Cost Accounting Practice In The Oil Industry

Project and Seminar material for Accountancy

Abstract

The study heavy carried out to look into cost accounting practice in the oil industry. It may not be out of place to say that petroleum product is the mainstream of the Nigerian economy.

The importance of this product is obviously the worry of all Nigerians. This study has therefore given a non down of how cost accepting can be relevant in the planning an organizing petroleum product in our economy, in which we all have a stake.

To the light of the foregoing, the research is aimed at finding out how effective is cost accounting practices in the oil industry, the problems and identifying ways and means of solving the differences we have in its use.

Therefore, in this research, the researcher made use of both primary and secondary sources of data. The primary sources includes interview, observation and most importantly form well structured questionnaires which were distributed to staff of the oil companies in oil industry.

The secondary data came in form of text, journal, and seminar paper in order to ascertain or support the research findings responses were analyzed using percentages.

The researcher has achieved some objections in this work and these are

• That costing is a daily exercise and the costing element materials, labour and overheads.
• That there exist some relationship between cost accounting techniques and methods taught in school and those actually practiced in the oil industry.
• Also that the companies uses contact costing method more than other costing methods.
• The successful effort method and the full, cost methods are peculiar to the oil industry.
• The research work has concluded with some recommendation on part of the deficiencies in this study.

Table Of Contents

Preliminary Page(s)

• Title page
• certification
• Approval page
• Dedication
• Acknowledgement
• Abstract
• Table of contents

Chapter One

1.0 Introduction

• 1.1 Statement of the problem
• 1.2 Objective of the study
• 1.3 Research Questions
• 1.4 Hypothesis
• 1.5 Significance of the study
• 1.6 Scope of the study
• 1.7 Limitation of the study
• 1.8 Brief profile of Nigeria oil and gas
• 1.9 Definition of term

Chapter Two

2.0 Literature Review

• 2.1 The nature of cost accounting
• 2.1.1 Historical development of costing
• 2.1.2 Advent of the oil industry in the world
• 2.1.3 Classification of cost
• 2.1.4 Cost behaviour
• 2.1.5 Element of cost
• 2.1.6 Cost accounting method
• 2.1.7 Cost accounting Technologies
• 2.1.8 Marginal costing and absorption costing
• 2.1.9 Standard absorption and standard marginal costing
• 2.1.9 Overhead allocation
• 2.2 Accounting of work in progress
• 2.3 Cost accounting practice in oil industry
• 2.3.1 Costing accounting policy in the oil and gas industry

Chapter Three

3.0 Summary Conclusion And Recommendation

• 3.0.1 Conclusion
• 3.0.2 Recommendation
• Bibliography

Chapter One

1.0 Introduction

An efficient system of costing is an essential factor for industrial control under modern conditions of business and as such may be regarding as an important part in the efforts of any management to some business stability. The organization of an undertaking has controlled that the designed volume of production is secured at the least possible cost in relation of the scheduled quantity of the product. Cost accountings provide the measurement of the degree to which this objective is attained, and thus has a definite place in the organization of the business.

All expenses is localized, and thereby controlled, in the height of information provided by the cost record.
Horngen (1962) defined cost accounting system as “the process of rendering a services or performing a function”.
To highlight more on the definition, the institute of cost and works Accountants (I.C.W.A) by L.W.J. OWLer and J.L. Brown (1960) content that cost accounting embraces the following:

• To analyze and classify with reference to the cost of product and operation.
• To arrive at the cost of production of every units, job, operation, process, department, or service and to develop cost standards.
• To indicate to the management any inefficiencies, and the extent to various form of waste, whether of material, time expenses, or in the use of machinery, equipment, and tools, Analysis of the causes of unsatisfactory results may indicate remedial action.
• To provide for periodical profit and loss Accounts and Balance sheet at such interval e.g. weekly, monthly, pr quarterly as may be desired during the financial year, not only for the whole business but also by department or individual product.
• To provide actual figure for comparison with estimates and assist the management in their price fixing policy.
• To show, where standard costs are prepared, what the cost of production is to be and with which the actual cost which are eventually recorded may be compared.
• To provide a perpetual inventory of stores and other materials so that
  1. Interim profit & loss Accounts and Balance sheets can be prepare without stock-taking
  2. Check on stores and adjustments are made at frequent intervals.
• To explain in details the source of profit or loss revealed in total in the profit and loss Account Elements of cost

Basically there are three elements of cost

1. Direct material
2. Direct expenses
3. Direct labour
4. Overhead expenses

If management is to be provide with the data required for cost control it is necessary to analyze & classify cost.
Nnandi (1994), maintained that two broad method of costing have been popularized in the oil industry. They are the full cost method and the successful method which the former emphasizes general capitalization of all costs incurred in employing for and developing oil and gas recourses, the latter popularizes the capitalization of only these costs that related directly to discussing and development of commercially exploitable oil and gas resources.

