Research methodology

COSTING STRUCTURE & SENSITIVITY ANALYSIS

A. Research Methodology

Study objectives or Learning Objectives: -

To know how the costing calculation is done in order to carry out the

per unit cost of the finished product.

To know how the final cost of products arises after including all the

expenses which are incurred in Hazira plant during production of the

products.

As calculation is done automatically in SAP system so how that

calculation is done that has been shown in the report.

In Sensitivity Analysis to know how the % rise in cost differs at

different levels during general condition as well as in present

condition.

Scope of the study: -

The scope of study includes the calculation of cost which is done in

the SAP system automatically in that also there is so much complexity is

there so in order to reduce the complexity this type of calculation is done.

There is need to derive Activity Based Costing to firm the cost of each input.

In Sensitivity Analysis company can save the cost durig present condition.

S.K.P.I.M.C.S 1


Data collection sources : -

(1) Primary sources:

Cost summary of ONGC-Hazira Plant of the finished products as well

as worked in SAP system also.

(2) Secondary sources: -

As secondary sources I have studied different magazines, books and

web sites.

(D) Data analysis: -

Tables is used as data analysis tools.

(E)Limitations of the study: -

Some of the information of the company is highly confidential, so I had

to restrict my self up to the data given by the company only.

No. of employee available for sharing the information is less because

all are busy in their own work.

While preparing the project I had to use hypothetical data whenever

needed because of the unavailability of some of the required data.

S.K.P.I.M.C.S 2


1.AN OVERVIEW – OIL & NATURAL GAS INDUSTRY

Almost all oil and natural gas are found deep underground in tiny

holes in rocks. Millions of years ago a sea covered much of what is now dry

land. In prehistoric times, tiny plants and animals lived in the sea. When

these creatures died, they sank to the bottom of the sea, and got buried in

layers of mud and sand. As the ages passed, this organic material sank

deeper and deeper. The earth's crust changed its shape, and put intense

pressure and heat on what was once only plants and tiny animals. Heat

from the earth's interior and the weight of the overlying rocks gradually

changed the energy-containing substances in the accumulated plants into

hydrocarbon liquids and gases. As millions of years passed, these deposits

turned into chemicals that are now called ‘hydrocarbons’.

Hydrocarbons are simple molecules made up of carbon and hydrogen

atoms joined together in chains or in rings. These molecules, being light and

mobile, migrated upwards through the rocks but eventually became trapped

beneath impermeable rock structures in the earth's crust. That is where oil

and natural gas come from. Some were created millions of years ago, some

were created thousands of years ago, and some are being created right

now!

Much of the oil and gas production now comes from underneath the

sea-bed. As the technology for extraction continues to advance, production

becomes possible from deeper and deeper waters. But the supplies are

limited. Every drop of oil burnt adds to the monumental environment

problems already created by pumping gases like carbon dioxide into the

S.K.P.I.M.C.S 3


atmosphere. Many scientists worry that this continual release of carbon

dioxide is an important cause of global warming.

Natural gas is usually found underground near an oil source. It is a

mixture of light hydrocarbons including methane, ethane, propane, butane,

and pentane. Other compounds found in natural gas include carbon dioxide,

helium, hydrogen sulphide, and nitrogen. It is found around the world, but

the largest reserves are in the former Soviet Union and the Middle East.

This gas is lighter than air and is highly flammable, made up mainly of a gas

called methane. Methane is a simple chemical compound that is made up of

carbon and hydrogen atoms. Natural gas usually has no odour and cannot

be seen. Before it is sent to the pipelines and storage tanks, it is mixed with

a chemical that gives it a strong odour, almost like rotten eggs. The odour

makes it easy to detect a leak.

Natural gas is the cleanest burning fossil fuel. When it is burned, it

gives off less carbon dioxide than oil or coal, virtually no sulphur dioxide,

and only small amounts of nitrous oxides. Natural gas is mostly composed

of methane and other light hydrocarbons. Both the carbon and the hydrogen

in methane combine with oxygen when natural gas is burned, giving off

heat. Coal and oil contain proportionally more carbon than natural gas,

therefore giving off more carbon dioxide per unit of energy produced.

Natural gas gives off 50% of the carbon dioxide released by coal and 25%

less carbon dioxide than oil, for the same amount of energy produced.

Carbon dioxide is the most important greenhouse gas contributing to global

warming.

S.K.P.I.M.C.S 4


To find oil and natural gas, companies drill through the earth to the

deposits deep below the surface. The oil and natural gas are then pumped

from below the ground by oil rigs. They then usually travel through pipelines.

At oil refineries, crude oil is split into various types of products by

heating the thick black oil. The products include gasoline, diesel fuel,

aviation fuel, home heating oil, oil for ships, and oil to burn in power plants

to make electricity. Oil is used for transportation—cars, airplanes, trucks,

buses, and motorcycles.

Oil is stored in large tanks until it is sent to various places to be used.

