Management Accounting

Project report – “Fuel Retail Outlet” Cost Accounting

Current Revision: 6.0

Submitted By
Revision History
Revision Date Description of Change Submission Remarks
No. Schedule
5.0 17-Nov-14 Final draft submission On-time This may be revised
based on review
6.0 9-Dec-2015 Review comments of Prof. On time Final report
Bansal is incorporated:
Cash receipt time is batch level
activity based upon quantity of
fuel filled.
Table of Contents
1 Background and History (M/s Sanagam Service Center, Ghaziabad) ................................................. 4
2 Products available............................................................................................................................ 4
3 Operations....................................................................................................................................... 5
3.1 Fuel Outlet Location ................................................................................................................. 5
3.2 Facilities at Site ........................................................................................................................ 5
3.3 Procured Finished Goods.......................................................................................................... 5
3.4 Fuel Distribution ...................................................................................................................... 5
3.5 Operational Activities and details ............................................................................................. 6
3.6 Organization Chart ................................................................................................................... 7
4 Initial Data/ Information .................................................................................................................. 7
4.1 Administrative Office ............................................................................................................... 7
4.2 Fuel reception .......................................................................................................................... 7
4.3 Fuel dispensation ..................................................................................................................... 8
4.4 Basic Cost information ............................................................................................................. 8
4.4.1 Note: ................................................................................................................................ 9
4.5 Assets and respective Depreciation .......................................................................................... 9
4.6 Existing Cost sheet/ P&L ......................................................................................................... 10
5 Initial Critical Analysis .................................................................................................................... 11
6 Contribution .................................................................................................................................. 11
6.1 Activity Based Costing ............................................................................................................ 11
6.2 Direct & OH cost Allocation .................................................................................................... 11
6.2.1 Wages ............................................................................................................................ 11
6.2.2 Distribution of Resource Consumption across Activity Cost Pools & First Stage Cost
Allocations ..................................................................................................................................... 12
6.3 Activity Rate Calculations ....................................................................................................... 13
6.4 Second Stage Allocation of Overhead Costs to Products& Profitability Analysis ...................... 15
7 Management Analysis & Report ..................................................................................................... 15
8 Recommendations ......................................................................................................................... 16
9 References:.................................................................................................................................... 17
 1 Background and History (M/s Sanagam Service Center,
Ghaziabad)
This firm is a retail outlet of Indian Oil Corporation in Ghaziabad city on NH24. It deals in
retailing of various petroleum products like Motor Spirit, High Speed Diesel, Xtra-Premium, Fuel
Additives and Lubricants.

Apart from above products, it also provides PUC, Air facility to the customers. The dealer of this
firm procures the products from Indian Oil Corporation and sells it to the customers. The outlet
has fixed assets such as Canopy, Driveway, building, compound wall, tanks, dispensers etc.
The outlet has considerable manpower and utilizes electricity, water etc. for its normal
operations.

2 Products available
Following are products sold by this firm: –

 Motor Spirit
 High Speed Diesel
 Lubricants
 Fuel Additives

Table 1 summarizes the products and Quantities that are being sold in a month at fuel
outlet.

Number of
Annual Number of
customers
Sold customers Infrastructure Shared Direct Sales
Products serves on daily
quantity served (%) Material Cost Revenue
basis (Ltr) annual
(Average)

Motor Spirit 600.00

847561.00 219000 0.50 61186089.77 62514762.70
High Speed
250.00
Diesel 4162381.00 91250 0.50 242018956.27 246838165.90

Lubricants 40.00
26879.48 14600 0.00 4660123.14 5010219.27
Fuel
30.00
Additives 48.00 10950 0.00 48000.00 67200.00

Total 307913169.18 314430347.87

Table - 1
3 Operations
3.1 Fuel Outlet Location

It is located on NH24, near Dasana, Ghaziabad. This area is chosen for following
reasons:
 Uniform supply of Electricity
 Identified Industrial activities
 Mass purchaser industries availability in vicinity

3.2 Facilities at Site

The following are the basic facilities available at the retail outlet:

