CHAPTER ONE
1.0
INTRODUCTION
1.1 GENERAL
DESCRIPTION OF THE AREA OF STUDY
Management
has been described as a process by which system are administered. And
management functions involved essential planning, organization, directing,
coordinating and controlling the business activities of organization in
carrying out these responsibilities effectively and efficiently management must
be adequately informed about the variable existing in their business
environment. These variable are either controllable or uncontrollable. Hooray
(2006:14) defines cost accounting as a process of determining the cost of an
articles, cost or rendering a service or performing a function.
Highlighting
more on this definition Character Institute Of Management Accountants (CIMA),
defined cost accounting as “The establishment of budgets, standard cost and
actual costs of operations, process activities or products; and the social use
of funds while costing is the ascertainment of costs.
Basically,
there are three elements of cost: Direct Material, Direct Labour and Direct
Expenses. The determination of the cost of manufacturing product or services
rendered, often involves the accumulation, classification allocation,
apportionment and absorption of cost according to Adeniyi. (2009:2). Before a cost can be accumulated,
the activities of the organization would have to be classified into cost centre
or departments. This will depends on the kinds of activity undertaken by the
organization.
Nnachi
(2007:8), maintain that two (2) broad method of costing have been popularized
in the oil industry. They are the full cost and successful methods while the
former emphasizes general capitalization of only this costs that relate
directly to the discuss and development of commercial exploitable oil and gas
reserve in apprising these method, the accountant must realize that the
activities of the oil industry are broadly categorized into: upstream activities,
the acquisition of minerals interest in properties exploration of crude oil and
gas and downstream activities, (transporting, and refining and marketing).
Adeniyi
(2009:4), the successful management of any organization depends on information,
which can be financial, non financial or a combination of both financial and
non-financial. In practice . it is erroneous to conclude that cost accounting
is only concerned with financial information. The truth is that’s non-financial
information must be monitored carefully, recorded accurately and taken into
account as fully as financial information. Therefore, while cost accounting is
mainly concerned with the provision of financial information to aid planning,
control and decision making, the cost accountant cannot ignore non-financial
influences and should qualify the information he provides with non-financial
matters as appropriate.
However,
an information is relevant and appropriate to an organization, if it is useful
for managerial planning, control and decision-making. The value of information
lies in the action taken as a result of receiving it.
In
the recent times, there has been a re-organization plan going on in the oil
industry. The re-organization has been in the areas of staff reduction and full
computerization of all the activities affecting the production process of the
crude oil. These plans no doubt geared towards cost effectiveness and efficient
use of resources, cost accounting obviously has provided enough information
(data) to justify, these reorganization programmers in the oil industry.
Cost
accounting practice in the oil industry is the techniques used in collecting,
processing, and presenting financial and quantitative data within the oil
industry, in order to ascertain the cost canters, the cost units , and the
various operations within the oil sectors. The practice of cost accounting in
the oil industry has helps to boost and enhance the production of oil within
the oil sector of the economy, and also to minimize its resultant effects
within the economy, which include;
a)
Exploration and drilling cost
b)
Production cost
c)
Development cost
d)
Shortage of petroleum products
e)
Reduction in staff
f)
Inefficient and ineffective use of petroleum
product
g)
Inadequate cost accounting information.
In
the same vein, this research work is also geared towards providing remedies to
the above listed problems, which include:
(i)
The exploration and dulling cost incurred
has helps in prospecting for oil and gas resources.
(ii)
The product cost incurred has helps to
operate and maintain wells, related equipment and facilities.
(iii)
Development cost: has also helps to secure
access in providing resources and facilities for extracting, treating,
gathering and storing of oil and gas.
(iv)
The re-organization plans couple together
with other programs in the oil industry has also helped to minimize the
problems of shortage of petroleum products and staff reduction in the oil
industry
(v)
Adequate costing information has equally
goes a long way in enhancing the efficient and effective use of petroleum
products and at the same time increasing oil production within the economy’s.
1.2
HISTORY
OF THE CASE STUDY / ORGANISATION
Although,
Kaduna refining
and petrochemical company (KEPC) was the first in its kind to reduce the plants
operating cost and new products from existing and extend refining services to
the West.