Oil is also made into many different products—fertilizers for farms, clothes,

toothbrush, plastic bottle, and plastic pen. There are thousands of other

products that come from oil. Almost all plastic comes originally from oil. Oil

is transported in huge pipelines and tanker ships to places where it is made

into other products.

The origin of the oil industry in India can be traced back to the last part

of the 19th century when petroleum was discovered in Digboi in north-east

India. Thereafter large numbers of oil fields have been discovered both

inland and off-shore. This has led to the setting up of refineries to process

the oil and gas for use in various sectors.

S.K.P.I.M.C.S 5


1. INTRODUCTION TO ONGC

ONGC-A GEM AMONG THE ‘NAVRATNAS’

The Oil and Natural Gas Corporation Ltd, popularly known to the

people as ONGC is today the Numero Uno among the ‘Navratna’ Public

Sector Companies of India. It was set up in 1956 and has made significant

contribution in industrial and economic growth of the country. ONGC is a

leader in India engaged mainly in exploration, development and production

of Crude oil, Natural gas and some Value Added Products.

Now ONGC is India’s largest producer of Crude oil, Natural gas and

LPG. It also produces other value added products such as NGL, C2-C3,

Aromatic Rich Naphtha and Kerosene.

Internationally its wholly owned subsidiary ONGC Videsh Limited has

number of existing and up-coming interest in selected Oil patches including

development of large gas field in Vietnam Off-shore. It was converted into a

Public Limited company in June 1993 following new liberalized economic

policy adopted by Government of India in July 1991 sought to deregulate

and de-license the core sector (including Petroleum Sector) with partial

disinvestment of Govt. equity in PSUs & other measures. During March 1999

ONGC, M/s. Indian Oil Corporation – a down-streaming Giant and M/s. Gas

Authority of India Limited – the only gas marketing company agreed to have

cross-holding in each other’s equity to pave the way for long term strategic

alliance amongst themselves, both for the domestic and overseas business

opportunities in the Energy Value Chain.

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A. History

1947 - 1960

During the pre-independence period, the Assam Oil Company

in the northeastern and Attock Oil company in northwestern part of the

undivided India were the only oil companies producing oil in the country,

with minimal exploration input. The major part of Indian sedimentary basins

was deemed to be unfit for development of oil and gas resources.

After independence, the national Government realized the importance

oil and gas for rapid industrial development and its strategic role in defense.

Consequently, while framing the Industrial Policy Statement of 1948, the

development of petroleum industry in the country was utmost necessity.

Until 1955, private oil companies mainly carried out exploration of

hydrocarbon resources of India. In Assam, the Assam Oil Company was

producing oil at Digboi (discovered in 1889) and the Oil India Ltd. (a 50%

joint venture between Government of India and Burmah Oil Company) was

engaged in developing two newly discovered large fields Naharkatiya and

Moran in Assam. In West Bengal, the Indo-Stanvac Petroleum project (a

joint venture between Government of India and Standard Vacuum Oil

Company of USA) was engaged in exploration work. The vast sedimentary

tract in other parts of India and adjoining offshore remained largely

unexplored.

In 1955, Government of India decided to develop the oil and natural

gas resources in the various regions of the country as part of the Public

Sector development. With this objective, an Oil and Natural Gas Directorate

was set up towards the end of 1955, as a subordinate office under the then

Ministry of Natural Resources and Scientific Research. The department was

S.K.P.I.M.C.S 7


constituted with a nucleus of geoscientists from the Geological survey of

India.

A delegation under the leadership of Mr. K D Malviya, the then Minister of

Natural Resources, visited several European countries to study the status of oil

industry in those countries and to facilitate the training of Indian professionals for

exploring potential oil and gas reserves. Foreign experts from USA, West

Germany, Romania and erstwhile U.S.S.R visited India and helped the

government with their expertise. Finally, the visiting Soviet experts drew up a

detailed plan for geological and geophysical surveys and drilling operations to

be carried out in the 2nd Five Year Plan (1956-57 to 1960-61).

In April 1956, the Government of India adopted the Industrial

Policy Resolution, which placed mineral oil industry among the schedule 'A'

industries, the future development of which was to be the sole andexclusive

responsibility of the state.

Soon, after the formation of the Oil and Natural Gas Directorate, it

became apparent that it would not be possible for the Directorate with its

limited financial and administrative powers as subordinate office of the

Government, to function efficiently. So in August, 1956, the Directorate was

raised to the status of a commission with enhanced powers, although it

continued to be under the government. In October 1959, the Commission

was converted into a statutory body by an act of the Indian Parliament,

which enhanced powers of the commission further. The main functions of

the Oil and Natural Gas Commission subject to the provisions of the Act,

were "to plan, promote, organize and implement programmes for

development of Petroleum Resources and the production and sale of

S.K.P.I.M.C.S 8


petroleum and petroleum products produced by it, and to perform such

other functions as the Central Government may, from time to time, assign to

it ". The act further outlined the activities and steps to be taken by ONGC in

fulfilling its mandate.