Description Owned by
1 Developed land with boundary /compound Firm
2 Tanks, Dispensing Units etc. Indian Oil
3 Sales Office, Store Room, Toilet, Electrical Room, Water Firm
, Lighting, Telephone etc.
4 Generator / Inverter Firm
5 Compressor with Electronic Gauge for Air Filling Firm
6 Driveway Firm
7 Canopy Firm
9 Firefighting & Safety Equipment Firm
Table - 2
3.3 Procured Finished Goods
 Normal Diesel
 HSD
 Normal Petrol
 High quality petrol

3.4 Fuel Distribution

The different variant of fuels are being sold in the quantity started from 1 ltr. 4
dispensers are installed at distribution center. The Distributor network is organized at
retail level as well as to institutional customers spread around industrial zone.

One week demand history and any seasonal effect (festival or weekend) is
accounted for ordering finished goods i.e. petrol & Diesel from IOC center.

Three days Daily sales average is used to estimate the demand. Indent is being
raised by SMS and same day finished goods received in general. The fuel is
transported form IOC distribution center to fuel distribution center by owned
container having three compartments of 4Kl each. In an average 350K Fuel
consumption in a month.
 3.5 Operational Activities and details

Frequency Manpower Time taken in

Involved the activity

Receiving Oil Tankers

3 days 1 Nos.(Manager) 30 MINs

1. Check Quality-Density
(829+-3%) 3 Days 1 Nos.(Manager) 40 Mins
2. Check Volume in all 3-
separate parts of tanker
with standard Gauge

Unloading of Fuel from Tanker 3 Days 2 Nos(Transporter) 60 Min.

1. Receive the order-On the

spot 2.setting fuel type/ qty in =1200/24Hrs*4 M/C 1/Disp. 30 Sec
dispenser

Filling the tank

=1200/24Hrs*4 M/C 1/Disp. 5 secs/ Litre

Generating bill *
=600/24Hrs*4 M/C 1/Disp. 30 secs

Re-ordering tankers –
Frequency-3 days

*Receiving cash is 10 seconds per liter.

Therefore order/ reception, storage, dispensing, and selling of products at retail level are the
general activities.
 3.6 Organization Chart

Owner

Manager

Supervisor-2
Supervisor-1

Shift-1 (8AM-6PM) Shift-2 (6PM-8AM)

8AM-6PM

DISP-1 , 2-labors DISP-1, 2-labor Sweeper-1

DISP -2, 2 -Labors DISP-2, 2-labor

Sweeper-2
No.Nos

DIPS--3, 2-labors DISP-3, 1-labor

DISP-4, 1- labor DISP-4, 1-labor

4 Initial Data/ Information

4.1 Administrative Office
a. 50 Sqmtr..Constructed area.
b. Uses common electricity/ Generator support with dispensation units (50% each)

4.2 Fuel reception

c. Petrol and Diesel (normal and high speed) are being accepted at Fuel distribution
center only if density remains in range (730-750) & (820 – 840) respectively.
d. Petrol & Diesel (all variants) gets downloaded to respective fuel tanks, taking 40
minutes time (12Kl) from transport truck.
e. Fuel is stored in 4 tanks (610 cm length x 210 cm breadth). But it is not taking
any space as it is buried in and used as drive way.
f. Transportation truck is owned by distribution center in order to
 i. Reduce the delay in throughput.
ii. Less operational issues
iii. Reduction in idle time for vehicle.

4.3 Fuel dispensation

g. 4 Fuel dispensers used having two sided nozzles.
h. Two shift operations (24x7). Morning Shift with 8 persons (7 workers + 1
Supervisor). Night shift with 6 persons (5 workers + 1 Supervisor).
i. One manager at Office (day shift) with salary as Rs 12000 per month.
j. Two Sweepers (one full time & one part time) with wages as Rs 8000/ month and
Rs. 1000/ month respectively.
k. Air filling activity is supported by dispensing workers (one worker 50% time).

4.4 Basic Cost information

SANGAM SERVICE CENTRE : GHAZIABAD
Annual
Expense Heads Expense Remarks for cost distribution
12 worker @8000 Rs., two Supervisors @ Rs 19500 total. One
Salary (Total including Manager @Rs 12000/ month+ Two Sweeper salary @ (8000+1000)
1677600
direct and indirect) Rs+ One office staff @ Rs 3300 + One worker 50% time for Air filling
(Org sustaining cost)
Direct cost - Bill/ Credit card/ --- 95% used for billing purpose. 5%
Printing & Stationery 11510 cost is for admin office usage.

