PROCTER & GAMBLE COST ACCOUNTING
Mission Statement
“
Wee will provide branded products and services of superior W quality and value that improve the lives of the world's consumers. As a re resu sult lt,, co cons nsum umer erss wi will ll re rewa ward rd us wi with th le lead ader ersh ship ip sa sale les, s, prof pr ofit it,, an and d va valu luee cr crea eati tion on,, al allo lowi wing ng ou ourr pe peop ople le,, ou ourr sh shar areh eho o ld lder ers, s, and the communities in which we live and work to prosper. ”
Procter & Gamble
Values P&G is its people and the values by which we live. We attract and recruit the finest people in the world. We build our organization from within, promoting and rewarding people without regard to any difference unrelated to performance. We act on the conviction that the men and women of Procter & Gamble will always be our most important asset. Leadership We are all leaders in our area of responsibility, with a deep commitment to deliver leadership results. We have a clear vision of where we are going.
We focus our resources to achieve lea dership objectives and strategies.
We develop the capability to deliver our strategies and eliminate organizational barriers. Ownership We accept personal accountability to meet o ur business needs, improve our systems, and help o thers improve their effectiveness. We all act like owners, treating t he Company's assets as our own and behav ing with the Company's long-term success in mind. Integrity We always try to do the right thing. We are honest and straightforward with each other. We operate within the letter and spirit of the law. We uphold the values and principles of P&G in every action and decision. We are data-based and intellectually honest in advocating proposals, including recognizing risks.
Passion for Winning We are determined to be the best at doing what matters most. We have a healthy dissatisfaction with the status quo. We have a compelling desire to improve and to win in the marketplace. Trust We respect our P&G colleagues, customers, and consumers, and treat them as we want to be treated. We have confidence in each other's capabilities and intentions. We believe that people work best when there is a foundation of trust.
Our principles We Show Respect for All Individuals We believe that all individuals can and want to contribute to their fullest potential. We value differences.
We create and deliver products, packaging, and concepts that build winning brand equities.
We inspire and enable people to achieve high expectations,
standards, and challenging goals. We are honest with people about their performance. The Interests of the Company and the Individual Are Inseparable We believe that doing what is right for the business with integrity will lead to mutual success for both the Company and the individual. Our quest for m utual success ties us together. We encourage stock ownership and ownership behavior. We Are Strategically Focused in Our Work We operate against clearly articulated and aligned objectives and strategies. We only do work and only ask for work that adds value to the business. We simplify, standardize, and streamline o ur current work whenever possible. Innovation Is the Cornerstone of Our Success We place great value on big, ne w consumer innovations. We challenge convention and reinvent the way we do business to better win in the marketplace.
We Are Externally Focused We develop superior understanding of consumers and their needs.
We develop close, mutually productive relationships with our customers and our suppliers.
We are good corporate citizens. We Value Personal Mastery We believe it is the responsibility of all individuals to continually develop themselves and others. We encourage and expect outstanding technical mastery and executional excellence. We Seek to Be the Best We strive to be the best in all areas of strategic importance to the Company. We benchmark our performance rigorously versus the very best internally and externally. We learn from both our successes and our failures.
Mutual Interdependency Is a Way of Life We work together with confidence and trust across business units, functions, categories, and geographies. We take pride in results from reapplying others' ideas. We build superior relationships with all the parties who contribute to fulfilling our Corporate Purpose, including our customers, suppliers, universities, and governments.
Chart of accounts As se t Ac co un ts Current Assets
1000 1010 1020 1100 1140 1150 1200 1205 1210 1215 1220 1230 1400 1410 1420 1430 1470
Cash and Cash Equivalents Investment – Money Market Investment- Certificates Deposits Accounts Receivable Other Receivables Allowance for doubtful accounts Raw Material Inventory Supplies Inventory Work In Progress Inventory Finish Goods Inventory – Product # 1 Finish Goods Inventory – Product # 2 Finish Goods Inventory – Product # 3 Prepaid Expenses Employee advances Note Receivable-Current Prepaid Interest Other Current Assets
Fixed Assets
1500 1510 1520 1530 1540 1550 1560 1690
Furniture and Fixtures Equipment Vehicles Other Depreciable Property Leasehold Improvements Building Building Improvements Land
