Before discussing the specific elements of cost of production, this section reviews the basic principles that underlie the Commerce Department determinations. This section also illustrates the basic accounting concepts and terminology used in cost investigations.

 

Fully distributed, actual costs

 

The Commerce Department determines the cost of merchandise under investigation based on the 'fully distributed, actual costs' of production. This principle means that all of the costs of the product must be included. Obvious costs such as materials and labour, as well as less obvious costs such as interest expenses and various overhead expenses, must all be included. If several related companies are involved - for example, a subsidiary manufactures subassemblies, which are sold to the parent company for final assembly, and then shipped to a related subsidiary in the United States for distribution - all of the costs of production and distribution must be included. How the costs are allocated to different products will be the subject of extensive arguments during the cost investigation. All of the costs must go somewhere, however.

 

The costs must also be 'actual' costs, not estimated costs or hypothetical costs. In general, this means that the Commerce Department looks at the costs actually paid by the foreign company and recorded in its accounting records. Although there are some exceptions to this principle (i.e. the major input rule), the Commerce Department generally uses actual costs in anti-dumping investigations. The Commerce Department does not always classify or allocate costs in the same way as the company's accounting system, but the magnitude of the costs usually corresponds to the company's accounting records.

 

Product-specific costs

 

The Commerce Department requires cost data to be submitted on a product-specific basis. It is not acceptable to submit general cost information for a whole product line - these general costs must be allocated to individual models. This requirement is sometimes very frustrating for foreign companies, especially for companies that record costs on a product line basis, rather than model by model. The Commerce Department, however, has consistently required companies to develop model-by-model costs for use in anti-dumping investigations. Depending on the type of cost accounting system used by the company, developing model-by-model costs can be easy or difficult.

 

Standard cost systems

 

Many foreign companies use 'standard cost' accounting systems. The Commerce Department will accept cost of production information based on such a system, provided the company adjusts its standard costs to reflect the actual costs of production.

 

Under such a system, the company has a 'standard cost' for each product, usually based on some combination of (1) cost estimates made when the product was first introduced, and (2) actual costs collected during the initial production phase. The company also calculates 'variances' - the difference between the standard cost of the product and the actual cost of the product. Variances are normally calculated based on 'cost centres'. Cost centres are simply accounting conventions for determining how best to organize the cost data. They vary from company to company. Sometimes an entire factory will be a cost centre. Sometimes a particular product, or even an individual production line at a factory, will be a cost centre. Regardless of how they are calculated, the variances are applied to the standard cost of the individual product to yield the actual cost of the product.

 

Other cost accounting systems

 

If a foreign company does not use a standard cost system, the company needs to develop some way of allocating general. costs to individual products. For example, in a number of investigations of steel pipe the Commerce Department has insisted that the companies calculate costs on a size by size basis ( I -inch pipe, 2-inch pipe, and so on), even though the foreign companies maintained cost accounting records only on an aggregate basis, such as how much steel and zinc was used to produce all of the pipe. These companies were forced to develop allocations from scratch.

 

There are no specific rules for allocating costs, as long as the allocation meets two general criteria: 1) all of the costs must be allocated, and 2) the allocation must not distort the relative costs of products. Within these constraints, the company and its lawyers are free to develop the most favourable allocation methodology that can be defended as reasonable. The lawyers for the domestic industry will undoubtedly challenge the allocation methodology proposed by the foreign company, and try to persuade the Commerce Department to adopt a less favourable allocation methodology. These issues will be the source of much contention during the course of the investigation.

 

Time period and form for cost information

Annual costs

 

Although its practice has varied over the years, the Commerce Department now requests that foreign companies submit cost information for the period of investigation but allows companies to ask for permission to report cost information for a completed calendar or fiscal year that most closely corresponds to the period being investigated. The idea is to simplify the task of linking costs of production back to the company's financial statements. This period for reporting costs can change depending on the circumstances of a particular case, however. If petitioners believe that costs have been changing over time, they will argue for a different period. The Commerce Department often agrees, and requires companies to go through the burden of preparing cost of production information for some other period of time that overlaps two different fiscal year periods.

 

Weighted average costs

 

Once the Commerce Department has identified the particular 12-month period for costs, it must decide how to calculate the costs during that period. In a normal case, the Commerce Department calculates a single weighted average cost for each model for the 12-month period under investigation. This weighted average cost is then used to determine whether the sale prices have been above or below cost.