50% direct cost , 50% period cast - Office/ Canopy

Electricity Charges 283012
Period cost/ Organization sustaining cost
Bank Charges 10986
Promotional Activities 36640 Period cost
25KVA - 2.5 liters/ hrs. 6 hrs. Daily power cut cost to be divided as
General Expenses 180425 50% for distribution. Maintenance of Generator is included.

Maintenance + Insurance of Car.

Repairs & Maintenance
Professional Charges
Uniform Expenses
Insurance
Scooter Expenses
Travelling Expenses
Telephone Expenses
Staff Welfare
Audit fee
Tax and Fee
24250
Admin cost VAT return filling
7200
Uniform provided to laborers placed with dispenser machines.
35540
65 % Cash Insurance+25% product Insurance+ 10 % Employee
109385 Insurance+ Car (Owner)
24850 Used by petro pump Manager
Institutional Customers visit & Supply point. A Swift Desire Car is
94080 being used by Owner in personal use.
600Rs per month rental for SIM to raise indent + Landline 600Rs per
32109 month + Broadband security cost
26410 Period cost … refreshment to staff.
12000 Income tax Audit
Rs 12000 fixed Jila Parishad tax for running petrol pump + Rs 5000
27211 tender cost applicable for three years.
 1500 Rs. per nozzle. Machine calibration (5 liter measurement) from
Weight & Measurement 27395 weights and measures inspector per machine
Wrong fueling …losses (period), duplicate note, short recovery, fill
Miscellaneous Expenses 49456.66 and run, Sudden loss of power causing wrong display.
Rebate and Discount 62317.11 BAD debt as govt. supply not getting re-imbursement, bulk discounts
Bank Interest 756037.18 OD limit for running business.
Festival Expenses 24270 Period cost
Depreciation 11377259.21
TOTAL Rs. 3892549.83
Table 2 : Raw Cost Data

4.4.1 Note:
 Dispensers are owned by IOC not the fuel distribution center.
 Petrol pump is built on land measuring 1000 sq. mtr. Land is owned by Owner.

4.5 Assets and respective Depreciation

Depreciation Data (Annual)

Salvage Depreciation Present

Current Infra Historical Value Life method (Fixed Depreciation Value
life (Yrs.) Setup Qty cost (INR) (INR) (Yrs.) declining) cost (Annual) (INR)

1000
Land mtr^2 25000 10,000,000
8 Building 1 2000000 50000 15 5% 77,971.12 279,694.00
10 Canopy 1 1860000 180000 15 15% 66,090.54 392,871.56
Air
compres
sor &
Digital Air
5 Gauge 1 1800000 20000 15 15% 140,554.61 402,127.00
Generato
r&
6 inverter 1 580000 50000 8 15% 33,068.99 92,192.35
Other
Equipme
4 nt 1 120000 20000 8 15% 12,303.19 48,906.70
Swift
5 Desire 1 620324 72000 8 15% 49,877.42 161,467.60
11,377,259.
Total 6360000 392000 379865.8796 21

Table 3: Depreciation Data

Note: *Present Value (Land at market rate) + others as depreciated value

4.6 Existing Cost sheet/ P&L
SANGAM SERVICE CENTRE : GHAZIABAD

TRADING & PROFIT & LOSS ACCOUNT

PARTICULARS AMOUNT PARTICULARS AMOUNT

To Opening Stock 6,485,978.17 By Sales 314430347.9

By Closing
To Purchases 307913169.18 Stock 6,673,052.00

To Gross Profit Carried down 6,704,252.52

Total Rs. 321,103,399.87 Total Rs. 321,103,399.87

To Salary 1,677,600.00
By Gross Profit
brought down 6,704,252.52
To Printing & Stationery 11,510.00
To Electricity Charges 283,012.00
To Bank Charges 10,986.00

To Promotional Activities 36,640.00

To Generator Expenses 180,425.00
To Repairs & Maintenance 24,250.00
To Professional Charges 7,200.00
To Uniform Expenses 35,540.00