1700 1710 1720 1730 1740 1750 1760
Accumulated Depreciation, Furniture and Fixtures Accumulated Depreciation, Equipment Accumulated Depreciation, Vehicles Accumulated Depreciation, Other Accumulated Depreciation, Leasehold Accumulated Depreciation, Building Accumulated Depreciation, Building Improvement
Other Assets
1900 1910 1915 1920 1990
Deposits Organization Costs Accumulated Amortization, Organization Costs Notes Receivable, Non-Current Other Non-Current Assets
Liability Accounts Current Liabilities
2000 2300 2310 2320 2330 2335 2340 2350 2360 2370
Accounts Payable Accrued Expenses Sales Tax Payable Wages Payable 401-K Deduction Payable Health Insurance Payable Federal Payroll Taxes Payable FUTA Tax Payable State Payroll Taxes Payable SUTA Payable
2380 2390 2400 2410 2420 2440 2480
Local Payroll Taxes Payable Income Taxes Payable Other Taxes Payable Employee Benefit Payable Current Portion of Long-term Debt Deposit from Customer Other Current Liabilities
Long-Term Liability
2700 2702 2704 2706 2708 2710 2740
Notes Payable Land Payable Equipment Payable Vehicles Payable Bank Loans Payable Differed Revenue Other Long-Term Liabilities
Equity Account
3010 3020 3030
Stated Capital Capital Surplus Retained Earnings
4540 4550 4800 4900
Finance Charge Income Shipping Charges Reimbursed Sales Returns and Allowances Sales Discounts
Cost of Goods Sold
5000 5010 5020 5050 5100 5150 5200 5300 5700 5730 5750 5800 5850 5900 5950
Product # 1 Cost Product # 2 Cost Product # 3 Cost Raw Material Purchases Direct Labor Costs Indirect Labor Cost Heat and Power Miscellaneous Factory Cost Cost of Goods Sold, Salaries and Wages Cost of Goods Sold, Contract Labor Cost of Goods Sold, Freight Cost of Goods Sold, Other Inventory Adjustments Purchase Return and Allowances Purchase Discount
Expenses Revenue Accounts
4000 4020 4040 4060 4080
Product # 1 Sales Product # 2 Sales Product # 3 Sales Interest Income Other Income
6000 6010 6050 6100 6150 6200 6250
Default Purchase Expense Advertising Expense Amortization Expense Auto Expense Bad Debt Expense Bank Fees Cash Over and Short
6300 6350 6400 6450 6500 6510 6520 6530 6550 6600 6650 6660 6670 6700 6710 6750 6850 6900 6950 7000 7100 7200 7250 7300 7350 7400 7450 7460 7550 7600 7620 7650 7700 7750
Charitable Contributions Expense Commissions and Fees Expense Depreciation Expense Dues and Subscription Expense Employee Benefit Expenses, Health Insurance Employee Benefit Expenses, Pension Plans Employee Benefit Expenses, Profit Sharing Plan Employee Benefit Expenses, Other Freight Expenses Gift Expenses Income Tax Expense, Federal Income Tax Expense, State Income Tax Expense, Local Insurance Expense, Product Liability Insurance Expense, Vehicle Interest Expense Legal and Professional Expense Licenses Expense Loss on NSF Checks Maintenance Expense Office Expense Payroll Tax Expense Penalties and Fines Expense Other Taxes Postage Expenses Rent or Lease Expenses Repair and Maintenance Expense, Office Repair and Maintenance Expense, Vehicle Supplies Expense, Office Telephone Expenses Training Expense Travel Expense Salaries Expense, Officer Wages Expense
7800 8900 9000
Utilities Expense Other Expenses Gain/Loss on Sales of Assets
Financial Statements Consolidated Statement of Earnings
Amounts in millions except per share amounts; Years ended June 30 NET SALES Cost of products sold Selling, general and administrative expense OPERATING INCOME Interest expense Other non-operating income/(expense), net EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Income taxes on continuing operations NET EARNINGS FROM CONTINUING OPERATIONS NET EARNINGS FROM DISCONTINUED OPERATIONS NET EARNINGS BASIC NET EARNINGS PER COMMON SHARE: Earnings from continuing operations Earnings from discontinued operations BASIC NET EARNINGS PER COMMON SHARE DILUTED NET EARNINGS PER COMMON SHARE: Earnings from continuing operations Earnings from discontinued operations DILUTED NET EARNINGS PER COMMON SHARE DIVIDENDS PER COMMON SHARE
2011 $82,559 40,768 25,973 15,818 831 202 15,189 3,392 11,797 —
$11,797 $ 4.12 —
4.12 3.93 —
3.93 $ 1.97
2010 $78,938 37,919 24,998 16,021 946 (28) 15,047 4,101 10,946 1,790 $12,736
2009 $76,694 38,690 22,630 15,374 1,358 397 14,413 3,733 10,680 2,756 $13,436
$ 3.70 0.62 4.32
$ 3.55 0.94 4.49
3.53 0.58 4.11
3.39 0.87 4.26
$ 1.80
$ 1.64
Consolidated Balance Sheet Amounts in millions; June 30
Assets CURRENT ASSETS Cash and cash equivalents Accounts receivable INVENTORIES Materials and supplies Work in process Finished goods Total inventories Deferred income taxes Prepaid expenses and other current assets TOTAL CURRENT ASSETS PROPERTY, PLANT AND EQUIPMENT Buildings Machinery and equipment Land Total property, plant and equipment Accumulated depreciation NET PROPERTY, PLANT AND EQUIPMENT GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Trademarks and other intangible assets, net NET GOODWILL AND OTHER INTANGIBLE ASSETS OTHER NONCURRENT ASSETS TOTAL ASSETS Liabilities and Shareholders’ Equity
2011
2010
$ 2,768 6,275
$ 2,879 5,335
2,153 717 4,509 7,379 1,140 4,408 21,970
