CAMERON INTERNATIONAL CORPORATION POLICY

SUBJECT
Variances from Standard Costs

POLICY TYPE FUNCTIONAL AREA POLICY NO

Income Statement FP-IS-04-010
Finance and Accounting
CATEGORY DATE ISSUED/REISSUED
12/01/2003
Variances & OVMC 06/03/2013
APPROVED BY
CAO
Authoritative Literature Reference:
ASC 450 - Contingencies

SCOPE

The purpose of this policy is to explain and clarify the Company’s policy regarding variances from
standard costs and to provide the basis for the recognition of product cost and variances from standard.

POLICY STATEMENT

It is the policy of Cameron that all product cost and manufacturing variances from standard costs are to be
recognized by all operating units using the same criteria defined within this policy. Purchase Price
Variances (PPV) are recognized at the time the liability for the purchased goods or services are received
and recorded. Direct Labor & Overhead, material usage and subcontract variances are recorded in the
period in which the order is closed. To close an order from further entry, it must have no outstanding
receipts, all operations must be confirmed, and all issues material to inventory must be complete. All
production orders are to be settled on a regular and timely basis.

PURCHASE PRICE VENDOR (PPV) VARIANCES

SAP charges all PPV variances into one single account for General Ledger reporting. The PPV material
variances are differences between the actual price paid to a vendor and the current standard price for that
material.

Freight and duty variances are included as part of the PPV Material Variance. A Freight and Duty factor
is built into the standard cost of the product, thereby creating a favorable variance under the material PPV
variance, but when the actual costs for freight are incurred, the actual costs will be charged as an
unfavorable variance in material PPV variance and the two should approximately offset.

When a part number is cost rolled in Optimus, a freight factor (%) is applied systematically to the
standard cost of the part (supplier cost). When the part is received, the system capitalizes the full standard
cost into inventory (including the freight factor value), credits the GRIR for the supplier cost portion, and
credits a special PPV Freight & Duty account within Variances (account 550010 in Optimus). If there is a
difference between the set standard buy cost in SAP and the current purchase/receipt, then the delta is
charged to the PPV PO account in Variances (Optimus Account 550000).

Subsequent Freight Carriers charged to the Company will be expensed directly to the 550010 PPV Freight
& Duty account, which will net off the credits sitting in the account for the freight factor applied upon
goods receipt.
 CAMERON INTERNATIONAL CORPORATION POLICY
SUBJECT
Variances from Standard Costs

POLICY TYPE FUNCTIONAL AREA POLICY NO

Income Statement FP-IS-04-010
Finance and Accounting
CATEGORY DATE ISSUED/REISSUED
12/01/2003
Variances & OVMC 06/03/2013
APPROVED BY
CAO
Authoritative Literature Reference:
ASC 450 - Contingencies

Exchange PPV variance is the difference between the foreign currency rate used at the goods receipt and
the rate at the time the invoice is recorded. If there is a difference between the rate used on the Purchase
Order and the rate used at goods receipt, the difference goes to PPV Exchange Rate Variance.

All PPV variances can be segregated into Vendor and Intra-division.

In response to Intra-division PPV variances, a process was developed to handle price discrepancies
between legal entities. It entails processing the invoices as they are presented from the selling entity,
regardless of the price. Invoices with price discrepancies less than $500 will result in the difference being
charged to the intra-division PPV account. Where price discrepancies are greater than $500, the
difference will be charged to account Disputed Interdivision Transactions - Other. This account will be
the responsibility of the plant controllers to clear on a periodic basis, but no less often than monthly at
month end. In most cases, the research on these amounts will result in a charge to intra-division PPV,
offsetting a positive PPV already recognized. In fewer cases, the amount may represent a true pricing
dispute that should be taken up with the selling entity. The process does not affect invoices with quantity
differences.

Optimus has a customized solution that automatically isolates all Company orders and records price
variances into separate accounts. Price discrepancies are categorized as either: difference in standard cost
between 2 locations, freight applied, exchange rate differences, or Interdivision markup.

