4 0.00%

Sale discount rate W eight - sa le s Base Gross salesa Sales discount Net sales
a

$15,000 $1,500 $13,500 10.000% 13.64%

$55 ,000 $11 ,000 $44 ,000 20.000% 50 .00%

$4 0,000 $ 2,000 $3 8,000 5 .000% 3 6.36%

$1 10,00 0 $ 14,50 0 $ 95,50 0 1 3.182 % 1 00.00 %

Average sales d iscou nt rate for th e model

Sales discount rate W eight - sa le s


a

denot es price has been adjust ed f or changes in published price.

Mix Calculations Base period sa le s d iscou nt rate Average sales discount rate for the Model Sales discount rate gap [Avg. rate - Base rate] Base weight Current weight Cha nge in weight [Curr. weight - Base weigh t] Gross sales (Model) Mix
a

10.000% 13.182% 3.182% 13.64% 35.00% 21.36% $10 0,000 .00 $6 79.75

20.000% 13.182% -6.818% 50 .00% 25 .00% -25 .00% $ 100,0 00.00 $1,704.5 5

5 .000% 13 .182% 8 .182% 3 6.36% 4 0.00% 3.64% $ 100,0 00.00 $297.52 $2,681.82 The produ ct line total is the sum of a ll models within a p roduct lin e

The example above considers a Model with sales to three countries, CTRY A, CTRY B and CTRYC, and assumes no currency and published price variance.

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Transparent Financial Reporting Analysis Manual

Mix: Sales Discount - Country/Region Mix


Mix Calculation The combination (mix) of gross sales in each country has changed in the current period from the mix in the base period. This change is shown as the Change in weightof 21.36%, 25.00% and 3.64% for the three countries, respectively. The differences ( Sales discount rate gaps between the base period discount rates for each country and the Model are also ) calculated. Sales discount rate gaps for CTRYA , CTRYB and CTRY C are 3.182%, 6.818% and 8.182%, respectively. Using the methodology outlined above, the Country/Region Mix for CTRYA , CTRYB and CTRYC are calculated to be $679.75, $1,704.55 and $297.52, respectively. The resulting Country/Region mix impact for the Model as a whole is $2,681.82. The Mix result shows the Business Unit in the illustration has sold relatively more product in below-average discount rate countries (indicated by negative discount rate gaps, CTRYA and CTRYC), and has sold relatively fewer product in its above-average discount rate country (indicated by a positive discount rate gap, CTRYB). The resulting impact is a positive Country/Region mix for the Product Line as a whole in this example. This calculation is applied to all models within a product line.

Application
The numeric illustration above demonstrates how the total Country/Region Mix is calculated for a single Model. Business Units must calculate the Country/Region Mix for each Product Line by model and enter the results manually in the yellow shaded cells in the Form M as shown below.

Net Revenue Sales

Non-Revenue Sales & Transfers

Total Sales & Transfers

Product Line Product Line Product Line A B C ** Price Index to be calculated at base period pe

Price Realization (Currency Neutralized)


Sales Discount Rate Change Base Period Sales Discount Rate Current Period Sales Discount Rate Change Sales Discount - Product Mix Sales Discount - Country/Region Mix Sales Discount - Geographic Mix Sales Discount - Geographic Mix - PSMD & SOLAR ONLY Sales Discount - Other Sales Discount - Overall Product Line Rate Calc Transfer Yield Total Price Realization 20,865 400 2,500 N/A 1,849 4,749 130 130 Enter Country/ Region Mix by Product Line 400 2,500 N/A 1,849 4,749 130 20,995

0.0150 0.0106 0.0044 300 1,500

0.0200 0.0122 0.0078 300 1,000

0.0250 0.0245 0.0005 (200)

1,009 2,809 110 15,664

602 1,902 10 6,814

238 38 10 (1,482)

The example extract is taken from the Sales Reconsheet in the Form M. calculations are included in the Price Realization line item in the Form M.

The mix

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Transparent Financial Reporting Analysis Manual

Mix: Sales Discount - Product Mix


Overview
Sales Discount Product Mix represents the mix created when sales of different product models change within a Product Line.

Calculation Theory
Sales Discount Product is calculated as follows:
Sum of the Change in weight x Sales discount rate gap salesfor each product model x Total Product Line current Gross

* Note: All current period amounts must be reflected at base period currency terms and price levels. Illustration (1): Sales Discount - Product Mix
TOTAL PRODUCT LINE
$100,000 $9,000 $91,000 9.000% 100.00%

ModelA
Current Gross salesa Sale discount Net salesa Sales discount rate Weight - sales Bas e Gross salesa Sale discount Net salesa Sales discount rate Weight - sales
a

ModelB
$10,000 $2,000 $8,000 20.000% 10.00%

ModelC
$40,000 $2,000 $38,000 5.000% 40.00%

$ 50,000 $5,000 $ 45,000 1 0.000% 50.00%

$ 10,000 $1,000 $9,000 1 0.000% 10.00%

$50,000 $10,000 $40,000 20.000% 50.00%

$40,000 $2,000 $38,000 5.000% 40.00%

$100,000 $13,000 $87,000 13.000% 100.00%

Average sales discount rate for the Product Line

denote s price has bee n adjusted for cha nges in p ublished price .

Mi x Calcul ations Base period sales discoun t rate Average sa les discount rate for the Product Line Sales discount rate gap [Avg. rate - Base rate] Base weight Current weight Change in weight [Curr. weight - Base weight] Gross salesa (Pro duct Line) Mix 1 0.000% 1 3.000% 3.000% 10.00% 50.00% 40.00% $10 0,000.00 $1,200.00 20.000% 13.000% -7.000% 50.00% 10.00% -40.00% $10 0,000.00 $2,800.0 0 5.000% 13.000% 8.000% 40.00% 40.00% 0.00% $ 100,000.00 $0.0 0 $4,000 .00

The example above considers a Product Line with three models, ModelA, ModelB and ModelC, and assumes no currency, price and cost variances.

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Transparent Financial Reporting Analysis Manual

Mix: Sales Discount - Product Mix


Mix Calculation The combination (mix) of gross sales from each model has changed in the current period from the mix in the base period. This change is shown as the Change in weightof 40.00%, 40.00% and 0% for the three models, respectively. The differences ( Sales discount rate gaps between the base period discount rates for each model and the Product Line as a ) whole are also calculated. Sales discount rate gaps for ModelA, ModelB and ModelC 3.000%, 7.000% and 8.000%, respectively. Using the methodology outlined above, the Sales Discount Product Mix for ModelA , ModelB and ModelC are calculated to be $1,200.00, $2,800.00 and $0, respectively. The total for the Product Line is $4,000.00. The Mix result shows the Business Unit in the illustration has sold relatively more of the below-average discount rate models (indicated by negative discount rate gaps, ModelA and ModelC), and has sold relatively fewer of its only above-average discount rate model (indicated by a positive discount rate gap, ModelB). The resulting impact is a positive Sales Discount - Product Mix for the Product Line as a whole in this example. The Form M only has total Product line data available to calculate the sales discount rate impact. In the illustration above the Form M would calculate the sales discount rate impact to be $4,000. See Illustration (2) below.

Illustration (2): Sales Discount - Product Mix


TOTAL PRODUCT LINE
$100,000 $9,000 $91,000 9.000% 100.00% $100,000 $13,000 $87,000 13.000% 100.00%

ModelA
Current Gross sales a Sale discount Net sales Sales discount rate Weight - sales Base Gross sales a Sale discount Net salesa Sales discount rate Weight - sales
a

ModelB
$10,000 $2,000 $8,000 20.000% 10.00% $50,000 $10,000 $40,000 20.000% 50.00%

ModelC
$40,000 $2,000 $38,000 5.000% 40.00% $40,000 $2,000 $38,000 5.000% 40.00%

$50,000 $5,000 $45,000 10.000% 50.00% $10,000 $1,000 $9,000 10.000% 10.00%

denotes price has been adjusted for changes in published price.

Change in sales discount rate [Base rate - Curr. rate] Sales discount variance

4.000% $4,000

Application
The numeric illustration above demonstrates how the Sales Discount - Product Mix is calculated for a single Product Line. Business Units must calculate the Product Mix Impact on Sales for each Product Line and enter the results manually in the yellow shaded cells in the Form M as shown below.

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Mix: Sales Discount - Product Mix


Non-Revenue Sales & Transfers

Net Revenue Sales

Total Sales & Transfers

Product Line Product Line Product Line A B C ** Price Index to be calculated at base period pe

Price Realization (Currency Neutralized)


Sales Discount Rate Change Base Period Sales Discount Rate Current Period Sales Discount Rate Change Sales Discount - Product Mix Sales Discount - Country/Region Mix Sales Discount - Geographic Mix Sales Discount - Geographic Mix - PSMD & SOLAR ONLY Sales Discount - Other Sales Discount - Overall Product Line Rate Calc Transfer Yield Total Price Realization 20,865 400 2,500 N/A 1,849 4,749 130 130 N/A 1,849 4,749 130 20,995

Enter Product M by Product ix Line 400 2,500

0.0150 0.0106 0.0044 300 1,500

0.0200 0.0122 0.0078 300 1,000

0.0250 0.0245 0.0005 (200)

1,009 2,809 110 15,664

602 1,902 10 6,814

238 38 10 (1,482)

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Mix: Mix between Product Lines


Overview
Mix between Product Lines represents the impact on variable margin (base vs. current period) driven by Product Line weighting of sales and transfers as a percentage of total Business Unit sales and transfers. This mix may be regarded as a higher level calculation than the Mix within Product Lines outlined in the preceding subsection.