1,692 604 4,088 6,384 990 3,194 18,782
7,753 32,820 934 41,507 (20,214) 21,293
6,868 29,294 850 37,012 (17,768) 19,244
57,562 32,620 90,182 4,909 $138,354 2011
54,012 31,636 85,648 4,498 $128,172
2010
CURRENT LIABILITIES Accounts payable Accrued and other liabilities Debt due within one year TOTAL CURRENT LIABILITIES LONG-TERM DEBT DEFERRED INCOME TAXES OTHER NONCURRENT LIABILITIES TOTAL LIABILITIES
$ 8,022 9,290 9,981 27,293 22,033 11,070 9,957 70,353
$ 7,251 8,559 8,472 24,282 21,360 10,902 10,189 66,733
1,234
1,277
—
—
4,008 62,405 (1,357) (2,054) (67,278) 70,682 361 68,001 $138,354
4,008 61,697 (1,350) (7,822) (61,309) 64,614 324 61,439 $128,172
SHAREHOLDERS’ EQUITY
Convertible Class A preferred stock, stated value $1 per share (600 shares authorized) Non-Voting Class B preferred stock, stated value $1 per share (200 shares authorized) Common stock, stated value $1 per share (10,000 shares authorized; shares issued: 2011 —4,007.9, 2010 —4,007.6) Additional paid-in capital Reserve for ESOP debt retirement Accumulated other comprehensive income (loss) Treasury stock, at cost (shares held: 2011 —1,242.2, 2010 —1,164.1) Retained earnings Noncontrolling interest TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Consolidated Statement of Cash Flows
Amounts in millions; Years ended June 30 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR OPERATING ACTIVITIES Net earnings Depreciation and amortization Share-based compensation expense Deferred income taxes Gain on sale of businesses Change in accounts receivable Change in inventories Change in accounts payable, accrued and other liabilities Change in other operating assets and liabilities Other TOTAL OPERATING ACTIVITIES INVESTING ACTIVITIES Capital expenditures Proceeds from asset sales Acquisitions, net of cash acquired Change in investments TOTAL INVESTING ACTIVITIES FINANCING ACTIVITIES Dividends to shareholders Change in short-term debt Additions to long-term debt Reductions of long-term debt Treasury stock purchases Impact of stock options and other TOTAL FINANCING ACTIVITIES
2011 $ 2,879
2010 $ 4,781
2009 $ 3,313
11,797 2,838 414 128 (203) (426) (501) 358 (1,190) 16 13,231
12,736 3,108 453 36 (2,670) (14) 86 2,446 (305) 196 16,072
13,436 3,082 516 596 (2,377) 415 721 (742) (758) 30 14,919
(3,306) 225 (474) 73 (3,482)
(3,067) 3,068 (425) (173) (597)
(3,238) 1,087 (368) 166 (2,353)
(5,767) 151 1,536 (206) (7,039) 1,302 (10,023)
(5,458) (1,798) 3,830 (8,546) (6,004) 721 (17,255)
(5,044) (2,420) 4,926 (2,587) (6,370) 681 (10,814)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, END OF YEAR SUPPLEMENTAL DISCLOSURE Cash payments for: Interest Income taxes Assets acquired through non-cash capital leases Divestiture of coffee business in exchange for shares of P&G stock
163 (111) $ 2,768
(122) (1,902) $ 2,879
(284) 1,468 $ 4,781
$ 806 2,992 13
$ 1,184 4,175 20 —
$ 1,226 3,248 8 2,466
—
Ratio Analysis / Trend Analysis Ratio analysis can be done differently depending on what type of ratio you may want. Activity ratios measure how efficiently a company performs day-to-day tasks, such us the collection of receivables and management of inve ntory. For example, exhibit 1 shows Procter and Gamble co. Short-term (operating) activity ratio. Procter & Gamble Co., short-term (operating) activity ratios Jun 30, 2012
Turnover Ratios Inventory turnover Receivables turnover Payables turnover Working capital turnover Average No. of Days Average inventory processing period Add: Average receivable collection period Operating cycle Less: Average payables payment period Cash conversion cycle
Jun 30, 2011
Jun 30, 2010
Jun 30, 2009
Jun 30, 2008
Jun 30, 2007
12.45 13.79 10.57 17.19
11.19 13.16 10.29 14.66
12.36 14.80 10.89 17.67
11.49 13.54 13.22 11.73
9.92 12.35 12.33 9.94
11.22 11.54 13.39 9.88
29 26 56 -35 21
33 28 60 -35 25
30 25 54 -34 21
32 27 59 -28 31
37 30 66 -30 37
33 32 64 -27 37
Source: Based on data from Procter & Gamble Co. Annual Reports Stock Analysis on Net (www.stock-analysis-on.net) Copyright © 2012 EBIT Financial Analyses Center
If we take a closer look at the inventory turnover which is calculated; revenue divided by inventory. We will see how during the 2010 to 2011 inventory turnover deteriorated but then during the year 2011 to 2012 inventory turnover increase by .55. This tells us that Procter & Gamble inventory was being used at a much faster rate than the previous years. Now le t’s take a look at the whole picture, if we see in exhibit 1 from
2007 to 2012 the ratio turnover for inventory, receivables, working capital began with a very low ratio but each year it increase even though that our economy has been a bit wobbly. But for payable turnover instead of increasing year by year it actually decrease. This is because Procter & Gamble was having a harder time to pay of creditor during the 2007 to 2009 years when the economy was not so good. But during the l ast 3 years they were able to lower their payable rates ratio dramatically. This meaning that by combining all the information together we can come to conclude that P&G turnover ratio has been improving gradually every year.