To Insurance 109,385.00
To Scooter Expenses 24,850.00
To Travelling Expenses 94,080.00
To Telephone Expenses 32,109.00
To Staff Welfare 26,410.00

To Audit fee 12,000.00

To Tax and Fee 27,211.00
To Weight & Measurement 27,395.00
To Miscellaneous Expenses 49,456.66

To Rebate and Discount 62,317.11

To Bank Interest 756,037.18
To Festival Expenses 24,270.00
To Depreciation 379,865.88
To Net Profit
2,811,702.69
TOTAL Rs. 6,704,252.52 TOTAL Rs. 6,704,252.52

Table 5 : P&L Statement

5 Initial Critical Analysis
- Direct traceable cost to product has not been included in Production cost/ COGS for
calculation of gross margin and currently treated as operational overheads in
calculations in overall Profits.
- Operational Losses of processes are not taken in calculating actual per unit cost.
Instead, the total expenses are directly transferred to P&L statement.
- Owners have comfortable understanding about profitability but do not have
understanding about profitable products in priority.
- Owners are not taking into account own land w.r.t. opportunity costing.
- Owners do not realize the need of comparison with benchmarking of fuel distribution
system.
- Product selling price is determined by market, not by owners.

6 Contribution

Excel Sheet is attached herewith for detailed calculation and analysis.

6.1 Activity Based Costing

Currently we would use ABC to find out different products cost, other costs to arrive at firm’s
current financial state and identify product wise profitability as well as some of the areas owners
needs to prioritize for efficiency and effectivity based on data points.

We would also cover the opportunity cost as this business is using a land and to make owners
aware of the business continuity view.

Organization sustaining Costs shall be treated as period expense rather than product cost. And
these costs shall be taken to P&L directly i.e. for the calculation of product margin.

6.2 Direct & OH cost Allocation

Out of miscellaneous operational expenses mentioned in P&L statement some of the expenses
are directly traceable to products. And some expenses are taken as overheads as not directly
related with products. These costs need to be taken as operations overhead or organization
sustaining costs.

6.2.1 Wages
Annual
Wages Distribution Expense Cost Remarks
One worker 50% time for Air
Product Cost (Traceable) 1338000 filling (Org sustaining cost)

Workers at dispensers 1152000 12 worker @8000 Rs.

 Two Supervisors @ Rs 19500
Supervisors at dispensers 234000 total.
One worker 50% time for Air
Air filling staff deduction -48000 filling (Org sustaining cost)

Overhead/ non production cost 108000

Two Sweeper salary @
Sweeper salary 108000 (8000+1000) Rs
Other (Org Sustaining Cost) 231600
One Manager @Rs 12000/
Manager 144000 month
office staff 39600 One office staff @ Rs 3300
One worker 50% time for Air
worker 48000 filling (Org sustaining cost)
Total Expense 1,677,600.00

Worker's activity at dispensing unit mapping with required time

Machine setup time 30 Seconds/ customer

Filling the tank 5 seconds/ liter

Generating Bill 30 Seconds/ Customer

Cash reception (Petrol, Diesel & Additive) 10 seconds/ liter

Generating Bill & Cash reception (Lubricant) 180 Seconds/ Customer

6.2.2 Distribution of Resource Consumption across Activity Cost Pools & First Stage Cost
Allocations

First step is to identify the activities cost pools and based on interview and factory visit
identification cost driver and allocation basis is done and applied. Attaching excel sheet
containing the overall data & calculations and same is covered in subsequent tables
appropriately and there is no need to refer this.