Calculation Theory
Mix between Product Lines is defined as:
Sum of the Change in weight x Margin gap Product Line x Total Business Unit current net salesfor each

* Note: All current period amounts must be reflected at base period currency terms and price levels.

The calculations are best described using the illustrative example included below. Illustration: Mix between Product Lines
* (PL denotes Product Line ) Current a Net sales Variable costs b Variable margin Base a Net sales Variable costs Variable margin Base margin %
b

PLA
$1,500 $1,350 $150 $1,000 $900 $100 10.00%

PLB
$3,000 $2,250 $750 $2,000 $1,500 $500 25.00%

PL C
$3,800 $1,900 $1,900 $4,000 $2,000 $2,000 50.00%

TOTAL Business Unit


$8,300 $5,500 $2,800 $7,000 $4,400 $2,600 37.14%

Average margin for the Business Unit

Mix Calculations
Base Margin % Average margin for the Business Unit Margin gap Base weight Current weight Change in weight a Current net sales (Business Unit) Mix
a b

10.00% 37.14% -27.14% 14.29% 18.07% 3.79% $8,300 ($85.31)

25.00% 37.14% -12.14% 28.57% 36.14% 7.57% $8,300 ($76.33)

50.00% 37.14% 12.86% 57.14% 45.78% -11.36% $8,300 ($121.22) ($282.86)

Net Sales & Transfers, before Warranty, Parts Transfers to MPC's Adjusted for Period costs of sales, Parts costs of sales and Inventory adjustments

The example above considers a Business Unit with three Product Lines, PLA , PLB and PL C, and assumes no currency, price and cost variance.

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Mix Calculation The combination (mix) of net sales from each Product Line has changed in the current period from the mix in the base period. This change is shown as the Change in weightof 3.79%, 7.57% and 11.36% for the three Product Lines respectively. The differences ( Margin gaps ) between the base period margin percentages for each Product Line and the Business Unit as a whole are also calculated. Margin gaps for PLA, PL B and PLC are 27.14%, -12.14% and 12.86%, respectively. The Mix between Product Lines for the three Product Lines are ($85.31), ($76.33) and ($121.22), respectively. The resulting Mix between Product Lines for the total Business Unit as a whole is ($282.86). The Mix result shows the Business Unit in the illustration has sold more products from below average margin Product Lines (indicated by negative margin gaps, PL A and PL B), and has sold fewer products from its above-average margin Product Line (indicated by a positive margin gap, PLC). The resulting impact is a negative Mix between Product Lines for the Business Unit as a whole in this example. Alternate Calculation Apart from the methodology introduced above, an alternate way exists to calculate Mix between Product Lines. In the Form M ( Volumesheet), the Mix between Product Lines is the difference between the Additive Product Line total and the Overall Business Unit total margin volume variance.
Illustration: Mix betw een Product Lines
* (PL denotes Product Line) Current Net sales a Variable costs Variable margin b Bas e Net sales a Variable costs Variable margin b Base margin % Sales volume change Margin volume variance $1,000 $900 $100 10.00% $500 $50 $2,000 $1,500 $500 25.00% $1,000 $250 $4,000 $2,000 $2,000 50.00% ($200) ($100) $200.00 $7,000 $4,400 $2,600 (b) 37.14% $1,300 $482.86 Overall Business Unit margin volume Average margin for the Business Unit $1,500 $1,350 $150 $3,000 $2,250 $750 $3,800 $1,900 $1,900 $8,300 $5,500 $2,800 (a)

PLA

PLB

PL C

TOTAL Business Unit

Additive P-L vol. var. Additive Product Line calcs Overall Business Unit > > Mix Between Product Lines PROOF: Base Margin % Average margin for the Business Unit Margin gap Base weight Current weight Change in weight Current net sales a (Business Unit) Mix
a b

$200.00 $482.86 ($282.86)

10.00% 37.14% -27.14% 14.29% 18.07% 3.79% $8,300 ($85.31)

25.00% 37.14% -12.14% 28.57% 36.14% 7.57% $8,300 ($76.33)

50.00% 37.14% 12.86% 57.14% 45.78% -11.36% $8,300 ($121.22) ($282.86)

Net Sales & Transfers, before Warranty, Parts Transfers to MPC's Adjusted for Period costs of sales, Parts costs of sales and Inve ntory adjustments

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Mix: Mix between Product Lines


As mentioned above, the example assumes no currency, price and cost variance. Changes in net sales for Product Lines PL A, PLB and PLC ($500, $1,000 and ($200), respectively) relate only to physical sales volume change for the purposes of this simplified example. The resulting margin volume variances for PLA , PLB and PLC, are $50.00, $250.00 and ($100.00), respectively, which total to $200.00. However, the margin volume variance is $482.86 when calculated at the overall Business Unit level. The difference, ($282.86), being $200 Additive basis less $482.86 BU basis, is the Mix between Product Lines.

Application
Using the alternate method described above, Mix between Product Lines is automatically calculated in the Volume sheet in the Form M ( Volume sheet).

Base Period VolumeImpact onMargin(FormM- Overall BusinessUnit) $ 41,759

Product LineA

Product Line B

Product LineC

VolumeImpact onMargin(FormM- Additive Product Line Calcs) FormM impact MixBetween Product Lines

47,002

58,652 $

(3,597) $

(8,053)

5,244

The screen shot shows the Mix between Product Lines being the difference between the Additive approach and the Overall BU approach, being $5,105 in this example. This mix amount feeds directly into the Form M as shown below.

CORPORATE PROFIT IMPACT


Volume/Price/Mix: Sales & Transfers Volume Price Realization Transfer Yield W arranty - Policy W arranty - Standard Mix - Between Product Lines Mix - Within Product Lines (by model) Directly from the 'Volume' sheet

Total Corporate Profit / (Loss)

**6 Sigma**

Change Excluding 6 Sigma Benefits

41,759 20,865 130 (575) (3,750) 5,244 (6,200)

41,759 20,865 130 (575) (3,750) 5,244 (6,200)

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Mix:

Mix within Product Lines with Revenue Sales

Business Units

Overview
Product Mix within Product Lines represents the impact on variable margin (base vs. current period) driven by model weighting of gross sales as a percentage of total Product Line gross sales.

Calculation Theory
The Product Mix within Product Line is defined as:
Sum of the Change in weight x Margin gap x Total Product Line current gross salesfor each product model * Note: All current period amounts must be reflected at base period currency terms and price levels.

The calculations are best described using the illustrative example included below.

Illustration: Product Mix within Product Lines


ModelA
Current Gross sales Variable costs Variable margin Base Gross sales Variable costs Variable margin Base margin % $1,100 $750 $350 31.82% $950 $450 $500 52.63% $1,950 $800 $1,150 58.97% $4,000 $2,000 $2,000 50.00% Average margin for the Product Line $1,000 $550 $450

ModelB
$800 $400 $400

Model C
$2,000 $950 $1,050

TOTAL PRODUCT LINE


$3,800 $1,900 $1,900

Mix Calculations
Base margin % Average margin for the Product Line Margin gap Base weight Current weight Change in weight Current gross sales (Product Line) Mix 31.82% 50.00% -18.18% 27.50% 26.32% -1.18% 52.63% 50.00% 2.63% 23.75% 21.05% -2.70% 58.97% 50.00% 8.97% 48.75% 52.63% 3.88%

$3,800 $8.18

$3,800 ($2.70)

$3,800 $13.24 $18.72

The example above considers a Product Line with three models, ModelA, ModelB and ModelC, and assumes no currency, price and cost variances.

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Mix:

Mix within Product Lines with Revenue Sales

Business Units

Mix Calculation The combination (mix) of gross sales from each model has changed in the current period from the mix in the base period. This change is shown as the Change in weightof 1.18%, 2.70% and 3.88% for the three models, respectively. The differences ( Margin gaps ) between the base period margin percentages for each model and the Product Line as a whole are also calculated. Margin gaps for ModelA , ModelB and ModelC are 18.18%, 2.63% and 8.97%, respectively. Using the methodology outlined above, the Product Mix within Product Lines for ModelA , ModelB and ModelC are calculated to be $8.18, ($2.70) and $13.24, respectively. The total Product Mix within the Product Line for the Product Line as a whole is, therefore, $18.72. The Mix result shows the Business Unit in the illustration has sold fewer of ModelA in the current period. ModelA has a variable margin percentage that is lower than the overall Product Line variable margin rate. Selling less of a lower-than-average margin product results in a favorable Product Mix within Product Lines of $8.18. The Business Unit also sold less of ModelB, which has a variable margin percentage greater than the overall Product Line average. Selling less of a better-than-average margin product results in a negative Product Mix within Product Lines of ($2.70). Finally, the Business Unit sold more of ModelC, which has a variable margin percentage greater than the overall Product Line average. This results in a favorable Product Mix within Product Lines of $13.24. The resulting impact is a positive Product Mix within Product Lines, $18.72, for the Product Line as a whole in this example.