Trends analyzes calculates the percentage change for one account over a period of two years or more. For example, for 2012 P&G net sales were $83,680(amounts in million) and the 2011 net sales were $81,104(amounts in million). So we subtract $83,680-$81104 which equals to $2576. We then divide $2576 by the previous year sales of $81,104, which equal to .0317626, after this we multiply by 100, wh ich gives us 3.18 percent. What this percent means is that P&G increase in net sales 3.18 percent over the last year. But is this really good? Well in order to really figure out if it’s actually an improvement we can compare it to the previous 2 years sales (2011-2010). So $81,104 minus $77,867 equals $3237,
we then divide by $77,867, which equal .04157 then multiply by 100. This te lls us that even thought that sales went up by 3.18 percent in 20122011 it increase very little compare to the increase in 2011-2010 of 4.1 percent. This would tell our stockholders and CEO that the company did not do very well in net sales in the year 2012-2011 compare to 2011-2010. But if we want to figure out the percentage trend analyzes for more than two years we would use another formula in order to calculate it. As we can see in exhibit 1, 2008 year will be our base years and then we divide the amount in each non-base year by the amount in the base year and multiply by 100. This will give us the trend percentage for each year. (amounts in million)
Historical Data Net Sales Operating Income Trend Percentage Net Sales Operating Income
2012 $83,680.00 $13,292.00
2011 $81,104.00 $15,495.00
2010 $77,567.00 $15,732.00
2009 $75,295.00 $15,188.00
2008 $77,714.00 $15,743.00
107.67687 84.431176
104.36215 98.424697
99.810845 99.930128
96.887305 96.474624
100 100
As we can see from the trend analyzes as the years for net sales go from 2008 to 2012, sales de crease from the years 2009-2010 but af ter this in began to increase slowly each passing year. This could have happen because of bad economy or difficulty in the company. But if we take a look into operating income then we could see that it actually went lower each passing years. But this time this is actually a very good thing, because the company was actually able to cut cost by approximately 15 percent during the 4 years period. So as we see this process of trend analyzes and percentage change can be done for any kind of item like cash, net income, inventory, liabilities, Cost of Goods Sold, etc. This will be a great use for P&G since it will tell them if they are meeting their selling goals, or cutting enough money per year.
Information from Annual Report and Footnotes to Financial Statements related to Cost Accounting Consolidated Financial Statements Use of Estimates Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on manage ment’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, consumer and trade promotion accruals, pensions, postemployment benefits, stock options, valuation of acquired intangible assets, useful lives for depreciation and amortization of long-lived assets, future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the financial statements in any individual year. However, in regard to ongoing impairment testing of goodwill and indefinite-lived intangible assets, significant deterioration in future cash flow projections or other assumptions used in valuation models, versus those anticipated at the time of the valuations, could result in impairment charges that may materially affect the financial statements in a given year. Revenue Recognition Sales are recognized when revenue is realized or realizable and has been earned. Revenue transactions represent sales of inventory. The revenue recorded is presented net of sales and other taxes we collect on behalf of governmental authorities. The revenue includes shipping and handling costs, which generally are included in the list price to the customer. Our policy is to recognize revenue when title to the product, ownership and risk of loss transfer to t he customer, which can be on the date of shipment or the date of receipt by the customer. A provision for payment discounts and product return allowances is recorded as a reduction of sales in the same period that the revenue is recognized. Trade promotions, consisting primarily of customer pricing all owances, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. Sales are recorded net o f trade promotion spending, which is recognized as incurred, generally at the time of the sale. Most of these arrangements have terms of approximately one year. Accruals for expected payouts under these programs are included as accrued marketing and promotion in the accrued and other liabilities line item in the Consolidated Balance Sheets.
