The necessary steps to take in order to lock in December sales cost for a product whose price must be quoted at the end of April.
January through April - Buy June steel futures Buy June futures for the total tons planned for December shipments and calculate the weighted average price to use as the budgeted steel component of December's cost of goods sold (COGS).
June - Settle the steel futures Allow the June steel futures contracts to automatically settle at the end of June and post the cash from the futures settlement (plus or minus) to a holding account for September's steel purchase variance.
July - OEM's steel processor buys steel from the steel mill at July's spot price The processor should prearrange with the mill that spot price will be based on the prior month's steel futures close out price (June).
September - OEM buys the processed steel from processor at July's spot price The OEM should prearrange with the processor that the spot price will be based on the processor's month of purchase, plus the agreed upon mark up. OEM combines spot price with the cash (plus or minus) in the variance account from the June steel futures and nets the budgeted steel cost used in April to set the December price.
October to November - OEM converts steel to Work-In-Process (WIP) and Finished Goods (F/G) Steel flows through the OEM's inventory as it is converted into a finished product.
December - OEM sells product at budgeted cost
Budget is met because the steel futures offset any movement (up or down) in the steel spot price.