Application
The numeric illustration above demonstrates how the Mix within Product Lines is calculated for a single Product Line. Business Units must calculate the Mix within Product Lines for each Product Line and enter the results manually in the yellow shaded cells in the Form M as shown below.
Volume/Price/Mix: Sales & Transfers Volume Price Realization Transfer Yield Warranty - Policy Warranty - Standard Mix - Between Product Lines Mix - Within Product Lines (by model) 41,759 20,865 130 (575) (3,750) 5,244 (6,200) (3,000) (2,200) (1,000) Enter Product Mix within Product Lines by Product Line 58,652 15,554 110 (710) (4,500) (3,597) 6,804 10 10 (8,053) (1,492) 10 125 750

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Mix:

Mix within Product Lines Business Units with Non-revenue Sales and Transfers

Overview
For units with non-revenue sales and transfers, product Mix within Product Lines represents the impact on variable margin (base vs. current period) driven by changes in both model and geographic weighting of sales and transfers as a percentage of total Product Line sales and transfers.

Calculation Theory
The Product Mix within Product Line is defined as:
Sum of the Change in weight x Margin gap sales and transfers for each product model x Total Product Line current net non-revenue

* Note: All current period amounts must be reflected at base period currency terms and price levels.

The calculations are best described using the illustrative example included below.

Illustration: Product Mix within Product Lines


Model A
Region 1

Model B
Region 1

Model A
Region 2

TOTAL Model B PRODUCT LINE Region 2


$1,000 $600 $400 $1,150 $650 $500 43.48% $4,800 $2,500 $2,300 $5,150 $2,650 $2,000 38.83%

Current Net sales Variable costs Variable margin Base Net sales Variable costs Variable margin Base margin %

$1,000 $550 $450 $1,100 $750 $350 31.82%

$800 $400 $400 $950 $450 $500 52.63%

$2,000 $950 $1,050 $1,950 $800 $1,150 58.97%

Mix Calculations
Base margin % Average margin for the Product Line Margin gap Base weight Current weight Change in weight Current net sales (Product Line) Mix 31.82% 38.83% -7.02% 21.36% 20.83% -0.53% $4,800 $1.77 52.63% 38.83% 13.80% 18.45% 16.67% -1.78% $4,800 ($11.79) 58.97% 38.83% 20.14% 37.86% 41.67% 3.80% $4,800 $36.76 43.48% 38.83% 4.64% 22.33% 20.83% -1.50% $4,800 ($3.34)

Average margin for the Product Line

$23.41

The example above considers a Product Line with two models sold in two regions; ModelA Region 1, ModelB Region 1, ModelA Region 2, and ModelB Region 2, and assumes no currency, price and cost variances.

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Mix:

Mix within Product Lines Business Units with Non-revenue Sales and Transfers

Mix Calculation The combination (mix) of non-revenue sales and transfers from each model has changed in the current period from the mix in the base period. This change is shown as the Change in weight of 0.53%, 1.78%, 3.80%, and 1.50% for the two models within region, respectively. The differences ( Margin gaps between the base period margin percentages ) for each model by region and the Product Line as a whole are also calculated. Margin gaps for ModelA Region 1, ModelB Region 1, ModelA Region 2, and ModelB Region 2 are 7.02%, 13.8%, 20.14% and 4.64%, respectively. Using the methodology outlined above, the Product Mix within Product Lines for ModelA Region 1, ModelB Region 1, ModelA Region 2, and ModelB Region 2 are calculated to be $1.77, ($11.79), $36.76, and ($3.34) respectively. The total Product Mix within the Product Line for the Product Line as a whole is, therefore, $23.41. The mix result shows the Business Unit in the illustration has sold more of ModelA in Region 2 in the current period. ModelA in Region 2 has a higher variable margin percentage than the overall product line, selling more of the above average margin product results in favorable mix of $36.76. The Business Unit also sold less of ModelB in Region 1 in the current period. ModelB in Region 2 has a higher variable margin percentage than the overall product line. Selling less of a better than average margin product results in a negative mix of ($11.79). The impact of ModelA Region 1 and ModelB Region 2 are $1.77 and ($3.34), respectively. The total mix within product line is $23.41.

Application
The numeric illustration above demonstrates how the Mix within Product Lines is calculated for a single Product Line. Business Units must calculate the Mix within Product Lines for each Product Line and enter the results manually in the yellow shaded cells in the Form M as shown below.
Volume/Price/Mix: Sales & Transfers Volume Price Realization Transfer Yield Warranty - Policy Warranty - Standard Mix - Between Product Lines Mix - Within Product Lines (by model)

41,759 20,865 130 (575) (3,750) 5,244 (6,200)

Enter Product Mix within Product Lines by Product Line

58,652 15,554 110 (710) (4,500) (3,000)

(3,597) 6,804 10 10 (2,200)

(8,053) (1,492) 10 125 750 (1,000)

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Variable Cost: Overview


This section illustrates the calculations of cost variances in the variable costs of production of the Business Unit. With the exception of Inventory Adjustments, RSSM and warranty, cost s, variances relating to variable costs are calculated on a rate basis. The key components of variable costs in the Form M are as follows: 1. Cost of sales materials, labor and burden 2. Transfers In/Inter-company Purchases 3. Inventory Adjustments / RSSM s 4. Other Variable Costs Each category of variable costs is discussed in detail in the sub-sections below.

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Variable Cost: Cost of Sales


Overview
This section considers the calculations behind material, labor and burden costs in the Form M. The Form M ( Variable Costsheet) aims to flex base period cost levels to actual volumes in the current period. The production indicator built in the Form M ( Variable Cost sheet) is an attempt to do that. In some situations, however, this may not be indicative of true volume changes. In that event, with the approval of CAS, a BU may enter a flexing factor manually.

Calculation Theory
Variances in variable costs result from changes in cost variance rates. In order to compare base period variable costs to current period variable costs, the base period and current period variance rates must first be calculated. The Form M ( Variable Costsheet) was developed to accommodate two types of Business Unit: (i) those with standard costs, and (ii) those without standard costs. The Form M has separate volume flexing options for each. (i) Business Units with Standard Costs Variance rates, defined as actual costs divided by standard costs, for both base and current periods are calculated. These rates are essentially ratios of actual costs to standard costs. For example, a variance rate of 1.00 means that actual costs are the same as standard costs. A rate of less than 1.00 means actual costs are lower than standard costs, while a rate of more than 1.00 means relatively higher actual costs. Standard costs are updated annually and the standard costs for the base period should be adjusted to reflect the new Standard Costs for the current period such that standard costs for base and current periods are on the same basis.

Illustration: Variable Costs with Standards


Cost Variance

Base Actual costs Standard costs Variance rate


$700.00 $1,000.00 0.7000

Current
$850.00 $1,130.00 0.7522

Rate Diff

(0.0522)

($59.00) [Rate diff. x Current std. costs]

Essentially, the increase of 0 .0522 in the variance rate is translated into a $59 increase in variable costs.

The variance rates for the base period and the current period are calculated as 0.7000 and 0.7522, respectively, indicating an increase in the relative level of actual costs. The difference between the variance rates of the base period and the current period is then calculated to be -0.0522 or (0.7000 0.7522). This implies a deterioration of the variance rate and thus, a negative impact on profits (increase in the relative amount for Actual costs). In this example it was relatively cheaper to buy variable manufacturing inputs in the base period than in the current. The difference in variance rate is then multiplied by the current period standard costs to calculate the cost variance ($59) [(0.0522) x $1,130]. The remaining ($91) [($850)-($700) ($59)] difference represents the increase in costs due to physical sales volume.

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Variable Cost: Cost of Sales


(ii) Business Units without Standard Costs When Business Units do not have Standard Costs for variable costs, an alternative flexing approach is used to calculate cost variance. The example below shows a 10% increase in volume. This volume increase is flexed in the Form M ( Variable Cost sheet) and is a manual adjustment made by the Business Unit. Note that the 10% used here is for illustrative purposes only and is different from the example for Business Units with standard costs.

Illustration: Variable Costs without Standards


Volume Rate
10%

Base Actual Costs


$700.00

Current
$850.00

Expected Current
$770.00

Cost Variance
($80.00)

[(1+10%) x $700]

[$770 - $850]

This example shows that if a Business Unit only has actual cost information and no standard cost information, the Business Unit should utilize a volume rate to project a cost amount for the current period and compare this volume flexed cost with the current period actual costs. The difference between the volume flexed cost and the current period actual costs is the cost variance. The volume rate is an approximation of how the variable cost item has changed due to a change in physical sales volume. In the above example, the volume rate is 10% and the base period actual cost is $700. Assuming nothing but physical sales volume has changed by 10% (production indicator), the total variable costs would have been $770 [(1+10%) x $700]. However, the current period actual cost is $850. Therefore, the cost variance is ($80) [$770 $850].