Annual Number of
Sold customers Machine setup
quantity served time (mins) - Filling the tank Generating Bill Cash reception
Products (Ltr) annual Annual (Mins) (Mins) (Mins)

Motor Spirit 847561 219000 109500.00 70630.08 109500.00 141260.17

High Speed
Diesel 4162381 91250 45625.00 346865.08 45625.00 693730.17

Lubricants 26879.48 14600 2628000.00 4479.91

Fuel Additives 48 10950 4.00 5475.00 8.00

Total 155125 417499 2788600 839478

Setup Time and fuel filling time distribution

Table 7

Total Worker's consumed time (Unit level activity) - Minutes 2943725

Total Worker's consumed time Filling and cash receipt (Batch level activity) - Minutes 1256977
Total 4200702
Worker wages (at dispensing site) - INR 1446000

6.3 Activity Rate Calculations

First Stage Allocation to Activity Cost Pools
Activity Cost Pool Amounts (INR)
Dispensing
Annual Labour_ Dispensing Site_Equip
Expense Heads Expense Setup Site Cost ment Others Remarks for cost distribution
Salary (Total Time consumed in Setup/ billing and
including direct 101331 cash receipt, fuel filling.
and indirect) 1677600 3 432687 231600
Direct cost - Bill/ Credit card/ --- 95%
Printing & used for billing purpose. 5% cost is for
Stationery 11510 9208 2302 admin office usage.
Electricity 50% direct cost , 50% period cast -
Charges 283012 141506 141506 Office/ Canopy
Period cost/ Organization sustaining
Bank Charges 10986 10986 cost
Promotional Period cost
Activities 36640 36640
25KVA - 2.5 liters/ hrs. 6 hrs. Daily
power cut cost to be divided as 50%
General for distribution. Maintenance of
Expenses 180425 90212.5 90212.5 Generator is included.
Repairs & Maintenance + Insurance of Car
Maintenance 24250 24250
Professional Admin cost VAT return filling
Charges 7200 7200
Uniform Uniform provided to laborers placed
Expenses 35540 35540 with dispenser machines.
60 % Cash Insurance+30% product
Insurance 109385 10938.5 65631 32815.5 Insurance+ 10 % Employee Insurance
Scooter
Used by petrol pump Manager
Expenses 24850 24850
 Institutional Customers visit & Supply
Travelling point. A Swift Desire Car is being used
Expenses 94080 94080 by Owner in personal use.
600Rs per month rental for SIM to
Telephone raise indent + Landline 600Rs per
Expenses 32109 7200 24909 month + Broadband security cost
Staff Wefare 26410 26410 Period cost … refreshment to staff.
Audit fee 12000 12000 Income tax Audit
Rs 12000 fixed Jila Parishad tax for
running petrol pump + Rs 10000
Tax and Fee 27211 10000 17211 tender cost applicable for three years.
1500 Rs. per nozzle. Machine
calibration (5 liter measurement) from
Weight & weights and measures inspector per
Measurement 27395 27395 machine … direct
Wrong fueling …losses (period),
duplicate note, short recovery, fill and
Miscellenous 49456.6 run, Sudden loss of power causing
Expenses 49456.66 6 wrong display.
Rebate and 62317.1 BAD debt as govt. supply not getting
Discount 62317.11 1 re-imbursement, bulk discounts
OD limit for running business. But
756037.1 756037. charged as total amount which is
Bank Interest 8 18 based upon volume.
Festival
Period cost
Expenses 24270 24270
Other Equipments + Swift Desire+
Building as organisational sustainable
cost
Canopy and Air compressor - Site
Equipment
379865.8 16534.4 16534.497 140,151 50% of generator and Inverter - Batch
Depreciation 796 9733 33 206,645.15 .73 level & Unit level each
3892549. 195285 746571.00 239460.65 953667.
TOTAL Rs. 83 1.174 08 49 00
Table 8

Next step is given in table 9 to calculate activity rate.

Computation of activity Rates

Activity Cost Pools Total cost Total Activity Activity Rate
Labour 1952851.174 335800 5.82 per customer
Dispensing Site 746571.0008 5036869 0.15 per ltr.
Dispensing Site_Equipment 239460.6549 1 239,460.65
Others 953667 Not Applicable Not Applicable

Table 9
 6.4 Second Stage Allocation of Overhead Costs to Products& Profitability Analysis
To consider the opportunity cost that owners started with and its interest it would have
earned in any debt instrument with assumption of 10% pa return.

Opportunity Cost for

Investment (Asset Value) 11377259.21
Interest rate @10% p.a 1137725.92
Table 10

We would allocate this cost in ratio of estimated capacity of infrastructure (creating

capacity).