1961 - 1990

Since its inception, ONGC has been instrumental in transforming the

country's limited upstream sector into a large viable playing field, with its

activities spread throughout India and significantly in overseas territories. In

the inland areas, ONGC not only found new resources in Assam but also

established new oil province in Cambay basin (Gujarat), while adding new

petroliferous areas in the Assam-Arakan Fold Belt and East coast basins

(both inland and offshore).

ONGC went offshore in early 70's and discovered a giant oil field in

the form of Bombay High, now known as Mumbai High. This discovery,

along with subsequent discoveries of huge oil and gas fields in Western

offshore changed the oil scenario of the country. Subsequently, over 5

billion tones of hydrocarbons, which were present in the country, were

discovered. The most important contribution of ONGC, however, is its self-

reliance and development of core competence in E&P activities at a globally

competitive level.

After 1990

The liberalized economic policy, adopted by the Government of India

in July 1991, sought to deregulate and de-license the core sectors (including

petroleum sector) with partial disinvestments of government equity in Public

Sector Undertakings and other measures. As a consequence thereof,

S.K.P.I.M.C.S 9


ONGC was re-organized as a limited Company under the Company's Act,

1956 in February 1994.

After the conversion of business of the erstwhile Oil & Natural Gas

Commission to that of Oil & Natural Gas Corporation Limited in 1993, the

Government disinvested 2 per cent of its shares through competitive

bidding. Subsequently, ONGC expanded its equity by another 2 per cent by

offering shares to its employees.

During March 1999, ONGC, Indian Oil Corporation (IOC) - a

downstream giant and Gas Authority of India Limited (GAIL) - the only gas

marketing company, agreed to have cross holding in each other's stock.

This paved the way for long-term strategic alliances both for the domestic

and overseas business opportunities in the energy value chain, amongst

themselves. Consequent to this the Government sold off 10 per cent of its

share holding in ONGC to IOC and 2.5 per cent to GAIL. With this, the

Government holding in ONGC came down to 84.11 per cent.

In the year 2002-03, after taking over MRPL from the A V Birla Group,

ONGC diversified into the downstream sector. ONGC will soon be entering

into the retailing business. ONGC has also entered the global field through

its subsidiary, ONGC Videsh Ltd. (OVL). ONGC has made major

investments in Vietnam, Sakhalin and Sudan and earned its first

hydrocarbon revenue from its investment in Vietnam.

ONGC today is the only fully–integrated petroleum company in India,

operating along the entire hydrocarbon value chain:

S.K.P.I.M.C.S 10


• Holds largest share (57.2 per cent) of hydrocarbon acreages in India.

• Contributes over 84 per cent of Indian’s oil and gas production.

• Every sixth LPG cylinder comes from ONGC.

• About one-tenth of Indian refining capacity.

B . Organizational Structure

S.K.P.I.M.C.S 11


C . Board of Directors

Mr. R S Sharma Chairman & Managing Director

Dr. A K Balyan Director (HR)

Mr. A K Hazarika Director (Onshore)

Mr. N K Mitra Director (Offshore)

Mr. D K Pande Director (Exploration)

Mr. U N Bose Director (T&FS)

Mr. U Sundararajan Director

Mr. Rajesh V Shah Director

Mr. M M Chitale Director

Mr. A M Uplenchwar Director

Mr. Anil Razdan Director

Mr. Ashok Chawla Director

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D. Head Office and Regional Offices

Corporate Office / Headquarters: Tel Bhavan, Dehradun

Registered Office: Jeevan Bharti Towers, New Delhi

Plants/ Assets/Basins/Regions/Institutes/Major Projects

A. Assets/Plants:

Sr.

No.

Name of Asset Location

Mumbai High Asset MumbaiNeelam & Heera Asset MumbaiBassein & Satellite Asset MumbaiUran Plant UranHazira Plant HaziraAhmedabad Asset Ahmedabad Ankleshwar Asset Ankleshwar Mehsana Asset Mehsana Rajamundry Asset Rajamundry Karaikal Asset Karaikal Assam Asset Nazira Tripura Asset Agartala

B. Basins:

1. Western Offshore Basin Mumbai2. Western Onshore Basin Baroda3. KG Basin Rajamundry

S.K.P.I.M.C.S 13


4. Cauvery Basin Chennai5. Assam & Assam-Arakan Basin Jorhat6. CBM- BPM Basin Kolkata7. Frontier Basin Dehradun

C. Regions:

1. Mumbai Region Mumbai2. Western Region Baroda3. Eastern Region Nazira4. Southern Region Chennai5. Central Region Kolkata

D. Institutes:

1. Keshava Deva Malaviya Institute of Petroleum Exploration (KDMIPE)

Dehradun

2. Institute of Drilling Technology (IDT)

Dehradun

3. Institute of Reservoir Studies Ahmedabad4. Institute of Oil & Gas Production

Technology Navi Mumbai

5. Institute of Engineering & Ocean Technology

Navi Mumbai

6. Geo- data Processing & Interpretation Center (GEOPIC)

Dehradun

7. ONGC Academy Dehradun8. Institute of Petroleum Safety

Health & Environment Goa

S.K.P.I.M.C.S 14


Management9. Institute of Biotechnology &

Geotectonics StudiesJorhat

10. 10. School of Maintenance Practices

Vadodara

11. 11. Regional Training Institutes Navi Mumbai, Chennai, Sivasagar & Vadodara.