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Variable Cost: Cost of Sales


Application
Costs variances are calculated on the Variable Costsheet in the Form M. Business Units are required to enter cost information differently for variable costs with standards and those that do not.

(i) Business Units with Standard Costs


Favorable / Unfavorable Before Currency

Base Period

Current Period

Rate Change

FOR FACILITIES WITH STANDARD COSTS


Material (External Suppliers Only) Purchases @ Actual Purchases @ Standard Material Variance Rate Variable Labor / Burden Variable Labor @ Actual Variable Burden @ Actual Standard Hours Produced Variable Labor Rate Variable Burden Rate Total Variable Labor/Burden 50,000 47,000 1.0638 65,000 55,000 1.1818 -0.1180 $ (6,489)

110,000 60,000 1,775 61.9755 33.8048

128,342 67,209 2,025 63.3799 33.1902 -1.4044 0.6146 $ $ (2,844) 1,245 (1,599)

Materials The screen shot above is an example extract from the Variable Costsheet. The materials variance is calculated as:
a). The Material Variance Rate in the base period of 1.0638. Base Purchases @ Actual, $50,000 / Base Purchases @ Standard, $47,000. b). The Material Variance Rate in the current period of 1.1818. Current Purchases @ Actual, $65,000 / Current Purchases @ Standard $55,000 being the volume flexed base Standard Costs ($47,000 +/- volume flexing). c). Movement in the rate is 0.1180. Base variance rate, 1.0638 - Current variance rate, 1.1818 d). Material cost variance is ($6,489). Rate movement, 0.1180 x Current Purchases @ Standard, $55,000

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Variable Cost: Cost of Sales


Labor/burden Rates for both variable labor and variable burden are also calculated in the Variable Cost sheet. Business Units are required to enter actual dollar amounts in the yellow shaded cells in the Form M ( Variable Costsheet). The Standard Hours are automatically downloaded from Essbase into the Base P&Land Current P&Lsheets in the Form M. The standard hour amounts are directly linked from the P&L sheets to the Variable Cost sheet. The example above shows the following:
a). The Variable Labor Rate in the base period is 61.9755. Base Variable Labor @ Actual, $110,000 / Base Standard Hours Produced, 1,775 hr. b). The Variable Labor Rate in the current period is 63.3799. Current Variable Labor @ Actual, $128,342 / Current Standard Hours Produced, 2,025 hr. c). Change in rates from the base period to the current period is 1.4044. Base Variable Labor rate 61.9755 Current Variable Labor rate, 63.3799 d). The cost variance for Variable Labor is ($2,844). movement in the Variable Labor Rate of -$1.4044/hr. x 2,025 hr. e). The cost variance for the Variable Burden is calculated in the same way as the Variable Labor rate. movement in the Variable Burden Rate of $0.6146/hr. x 2,025 hr.= $1,245

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Variable Cost: Cost of Sales

(ii) Business Units without Standard Costs

FOR FACILITIES W ITH OUT STANDARD COSTS


Cost of Sales Volum e Indicator Cost of Sales Beginning Inventory Ending Inventory 680,575 65,000 66,000 1,000 681,575 764,180 66,000 73,000 7,000 771,180 89,605 13.1%

Produc tion O ptional Volum e Indicators ** M aterial (External Suppliers Only) Variable Labor / Burden M ater ial (External Suppliers O nly) Purchases @ Actual

12.0% 8.0%

59,881 Var iable Labor/Burden Variable Labor @ Ac tual Variable Burden @ Actual Total Variable Labor/Burden

66,651

12.0%

416

94,173 76,115

102,000 83,000

8.0% 8.0%

$ $

(294) (796) (1,089)

This screen shot from the Form M is an extract from the Variable Costsheet that also contains the section for Business Units with standard costs. Business Units should use this section of the Variable Cost sheet for calculating the cost variance of any variable costs that do not have a standard cost. There are two parts to this calculation: i) automated change in production and ii) a manual entry. Automated change in production Using cost of sales, and the beginning and ending inventory amounts from the two periods P&L, the Form M ( Variable Cost sheet) automatically calculates the production values for the base period and the current period, and the rate of change in production. This automated approach considers cost of sales as a whole rather than material and labor/burden costs separately. In the illustration above, the automated rate is calculated as follows:
a). The production cost in the base period is $681,575. Total cost of sales per the base P&L, $680,575 + net change of inventory in the period ($66,000 - $65,000) b). The production cost in the current period is $771,180. Cost of sales, $764,180 + net change of inventory in the period ($73,000 - $66,000) c). Change in production between the base period and the current period is $89,605. Current period $771,180 less base period $681,575 d). Volume growth indicator is 13.1%. Production change, $89,605 / base period production, $681,575.

The 13.1% is the rate calculated for production volume.

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Manual entry Business Units may manually enter the optional growth indicator for production instead of using the automated rate. This option overrides the automated rate and should only be used if the automated rate is not representative of the actual volume growth in the variable cost item as production changes. As part of the reporting exercise, the Business Unit must provide supporting documentation for these manually entered rates. The Form M ( Variable Costsheet) automatically selects the manually entered rates to calculate the cost variance when the manual entry override is used. If no manual override is to be used, leave the yellow-shaded cells blank. Inserting a zero will mean the Form M ( Variable Cost sheet) will use that zero to override the automated rate. The rates selected are applied on the base period actual costs (materials, labor and burden). To use this part of the Form M ( Variable Cost sheet), follow these steps: a) b) Enter the actual material, labor and burden costs separately for the base period and the current period. For each cost (material, labor, burden) enter the estimated volume growth rate. In the example above a growth rate of 12.0% is assumed for materials and a rate of 8.0% for labor and burden. For Material purchases, the actual costs entered by the Business Unit are $59,881 (base period) and $66,651 (current period), respectively. Labor costs are $94,173 (base) and $102,000 (current). Burden costs are $76,115 (base) and $83,000 (current).

c)

Using these values we can assess both a rate variance and a volume variance. Taking labor costs as an example we have populated the Form M ( Variable Costsheet) to show base costs of $94,173 and current costs of $102,000. This indicates an 8.3% increase of total costs (current over base, or $102,000/$94,173). However, we are flexing the volume by 8.0% (as manually entered) which would flex the base cost ($94,173) to $101,707 [$94,173 x 1.080]. The volume and rate variance is as follows:
Base cost Volume flexed base cost => volume variance Actual current cost => total variance => rate variance $ 94,173 $101,707 $ 7,534 (increase in cost)

$102,000 $ ($ 7,827 (increase in cost) 294) (favorable variance) [($7,827) ($7,534)]

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Variable Cost: Cost of Sales

B ase Period

C nt urre Pe riod

R ate C ange h

Favo rable/ U nfavorable B re efo C urren cy

C urren cy FormM Im pact

Favo rable/ U nfavo rableA fter C urrency

T TA R O LFO MM
M aterial (E xternal S pliersO up nly) V ariableLab or V ariableB urden Inven toryA djustm ents/ R M SS 's $ 8 50 $ 850 (6 ,074) (3 ,138) 449 -

(2,0 00) -

(4,074) (3,138) 449 -

The third section of the Variable Costsheet illustrates the summary portion of the cost variance calculations. Adjustment for foreign currency impact is also shown at this point. The currency impact for material purchases shown here is $2,000 (unfavorable). This is linked directly from the FXsheet in the Form M. Material cost variance adjusted for foreign currency impact is therefore, ($4,074) [($6,074) ($2,000)]. The currency neutralized cost variances are linked directly to the Form M as illustrated in the screen shot below. Note that variable labor and variable burden are combined in the Form M (Labor = ($3,138) + Burden = $449 totaling ($2,689) below).
Change Excluding 6 Sigma Benefits

CORPORATE PROFIT IMPACT


Manufacturing Cost: Variable Cost Material (External Suppliers Only) Transfers in / Intercompany Purchases Cost Variance Variable Labor / Burden Inv. Adj.'s / RSSMs Other Variable Cost Directly from 'Variable Cost' sheet

Total Corporate Profit / (Loss)

**6 Sigma**

(4,074) (2,992) (2,689) 127

(4,074) (2,992) (2,689) 127

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Variable Cost: Transfer In/Inter-company Purchases


Overview
Note: this section is very similar to the Transfer Yield sub-section in the Sales Reconciliation chapter above. While the variable cost calculations cover variances on costs incurred externally by a Business Unit in the Form M, internal transfers and inter-company purchases are dealt with separately in the Transfer In/Inter-company Purchase section. Across all Business Units, on a consolidated basis, all transfer yield and transfer cost variance will total to zero. An individual Business Unit Form M will show a variance that will be offset in opposite variances in another Business Unit. Transfer cost variance represents a portion (non-volume related) of the change in purchases that can be explained by changes in internal transfer prices. Current period transfers are converted to base period terms by means of a Transfer Price Index. The Form M uses a matrix in the Xfers-Intercosheet to capture the transfer price changes between Units. Each Business Unit will have a transfer price index relating to both internal purchases from, and internal sales to, all other Business Units. Component Product Lines are responsible for providing the price indices for all of their respective sales and transfers. Marketing Business Units are responsible for providing the indices for all of their respective inter-company purchases (purchase from product groups). Each Business Unit will have a transfer price index relating to both internal sales and purchase. The transfer cost variance forms part of the total variable cost variance in the Form M.