There are ten different types of variance categories that have been defined in SAP for Production Orders.
They fall into two categories; those on the “Input Side” and those on the “Output Side”. All of the Input
variances are active and functioning, while only two of the Output variances are being utilized. For each
of these categories, there can be separate variances reported by Material, Labor & Overhead and
Subcontract components. The definition of each is as follows:

INPUT VARIANCES

Input Price Variance – Note that this is not to be confused with Purchase Price Variance. This will only
occur on production orders that are opened in one year and closed in a different year, after costs have been
re-rolled. Otherwise, this account will not be used.
 CAMERON INTERNATIONAL CORPORATION POLICY
SUBJECT
Variances from Standard Costs

POLICY TYPE FUNCTIONAL AREA POLICY NO

Income Statement FP-IS-04-010
Finance and Accounting
CATEGORY DATE ISSUED/REISSUED
12/01/2003
Variances & OVMC 06/03/2013
APPROVED BY
CAO
Authoritative Literature Reference:
ASC 450 - Contingencies

Differences between the target cost (Current Standard) and the Actual Cost are caused by differences
between target prices and actual prices of the goods consumed for material; or caused by differences
between planned and actual activity costs for labor & overhead.

Input Quantity Variance – Difference between the target cost (Current Standard) and the actual cost
caused by differences between the target and actual quantities consumed can be reported as material, labor
& overhead or subcontract variances.

Resource Usage Variance – Difference between the target cost (Current Standard) and the actual cost
caused by a different input component (i.e. Material, Labor & Overhead, Subcontracting) being used to
calculate each cost.

Scrap Variance – Value of scrapped quantities that were not finished and issued to stock. Refer to policy
FP-IS-04-040 ‘Production Scrap’ for further details.

Remaining Input Variance – If the system cannot assign a variance to any of the above categories, it
assigns the variance to this category. This can happen when costs are entered without a quantity, or when
the rates are changed at cost roll-over time. These are variances that are calculated based on not having
enough information to categorize them into one of the variance accounts above. In most cases, these
variances will occur if there is some type of deviation from the normal production processing of the order
(process/procedural mistakes).

OUTPUT VARIANCES

Output Price Variance – This will generally occur between years where there has been an update to
standards or a standard cost roll. Output price variances are caused by a difference between the target
credit and the actual credit. These variances will come from having a standard cost change while the
production order is open.

Remaining Output Variance – Difference between the target costs and the actual costs that cannot be
attributed to a single variance category. These occur when the system cannot calculate target costs, such
as when no cost estimate for material exists or because no goods receipt for the order has taken place.
Similar to the Input variances, these will occur if there is some type of deviation from the normal
production processing of the order (process/procedural mistakes).
 CAMERON INTERNATIONAL CORPORATION POLICY
SUBJECT
Variances from Standard Costs

POLICY TYPE FUNCTIONAL AREA POLICY NO

Income Statement FP-IS-04-010
Finance and Accounting
CATEGORY DATE ISSUED/REISSUED
12/01/2003
Variances & OVMC 06/03/2013
APPROVED BY
CAO
Authoritative Literature Reference:
ASC 450 - Contingencies

SUBCONTRACT VARIANCES

These are booked into two different account groupings. When the subcontract cost is higher or lower than
the standard subcontract cost the difference is posted to a PPV variance account. However, when a
subcontractor is utilized where normally an internal (In-house) department is utilized, or vice versa, the
difference between the two costs is charged to the subcontract variance account that is calculated in the
closed order variances (the originating variance component for these costs is “Subcontract Resource
Usage Variance”).

MANUFACTURING ABSORPTION

The absorption of a cost center is defined as the amount of direct labor and overhead that is absorbed
(actual hours charged at standard – NOT Earned hours) at the budgeted rate. The absorption is then
compared to the actual direct labor and overhead costs incurred in the cost center and the difference is
either an over-absorption (budgeted cost is greater than the actual spending) or under-absorption (actual
cost is greater than budgeted cost).
The budgeted hourly rates developed to calculate absorption are developed on an annual basis as
part of the budgeting process and remain constant for the entire budget year. Rates are developed by
individual cost element based on budgeted spending (cost center budgets) and activity levels (direct hours
planned) for each cost center. These hourly rates are then applied to actual hours charged to production
orders worked by employees to obtain the value of absorption for the cost center.

RESPONSIBILITIES

The Corporate Controller is responsible for the development of this policy. It is the responsibility of each
Division’s Vice President or Director of Finance to implement and to ensure compliance with this policy.
It is the responsibility of all personnel to read, understand and follow this policy and its procedures in
completing all tasks performed for the Company.