The
search for oil in Nigeria
started in 1937 and was pioneered by shell Development company of Nigeria
Limited. (Then known as shell Dary and later shell British). Oil was discovered
in Nigeria Delta after half a century of exploration. The discover was made by
shell-Bp at the time the sole concessionaire Nigeria.
The
first Cargo of crude oil was shipped in 1958 by the pipeline, running to
Port-Harcourt production to Kaduna,
then stood 600 barrels per day. After 1960s exploration right in Onshore and
offshore areas adjoining the Niger Delta were extended to other foreign
companies. In 1961, shells Bonny Terminal was commissioned and Texaco Overseas
started operation in Nigeria E/F started production in Rivers State
with 12,000 b/d. in 1965, the shallow water south east of Warri.
By
the year, 1969, there were fourteen companies engaged in all kinds of oil
exploration and development activities in Nigeria by the end of 1969,
production level reached about 200 Million barrels. The early 1990s witnessed
an unprecedented growth in crude oil production and reached its peak in 1994.
Source:
www.nnpcgroup.com/nnpcbusiness/busi.
Considering
also the base year of 1970, thee has been a steady growth in the oil industry
averagely the production level is put at 396 million barrels.
The
Nigeria National Petroleum Co-operation in its publication reports that the
Nigeria oil Company (NNPC), Kaduna was established under the Nigeria National
Oil Company (NNOC) Act of 1971 and by 1973, the first participation agreement,
federal government acquires 35% shares in the oil companies, then agreement,
federal government increases equity to 55% and in 1972, through Mergers of the
Nigeria National Oil Company whose main function was operational and then
federal minister of petroleum regulatory function, 100% private ventures to
between 60% and 80% government participation is 60% in April 1977 Government
established Nigeria National Petroleum Corporation (NNPC) by Decree 33, (NNOC)
& MPR extinguished)
Source:
Operators…www.nnpcgoroup.com/…
Commercial
oil was discovered in Lagos
by Salaimon Salan in Nov.
15, 2010. A consortium of companies, operating the Aje oil field in
oil mining license, its (OML 113), offshore Lagos has conformed the field for commercial
discovery and after the discovery providence resources oil and gas exploration and
production company, the Aje field, in OML 113, offshore. Nigeria has
been deemed a commercial discovery by the operating committee.
Recently,
NNPC / CSECC, Lagos state has commence exploration activities of Green field
refinery, says the refinery will produce 500,000 liquefied petroleum gas,
sequel to its transformation programmed, the Nigeria National petroleum
cooperation NNPC, chain state engineering construction cooperation, (SECC and
the Lagos State government have gone into a strategic participation by
embarking on exploratory activities aimed at building a green field refinery at
the Lekki free trade zone as part of efforts to curb importation of petroleum
products into the country, improve pipeline and products marketing company
limited and also to integrate data services limited.
The
history of the oil industry in Nigeria
at Lagos form
essential transformation in the activities of the Nigeria National Petroleum
Corporation (NNPC). Which implies that the history and growth of the oil
industry in Nigeria
is closely related to the industry and growth of NNPC.
Source:
www.rice.edu/../Ndc-nnpc.ugo.pdf
1.3
PROBLEMS
ANALYSIS
In
recent time the application of cost accounting practice in oil industry has
been tedious and unconventional in the operation of industry in Nigeria economy
which has a results has caused a lot of problems in the oil industry. Hence the
basis o this study are:
a.
Problem of allocating exploration and
drilling cost
b.
Problem of identifying production cost
c.
Problem of identifying development cost
d.
Shortage of petroleum products
e.
Staff reduction in the oil industry
f.
Inefficient and ineffective use of petroleum
products
g.
Inadequate cost accounting information.
1.4
PURPOSE
OF THE STUDY
Linked
by the seeming controversy brought about by the problem highlighted determine
the true position as far as the issue is concerned. Hence, the purpose of this
study is intended to:
i.
Known whether cost accounting techniques and
method is practiced in the oil industry
ii.
Ascertain the actual use and possible
development in cost accounting techniques and method in the oil industry
iii.
Find out how cost information is used in
fixing company’s product and services.
iv.
Find out whether efficiency and
effectiveness depend on the utilization of costing techniques and method
v.