Calculation Theory
Step 1: The Transfer Price Matrix The transfer yield and transfer cost variance calculations center around the matrix in the Xfers Intercosheet. This matrix is pre-populated in the Form M file and captures all the transfer price indices between the Business Units. Using a two-dimensional matrix ensures that the Form M maintains the necessary principle that one Business Unit cost is another s Business Unit yield. s A simplified example is shown below for two Business Units.

Illustration: Inter-company Transfers


For BU B

Transfer Price $ value


($13,000) ($13,000)

Current inter-company purchases - from BUA


For BU A

Index
110.00

Adj'd value
($11,818) ($11,818) ($1,182)

Transfer Price $ value


($10,000) ($10,000)

Current inter-company purchases - from BUB

Index
103.00

Adj'd value
($9,709) ($9,709) ($291)

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Variable Cost: Transfer In/Inter-company Purchases


The indices shown are used by the Form M to roll current transfer prices back to base period levels. These transfer price indices are very similar to the factors used in adjusting current published prices to base period published prices. The transfer price index of 103 in the example shown above converts a current internal purchases value of ($10,000) to a base period equivalent of ($9,709) [($10,000)/(103/100)]. This conversion results in a transfer cost variance of ($291) attributable to the internal transfer for BUA . Meanwhile BUB will have a transfer yield of $291. Where a current transfer price is $22 and the base transfer price is $20, the transfer price index is 110 (i.e. $22/$20 x 100). Example: Prices remain unchanged from base level Prices fall 10% from base Prices rise 10% from base Transfer Price Index = 100 Transfer Price Index = 90 Transfer Price Index = 110

In total, the consolidated profit figure will not be affected by transfer price changes. Each Business Unit profit figure will be affected by both transfer yield and transfer cost variance. s

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Variable Cost: Transfer In/Inter-company Purchases


Step 2: Current Period Transfers In / Inter-company Purchases In the Trans-Interco - Costsheet, the Business Unit must enter the level of inter-company purchases from each of the other Business Units. Many of the entry cells will be zero. The inputs should represent current period inter-company purchases, before any currency impact adjustment. Inter-co. purchases from Business Unit 1 Business Unit 2 Current Value ($100,000) ($50,000) ($150,000) Price Index $110 $110 Base Value ($90,909) ($45,455) ($136,364)

Transfer cost variance

($13,636)

The total transfer cost variance ($13,636) feeds into the Form M summary. Step 3: Transfer Cost Variance split by Product Line The total transfer cost variance ($13,636 in the example above) is further split across the relevant Product Lines in each Business Unit according to the Product Line mix of internal transfers.

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Variable Cost: Transfer In/Inter-company Purchases


Application
Step 1: The Transfer Price Matrix Shown below is an extract from the Transfer Price Matrix in the Form M. Note that the sheet will highlight in yellow, the row and column applicable to the facility submitting the analysis. In the example below, Business Unit 2 is selected as the submitting facility. In the calculation of transfer cost variance, the Form M reads down the highlighted column. For example, assume that Business Unit 2 transfers to Business Unit 1. The Form M will read down the Business Unit 2 column, to the row where Business Unit 1 intersects it. The index that will be used is circled below.
* Screenshot from the Xfers Interco sheet.

BUs I/Co PUR CHASES

With Facility

Business Unit 1

Business Unit 2

Business Unit 3

Form M Facility Transfers Out (sales to other BUs) Business Unit 1 Business Unit 2 Business Unit 3

110.0000 110.0000 110.0000

110.0000 110.0000 110.0000

110.0000 110.0000 110.0000

BUs I/Co SALES

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Variable Cost: Transfer In/Inter-company Purchases


Step 2: Current Period Transfers In / Inter-company Purchases Business Units should enter Transfers In/ Inter-company Purchases into the yellow cells in the Transfers-Interco Costsheet. The Transfers In/Inter-company Purchases values should be entered before currency impact adjustments. The currency impact on Transfers In/Inter-company Purchases is captured on the sheet (see detailed description in the subFX section (a) of Sales Reconciliation chapter). This only impacts transactions that are non USD based. Transfer cost variance for transfers from each relevant Business Unit is defined as:
Current period transfers in [Current period transfers in/ (Transfer price index / 100)]

The Business Unit impact is the addition of all transfer cost variance calculations, adjusted for currency movements. An example is provided below.
* Example screenshot from the Form M: Inter-company purchases
Current Period Transfers In / Intercompany Purchases From Transfers In / Intercompany Factor Form M

Articulated Truck BCP Cat Distr Svcs Cat Elphinstone (CEPL) Cat W ork Tools & Svcs - AAP Cat W orld Trade Track-Type Tractors Central Legal Entity Control

11,805 3,000 18,000 108

110.0 110.0 110.0 110.0 110.0 110.0 110.0 110.0

(1,073) (273) (1,636) (10) (2,992)

32,913

Transfers W ithin Business Unit

Total Per P&L's Check (must = 0) Currency Adjustment Net Form M Impact

32,913 0 Form M Impact $ (2,992)

The value circled in red flows into the Form M sheet. It represents the total Business Unit impact from changes to the transfer prices charged by other Business Units in the current period. This value is currency neutralized i.e. all values are adjusted to the base period exchange rate in the sheet prior to this transfer price calculation. FX

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Variable Cost: Transfer In/Inter-company Purchases


Step 3: Transfer Cost Variance split by Product Line The total transfer cost variance calculated by the Business Unit must be manually split by Product Line according to the Product Line mix of internal transfers, and entered into the Form M.
Manufacturing Cost: Variable Cost Material (External Suppliers Only) Transfers in / Intercompany Purchases Cost Variance Variable Labor / Burden Inv. Adj.'s / RSSMs O Variable Cost ther Enter Transfer Cost Variance by Product Line (4,074) (2,992) (2,689) 127 (1,426) (1,047) (941) (8,494) (1,426) (1,047) (941) 1,329 (1,222) (898) (807) 7,292

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Variable Cost: Inventory Adjustments / RSSM s


Overview
For analysis purposes, Inventory Adjustments and RSSM are treated in the same manner s as Period Costs. The Form M variance is calculated as (base period amount current period amount currency impact = Form M variance).

Calculation Theory
All Inventory Adjustments and RSSM values are automatically fed from the Form M section s of the Variable Cost sheet. See the Application section below.

Application
Inventory Adjustments and RSSM are automatically downloaded from Essbase onto the s Base P&Land Current P&Lsheets and linked directly from the Base P&Land Current P&L sheets to the Variable Cost sheet in the Form M.
Favorable / Unfavorable Before Currency Favorable / Unfavorable After Currency

Base Period

Current Period

Rate Change

Currency Form M Impact

TOTAL FORM M
Material (External Suppliers Only) Variable Labor Variable Burden Inventory Adjustments / RSSM's $ 850 $ 850 (6,074) (3,138) 449 -

(2,000) -

(4,074) (3,138) 449 -

This screen shot illustrates an example extract from the Variable Cost sheet. The change in Inventory Adjustments and RSSM is zero [$850 - $850]. The impact from Inventory s Adjustments and RSSM flows directly into the Form M as shown below. s
Change Excluding 6 Sigma Benefits

CORPORATE PROFIT IMPACT


Manufacturing Cost: Variable Cost Material (External Suppliers Only) Transfers in / Intercompany Purchases Cost Variance Variable Labor / Burden Inv. Adj.'s / RSSMs Other Variable Cost

Total Corporate Profit / (Loss) Directly from 'Variable Cost' sheet (4,074) (2,992) (2,689) 127

**6 Sigma**

(4,074) (2,992) (2,689) 127

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Variable Cost: Other Variable Cost


Overview
Other Variable Costs are treated as a balancing figure in the Form M.

Calculation Theory
All Other Variable Cost values are automatically calculated in the Form M and are shown in the Application section.

Application
Shown below is the relevant extract from the Form M.
Volume/Price/Mix: Sales & Transfers Volume Price Realization Transfer Yield Warranty - Policy Warranty - Standard Mix - Between Product Lines Mix - Within Product Lines (by model) (3,000) (2,200) (1,000) (6,200) 58,652 15,554 110 (710) (4,500) (3,597) 6,804 10 10 (8,053) (1,492) 10 125 750 47,002 20,865 130 (575) (3,750)
Total Sales Var = $57,472

Manufacturing Cost: Variable Cost Material (External Suppliers Only) Transfers in / Intercompany Purchases Cost Variance Variable Labor / Burden Inv. Adj.'s / RSSMs Other Variable Cost Manufacturing Period Cost of Sales Period Cost Incurred Period Cost inventory effect Total Manufacturing Cost Total Gross Margin Change (Excl Fx & Parts) $ $ (1,426) (1,047) (941) (8,494) (1,426) (1,047) (941) 1,329 (1,222) (898) (807) 7,292 (4,074) (2,992) (2,689) 126
Total Manuf. Period Cost Var = ($12,899) Total Manuf. Cost Var = $34,945 $57,472 Variable Cost Var (excl. other variable cost) = ($9,755)

(21,641) 140 (33,410) $ 32,696 $

4,583 360 2,857 $ 3,885 $

3,430 230 8,025 (1,635) $ $

(13,629) 730 (22,527) 34,945

The Other Variable Cost calculated above is $126 [Total manufacturing cost ($22,527) Total cost variance ($9,755) Manufacturing period cost of sales ($12,899)].