Assigning Overhead cost to Products

Motor Spirit High Speed Diesel Lubricants Fuel Additives
Activity Activity Activiti ABC Activitie ABC Activiti ABC Activiti ABC
Cost Pools Rate es Cost s Cost es Cost es Cost
219,000 1,273,59 91,250.0 530,666. 14,600. 84,906. 10,950. 63,679.
Labour 5.82 .00 8.59 0 08 00 57 00 93
Dispensing 847,561 125,626. 4,162,38 616,953. 26,879. 3,984.1
Site 0.15 .00 54 1.00 24 48 1 48.00 7.11
Dispensing
Site_Equip 239,460 119,730. 119,730.
ment .65 0.50 33 0.50 33
Total ABC 1,518,95 1,267,34 88,890. 63,687.
cost 5.45 9.65 68 04
Table 11

7 Management Analysis & Report

 Though sales figure is different for Petrol and Diesel, storage capacity i.e.
infrastructure cost remains same.
 Due to economy of scale of diesel, profit is coming from Diesel. Petrol is being
purchased by majorly by retail customers. And therefore majority of wages
(depending upon number of customers served) is consumed by Petrol. And
hence leading to overall loss for product.
 Product wise profitability analysis suggests that Lubricant business is most
profitable.
 Diesel sales is the second most profitable product mainly due to institutional
customers.
 Additives is most loss making product

Product Margin - Activity Based Costing

 Motor Spirit High Speed Diesel Lubricants Fuel Additives

62514762 24683816 5010219 67200.

Sales .70 5.90 .27 00

Costs
Direct 61186089 24201895 4660123 48000.
Material .77 6.27 .14 00
1,273,598 530,666.0 84,906.5 63,679.
Labour .59 8 7 93
Dispensing 125,626.5 616,953.2
Site 4 4 3,984.11 7.11
Dispensing
Site_Equip 119,730.3 119,730.3
ment 3 3
62705045 24328630 4749013 111687
Total Cost .22 5.92 .82 .04
- -
Product 190282.5 3551859.9 261205. 44487.
Margin 2 8 45 04
Product -
Margin (%) -0.30% 1.44% 5.21% 66.20%

Table 12

Net operating Income Calculation

Product Margin 3578295.86
Others (Overhead cost not assigned to products) 953667
Net operating Income 2624628.86
Net profit (%) 0.83%

Opportunity Cost for Investment (Asset Value) 11,377,259.21

Interest rate @10% p.a 1137725.921
Net Operating Profit considering Opportunity Cost 1486902.94
Net profit % of Asset Value including Opportunity cost 13.07%

8 Recommendations
Following are key highlights and recommendations –

 Firm is making overall profit amounting to 0.83% to annual turnover. Being high
turnover industry, it amounts to be good profit.
 With respect to opportunity cost, overall 13.07% additional net profit observed.
 Firm is making losses in the sales of petrol and Additives.
 Additive business to be discontinued or discouraged
  Diesel and Lubricants are making good profit.
 Petrol is making –ive Product Margin as -0.30%. This is due to retail sales of
Petrol (small quantity) covering large amount of manual intervention.
 This cost analysis is done keeping opportunity cost and all expenses in to
account but gives true reflection of business.
 This analysis is in line with owner’s feedback as they are wondering that they are
running business in overall profit but making losses for petrol without knowing the
exact data
 There is significant cost amount in other costs due to idle capacity which can be
further analyzed if compared with Industry standard and standard in terms of
over size, sales and employees.
 Alternatively, existing infrastructure can be altered in order to reduce for petrol
and increase for diesel.
 A low running inventory cost as on an average three days inventory exists.
 Owner’s electricity backup form Diesel Gen-set as well as car is actually getting
billed to firm.
 A different market strategy needs to be devised for petrol sale. Some promotional
activities can be taken for institutional sale particularly for petrol

9 References:

 Mr. Anurag Bansal (M/s Sanagam Service Center, Ghaziabad)

A special thanks to him for providing adequate replies to our multiple queries and making available of
various cost related confidential information (from business perspective)

 Activity-Based Costing and Predatory Pricing: The Case of the Petroleum Retail
Industry
BY THO M A S L . B A RT O N A N D J O H N B . M A C A R T H U R