E. Services:

1. Chief Drilling Services Mumbai

2. Chief Well Services Mumbai

3. Chief Geo-Physical Services Dehradun

4. Chief Logging Services Baroda

5. Chief Engineering Services Mumbai

6. Chief Offshore Logistics Mumbai

7. Chief Technical Services Mumbai

8. Chief Info-com Services New Delhi

9. Chief Corporate Planning New Delhi

10. Chief Human Resource Development

Dehradun

11. Chief Employee Relations Dehradun

12. Chief Security Dehradun

13. Company Secretary New Delhi

S.K.P.I.M.C.S 15


14. Chief Marketing New Delhi

15. Chief Corporate Affairs & Co-ordination

New Delhi

16. Chief Corporate Communication New Delhi

17. Chief Material Management Dehradun

18. Chief Technical Services Dehradun

19. Chief Health, Safety & Environment

Mumbai

20. Chief Legal New Delhi

21. Chief Medical Dehradun

22. Chief Internal Audit New Delhi

23. Chief Commercials New Delhi

24. Chief Exploration and Development

Dehradun

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E . OBJECTIVES

VisionTo be a World-class Oil and Gas Company integrated in energy business with dominant Indian leadership and global presence.

World Class

• Dedicated to excellence by leveraging competitive advantages in R&D and technology with involved people.

• Imbibe high standards of business ethics and organizational values.

• Abiding commitment to safety, health and environment to enrich quality of community life.

• Foster a culture of trust, openness and mutual concern to make working a stimulating and challenging experience for our people.

• Strive for customer delight through quality products and services.

Integrated In Energy Business

• Focus on domestic and international oil and gas exploration and production business opportunities.

• Provide value linkages in other sectors of energy business.

• Create growth opportunities and maximize shareholder value.

Dominant Indian Leadership

• Retain dominant position in Indian petroleum sector and enhance India's energy availability

Mission

To be an Indian Integrated Energy Multinational (PSU); Target: A Turnover of 50 Billion US dollars in 5 years.

S.K.P.I.M.C.S 17


Global Ranking

• Is Asia’s best Oil & Gas Company, as per a recent survey conducted

by US-based magazine ‘Global Finance’.

• Ranks as the 2nd biggest E&P company (and 1st in terms of profits),

as per the Platts Energy Business Technology (EBT) Survey 2004.

• Is placed at the top of all Indian Corporate listed in Forbes 400 Global

Corporate (rank 133rd) and Financial Times Global 500 (rank 326th),

by Market Capitalization.

.

• Is recognized as the Most Valuable Indian Corporate, by Market

Capitalization, Net Worth and Net Profits, in current listings of

Economic Times 500 (4th time in a row), Business Today 500,

Business Baron 500 and Business Week.

• ONGC ranks among the top 10 Oil and Gas companies in world in

terms of market capitalization.

• ONGC has been ranked 273rd in the Forbes 2000-World’s biggest and

most powerful companies as measured by composite ranking for

sales, profits, assets and market value.

F. FINANCIAL DETAILS

S.K.P.I.M.C.S 18


Financials ONGC : Share Holding Pattern (%)

74.15%

2.40%

9.61%

1.52%6.19%

3.54%

2.59%

Govt of India

GAIL

IOCL

Public

FIIs, NRIs

PvtCorporateFIIs, Banks

S.K.P.I.M.C.S 19


3. HAZIRA GAS PROCESSING COMPLEX

S.K.P.I.M.C.S 20


The industrial pride of india

The ONGC Gas processing unit is located at Hazira on the suburbs of

Surat city in Gujarat. HGPC plant was specifically laid for processing

Natural gas, which is found at Bombay High. This plant comes under the

Mumbai Region Business Centre (MRBC).

Hazira Gas Processing Complex was set up in September 1985 to

receive gas from Mumbai High initially and subsequently to process sour

Natural Gas from Bassein and other offshore fields. Sour gas along with

associate condensate is transported through two sub-sea pipelines: one 36”

diameter(231 kms) and the other 42” diameter (244 kms) from bassein

offshore process platform to Hazira plant. From here the natural gas

production is carried out which on earlier stage is supplied to GAIL and HBJ

(Hazira Bijapur Jagdishpur) pipeline.

With the discovery of Bombay High begun the growth of Mumbai

region. From a small beginning Exploratory Bombay High with India’s first

offshore Sagar-Samrat. ONGC has come along way. After its success in

Bombay High ONGC discovered various other fields in western offshore.