In applying these methods the accountant must realized that the activities of the oil industry are broadly categorized into upstream activities (the acquisition of mineral interest properties, exploration; including prospecting development and production of crude oil and gas) and down stream activities (transporting reaffirming and marketing).

Cost accounting information assists management in a number of ways in there day to day decision making. It helps managers to take informed operating decisions concerning business objectives, polices and tactics of the organization or cost centre (departments).

Firms are faced with decision to make or to buy, to discontinue one product line or the other, to process further or not a raid of other decision would need cost information to achieve a more beneficial allocation of economically scarce resource.

In nearest times there have been reorganization plans going on in the oil industry. In just two years not les than three thousand workers of the oil industry were laid off. This reorganization has been in the area of staff reduction and full computerization of all the activities that affect the production process of the crude oil. The plans are in doubt gained towards staff effectiveness and allow efficient use of resources. Cost accounting obviously, has provided enough information (data) to justify this reorganization programme in the oil industry.

1.1 Statement Of The Problem

The effectiveness of any organization depends on its ability to get relevant information for its progress and development. The issue is how does management get these information from those concerned most especially, from the cost accountants who are at the services of the management They provides them with useful data on the various costs incurs by the organization.

However, the activities of the oil industry in regards to cost accounting practices have the following problems: Cost classification: The arbitrating ways of classifying costs into either cost behaviour or by common characteristics.

Joint (B) products treated: problems have always eaten between the companies in the industry in regards to what constitutes joint or by products. Also, the case of overheads has not been uniformed in the industry. While some companies write off overheads, other companies apportion them.

The issue of costing techniques such as marginal costing and absorption costs has not been uniformed in the oil industry.

Another problem is the uses of (FIFO-first in first-out) and weighted average. While companies use FIFO and consider it more efficient other companies use weighted average methods.

As Nigeria oil industry their costing departments are faced with some of the problems explained above, inadequate number of staff, which might cause weak budgetary controls planning in advanced to various functions of a business, as a whole can be controlled. Also the small size of the costing department is not encouraging

1.2 Objective Of The Study

The study is intended to:

1. To know whether cost accounting techniques and methods practiced in the oil industry
2. To ascertain the actual use and possible development in cost accounting techniques and methods in the oil industry.
3. To find out whether efficiency and effectiveness depends on the utilization of cost accounting techniques and method.
4. To find out if cost information is used in films company’s prices for products and services.
5. To make recommendations on the utilization and possible development of the techniques and method

1.3 Research Question

A number of research question are raise to evoke necessary answers to satisfy the basic objectives of the study in any research. It is important to pose certain questions which will provide the direction of the study. The research questions whose answers are offered in the last chapter of the study include:

1. Are cost accounting techniques and methods practiced in the oil industry?
2. What are actual uses of the various costing techniques and methods in the oil industry?
3. Is there any variance (s) between the cost techniques taught in school and the costing methods used in oil industry?
4. Are there relationship between costing techniques and the actual results of operations in the oil industry?
5. What improvement (s) are needed to the techniques and methods taught in school for there to be more useful and relevant to the oil industry?

1.4 Hypothesis

Available in the complete material you will get at the end of this page. Continue Reading….

1.5 Significance Of The Study

The study is undertaken as a race setter or a logical procedure for the following set of people:

1. Students, academicians and practitioners for films researcher who may want to evaluate accounting, to what is practiced in the oil industry.
2. Activities of companies engaged in the oil up stream may be enhanced through the embracement of this study.
3. The upstream activities in the oil industry are probably the most capitally intensive activity in the world.
4. There is no other business activity that could necessitate the expansion of so much money, manpower and time.
5. The risk level is also high, including a situation where after spending so much money even exploring, only to discover that it is dry or not found in commercial quantity.
6. There are also the added risks of human levels as a result of explosions or fire out breaks and even drawing for these driving off shore.

All this have cost implications and with the right method or techniques in place, a better evaluation would be made.

1.6 Scope Of The Study

This study focuses on costing activities or functions in the oil industry.

Generalizations are made on data gathered from the Nigeria oil industry. Data were collected from those respondents/personnel who are involved in the costing exercises, such choice were based on the premise that only knowledgeable personnel are capable of making informed imputes to this study.

1.7 Limitation Of The Study

Generally, in order to have an unbiased result from tests and analysis, it is necessary to have a wide spectrum of respondents. That ensures a truly representative data which shall form the basis of decisions for the research study. But, considering the time, cost accessibility to respondents the speed of responses the targets population may be to large to manage. The population size is, therefore, limited to cost generation area of the organization.

In the use of questionnaires a researcher is at the mercy of the respondents who may chose either not to answer the questions at all or give complete or falsified information or simply exercises that the information are sensitive and not meant for public consumption.

Finally, the financial resources available carrying out this research work is no means adequate.

