Cost Accounting Techniques and Overhead Allocation in Oman Society for Petroleum Services-OPAL

This article discusses the costing techniques and overhead allocation method used by Oman Society for Petroleum Services-OPAL. It covers the manufacturing and non-manufacturing overheads of the company, inventory accounting and labour accounting techniques. The chosen organization follows the absorption method for allocation and evaluation of the overhead cost among the different cost objects of the organization on the basis of the available volume of the overhead cost and the predetermined overhead rate.

Cost Accounting

Table of Contents
1. Description of Oman society for Petroleum Services-OPAL......................................................3
2. A discussion on the manufacturing and non-manufacturing overheads of the company............3
3.......................................................................................................................................................5
a. A discussion on the method of overhead allocation in the company...........................................5
b. Reasons of choosing this specific method of overhead allocation in that company...................5
c. Evaluation of the chosen method of overhead allocation in terms of its merits and demerits.....6
4.......................................................................................................................................................7
a. Techniques of inventory accounting of the chosen organization.................................................7
b. Techniques of labour accounting of the chosen organization.....................................................7
5.......................................................................................................................................................8
a. Description of the costing techniques used in a company........................................................8
b. Evaluation of the effectiveness and suitability of this technique.............................................9
References......................................................................................................................................10

1. Description of Oman society for Petroleum Services-OPAL
OPAL or the Oman society for Petroleum services is a non-profit organization and is the first
society of the Oman’s Petroleum Industry that become officially registered as a society with
Sultanate of Oman in 27 October, 2001.The registration of the OPAL society has been done
according to the regulation that is governing the registration of the society as per the Ministry of
Social development. There are 400 members in the organisation and the organization includes
the Producers of Oil & Gas companies and the large and small operators, contractors and
suppliers of the oil and gas industry of Oman.
Leaders of OPAL meet on a quarterly basis in order to identify the area and strategies that will be
beneficial for all the members of the society. An elected board of directors govern the society for
ensuring the highest standard of good corporate governance.
The main objective OPAL is to provide to work as an umbrella body that will promote the
standard, work efficiency and professionalism in the Oman Petroleum Industry. The standard
will be set in such a way so that it will be equivalent to the standard and practices of international
petroleum industry which will ensure the optimum allocation of the petroleum resources of the
country(Opaloman.org, 2017).
2. A discussion on the manufacturing and non-manufacturing overheads
of the company
The chosen organization regulates their accounting process of resources and inventories as per
the International Financial Reporting Standards that is issued by International Accounting
Standards Board (IASB) and the interpretation of the accounting policy of the organization has
been given as per the International Financial Reporting Interpretations Committee (IFRIC)

As per the IFRS (International Financial Reporting Standards) the non-manufacturing overheads
of the company can be identified as the Selling, General & Administrative (SG&A) expenses
and Interest expense as these costs can not be identified with the cost object or the units of
production. These costs are identified as the non-manufacturing overheads as these indirect costs
are not related to the manufacturing process carried out within the organization. The non-
manufacturing indirect costs or overheads are represented in the income statement as expense in
the period in which the expenditure has been incurred(Ho et al.,2015).
The non-manufacturing overheads of the company are as follows:
(Source:Opaloman.org, 2017)
As decried in the 2017 annual report of the company, OPAL it can be seen that the different
components of the Administrative and General Expenses can be identified as the non-
manufacturing overheads of the company. Thus the some o the non manufacturing overheads of
the company are Rent , Function, expenses, Professional charges, Stationery and printing, Office
maintenance ,Legal Expenses, Communication expenses Travelling expenses Electricity and
water expenses, Office refreshments Miscellaneous expenses
The manufacturing overhead on the other hand refers to the factory overhead, factory burden,
and manufacturing support costs all that are indirect expenditures incurred by the organization
that are related to the factory and is incurred for carrying out the manufacturing process.

The cost related to the depreciation and repairment of the factory equipments is the
manufacturing overhead with respect to the chosen organization.
3.
a. A discussion on the method of overhead allocation in the company
The overhead allocation of the process of the chosen organization has been done as per the IFRS
accounting standard and on historical cost basis.
The accounting of the overheads of the chosen organization as per the historical costs indicates
that the expenses or the cots will be recognized in terms of the actual cost that has been incurred
by the business instead of the current market price or cost of the respective overheads
According to IFRS, the overheads are allocated in the organization as per the absorption costing
method. According to the absorption costing method the overhead cost items are first identified
and categorised, then all the identified cost items that are of same category are put in the cost
pool [of the same category].After that the cost base is decided for each category of overhead cost
and then the total cost of a particular category will be assigned to the cost base according to the
per unit basis(Noreen et al.,2011)
For example the “rent“ is a component of the Administrative and General Expenses and is a
particular category overhead cost and the allocation based of the cost will be the square foot of
the office premises.
b. Reasons of choosing this specific method of overhead allocation in
that company
The absorption technique or method is used for the purpose of overhead allocation by the chosen
organization as the method is followed for the allocation of the overhead cost in those
organizations that follows the accounting standards as described by the IFRS.