Among the various discoveries in western offshore, South Bassein proved

to be one of the biggest gas fields in Asia. Total recoverable reserves are

estimated to be of order of 200 billion cubic meters which is phenomenal

when compared to such fields in the world. The exploration of bassein field

paved way for development of number of gas based industries in Gujarat

and Northern India, covering Delhi to bring gas to shore and the process

before it is distributed to consumers, ONGC had chosen a 625 hectares of

land in Hazira plant about 20 km away from surat town which has now

grown to gigantic complex sprawling in 705 hectares with following certain

S.K.P.I.M.C.S 21


units plants built with state of the art technology at a cost of Rs. 1300 crores

and process of growth is continued. It has gas processing capacity of 41

MMSCMD (Million Metric Standard Cubic Meter per Day). The whole Plant

is completely automated where no one can find a single person working in

the field area. This fully automated plant is maintained and inspected

regularly with the responsible group of people.

PRODUCTS

1. SWEET NATURAL GAS

2. LPG (LIQUIFIED PETROLEUM GAS)

3. ARN (AROMATIC RICH NAPHTHA

4. SKO (SUPERIOR KEROSENE OIL)

5. ATF (AVIATION TURBINE FUEL)

6. HSD (HIGH SPEED DIESEL)

7. HEAVY CUT

8. SULPHUR

CUSTOMERS OF ONGC1. KRIBHCO 2. ESSAR3. GAIL 4. IOCL5. HPCL 6. BPCL7. RELIANCE INDIA LTD

DESPATCH OF PRODUCTS1. RAIL

S.K.P.I.M.C.S 22


2. ROAD

3. PIPELINE

4. SHIP

PRODUCTS DISPATCHED

1. LPG – ROAD, PIPELINE, RAIL

2. NAPHTHA – SHIP, PIPELINE, RAIL

3. SKO – ROAD, PIPELINE

4. SULPHUR – ROAD

• NATURAL GAS is sold to GAIL and marketing is done by GAIL.

• LPG is sold to IOCL, HPCL, BPCL and for domestic purpose.

• NAPHTHA is exported to Singapore, Hong Kong, South Korea, Japan etc through ship.

• SKO is sold to local customers as well as HSD also.

• ATF is used for internal purpose as well as HSD also.

• SULPHUR is sold to chemical companies.

These all are the Value Added Products.

COMPETITORS OF ONGC

1. ESSAR OIL

S.K.P.I.M.C.S 23


2. BPCL

3. HPCL

4. RIL

5. GPCL

6. IPCL

The main competitor of ONGC is Reliance Petrochemicals Ltd.

MAIN PLANT

1. GAS TRUNKLINES

2. GAS SWEETENING UNIT (GSU)

3. DEW POINT DEPRESSION (DPD)

4. LPG RECOVERY UNIT

5. CONDENSATION FRACTIONATE UNIT (CFU)

6. CAUSTIC WASH UNIT (CWU)

7. GAS DEHYDRATION UNIT (GDU)

8. KEROSENE RECOVERY UNIT (KRU)

AUXILLIARY PLANT

CO-GENERATION PLANT

S.K.P.I.M.C.S 24


MAIN UTILITIES AND OFFSITES

1. RAW WATER TREATMENT PLANT

2. LPG STORAGE SPHERES

3. NGL STORAGE TANKS

4. NAPHTHA STORAGE TANKS

5. KEROSENE STORAGE TANKS

6. HSD/ATF STORAGE TANKS

7. FIRE WATER STORAGE TANKS

8. RAW WATER RESERVOIR.

A. FINANCIAL HIGHLIGHTS

Statement showing Revenue and Surplus of Hazira plant

S.K.P.I.M.C.S 25


(Amount in Rs. Crores)Particular / Period 2004-05 ( Actual

for 12 months )2005-06 ( Projected for 9 months up to Dec 05 )

Revenue ( A ) 5394 5210ExpenditureStatutory levies 474 373Expenses* 152 130Depreciation 43 29Total ( B ) 669 532Surplus ( A – B ) 4725 4678

* Expense do not include input and Headquarter cost.

