Accounting Case study:Jinan oil refining company

Jinan oil refining company is a sub-company of Chinese petroleum gas incorporation, it manufactories more than 80 kind of petrochemical products such as petrol, diesel, various kerosene, liquefied gas and produces crude oil 6,300,000 tons per year. It is the biggest oil refining company in China. The company has perfect equipments and plants and there are 5100 employees. The total asset is 23.6billion and net asset is 15.69billion last year. The production overhead of the company is currently absorbed by using a machine hour rate, as the indirect costs were not caused equally by all the products, this method became increasingly inaccurate. The cost accountants of the company decide to experiment by applying the principles of ABC to the two products currently made and sold by the company. Details of the two products and relevant information are given below for Jan 2008:

 

 

The cost drivers to be used are as listed below for the overhead costs shown:
 

 

1.1 We are using the traditional cost system to allocate the total overhead.
 Total machine hours= (120x9) + (100x6) =1680hours
 Machine hour overhead rate = total overheads R28560/1680hours = R17per machine hour                
The cost per ton for petrol will be 40+28+ (9x17) =R289
Total cost of petrol for Jan 2008 is R289x120ton =R34680
The cost per ton for diesel will be 50+21+ (6x17) =R173
Total cost of diesel for Jan 2008 is R173x100ton =R17300

1.2 ABC system
Computation of cot driver rates:
Material handling cost per cost drive= 10430/ (180+120) =R34.77
Set-up cost per cost drive= 5250 / (200+300) =R10.5
Stores receiving cost per cost drive = R3600/ (20+20) =R90                                                         

Inspection and quality control cost per cost drive = R4660 / (360+240) =R7.77#p#分页标题#e#
Maintenance cost per cost drive =R4620 / (240+280) =R8.88

Overheads assigned to products:
 

 

 

1.3 The differences

Cost per unit:
Petrol      Diesel
Traditional system               R289                   R173
ABC system      R193.73                R205.74
Difference                      (R95.27)                R32.74

Petrol is over-costed and diesel is under-costed with the traditional system. It is claimed that ABC system more accurately measures resources consumed by products. Where cost-plus pricing is used, the transfer to an ABC system will result in a different product prices.
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