Cost of Products Sold Cost of products sold is primarily comprised o f direct materials and supplies consumed i n the manufacture of product, as well as manufacturing labor, depreciation expense and direct ove rhead expense necessary to acquire and convert the purchased materials and supplies into fi nished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity. Selling, General and Administrative Expense Selling, general and administrative expense (SG&A) is primarily comprised of marketing expenses, selling expenses, research and development costs, administrative and other indirect overhead costs, depreciation and amortization expense on non-manufacturing assets and other miscellaneous operating items. Research and development costs are charged to expense as incurred and were $2 ,001 in 2011, $1,950 in 2010 and $1,864 in 2009. Advertising costs, charged to expense as incurred, include worldwi de television, print, radio, internet and in-store advertising expenses and were $9,315 in 2011, $8,576 in 2010 and $7,519 i n 2009. Non-advertising related components of the Company’s total marketing spending include costs associated with consumer promotions, product sampling and sales aids, all of which a re included in SG&A, as well as coupons and customer trade funds, which are recorded as reductions to net sales. Other Non-Operating Income/(Expense), Net Other non-operating income/(expense), net, primarily includes net divestiture gains, interest and investment income and the provision for income attributable to noncontrolling interests. Currency Translation Financial statements of operating subsidiaries outside the United States of America (U.S.) generally are measured using the local currency as the functional currency. Adjustments to translate those statements i nto U.S. dollars are recorded in other comprehensive income (OCI). Currency translation adjustments in accumulated OCI were a gain o f $5,632 at June 30, 2011 and a loss of $861 at June 30, 2010. For subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Remeasurement adjustments for financial statements in highly inflationary economies and other transactional exchange gains and losses are reflected in earnings.
Cash Flow Presentation The Consolidated Statements of Cash Flows are prepared using the indirect method, which reconciles net earnings to cash flow from operating activities. The reconciliation adjustments include the removal of timing differences between the occurrence of operating receipts and payments and their recognition in net earnings. The adjustments also remove cash flows arising from investing and financing activities, whi ch are presented separately from operating activities. Cash flows from foreign currency transactions and operations are translated at an average exchange rate for the period. Cash flows from hedging activities are included in the same category as the i tems being hedged. Cash flows from derivative instruments designated as net investment hedges are classified as financing activities. Realized gains and losses from non-qualifying derivative instruments used to hedge currency exposures resulting from intercompany financing transactions are al so classified as financing activities. Cash flows from other derivative instruments used to manage interest, commodity or o ther currency exposures are classified as operating activities. Cash payments related to income taxes are classified as operating activities. Cash Equivalents Highly liquid investments with remaining stated maturities of three months or less when purchased are considered cash equivalents and recorded at cost. Investments Investment securities consist of readily marketable debt and equity securities. Unrealized gains or losses are charged to earnings for investments classified as trading. Unrealized gains or losses on securities classified as available-for-sale are generally recorded in sharehol ders’ equity. If an available-for-sale security is other than temporarily impai red, the loss is charged to either e arnings or shareholders’ equity depending on our intent and ability to retain the security until we recover the full cost basis and the extent of the loss attributable to the creditworthiness of the issuer. Investments in certain companies over which we exert significant influence, but do not control the financial and oper ating decisions, are accounted for as equity method investments. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method. Both equity and cost method investments are included as other noncurrent assets in the Consolidated Balance Sheets. Inventory Valuation Inventories are valued at the lower of cost or market value. Product- related inventories are primarily maintained on the first-in, first-out method. Minor amounts of product inventories, including certain cosmetics and commodities, are maintained on the last-in, first-out method. The cost of spare part inventories i s maintained using the average cost metho d.
Property, Plant and Equipment Property, plant and equipment are recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized over the assets’ estimated useful lives using the straight-line method. Machinery and equipment includes office furniture and fixtures (15-year life), computer equipment and capitalized software (3- to 5-year lives) and manufacturing equipment (3- to 20-year lives). Buildings are depreciated over an estimated useful life of 40 years. Estimated useful lives are periodically reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating conditions o ccur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts. Goodwill and Other Intangible Assets Goodwill and indefinite-lived brands are not amortized, but are evaluated for impairment annually or when indicators of a potential impairment are present. Our impairment testing of goodwill is per- formed separately from our impairment testing of indefinite-lived intangibles. The annual evaluation for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. We believe such assumptions are also comparable to those that would be used by other marketplace participants. We have acquired brands that have been determined to have indefinite lives due to the nature of our business. We evaluate a number of factors to determine whether an indefinite life is appropriate, including the competitive environment, market share, brand history, product life cycles, operating plans and the macroeconomic environment of the countries in which the brands are so ld. When certain events or changes in operating conditions occur, an impairment assessment is performed and indefinite-lived brands may be adjusted to a determinable life. The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Patents, technology a nd other intangibles with contractual terms are generally amortized over their respective legal or contractual lives. Customer relationships, brands and other non-contractual intangible assets with determinable lives are amortized over periods generally ranging from 5 to 30 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted. Fair Values of Financial Instruments Certain financial instruments are required to be recorded at fair value. Changes in assumptions or estimation methods could affect the fair value estimates; however, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. Other financial instruments, including cash equivalents, other investments and short-term debt, are recorded at cost, which approximates fair value. The fair values of long-term debt and financial instruments are disclosed in Note 4 and Note 5, respectively. New Accounting Pronouncements and Policies Other than as described below, no new accounting pronouncement issued or effective during the fiscal year has had or is expe cted to have a material impact on the Consolidated Financial Statements.
DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On January 1, 2009, we adopted new accounting guidance on disclosures about derivative instruments and hedging acti vities. The new guidance impacted disclosures only and requires additional qualitative and quantitative information on the use of derivatives and their impact on an entity’s financial position, results of operations and cash flows. Refer to Note 5 for additional information regarding our risk management activities, including derivative instruments and hedging activities. BUSINESS COMBINATIONS On July 1, 2009, we adopted new accounting guidance on business combinations. The new guidance revised the m ethod of accounting for a number of aspects of business combinations including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price) and post-acquisition exit activities of acquired businesses. The adoption of the new guidance did not have a material effect on our financial position, results of operations or cash flows. NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS On July 1, 2009, we adopted new accounting guidance on noncontrolling interests in consolidated financial statements. The new accounting guidance requires that a noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. The Company’s retrospective adoption of the new guidance on July 1, 2009, did not have a material effect on our financial position, results of operations or cash flows. Net expense for income attri butable to the noncontrolling interests totaling $130 in 2011, $110 in 2010 and $86 in 2009 i s not presented separately in the Consolidated Statements of Earnings due to immateriality, but is reflected within other non-operating income/(expense), net. After deduction of the net expense for income attributable to noncontrolling interests, net earnings represents net income attributable to the Company’s common shareholders.
RISK MANAGEMENT ACTIVITIES AND FAIR VALUE MEASUREMENTS As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. We evaluate exposures on a centralized basis to take advantage of natural exposure correlation and netting. To the extent we choose to manage volatility associated with the net exposures, we enter into various financial transactions, which we account for using the applicable accounting guidance for derivative instruments and hedging activities. These financial transactions are governed by our policies covering acceptable counterparty exposure, instrument types and other hedging practices. At inception, we formally designate and document qualifying instruments as hedges of underlying exposures. We formally assess, at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Fluctuations in the value of these instruments generally are offset by changes in the value or cash flows of the underlying exposures bei ng hedged. This offset is driven by the high degree of effective ness between the exposure being hedged and the hedging instrument. The ineffective portion of a change in the fair value of a qualifying instrument is immediately recognized in earnings. The amount of ineffectiveness recognized is immaterial for all years presented. Credit Risk Management We have counterparty credit guidelines and generally enter into transactions with investment grade financial institutions. Counterparty exposures are monitored daily and downgrades in counterparty credit ratings are reviewed on a timely basis. Credit risk arising from the inability of a counterparty to meet the terms of our financial instrument contracts generally is limited to the amounts, if any, by which the counterparty’s obligations to us exceed our obligations to the counter- party. We have not incurred, and do not expect to incur, material credit losses on our risk management or other financial instruments. Certain of the Company’s financial instruments used in he dging transactions are governed by industry standard netting agreements with counterparties. If the Company’s credit rating were to fal l below the levels stipulated in the agreements, the counterparties could demand either
collateralization or termination of the arrangement. The aggregate fair value of the instruments covered by these contractual features that are in a net liability position as of June 30, 2011, was $143. The Company has never been required to post collateral as a result of these contractual features. Interest Rate Risk Management Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage this risk in a cost-efficient manner, we enter into interest rate swaps whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional amount. Interest rate swaps that meet specific accounting criteria are accounted for as fair value o r cash flow hedges. For fair valu e hedges, the changes in the fair value of both the hedging instruments and the underlying debt obligations are immediately recognized in interest expense. For cash flow hedges, the effective portion of the changes in fair value of the hedging instrument is reported in OCI and reclassified into interest expense over the life of the underlying debt. The ineffective portion for both cash flow and fair value hedges, which is not material for any year presented, is immediately recognized in earnings.
