Mini-series on material balance: the material balance as the basis for the metallurgical accounting
Mini-series on material balance – Part 5: the material balance as the basis for the metallurgical accounting
Discover a CASPEO mini-series dedicated to the material balance in mineral processing: The material balance, a key step between measurement and process control. Follow us and learn everything you ever wanted to know about material balance. No promotion, it will describe the topic from a neutral point. In this 5th part, let’s focus on the material balance as a basis for the metallurgical accounting: concepts and techniques.
What is metallurgical accounting and why is it so important?
Metallurgical accounting is a prerequisite for the accounting balance of the production company and therefore has both financial and regulatory objectives. Indeed, accounting balance sheet requires knowing precisely (i.e. exactly), for the financial year, the production linked to the sales invoices, the consumption of raw materials linked to the purchase invoices (in case of smelters, for example) or to the estimate of resources (in case of mines), and the stocks and work in progress at the closing of accounts. All these elements in monetary value are obtained from the material balance, and should together result in a balanced financial statement.
Data reconciliation by material balance is therefore the only way to achieve the necessary consistency with an acceptable level of accuracy.
Although the balance sheet is drawn up annually, it is a common practice to draw up this balance sheet monthly in order to better anticipate any deviation from planning. This is requested by the shareholders who wish to have this follow-up, subject of quarterly or half-yearly reports. But it may also be a regulatory requirement, such as the monitoring of radioactive materials or mining resources by certain countries, or a contractual requirement in the case of subcontracting. Associated with the calculation of production costs, metallurgical accounting is also an essential tool for analysing the costs and added value of each operation.
What are the main principles of metallurgical accounting?
In all cases where metallurgical accounting is used, the contractual and regulatory aspects impose certain rules which have been the subject of a code of conduct associated with a guide of good practice: the AMIRA P754 code for metal accounting. These rules include:
- Traceability, which makes it possible to know the origin of the metallurgical balance, from the raw data resulting from the measurements to
the reconciled data, via consolidation and reconciliation.
- The auditability and the ability to identify at any time the calculation methods used for each period (in relation to traceability), as well as the
means and procedures implemented for the measurements, all of this based on up-to-date documentation following the modification of the
- Centralization of data with no duplication other than backups.
- A unique reconciliation method based on the estimation of measurement errors and maximum probability.
- Automation of repetitive tasks allowing for a single calculation method, but rigorous control of data at key stages of the balance preparation.
Why implementing metallurgical accounting procedures?
1. Automate and control
The repetitive tasks that can be automated are:
- On-line measurements and automatic samplers, qualified for material balance.
- Data storage, based on a robust time stamp, in structured and scalable databases.
- Collection of raw data for a period.
- Consolidation of the raw data for that period.
- Data reconciliation.
- Report generation.
Software solutions exist to facilitate the automation of the last three items in this list. However, human control is still needed to assess the quality of the data. This control regards measurement and data entry when this last remains manual. It is also carried out after consolidation to check the presence and relevance of the raw data used. A final control is performed before the generation of reports to assess that the material balance is realistic and sufficiently accurate.
2. Reconciling scientific uncertainty and accounting rigour
Since metallurgical accounting is based on material balance, it is the result of a technical calculation in which uncertainties, both related to measurements and to process variability , are taken into account as part of such a scientific approach. But accounting rigour has no interest in this approach and is even against any uncertainty.
Indeed, some data, although uncertain since as a result of measurement, are considered by the accounting rules to be unmodifiable. This is the case for production, consumption of raw materials and the inventory of stocks and work in progress. The general tendency is to consider these data as perfectly known (zero associated error) and to perform data reconciliation on this basis. This is called “data anchoring”. However, this approach has the disadvantage of biasing the overall material balance and the risk of showing a drift month after month.
A first compromise is to consider inventories and month-end stocks as uncertain and to take their estimates and not their direct measurements as book values. Similarly, raw material consumption is considered uncertain, and estimates are taken as book values, not purchase invoices which are rather the result of a commercial negotiation, the difference being recorded as commercial losses and profits subject to an appropriate accounting entry. Production remains anchored, but as long as the accuracy of measurements on production remains much higher than on the rest (which is most often observed), this anchoring does not cause a real statistical problem. Inventories and work in progress at the beginning of the month are also anchored.
A second compromise is to also release stocks and work-in-progress at the beginning of the month and record the differences with the end of the previous month as an accounting adjustment, a rule that is possible in many countries. The advantage is to avoid any drift by correcting them as soon as possible and it is shown by calculation that the accuracy of stocks and work in progress has the advantage of improving with time and statistically reducing the importance of these adjustments.
3. Reducing financial risk
The notion of financial risk makes the link between scientific uncertainty and financial concerns.
What financial risk, expressed in terms of a probability law on the costs generated, can be expected in case of a poor estimation of the metallurgical balance?
The answer is given by the calculation of errors of the measurements and reconciled data, associated with the calculation of costs related to the material balance. Thus, any investment in improving the measurement can be justified by the reduced financial risk it generates.
The financial risk also concerns the estimation of the value of the company. Indeed, an overestimation of stocks, often due to an underestimation of losses, leads to an overestimation of the value of assets. When the supposed stock is revealed not to be existing, an adjustment is made which discredits the company credibility in the eyes of its shareholders and even the regulatory authorities. An underestimation of stocks leads to the same harmful effects.
It should be remembered that the main source of such a financial risk is the inaccuracy of the measurements in terms of bias. Therefore, it is necessary to eliminate any bias in the measurements used for the material balance, but also, any calculation technique that could introduce a bias, such as anchoring certain data, as accounting rigour may tend to require.
Need to gain skills on metallurgical accounting?
If you want to learn methods to improve the accuracy of your metal balances and how to implement a metallurgical accounting system, this course is for your. A 100% online course by experts to start learning whenever and wherever you are!
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The material balance, a key step between measurement and process control
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The mini-series on material balance includes 5 parts + 1 bonus:
- Part 1: The mass balance approach (this page)
- Part 2: The material balance, a tool used throughtout the
process life cycle
- Part 3: Material balance in process control
- Part 4: What should be measured to get a good material balance
- Part 5: The material balance as the basis for metallurgical
- Bonus: Redundancy and data reconciliation
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