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Period Cost of Sales: Overview


Overview
Period costs are costs that do not typically fluctuate as production level changes. At Kater, manufacturing related period costs are referred to as period cost of sales. Period Costs of Sales impacts the Form M in three areas: a). the impact of incurred costs from period to period. b). the inventory effect, which explains how the absorption of Period Cost of Sales into inventory impacts Gross Margin. c). the variable margin percentage - as pe riod costs are not a component of Variable Margin, they are removed from gross margin when calculating the Variable Margin Percentage.

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Period Cost of Sales: Incurred


Overview
The impact of incurred costs from period to period.

Calculation Theory
Period costs are incurred each period. Their impact on the Form M is the change from the base period to the current period, adjusted for any currency impact. The Form M calculates this change in the sheet. See the screenshot in the Application section below. FX

Application

P &L Chan ge Material (E xte rnal Supp liers On ly) Transfers In / Interco mpany Purchas es Variable L abor Variable B urden Inventory A dj/RSS M's Other Total Variabl e Cost Peri od Cost of Sal es (1 3,629)

Curren cy Ad j (2,000) (2,000) -

Ne t Change Curre ncy Ne utraliz ed

Form M imp act (13,629)

The ($13,629) change in period costs is automatically calculated using values in the Base P&Land Current P&Lsheets. There is a favorable currency impact, $10 on period cost of sales, which is split into $6 and $4 at the Product Line level. See the Foreign Currency Reconciliation section for further detail on currency impact. The resulting currency neutralized change in period costs incurred is ($13,639), which flows directly to the Form M.

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Period Cost of Sales: Incurred


Total Corporate Profit / (Loss) Change Excluding 6 Sigma Benefits

CORPORATE PROFIT IMPACT


Manufacturing Cost: Variable Cost Material (External Suppliers Only) Transfers in / Intercompany Purchases Cost Variance Variable Labor / Burden Inv. Adj.'s / RSSMs Other Variable Cost Manufacturing Period Cost of Sales Period Cost Incurred Period Cost inventory effect Directly from 'FX' sheet

**6 Sigma**

(4,074) (2,992) (2,689) 127

(4,074) (2,992) (2,689) 127

(13,629) 730

(13,629) 730

The example above shows a screenshot from the Form M. The Period Cost Incurred is ($13,629) which is equal to the currency neutralized change in period cost of sales from the sheet. FX

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Period Cost of Sales: Inventory Effect


Overview
The second component of period costs of sales is the period costs that have been absorbed into inventory. When period costs are incurred each period, not all of such costs are expensed immediately but are absorbed into inventory through Value Added, and then expensed through standard cost of sales as inventory is sold.

Calculation Theory
Period costs absorbed in inventory affect profit as inventory levels rise and fall in each period.

Illustration: Period Cost Absorption (a)


Base Period Period cost incurred Other production costs Cost of inventory produced $10 $99 $109 Current Period $15 $149 $164

Beginning value of inventory Ending value of inventory Change in inventory Cost of sales [beg inv + cost of production - end inv.]

$10 $15 $5

$12 $9 ($3)

$104

$167

The illustrative example above shows that as inventory level increases, cost of sales is lower than cost of production, implying that not all costs of inventory produced in the period are expensed. In the base period, total cost of inventory produced is $109, but cost of sales is $104, the difference being $5 increase in inventory. Conversely, the current period experiences a decrease in inventory, ($3). Cost of production for the current period is $164 and cost of sales is $167. Cost of sales for the current period is higher than cost of inventory produced in the current period. Established in the example is the relationship between cost of sales and movement in inventory: As inventory levels increase, there is a positive impact on gross margin as period costs incurred are absorbed into inventory. Conversely, when inventory levels decrease, gross margin is negatively impacted as period costs are released from inventory to the P&L through cost of sales.

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Period Cost of Sales: Inventory Effect


The following examines how period costs affect profit through a change in inventory levels. The period costs incurred in the above example are $10 and $15 for the base period and the current period, respectively. The period cost effect on profit for each period can be calculated by understanding the period cost content in inventory.

Illustration: Period Cost Absorption (b)


Base Period % Period Cost in inventory Beginning value of inventory Ending value of inventory Change in inventory Impact of period cost absorption on profit Change in impact of period cost absorption on profit [Current period cost absorption impact base period cost absorption impact] 10% $10 $15 $5 $0.50 Current Period 10% $12 $9 ($3) ($0.30)

($0.80) [($0.30) - $0.50]

In Illustration (b) above, the percentage of period cost in inventory is 10% for both periods. The impact of period cost absorption on profit for the two periods are defined as Percentage of period cost in inventory x change in inventory being $0.50 and ($0.30), respectively. The change in impact of period cost absorption (i.e. Form M impact) from the base period to the current period is ($0.80) [($0.30) - $0.50].

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Period Cost of Sales: Inventory Effect


Application
Period cost inventory effect calculations.
Product Line A Product Line B Product Line C

Total Business Unit

PERIOD COST ABSORBED - FORM M IMPACT


Base Period Ending Inventory Base Period Beginning Inventory Net Change % of Period Cost in Inventory - Base Period Period Cost Absorbtion Impact on Margin Rate - Base $ $ 66,000 65,000 1,000 11.0% 110 $ 32,000 30,000 2,000 11.0% 220 $ 20,000 20,000 $ 11.0% $ 14,000 15,000 (1,000) 11.0% (110)

Current Period Ending Inventory Current Period Beginning Inventory Net Change % of Period Cost in Inventory - Current Period Period Cost Absorbtion Impact on Margin Rate - Current $ Form M impact Change of the Change in Inventory - To Form M $ $

73,000 66,000 7,000 12.0% 840

35,000 32,000 3,000 12.0%

23,000 20,000 3,000 12.0%

15,000 14,000 1,000 12.0% 120

360

360 $

730

140

360 $

230

The example extract is taken from the Period Cost Inventory Effectsheet. Business Units must enter in the yellow shaded cells the percentages of period cost in inventory for both the base and the current periods. The change in inventory for the two periods is calculated automatically in the Form M, being $1,000 and $7,000, respectively. The Period Cost Absorption Impact on Margin Rate for the base period and the current period is defined as: Period cost percentage in inventory x change in inventory being $110 and $840 respectively. The Form M impact of period costs, through the change in inventory, is $730 [$840 - $110]. This impact flows directly into the Form M. Se e screenshot below.
Total Corporate Profit / (Loss) Change Excluding 6 Sigma Benefits

CORPORATE PROFIT IMPACT


Manufacturing Cost: Variable Cost Material (External Suppliers Only) Transfers in / Intercompany Purchases Cost Variance Directly from Variable Labor / Burden 'Period Cost Inv. Adj.'s / RSSMs Inventory Effect' Other Variable Cost sheet Manufacturing Period Cost of Sales Period Cost Incurred Period Cost inventory effect

**6 Sigma**

(4,074) (2,992) (2,689) 127

(4,074) (2,992) (2,689) 127

(13,629) 730

(13,629) 730

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Period Cost of Sales: Variable Margin %


Overview
Period costs are not a component of Variable Margin. Rather, they are reversedfrom gross margin when calculating the Variable Margin Percentage.

Calculation Theory
The Form M automatically calculates the base period Variable Margin Percentage in the Volumesheet. Period Cost Incurred is addedback to the Gross Margin and Period cost inventory effect is deducted from the Gross Margin. As explained in the preceding section on period cost inventory effect, an increase in inventory translates into a positive impact on margin. Therefore, the period cost portionof the inventory change should be subtracted from the Gross Margin to arrive at Variable Margin. See the screenshot taken from the Volume sheet in the Application section below.

Application
Base Period Base Period Variable Margin Rate Net Sales & Transfers Add Back: Warranty Parts Transfers to MPC's (McFee Related) Net Sales & Transfers before W arranty and Parts Transfers $ 1,006,675 $ 600,950 $ 286,725 $ 119,000 Product Line A Product Line B Product Line C

29,750 (200,000) 836,425

17,500 (125,000) $ 493,450 $

8,750 (50,000) 245,475 $

3,500 (25,000) 97,500

Base Period Variable Margin Base Period Gross Margin Total W arranty Inventory Adjustments/RSSM's Period Cost of Sales Incurred Period Cost Absorbtion Impact on Margin Rate Parts Margin (McFee Related) Variable Margin

Period Cost impact

326,100 29,750 850 102,086 (110) (100,000) 358,676

$ $

210,333 17,500 500 58,593 (220) (62,500) 224,205

86,018

29,750 3,500 50 13,388 110 (12,500) 34,298

$ $

8,750 300 30,106 (25,000) 100,174 $

Base Period Variable Margin %

42.9%

45.4%

40.8%

35.2%

Period Cost of Sales Incurred, $102,086, is fed directly from the Base P&Lsheet. It represents total period costs that were incurred in the base period. The Period Cost Absorption Impact on Margin rate $110 i s the period cost inventory effect, calculated and linked directly from the Period Cost Inventory Effect sheet. See below for the calculations of the $110 inventory effect.