MOU Target v/s Achievement Apr-Nov 05

Product Unit Target Actual Achievement LPG TMT 335.100 383.438 115.32Naphtha TMT 686.900 805.491 117.26SKO TMT 100.000 113.653 113.65Gas sales MMSCM 6116 6553.916 107.16HSD TMT 8.960 9.092814 101.48

Total VAPS TMT 1130.96 1314.675 116.24

PC Target v/s Achievements (Apr-05)

Products Unit Target Actual Achievement LPG TMT 368.93 386.438 104.75Naphtha TMT 779.29 805.491 103.36SKO TMT 100.00 113.653 113.65Gas sales MMSCM 6532 6553.916 100.34HSD TMT 8.96 9.092814 101.48Total VAPs TMT 1418.19 1488.25 104.94

4. COSTING STRUCTURE OF HAZIRA PLANT

S.K.P.I.M.C.S 26


INTRODUCTION

ONGC Hazira follows cost centre accounting system. It has an ERP

system called SAP (system application & products of database). SAP is

used world over by most of the corporate giants and is well known for its

capabilities for integration of data. In ONGC, SAP system facilitates

integration of financial data with costing data, production data and sales

and distribution data. Thus in SAP, all the basic data for costing in

Hazira plant are picked up form various modules of SAP like FI(Finance)

module, Production module, S&D module and MM(Material Management

module). This is one of the distinct advantage of SAP that it avoids

duplicity of data entry and is used a common data base for different

purposes.

SAP is a system that integrates and automates all facets of business

operations. This includes planning, manufacturing, and sales, while more

recent ERP software products encompass marketing, inventory control,

order tracking, customer service, finance and human resources as well.

5. Methods of Costing at ONGC Hazira plant

S.K.P.I.M.C.S 27


ONGC Hazira plant follows cost centre accounting method for the

purpose of costing of products and reporting of cost data to management

and various other external and internal agencies. Cost centre accounting

is a method for applying resource costs to an organization. The

accounting system identifies each of the organizational parts of the

traditional functional structure and applies the identifiable costs to that

part of the structure.

Thus, in cost centre accounting, entire organization is divided into

parts and an attempt is made to identify and book costs related to these

parts separately so that cost incurred on each of such parts can be found

out separately for further use in cost control and other management

decisions.

6. Certain terms

S.K.P.I.M.C.S 28


In ONGC Hazira plant, the costing system is run on ERP system called

SAP. Entire costing calculations are done by this ERP system only. Thus

cost in Hazira plant and SAP system go hand to hand and it is difficult to

understand the costing system of Hazira plant if we make an attempt to

understand it in isolation without taking into the SAP system. Therefore,

to understand the cost system of the Hazira plant certain terms must be

understood.

These terms are used by the costing system of SAP. Some more

important terms have been explained here below:

1. Cost object:

A cost object, in SAP terminology, is a cost carrier. In other words, it is

an object with reference to which costs are incurred. For example, cost

centre is a cost object. Thus, LPG plant is a cost centre and therefore it is

a cost object too as various costs are incurred to run the LPG plant. In

SAP the cost objects are:

1.1 Cost centre

1.2 Plant maintenance order

1.3 Work break down structure (WBS)

1.4 Process order

1.5 Internal order

Each of these cost objects have been explained hereafter:

1.1 Cost centre:

S.K.P.I.M.C.S 29


Entire ONGC Hazira plant has been divided in around 61 cost centres. A

cost centre can be defined as a unit with reference to which cost is

incurred. The list of cost centres of Hazira plant is given as follows:

LIST OF COST CENTRES OF HAZIRA PLANT

COST CENTRE CODE COST CENTRE DESCRIPTION

PLANT COST CENTRES

MUMHPPL101 SLUG CATCHER UNIT

MUMHPPL102 GSU PLANT

MUMHPPL103 LPG PLANT

MUMHPPL105 DPD PLANT

MUMHPPL106 SRU PLANT

MUMHPPL107 GDU PLANT

MUMHPPL108 KRU PLANT

MUMHPPL301 CFU PLANT

UTILITY COST CENTRES

MUMHPUT204 IG PLANT

MUMHPUT202 UTILITY WATER

MUMHPUT205 COOLING WATER SYSTEM

MUMHPUT206 DMW PLANT

MUMHPUT201 WWTP PLANT

MUMHPUT102 ELECT DIST SYST

MUMHPSP928 COGEN OFFICE

MUMHPUT101 COGEN POWER PLANT

MUMHPUT105 HAZIRA TURBINE I & IIMUMHPUT108 HAZIRA TURBINE IIIMUMHPUT103 MP BOILERS

MUMHPUT104 STEAM GENERATION

MUMHPUT106 HZR- HITACHI BOILER

MUMHPUT107 HAZIRA THERMAX BOILR

MUMHPUT203 PLANT/INSTT. AIR

MAINTENANCE COST CENTRES

MUMHPMT101 MAINT-PROCESS-MECH

MUMHPMT102 MAINT –ELECT

MUMHPMT103 MAINT-PROCESS-INSTT.MUMHPMT902 HAZIRA MAINTN CIVIL

MUMHPMT901 MAINT_COMMON

S.K.P.I.M.C.S 30


MUMHPMT105 HAZIRA MAINT -E&T

MUMHPMT104 MAINT-ESTATE

OPERATION SUPPORT COST CENTRES

MUMHPSP930 CORROSION MONITORING

MUMHPSP931 CONDITION MONITORING

MUMHPSP911 CHEMISTRY-PTAU

MUMHPSP912 OPERATION OFFICE/GM(MUMHPSP915 PLANT TRAINING

MUMHPSP932 R.E(P) OFFICE

MUMHPPTAU1 PROCESS ANALYSIS UPG

MUMHPSP905 HAZIRA QAD / EM

ADMINISTRATIVE SUPPORT COST CENTRES

MUMHPSP910 PROJECT GROUP

MUMHPSP901 PROJECT HEAD'S OFFIC

MUMHPSP902 F&AMUMHPSP903 P&A/LEGAL/IR

MUMHPSP904 MM

MUMHPSP929 HAZIRA INFO COM

MUMHPSP914 SHE

MUMHPSP913 ERG

MUMHPSP916 MEDICAL

MUMHPSP919 TOWNSHIP

MUMHPSP917 SECURITY & VIGILANCE

SALES & DISTRIBUTION COST CENTRES

MUMHPSP923 TRANSPORT-BASE OFFIC

MUMHPTP910 PRODUCT STORAGE OFFI

MUMHPTP901 PRODUCT DESPATCH OFF

MUMHPTP301 DESPATCH-PIPELINE

MUMHPTP321 DESPATCH-RAIL

MUMHPSP927 HAZIRA PP& EVACUATION

MUMHPTP341 DESPATCH-ROAD

SECONDARY COST CENTRES

MUMHPECXP1 HAZIRA LOG E&C_CAP

MUMHPECXP2 HAZIRA LOG E&C_RE

MUMHPGEEXP HAZIRA GEN EXP

S.K.P.I.M.C.S 31


From the list, it can be seen that there are 7 broad categories of cost

centres in Hazira plant namely:

1.1.1 Plant cost centres:

All the major plants of ONGC Hazira plant have been identified with a

separate cost centre. For example, gas sweetening unit (GSU) plant has

been identified with cost centre MUMHPPl102. Similarly, LPG unit has

been identified with cost centre MUMHPPl103 and the like.

Whenever costs are incurred for any of the plants, these costs are

booked in respective plant’s cost centres.

1.1.2. Utility cost centres:

For the purpose of running the plant, various utilities like water, steam,

power, inert gas etc are required. ONGC Hazira plant has its own utility

plants to generate/produce and consume these utilities. Like, for power

and steam generation, Hazira plant has its own captive power plant

which generates power sufficient to run the plant on its own.

Each of such utility plants too, has been identified with separate cost

centres. For example, MUMHPUT204 represents inert gas plant;

similarly, water utility plant has been given code MUMHPUT 202.

1.1.3 Maintenance cost centres:

In order to capture separately the maintenance activities which are

carried out in the plants, separate cost centres have been created for

each of maintenance activities. For electric maintenance in the plant, cost

centre MUMHPMT102 has been created which captures all the electrical

maintenance cost incurred in Hazira plant. Similarly, for mechanical

S.K.P.I.M.C.S 32


maintenance, cost centre MUMHPMT101 has been created. In the same

manner, for civil maintenance, infocomm maintenance, etc, separate cost

centres, as indicated in the list above have been created.

1.1.4 Operation support cost centres:

To support operations of the plant, a huge team of engineers and other

technical experts has been engaged in Hazira plant. This team ensures

that every activity of the plant goes on smoothly without interruption as

even a single day’s plant shut down can result in loss of millions of

rupees.

For identifying cost of each of such operation support separately, a

separate cost centre has been created in SAP system. Like, for condition

monitoring group of the plant (which continuously monitors the condition

of the plant), cost centre, MUMHPSP931 has been created. Similarly,

chemistry section of the plant which monitors quality controls has been

identified with cost centre MUMHPSP911.

1.1.5 Administrative support cost centres:

All the administrative departments like human resources & employee

relations department, finance & accounts section, material management

section, health, safety & environment section etc have been identified

with separate cost centres to capture cost of each of these departments.

Finance & accounts section has been given cost centre code

MUMHPSP902. Again, material management section’s cost centre is

MUMHPSP904 and the like.

S.K.P.I.M.C.S 33


1.1.6 Sales & distribution cost centres:

Hazira plant produces various products like gas, LPG, ARN, SKO, and

HSD. These products are dispatched to customers through various

modes of transportations. Mainly dispatches are through pipeline, rail and

road. Gas is dispatched to GAIL through pipeline, while other liquid

products are dispatched through rail, road and as well as through

pipelines.

To identify cost of dispatch of goods by each of modes of transportation,

cost centres have been created in SAP for each of these modes. For

example, for dispatch through pipeline, cost centre MUMHPTP301 has

been created. Similarly, for rail dispatch, cost centre, MUMHPTP321 is

created.

Again, to capture cost of storage of products, cost of marketing section of

Hazira separate cost centres, MUMHPTP910 & MUMHPSP927have

been created.

1.1.7 Secondary cost centres:

Secondary cost centres are those cost centres in which no direct cost is

booked. They receive cost from primary cost centres (i.e. the cost

centres in which direct costs are booked). The purpose of secondary cost

centres is to ensure proper allocation of cost to appropriate products and

activities.