 

If the costs have been changing rapidly, however, the Commerce Department sometimes calculates quarterly or even monthly costs. In anti-dumping investigations involving high tech products, where the 'learning curve' is very steep and costs therefore drop rapidly as the company becomes more familiar with the production process, it is common for the Commerce Department to calculate costs for narrower periods of time. Similarly, in hyper-inflationary economies (i.e. economies that are experiencing annual inflation of greater than 25%), the Commerce Department often insists on monthly costs. Although foreign companies may in fact look at broader time periods, the Commerce Department assumes that the companies monitor their per-unit costs on a monthly or quarterly basis and believes that companies should recover their total costs at each point in the product life cycle. Although this practice may seem unreasonable, it is the current Commerce Department policy. The Commerce Department normally specifies in its questionnaire whether it wants costs on a quarterly or monthly basis.

 

When the foreign company produces the merchandise under investigation in two or more factories, the Commerce Department asks for cost information from all of the factories and calculates a single weighted average cost of production for each product. Even if a single factory produces for export to the United States and the other factories produce only for domestic consumption, the Commerce Department insists on a weighted average cost of production. The Commerce Department is more concerned about the possibility of the company's distorting its costs by shifting costs among the various factories than it is with the burden on the responding company.

 

Prior year models

 

For products that are sold on a model-year basis, prior year models can create a tremendous burden in cost investigations. If a company sells only 5 or 10 units of a 1999 model in 2001, and sells thousands of 2000 and 2001 models, it seems unreasonable to require the company to prepare detailed cost information for the 1999 model. Sometimes the Commerce Department agrees with this argument, and does not require the cost information. Other times the Commerce Department insists, and uses 'facts available' against companies that do not provide the information. Foreign companies must handle such situations on a case-by-case basis.

 

Commerce Department requests for information

 

The Commerce Department usually asks for cost information for the most recently completed fiscal year, and for any other months or quarters necessary to include the entire 12-month period under investigation. The fiscal year data is necessary for verification, since it should trace easily to the accounting records and financial statements of the company. The additional months or quarters may be more difficult to verify, but are necessary to provide the Commerce Department with information for the complete period. Although it generally calculates a single weighted average for the entire period of investigation, the Commerce Department sometimes asks for the various cost elements (such as materials, labour, overhead) to be provided on a quarterly basis.

 

Because of this uncertainty about how it will eventually decide to calculate the costs, the Commerce Department often makes very broad and expansive requests for information. It is easier for the Commerce Department to ask for much more information than it needs, and decide later what information it will actually use. Unfortunately, this attitude often results in great burdens for the foreign company forced to prepare the information. It is sometimes possible for the lawyer to negotiate with the Commerce Department staff and encourage them to think about what information is really necessary, and to narrow the request. Other times the unreasonable request will remain, and the company has little choice but to comply.

 

Use and misuse of GAAP

 

As a general matter, the United States statute requires the Commerce Department to follow the local 'generally accepted accounting principles' (GAAP) used by the company under investigation. This principle was acknowledged by the United States Congress when it added the cost of production provisions to the  United States anti-dumping law, and the Commerce Depaqment has generally followed this basic principle in its decisions.

 

Unfortunately; the Commerce Department sometimes deviates from the local GAAP.. The Commerce Department's justification for these deviations is that GAAP was designed to reflect the overall profitability of a company, and was not designed to calculate per-unit costs of particular products.. Whenever the Commerce Department feels that following local GAAP distorts the per,unit costs or does not adequately reflect certain costs, it ignores the local GAAP and creates its own accounting rules.

 

Two areas that often involve disputes are interest costs and R&D costs. The Commerce Department often disagrees with how the foreign country GAAP classifies such expenses, or how the foreign country GAAP allocates such expenses over time. The Commerce. Department has a general preference for whatever approach leads to higher costs in the period of time being investigated - which sometimes involves expensing all costs in the current year and sometimes involves spreading costs out over a longer period of time.

 

As it prepares its cost information, the foreign company should be sensitive to areas where the Commerce Department might depart from foreign GAAP. The sooner the company identifies a possible issue, the sooner, the company can begin to develop arguments to persuade the. Commerce Department not to reclassify the cost.

 

Source: Business Guide to Trade Remedies in the United States: Anti-dumping, countervailing and safeguards legislation practices and procedures