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Period Cost of Sales: Variable Margin %

Total Business Unit

Product Line A

Product Line B

Product Line C

PERIOD COST ABSORBED - IMPACT ON MARGIN RATE


Base Period Ending Inventory Base Period Beginning Inventory Net Change % of Period Cost in Inventory - Base Period Period Cost A bsorbtion Impact on Margin Rate - Base $ Absorption impact on base gross margin 66,000 65,000 1,000 11.0% 110 $ 32,000 30,000 2,000 $ 11.0% 220 $ 20,000 20,000 11.0% $ 14,000 15,000 (1,000) 11.0% (110)

The example above is taken from the Period Cost Inventory Effectsheet. The base period inventory has increased by $1,000. Business Units must enter the percentage of period cost in inventory in the yellow shaded cell. The percentage is 11.0% and the period cost absorption impact on margin is $110 [$1,000 x 11%]

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Parts
Overview
The main purpose of this section is to explain the calculations related to parts profit (market creation fee). Market Creation Fee ( McFee is Kater Inc. method of distributing parts profit ) s to all Business Units contributing to the replacement parts Business. Parts profit of a Business Unit is collapsed into one line in the Form M. The responsibility for replacement parts sales and distribution has been given to Product Support Division (PSD). Management strategy dictates that a portion of the profit or loss related to parts sales should be recognized by the profit centers that contributed to those sales either through the design or manufacture of those parts. Marketing Business Units also benefit from parts sales. MPCs have final revenue parts sales and sales variances on their accountable statements. The MPCs cost of sale is the transfer in from the product or component group. The calculation of the transfer is discussed below in the parts transfers to MPCs section.

Calculation Theory
Parts profit is treated like period cost of sales. There is no volume adjustment and any change period over period is taken directly to the form M. Below in the application section the parts profit is explained in depth.

Application
Parts profit (McFee) consists of: 1. Parts Transfers to MPCs (Marketing Profit Centers) 2. Parts Cost of Sales 3. Parts SG&A Service Fee and Neutralization Adjustment

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Parts
Parts Profit
0 Business Unit 41 YTD Actual vs. YTD Plan February Submission # (U.S. dollars in thousands)

LARGE Product Line A 125,000 62,500 62,500 12,500 50,000 Product Line B 50,000 25,000 25,000 5,000 20,000 Product Line C 25,000 12,500 12,500 2,500 10,000

Total Business Unit BASE PERIOD Parts Transfers to MPC's Parts COS Parts Margin SG&A (Parts) Net Parts Profit / (Loss) 200,000 100,000 100,000 20,000 80,000

Total 200,000 100,000 100,000 20,000 80,000

CURRENT PERIOD Parts Transfers to MPC's Parts COS Parts Margin SG&A (Parts) Net Parts Profit / (Loss)

205,000 102,500 102,500 20,500 82,000

130,000 65,000 65,000 13,000 52,000

52,000 26,000 26,000 5,200 20,800

23,000 11,500 11,500 2,300 9,200

205,000 102,500 102,500 20,500 82,000

FORM M

2,000

2,000

800

(800)

2,000

In this example, parts transfers to MPCs are taken directly from the base period and current period results. Parts transfers to MPCs are calculated by PSD for the product and component groups receiving market creation fee. Parts Transfers to MPCs are calculated based on USDN Parts Sales. Transfer factors are marketing area specific with the majority of the marketing areas have an 89% of USDN transfer factor. Product and component groups will see this number change based on parts volume or price changes. In Fig. 1, parts COS is taken directly from the base period and current period results. Parts COS is also calculated by PSD using the purchase price (for purchased finished material) or the transfer price (for worked material sent by the product and component groups to the parts distribution facilities) of parts sold in a given month. Product and component groups will see this number change with parts volume changes and material cost increases or reductions. Parts SG&A Service Fee is made up of 2 elements. The first element is a 12% fee calculated on parts variable margin to cover product support expenses. The second element of the parts SG&A service fee is an adjustment made by PSD to neutralize any profit impact to product and component groups for changes in parts volume or material cost changes. The net parts profit/(loss) for product and component groups will always be equal to plan. Below the line in the calculation of Corporate Profit, this neutralization will be reversed so a true parts profit impact is shown.

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Parts
Corporate Burden: Reversal of BU Hedging Reversal of Parts Business Plan Profit Equalization Admin & Exempt Other Allocated Operating Costs Other Allocated Income/Expense Costs Total Corporate Burden 50 500 (150) 20 420 50 500 (150) 20 420

Impact on Form M
When parts profit (McFee) changes, profit changes. In other words, a change in profit may be partially explained by a change in parts profit (McFee). There is normally no change from plan but year-on-year, there will be changes, and they are straight-line changes.
Change Excluding 6 Sigma Benefits

CORPORATE PROFIT IMPACT


Non-Manufacturing Period Costs SG&A R&D Total Period Cost Change Parts Profit (McFee)

Total Corporate Profit / (Loss)

**6 Sigma**

(11,900) (2,720) (14,620) 2,000

(11,900) (2,720) (14,620) 2,000

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Parts
Product Line Analysis
When analyzing a consolidated product line, parts elements must be looked at differently than when analy zing a Business Unit. For a product line, the following elements will exist: 1- Gross Revenue Sales 2- Revenue Sales Variances 3- Cost of Sales 4- SG & A
Consolidated View of Parts Activity
MPCs Gross Revenue Sales Revenue Sales Variances Total Net Revenue Sales Parts Transfers to MPCs (McFee) Product/Component Transfers to PSD Total Transfers Out Net Sales and Transfers Revenue Standard COS Parts Transfers in (McFee - IPTTF) Standard cost of Transfers to PSD Parts Cost of Sales (McFee) Transfer in Margin Expense Total Cost of Sales Gross Margin SG&A SG&A Service Fee & Neutralization Adj (McFee) Accountable Profit Corporate Burden Reversal of Parts BP Neutralization Adj (McFee) Corporate Profit 280 10 270 270 240 240 30 30 Pr oduct Group 139 139 139 101 101 38 4 34 Component Group 101 60 161 161 40 61 101 60 4 56 PSD 142 (162) 20 7 (8) 1 Elims (240) (60) (300) (300) (240) (40) (20) (300) Consolidated 280 10 270 270 142 142 128 7 121

30

( 3) 37

(1) 57

4 (3)

121

Key: These items eliminate - Component group profit is transfer in expense for PSD. These items eliminate - Parts Cost of Sales for product and component group is negative cost of sales for PSD. These items eliminate - Transfers in McFee for MPCs eliminate with Parts transfers to MPCs on Product and Component group book

These elements must be combined from different groups in order to have a consolidated view of parts activity. Market creation fee treats worked parts differently than purchased finished parts. The above is an example of both a worked part and purchased finished part combined. Below the examples show a worked part and purchased finished part separately.

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Parts
Consolidated View of Parts Activity - Purchased Finished Part Note: McFee is Split 40% Machine Group/60% Component Group
MPCs Gross Revenue Sales Revenue Sales Variances Total Net Revenue Sales Parts Transfers to MPCs (McFee) Product/Component Transfers to PSD Total Transfers Out Net Sales and Transfers Revenue Standard COS Parts Transfers in (McFee - IPTTF) Standard cost of Transfers to PSD Parts Cost of Sales (McFee) Transfer in Margin Expense Total Cost of Sales Gross Margin SG&A SG&A Service Fee & Neutralization Adj Accountable Profit Corporate Burden Reversal of Parts BP Neutralization Adj Corporate Profit 200 10 190 190 169 169 21 Product Group 68 68 68 41 41 27 Component Group 101 101 101 61 61 40 PSD 102 (102) 7 (8) 1 Elims (169) (169) (169) (169) (169) Consolidated 200 10 190 190 102 102 88 7 81

21

4 23

4 36

21

( 3) 26

(1) 37

4 (3)

81

Key: These items eliminate - Parts Cost of Sales for product and component group is negative cost of sales for PSD. These items eliminate - Transfers in McFee for MPCs eliminate with Parts transfers to MPCs on Product and Component group book

Consolidated View of Parts Activity - Worked Part Note: 100% of McFee is sent to Product Group
MPCs Gross Revenue Sales Revenue Sales Variances Total Net Revenue Sales Parts Transfers to MPCs (McFee) Product/Component Transfers to PSD Total Transfers Out Net Sales and Transfers Revenue Standard COS Parts Transfers in (McFee - IPTTF) Standard cost of Transfers to PSD Parts Cost of Sales (McFee) Transfer in Margin Expense Total Cost of Sales Margin SG&A SG&A Service Fee & Neutralization Adj Accountable Profit Corporate Burden Reversal of Parts BP Neutralization Adj Corporate Profit 80 80 80 71 71 9 Pr oduct Group 71 71 71 60 40 11 Component Group PSD Elims (71) (60) (131) (131) Consolidated 80 80 80 40 40 40 7 33