The application of the overhead absorption method visualises the proportion of the total
overhead cost that has been absorbed by a particular cost object. Now the proportion of the
overhead absorbed by a cost unit depend s upon two factors; the total overhead attributed to the
cost centre or cost object and the number of units of the absorption base is in use which
determines the predefined overhead rate.
The overhead rate = [Total overhead assigned/Number of units of the absorption base that has
been applied to the cost object]
The overhead rate for rent = [total rent paid/number of square foots (units of cost absorption)
applied to the office premise (cost object here)
Thus the absorption method helps to keep track of the amount of overhead absorbed by the
different cost objects of the organization.
c. Evaluation of the chosen method of overhead allocation in terms of its
merits and demerits
The most important merit of applying the overhead method is that it clearly visualises the
proportion of the overhead cost absorbed by the cost object of the organization and thus also
keep track of any possibility of over and under absorption of overhead with respect to the
different cost objects of the organization.
If under absorption of overhead happens with respect to the cost object then it indicates that the
cost object has absorbed more overhead than expected and the difference is identified as expense
in the income statement. Thus an identified under absorption of overhead cost indicates that the
cost object has absorbed more expense than expected and proportionately generated a lower
return and the accelerated recognition expense clubbed with lower return leads to the reduction
of the recognized profit with respect to the particular accounting period. Thus the absorption
method helps that manager to decide the amount of overhead that will be most appropriate to
absorb by a cost object for the generation of the target return(Haskin,2010.)

In other words the absorption methods lead to the most appropriate allocation of the overhead
among the different cost objects of an organization,
The application of the absorption method of overhead allocation is a very comprehensive and
simplified method of overhead allocation
Finally the application of the absorption method for overhead allocation leads to the organization
to follow a standardized method of overhead allocation that is used globally b y the other b ig
organizations which follows the accounting standards of IFRS (Bragg and Bragg, 2018)
4.
a. Techniques of inventory accounting of the chosen organization
The accounting of inventory of the organization is done as per accounting standard AS2 under
IFRS and according to the accounting standards the inventory valuation methods of FIFO or the
First in- First out and the valuation method of the weighted-average costing can be used for the
valuation of the inventory. The Organization will not be able to apply the LIFO method of
inventory valuation as this valuation method is not permitted under IFRS (Mulyadi, et al.,2012).
b. Techniques of labour accounting of the chosen organization
The Techniques of labour accounting chosen by the organization is the direct costing of labour as
per the accounting standard prescribed under IFRS. Under the method of direct costing of labour
the organization has to calculate the all kinds of cost that the organization is going to spend for
buying one hour of labour. The all kind of labour cost includes all the costs that are related to the
wage payment, social security related cost, cost related to the medical expenses and the insurance
compensation that are paid to the workers.
Once the cost of buying one hour of labour has been determined, and then for the purpose of
allocation of the labour hours to the production units the managers of the organization has to
calculate the hours of labour needed for manufacturing one unit of output. If in the chosen

organization the total cost including the wage of buying one-hour of labour is 12 Rials
Omani(RO) and two-hours of labour are needed for producing 1 unit of output, then the direct
labour cost of producing one unit of output of the organization is 24 Rials Omani(RO)( Davidson
et al.,2010).
5.
a. Description of the costing techniques used in a company
From the above discussion it can be seen that the organization follows the different costing
techniques as defined by the IFRS as the accounting policy of the organization follows the
accounting standards that are described by IFRS which is issued by the issued by the
International Accounting Standards Board (IASB)
Following the recommendations o the accounting standard, the chosen organization follows the
absorption method for allocation and evaluation of the overhead cost among the different cost
objects of the organization on the basis of the available volume of the overhead cost and the
predetermined overhead rate.
The organization follows the method of FIFO and Weighted average method for calculating the
cost of the inventory held at stock and also to calculate the cost of finished goods sold. The FIFO
method of inventory valuation requires that the inventory that is purchased first is sold first. The
underlying logic of using this method of inventory costing is that the old raw materials should be
used earlier in the manufacturing process in order to minimize the cost of deprecation and to
maintain a good flow of inventory purchase and utilization. On the other hand the FIFO method
required that the finished goods inventories that are being manufactured first will b e sold first.
The weighted average method of inventory costing requires that all the units of inventories that
are purchased in a particular accounting period at different prices will be valued at a same
common cost.
The labour and manufacturing methods are valued using the direct costing methods. Under the
direct costing methods the cost of buying each unit of labour and material is calculated, then the

amount of labour and material needed is decided for producing one unit of output. Thus the unit
cost of producing 1 unit of output is calculated which includes the cost of labour hours and the
material input that are needed to produce that one unit.
b. Evaluation of the effectiveness and suitability of this technique
The different costing techniques as described above which are followed by the chosen
organization following the accounting standard of IFRS is suitable as these costing methods are
quite comprehensive. But as per the accounting policy of the chosen organization as the costing
is done on the basis of the historical cost instead of the market cost, the relevance of the costing
procedure in terms of the current market cost and future costing projection is quiet low.

References
Bragg, S. and Bragg, S. (2018). Overhead absorption. [online] AccountingTools. Available at:
https://www.accountingtools.com/articles/what-is-overhead-absorption.html [Accessed 23 May
2018].
Davidson, M.C., Timo, N. and Wang, Y., 2010. How much does labour turnover cost? A case
study of Australian four-and five-star hotels. International Journal of Contemporary Hospitality
Management, 22(4), pp.451-466.
Haskin, D., 2010. Teaching special decisions in a lean accounting environment. American
Journal of Business Education, 3(6), p.91.
Ho, L.C.J., Liao, Q. and Taylor, M., 2015. Real and Accrual‐Based Earnings Management in the
Pre‐and Post‐IFRS Periods: Evidence from China. Journal of International Financial
Management & Accounting, 26(3), pp.294-335.
Mulyadi, M.S., Soepriyanto, G. and Anwar, Y., 2012. IFRS adoption and taxation
issue. International Journal of Arts and Commerce, 1(7), pp.159-165.
Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2011. Managerial accounting for managers.
McGraw-Hill Irwin.
Opaloman.org. (2017). [online] Available at:
https://opaloman.org/wp-content/uploads/2015/10/Annual-Report-2016-ENG.pdf [Accessed 23
May 2018].