Foreign Currency Risk Management We manufacture and sell our products and finance operations in a number o f countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. The purpose of our foreign currency-hedging program is to manage the volatility associated with short-term changes in exchange rates. To manage this exchange rate risk, we have historically utilized a combination of forward contracts, options and currency swaps. As of June 30, 2011, we had currency swaps with maturities up to five years, which are inte nded to offset the effect of exchange rate fluctuations on intercompany loans denominated in fo reign currencies. These swaps are accounted for as cash flow hedges. The effective portion of the changes in fair value of these instruments is reported in OCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the related hedged transactions affect earnings. The ineffective portion, which is not material for any year presented, is immediately recognized in earnings. The change in value of certain non-qualifying instruments used to m anage foreign exchange exposure of intercompany financing transactions and certain balance sheet items subject to revaluation is immediately recognized in earnings, substantially offsetting the foreign currency markto-market impact of the related exposure. Net Investment Hedging We hedge certain net investment positions i n foreign subsidiaries. To accomplish this, we eit her borrows directly in foreign currencies and designate all or a portion of foreign currency debt as a hedge of the applicable net investment position or enter into foreign currency swaps that are designated as hedges of our related foreign net investments. Changes in the fair value of these instruments are immediately recognized in OCI to offset the change in the value of the net investment being hedged. Currency effects of these hedges reflected in OCI were an after-tax loss of $1,176 and an after-tax gain of $789 in 2011 and 2010, respectively. Accumulated net balances were after- tax losses of $4,446 and $3,270 as of June 30, 2011 and 2010, respectively. Commodity Risk Management Certain raw materials used in our products or production processes are subject to price volatility caused by weather, supply conditions, politi cal and economic variables and other unpredictable factors. To manage the volatility related to anticipated purchases of certain of these materials, we may, on a limited basis, use futures and options with maturities generally less than one year and swap contracts with maturities up to five years. These market instruments generally are designated a s cash flow hedges. The effective portion of the changes in fair v alue of these instruments is reported in OCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the hedged transactions affect earnings. The ineffective and non-qualifying portions, which are not material for any year presented, are immediately recognized in earnings.
Insurance We self-insure for most insurable risks. However, we purchase insurance for Directors and Officers Liabil ity and certain other coverage in situations where it is required by law, by contract or deemed to be in the best interest of the Company. Fair Value Hierarchy Accounting guidance on fair value measurements for certain financial assets and liabilities requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs reflecting the reporting entities own assumptions or external inputs from inactive markets. When applying fair value principles in the valuation of assets and liabilities, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We calculate the fair value of our Level 1 and Level 2 instruments based on the exchange traded price of similar or identical instruments where available or based on other observable inputs. The fair value of our Level 3 instruments is calculated as the net present value of expected cash flows based on externally provided or obtained inputs. Certain Level 3 assets may also be based on sales prices of similar assets. Our fair val ue calculations take into consideration the credit risk of both the Company and our counterparties. The Company has not changed its valuation techniques used in measuring the fair value of any financial assets and liabilities during the year. DISCONTINUED OPERATIONS In October 2009, the Company completed the divestiture o f our global pharmaceuticals business to Warner Chilcott p lc (Warner Chilcott) for $2.8 billion of cash, net have assumed and transferred liabilities. Under the terms of the agreement, Warner Chilcott acquired our portfolio of branded pharmaceutical products, our prescription drug product pipeline and o ur manufacturing facilities in Puerto Ri co and Germany. In addition, the majority of the employees working on the pharmaceuticals business were transferred to Warner Chilcott. The Company recorded an after-tax gain on the transaction of $1,464, which is included in net earnings from discontinued operations in the Consolidated Statement of Earnings for the year ended June 30, 2010. The pharmaceuticals business had historically been part of the Company’s Health Care reportable segment. In accordance with the applicable accounting guidance for the disposal of long-live d assets, the results of the pharmaceuticals business are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all years presented. In November 2008, the Company completed the divestiture of our coffee business through the merger of our Folgers coffee subsidiary i nto The J.M. Smucker Company (Smucker) in an all-stock Reverse Morris Trust transaction. In connection with the merger, 38.7 mill ion shares of common stock of the Company were tendered by share- holders and exchanged for all shares of Folgers common stock, resulting in an increase in treasury stock of $2,466. Pursuant to the me rger, a Smucker subsidiary merged with and into Folgers and Folgers became a wholly owned subsidiary of Smucker. The Company recorded an after-tax gain on the transaction of $2,011, which is included in net earnings from discontinued operations in the Consolidated Statement of Earnings for the year ended June 30, 2009.
The coffee business had historically been part of the Company’s Snacks, Coffee and Pet Care reportable segment, as well as the coffee portion of
our away-from-home business, which was included in the Fabric Care and Home Care reportable segment. In accordance with the applicable accounting guidance for the disposal of long-live d assets, the results of Folgers are presented as discontinued operations and, as such, have been excluded from both continuing operations and se gment results for all years presented.