60 60 60 40 20

60

40 (71) (40) (60) 20 (20) (131) Gross 7 (8) 1 -

4 7

4 16

( 3) 10

(1) 17

4 (3)

33

Key: These items eliminate - Component group profit is transfer in expense for PSD. These items eliminate - Parts Cost of Sales for product and component group is negative cost of sales for PSD. These items eliminate - Transfers in McFee for MPCs eliminate with Parts transfers to MPCs on Product and Component group book

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Parts
For Product Line view, the eliminations will be similar to those shown above except for the component product lines. Transfers to PSD will not be eliminated because as shown in the example above, the component group does not receive market creation feeactivity related to the worked part. W hen the marketing company and product group receive the revenue sales and the market creation fee activity, this will be under a prime product line of Business code not a component line of Business. An example of a component line of Business consolidated parts view is shown below

Consolidated View of Parts Activity - Component Product Line


MPCs Gross Revenue Sales Revenue Sales Variances Total Net Revenue Sales Parts Transfers to MPCs (McFee) Product/Component Transfers to PSD Total Transfers Out Net Sales and Transfers Revenue Standard COS Parts Transfers in (McFee - IPTTF) Standard cost of Transfers to PSD Parts Cost of Sales (McFee) Transfer in Margin Expense Total Cost of Sales Gross Margin SG&A SG&A Service Fee & Neutralization Adj Accountable Profit Corporate Burden Reversal of Parts BP Neutralization Adj Corporate Profit 120 4 116 116 101 101 15 15 Product Group Component Group 101 60 161 161 40 61 101 60 4 56 PSD 21 (61) 20 (20) 20 3 (4) 21 Elims (101) (101) (101) (101) (101) Consolidated 120 4 116 60 60 176 21 40 20 81 95 3 92

15

(1) 57

1 20

92

Key: These items eliminate - Component group profit is transfer in expense for PSD. These items eliminate - Parts Cost of Sales for product and component group is negative cost of sales for PSD. These items eliminate - Transfers in McFee for MPCs eliminate with Parts transfers to MPCs on Product and Component group book

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Period SG&A and R&D


Overview
Form M impacts for Selling, General and Administration costs ( SG&A and Research and ) Development ( R&D costs are calculated as the change in P&L amounts from period to ) period, less the impact of currency (base period current period currency impact on costs).

Calculation
All calculations are automated in this section and shown in the Application section below.

Application
The SG&A and R&D impacts are straight-line changes from the base period to the current period. The Form M automatically calculates the impacts using the SG&A and R&D values in the Base P&Land Current P&Lsheets. These impacts are then adjusted for currency movements in the sheet before flowing into the Form M. FX
Net Change Currency Neutralized (13,629) Form M impact (11,900) (2,720) -

P&L Change Period Cost of Sales Gross Margin Impact SG&A R&D Other Operating (Income)/Expense Calculated from P&L sheets (12,400) (3,720) (13,629)

Currency Adj $ 2,950 (500) (1,000)

The example above is an extract from the FXsheet of the Form M. The adjustments for currency impacts on SG&A and R&D costs must be entered manually into the yellow shaded cells. The currency impacts are ($500) and ($1,000) for SG&A and R&D costs, respectively. For calculations and manual inputting of foreign currency impact, see section on Foreign Currency Reconciliation. The currency neutralized Form M impacts for SG&A and R&D, ($11,900) and ($2,720), respectively, are linked directly to the Form M as shown below.
Change Excluding 6 Sigma Benefits

CORPORATE PROFIT IMPACT


Non-Manufacturing Period Costs Directly from SG&A 'FX' sheet R&D Total Period Cost Change

Total Corporate Profit / (Loss)

**6 Sigma**

(11,900) (2,720) (14,620)

(11,900) (2,720) (14,620)

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Other Income and Expense


Overview
The Other (Income)/Expense section explains the P&L change of all non-operating items. Interest Expense: Form M amount is calculate d as the P&L change from period to period (base period interest current period interest). Net Currency Impact: Form M amount includes both the impact of changes in Business Unit Hedging, as well as the net currency impact from other Form M line items. See currency section for further detail. Affiliate Income: Form M amount is calculated as the P&L change from period to period, (base period Affiliate Income current period Affiliate Income). Other Income/Expense: Form M amount is calculated as the P&L change from period to period, neutralized for the impact of currency (base period Other Income/Expense current period Other Income/Expense currency impact).

Calculation
The Form M automatically calculates the change in Interest Expense, Affiliate Income and Other Income/Expense, using values from the Base P&Land Current P&Lsheets. The change in Other Income/Expense is then adjusted for currency impacts. Net Currency Impact is calculated as a total of currency impacts on all P&L items plus the impact on Business Unite hedging activities.

Application
Shown below is a screenshot of the sheet. FX
Ne t Ch a ng e Cu rren c y Ne u tra liz ed (13 ,6 29 )

P& L Ch a ng e Pe rio d C o st o f S a les Gro ss M a rg in Imp a ct SG & A R& D Oth er O pe ra tin g (In c om e )/Ex p en s e Ne t Cu rre n cy Im p ac t on O pe ra tin g Pro fit Ca lc ula te d fro m P & L s he e ts (1 2 ,40 0) (3 ,7 2 0) (1 3 ,62 9)

Cu rren c y Adj $ 2,9 5 0 (5 0 0) (1,0 0 0)

(11 ,9 00 ) (2 ,7 20 ) Fo rm M imp a c t -

1,4 5 0

Oth er In c om e /Ex p en s e

$ F orm M im p ac t $ $

1,4 5 0 (5 0) 1,4 0 0

Ne t Cu rre n cy Im p ac t Be fore He d gin g Bu s ine s s U nit H ed g ing Ne t Cu rre n cy Im p ac t

In the FXsheet, the change in Other Income/Expense is calculated from the P&L sheets in the Form M. There is no change in the Other Income/Expense from the base to the current period. There is also no currency impact on the item.

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Other Income and Expense


Business Units must manually enter currency impacts on Other Income/Expense in the FX sheet. Refer to the section on Foreign Currency Reconciliation for more information on calculations and manual input of currency impacts. The Net Currency Impact is also calculated on the FXsheet and flows directly to the Form M. See a screenshot of the Form M below.
Change Excluding 6 Sigma Benefits

CORPORATE PROFIT IMPACT


Other (Income) / Expense: Interest Expense Net Currency Impact Affilitate Income Other Income/Expense Change Directly from the 'FX' sheet

Total Corporate Profit / (Loss)

**6 Sigma**

(210) 1,400 $ 23,516 $

(210) 1,400 23,516

The currency neutralized change in Other Inco me/Expense and the Net Currency Impact have flowed directly from the sheet into the Form M. FX In addition, Interest Expense and Affiliate Income are calculated automatically, using the Base P&L and the Current P&L sheets, in the Form M. The Interest Expense, ($210), is not adjusted for currency impact. This is because Interest Expense is only a chargethat Kater allocates to its Business Units, and, therefore, it is denominated in U.S. Dollars. Affiliate Income is also not adjusted for currency impact as it, also, is recorded in U.S. Dollars.

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The Chunk Chart


Chunk Charts are a graphical representation of the Form M. They are utilized both for internal communication to the Executive Office, as well in external communications, such as the Quarterly Release.

The Business Unit Aligned Reporting template includes within it Chunk Charts to explain both profit changes, as well as for sales changes. The charts are completely mechanical in nature, and require no manual input from the user. In order to achieve consistency in communication, it is recommended that the Chunk Charts included in Aligned Reporting be used for internal communication within the Business Unit.

Sales Chunk:

Current Period Base Period Change

Sales & Revenues 1,130,675 1,006,675 124,000

Operating Profit 198,738 174,962 23,776

Accountable Profit 196,063 172,547 23,516

Corporate Profit 170,308 146,372 23,936

1,300

1,200

21 97
1,100

(4)

1,131

1,007
1,000

900

800

700 Base Period NS&T Volume Price Realization Warranty Currency Transfer Yield Parts (McFee Related) Current Period NS&T

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The Chunk Chart


Profit Chunk:

Current Period Base Period Change

Sales & Revenues 1,130,675 1,006,675 124,000

Operating Profit 198,738 174,962 23,776

Accountable Profit 196,063 172,547 23,516

Corporate Profit 170,308 146,372 23,936

250

20.9
200

0.1

(4.3)

1.4

(7.1)

(2.6)

(12.9) (11.9) (2.7) 2.0 (0.2) 0.4 170.3

40.8

146.4

100

50

Base Period Vo l/Mix Price Real Trans Yld Warr CCY Mat'l Cost Var Cost PCOS SG&A R&D Parts (McFee ) Oth er Ope r All Othe r Corp Burd en Current Period

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Contact Details

Any question regarding the Form M or on this Manual should be directed to:

Don Hall Tel (309) 675-1266 Peoria

Etc. etc

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