Make recommendation on the utilization and
possible development of the techniques and methods.
1.5
RELEVANT
RESEARCH QUESTIONS
i.
What are the ways of allocating exploration
and drilling cost?
ii.
What are the ways of identifying product and
development cost?
iii.
How does shortage of petroleum products
affect the operation of oil industry?
iv.
How does reduction in staff affect the
operation of oil industry?
v.
What are the possible ways of ensuring
efficient and effective use of petroleum production in the oil industry?
vi.
What are the possible ways of ensuring
adequate costing information in the oil industry by cost accountants?
1.6
DELIMITATION
(SCOPE) OF THE STUDY
The
scope of this study will be limited to issued stated above. The researcher is
aware of the fact that this study will be much appreciated if it had taken
across section of many organization with the business community as well as
other oil industries in the country.
However,
due to time cost and out reach constraints the study has been limited to NNPC
Lagos.
1.7
ASSUMPTIONS
It
was assumed that the management and staff of NNPC Lagos branch would give the
researcher the necessary information and explanation relevant to the study
It
was equally assumed that the supervisor would give the researcher the necessary
advice for the completion of the study.
1.8
SIGNIFICANCE
OF THE STUDY
The
importance of this study or the reason why the researcher details to base, his
research in this area of the study id:
i. Cost
accounting helps to provide an idea of the actual cost of process departments
operations or product which is the foundation of their budget allowing them to
analysis fluctuation and the way fund are used socially for profit.
ii. It helps
the managers justify the ability to cut costs for a company in order to
increase the company profit.
It
creates a financial value out of the production of a product measuring currency
that is normal into units that are measured by conversion.
iii.
Cost accounting allocate a company’s fixed
cost over a specific time period to what items are actually produced during
that period of time.
1.9
DEFINITION
OF TERMS AND CONCEPTS
For
the purpose of the study, the following term and concepts are defined:
i. COST:
these are total amount of resources scarified or forgone towards achieving a
stated objectives. For the purpose of this study is defined as the expenses of
production incurred in operating an organization.
ii. COST
ACCOUTING: It is defined as the collection, accumulation classification,
coding, analysis, processing and recoding of cost information to assist
management in planning, control and decision-making.
iii.
COST
ACCOUNTING METHOD: Method is an orderly way of carrying out
anything. The general fundamental principle of cost ascertainment are the same
in every system of cost accounting, but the method of collecting and presenting
the cost differs with the types of production, this research work, cost accounting
system operated in each business organization. This system has to replicate the
nature of business being conducted.
The
method full into the following categories:
a.
Unit costing
b.
Job costing
c.
Batch costing
d.
Contract costing
e.
Operating costing consist of:
i. Process costing
ii. Service costing
upstream,
this is major raw material of the oil industry, it is mixture of a family of
organize compound made up hydrogen and carbon in various proportion
downstream
activities, this has been defined as those oil and gas production activities
beginning at the refinery gate. It involve the transportation refining and marketing
of oil gas and their derivative.
- Batch
costing: This is a form of job costing under which each job is manufactured in
a batch of identical articles, either for sale or for use within the undertaken.
It is used when the production consist limited repetition work and a definite
number of articles are manufactured in one batch.
- Contract
Costing: The ascertainment of cost or work in progress. The principle of job
costing are applied, and it involve mainly the keeping of separate cost account
for each individual contract or job undertaken.
- Job
Costing: This method applied to business which carry out individual jobs of
work in accordance with customers special requirement. Where the jobs is of
long duration, a modified form of job costing known as “Contract costing will
be used”.
- Operating
Cost: The method of finding the average unit cost of stream of identical cost,
units. It is further subdivided into:
i. processing
costing: in some industries the output produced emerges from a continuous
process. Examples are processed food production, oil refining, brewing beer,
chemical manufactured etc. problem that arises in such situation include the
attribution of materials cost and conversion costs to units of finished output,
and the occurrence of asses during the process (Spoilt or cost production).
ii. Service
Costing: this form of operation applies where repetitive services are provided
either by the business as a whole or by a particular cost center within the undertaking.
Service costing is used when there is no physical product. When the service can
be measured in standard units, cost can be charged to activities and averaged
over the units.
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