Journal Entries Related to Cost Accounting Date 04/2011
Date 04/2011
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Date 04/2011
Description Raw Material Inventory Merchandise Inventory Accounts Payable Inventory Purchase
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Description Overhead Cost Pool Accounts Payable Record Indirect Production Cost in OH
Description Work in Process Inventory Raw Material Inventory Transfer of Raw Material to Inventory
Description Overhead Cost Pool Work in Process Inventory Record Inventory Scrap and Spoilage
Debit Xxx
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Description Finish Goods Inventory Work in Process Inventory Record Finished Goods
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Date 04/2011
Date 04/2011
Date 04/2011
Description Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Overhead Cost Allocate Overhead
Description Cost of Goods Sold Expense Obsolescence Reserve Obsolete Inventory Entree
Description Work in Process Inventory Raw Material Inventory Transfer of Raw Material to Inventory
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Thoughts of internal reports you would expect related to cost accounting Productivity and Cost Savings Plan In February 2012, the company announced a $10 bi llion productivity and cost savings plan to reduce costs and better leverage scale in the areas of supply chain, research and development, marketing and overheads. The program was designated to accelerate cost reductions by streaming management decision making, manufacturing and other work processes to fund the Company’s growth and strategy. As part of this plan the
Company expects to incur approximately $3.5 billion in before-tax restructuring costs over a four year period (from fiscal 2012 through fiscal 2015). More than half of the costs will be incurred by the end of fiscal 2013 and the remainder in fiscal years 2014 and 2015. Savings generated from the restructuring costs are difficult to estimate, given the nature of the activities, the corollary benefits achieved, the timing of the execution and the degree of reinvestment. Overall, all costs are expected to deliver approximately $2 billion in before-tax annual savings. The before-tax savings in the current year are not material due to the timing of the plan.
Driving Productivity and Cost Savings Productivity is the great enabler that allows us to invest in leadership levels of consumer understanding and innovation, ensure our brands are priced competitively, overcome macro headwinds and deliver bottom-line growth…simultaneously. Earlier this year, the company announced our objective of delivering$10 billion in cost savings by the end of fiscal year 2016. This program includes $6 billion of savings in cost of goods sold, $1 billion from marketing efficiencies, and $3 billion from nonmanufacturing overhead.
Cost of Goods Sold Schedule is one of the internal reports related to cost accounting. Cost of goods sold (COGS) refer to the inventory costs of those goods a business has sold during a particular period and, therefore, transferred from Finished Goods Inventory on the balance sheet to Cost of Goods Sold o n the income statement. Costs include a ll costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs of goods made by the business include material, labor, and overhead. The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value. Cost of goods manufactured schedule is the total cost of goods completed during the period and t ransferred to finished goods inventory. Manufacturing companies transform raw material into finished goods through the use of labor and factory facilities. For example, a company manufacturing furniture from wood or timber. The income statement prepared by a manufacturing company requires the calculation of cost of goods manufactured.
Budgets are the comprehensive financial plan for the organization as a whole. o Sales Budgets o Production Budget o Purchased Budget Labor Budget o o Manufacturing Overhead Budget o Selling and Administrative Budget o Cash Budget
Thoughts as to what concepts/techniques could be used to evaluate whether they are meeting their goals/ objectives. “We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers. As a result,
consumers will reward us with leadership sales, profit, and value creation, allowing our people, our shareholders, and the communities in which we live and work to prosper.” As the mission statement articulate, the main goal for the company is to be the quality, sales and consumer value
market leader. We are planning to focus on the company resources to achieve t hese objectives. As well to evaluate the company performance semiannually to see if the strategies the company is applying are meeting goals and objectives. Referring to sales objectives we can examine our financial ratios, for example the inventory “turn-over ratio” to see how m any days it takes to
sell the inventory on hand; also we can compare to the last years company ratios to review if the company is improving or declining, and/or we can compare to our market competitors to see how much advantage or disadvantage the company has. P&G Company can evaluate the quality of the products by doing quality research studies to see if their products are meeting and exceeding the standard quality qualifications. Last but not least, P&G need to evaluate their customer value applying different techniques, such as training employees, calls to customer after purchase and/ or surveys to see if customer satisfaction was achieved. Customer satisfaction usually le ads to customer loyalty and product repurchase.
Thoughts as to what concepts/techniques could be used when making decisions about future actions. Procter and Gamble might believe that a certain concept or technique they are currently could help them make a better decision about future actions within the company; but in our opinion we believe that if they could focus some of their attention to relevant costing they might be able to make a wiser choice. Relevant costing focuses managerial attention on a decision’s relevant information. Relevant costing techniques are applied in virtually all business decisions in both short-term and long-term contexts. Proctor and Gamble might examine the application of relevant costing techniques to recurring business decisions, such as replacing an asset, outsourcing a product or part, allocating scarce resources, manipulating sales mix, or evaluating specially priced orders. In decision making, managers should consider all relevant costs and revenues associated with each decision alternative. In this process, there is a relationship between time and relevance. For information to be relevant, it must possess three characteristics: be associated with the decision under consideration; be important to the decision maker; and have a connection to, or bearing on, some future endeavor. As the decision time horizon is reduced, fewer costs and revenues are relevant because the majority of such amounts cannot be changed by short-term management actions. In the longer term, management action can influence virtually all costs. Regardless of whether the decision is a short- or long-term one, all decision making requires analysis of relevant information.