1.8 Brief Profile Of Nigeria Oil Industry

Oil was first discovered in Nigeria in 1908, and exploration proceeded during the 1930s in the form of the shell-BP petroleum Department Company of Nigeria ltd. (shell-BP), under the control of shell and British petroleum (BP). Commercial exploration of the countries resources, however, did not begin until the late 1950s. The Nigeria government introduced its first regulations governing the taxation of oil industry profits in 1959 whereby profit would be split 50 to 50 between the government and the oil company in question and the industry grew during the 1960 as export markets were developed, predominantly in the United kingdom and Europe By the mid-1960s, Nigeria began to consider ways in which the resources being exploited by Western oil companies could better be harassed to the country’s development, and formulated its first agreement for taking an equity stake- in one of the companies producing there, the Nigeria Agip oil company, jointly owned by Agip of Italy and Philips of the limited states. The option to take up an equity stake- in effect the first step towards the variation of the NNPC was not, however exercised until April 1971.

The over riding factor was probably Nigeria decision to join OPEC in July 1971 obeying the government to take significant stakes in the companies producing in the country.

1.9 Definition Of Terms

For the purpose of the study, the following terms are defined:

Cost:

These are resources sacrificed or for gone to achieve specified objectives for the purposes of this study, cost is defined as the expenses of production incurred in operating an organization.

Cost Accounting Techniques:

The technique simply means a skill way of ding things or something. It is useless to plan. For anything at all if will be no relevant skill to accomplish it. For the purposes of this study, cost accounting techniques refers to the alternatives available in obtaining cost incurred in the production process.

Crude Oil:

This is a major raw material of the oil industry. It is a mixture of family organic components made up of hydrogen and carton in various proportions.

Down Stream:

Is activities of oil production beginning at the refinery. It involved the transportation, refining and marketing of oil derivations.

Upstream:

These are concerned with exploration prospecting, development and production of crude oil. The lifting of oil and gas from the reserved wells to either a refinery or a ship these activities is carried out offshore and onshore.

Dry Hole:

This is a well after geological and geophysical operations have been carried out and finding out that the well contains oil or gas reserved or not in commercial quantity.

By-Product:

A by-product is any saleable or useable value incidentally produced in addition to the main products.

Joint Product:

Joint products in cost accounting terminology are defined as two or more products separated in the course of processing, each having sufficiency high sociable value to merit recognition as a main product. These products are not separated, identifiable as individual product until their split off point.

Split-off point:

Is the point of maintaining where the joint product becomes individual, identifiable? Any cost incurred after this point is called separable cost, because they are not part of the joint process

Chapter Three

3.0 Summary, Conclusion & Recommendations

This study centre on costing techniques and methods in the oil industry. Questions were drawn up and distributed mainly to the oil company in Nigeria.

The responses were analyzed with the aid of percentages and the following are some of the findings.

It was found that costing is a daily activity and the costing elements include material, labour and overheads. The company uses contract costing methods more than other costing methods. Batch process and specific order process costing are also in use. The successful effort method and the full cost methods are peculiar to the oil industry. The successful effort method is more preferred in this organization than the full cost method.

The finding revels that there exist some difference between the method and techniques of costing used by the company under study and those taught in schools by the researcher’s observation. It was found that such difference is a weak one. Also it was found that there is a weak relationship between costing techniques and efficient performances of the organization.

However, the assessment for the effectiveness of the methods and techniques of costing used by the Nigeria oil industry show a positive result. Thus shows that the method/techniques of costing have been assisting other organization to achieve desire goals.

3.1 Conclusion

This research report on costing practices in the oil industry. It believed that the findings of this research would be similar to the costing practice of other company in the oil industry and can be used as a reasonable ground for generating of the entire industry.

The success of most organization can be judged by extent to which their costing practices are organized. Besides, methods and techniques of costing taught in schools differ slightly from that practice in various organizations. Such difference is minor since the whole method/techniques are build from the principles already developed by business scholars.

Therefore the research concludes the weak difference exist between costing methods/techniques taught in school and that used in the organization. Also there is a relationship between the method of costing is rise and the performance of the entire organization.

3.2 Recommendations

Having carried out this research study on cost accounting practice of company in oil industry and having analyzed the data collected from the respondents, it has become necessary to offer recommendation on some of the differences in the study recorded.

There should be a complete analysis of all the cost elements (material, labour& overhead) involved in the oil activities in order to have firms control over all items of cost implication.

Budget should precede production and detained report made offer each production process. Budget should also be prepared at all level of the organization wide objectives.

Since costing practices is synonymous with making sacrifice, it would therefore be necessary to minimize the sacrifice involved in achieving a given goals.

Most of al, the two peculiar costing methods in the oil industry (successful effort method and the full cost method) should be critically analyzed before adoption. Individuals’ organizations should consider her circumstances carefully before a decision is taken on which of the costing methods above to adopt.

Considering the fact that the oil & gas production is a global affair with a highly technological base.  It would be necessary for the oil industry and the individuals companies in particular to evolve strategic to affect cost consciousness in the production process.

Finally, due to time and financial constraint, it was not possible to extensively carry out all the research work on a typical issue of this nature. I therefore recommend a forth research work on the cost accounting practices in the oil industry.

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