In Hazira, there are three secondary cost centres, namely,

MUMHPECXP1, MUMHPECXP2 & MUMHPGEEXP.

S.K.P.I.M.C.S 34


1.1.7.1 Purpose of MUMHPECXP1 & MUMHPECXP2:

There is a section in Hazira plant called project group section. This

section takes care of implementation of all the revenue and capital

projects of Hazira plant. In other words, it executes & monitors all the

repair & maintenance jobs and also the projects for construction of some

capital asset like plant, building etc.

Project group section of Hazira plant has been identified with a separate

cost centre called MUMHPSP910. Costs of project group section are

initially booked in this cost centre.

Since, this section is engaged in execution and monitoring of revenue as

well as capital projects, some part of its cost should go to revenue while

the other part should logically be capitalized with the cost of assets which

come into being through capital projects which are executed and

monitored by it.

To facilitate this, secondary cost centres, MUMHPECXP1 and

MUMHPECXP2 have been created.

The flow of cost of the project group cost centre can be understood

through the following diagram:

S.K.P.I.M.C.S 35


The basis for location of cost of project group cost centre is as under:

The basis for allocation of cost of MUMHPSP910 to secondary cost

centres MUMHPECXP1 & MUMHPECXP2 is the number of manpower

engaged in revenue projects and capital projects. Thus if total cost

booked in a particular period in cost centre MUMHPSP910 is say Rs. 100

and during that period 7 persons of project group cost centre were

engaged revenue projects and rest of 3 persons were engaged in capital

projects, Rs.70 shall be allocated to products and Rs..30 will be

capitalized with the cost of capital projects executed and monitored by

project group section.

1.1.7.2 Purpose of MUMHPGEEXP:

There is certain expenditure which is treated in ONGC as non-allocable.

That is to say that these expenses are not allocated to products. These

expenses are expenditure like prior period expenses, foreign exchange

loss, write off of assets, advances etc.

S.K.P.I.M.C.S 36


All such expenditure which is initially booked in any of the 60 cost centres

mentioned above. However, since these expenses are non-allocable,

before the allocation of cost starts, they are taken out from the primary

cost centres and transferred to the cost centre MUMHPGEEXP.

Thus the purpose of MUMHPGEEXP is to capture all the non-allocable

expenditure.

1.2 Plant & maintenance order (PM order):

SAP system provides facility to capture cost as well as maintenance

history of each of the equipments of a plant. This is facilitated by use of

plant maintenance order.

A pm order is a cost object that capture maintenance cost of an

equipment.

In the SAP system of Hazira plant, details like its description and

specification, its location, the date of its commissioning, etc of equipment

is maintained. This detail is called “equipment master”. Each of such

equipment has been given a unique number by which it is identified.

Further, each such equipment has been attached to a cost centre

depending upon its location & use.

For keeping record of repair & maintenance of each of these major

equipments, the facility of pm orders is used. Whenever repair or

maintenance of a equipment is done, a pm order is created in the SAP

system. SAP gives a unique number to each of such pm orders. In that

pm order details like:

a) The equipment for which repair or maintenance job is being carried

out,

S.K.P.I.M.C.S 37


b) The scheduled as well as actual date of start of R&M job,

c) The scheduled as well as actual date on which the R&M job was

finished,

d) The cost of stores & spares or any other expenditure incurred in

carrying out the job,

e) The time (in hours) taken to complete the R&M job.

Thus, it can be seen that significant amount of information is collected in

these pm orders for further use in reporting and analysis. For detailed

analysis, even pm orders too have been broadly classified in the

following types:

Order type code Order typePm15 Malfunction report ordersPm20 Modular repair orderPm25 Threshold ordersPm30 Maintenance request ordersPm35 Crisis management ordersPm40 Preventive maintenance ordersPm45 Calibration ordersPm50 Refurbishment ordersPm55 Refurbishment orders – workshopPm60 Refurbishment orders – OEM/ externalPm65 Audit ordersPm70 PM order for IMR activities

This further classification of order types helps in more deep analysis of

R&M of an equipment. Appropriate order type is selected by the person

creating order, depending upon the nature of R&M work to be carried out.

S.K.P.I.M.C.S 38


1.3 Work break down structure (WBS):

WBS too is a SAP term. Whenever a cost is incurred for a capital

project which will result in creation of a capital asset, the cost is not

booked in a cost centre or pm order. Such cost is booked in a WBS so that

this type of cost can be captured separately.

Thus cost of a capital project is initially booked in a WBS. Then on

completion of the project, all the cost collected in a WBS is transferred to

the capital asset to which it pertains.

1.4 Process order:

A process order is a cost object to capture cost of production of final

products. It should be noted here that no direct cost is booked in a

process order. Costs initially booked in cost centres, pm orders flows into

process orders and thereby arrives at final cost of the products.

1.5 Internal order:

Internal order is similar to WBS. However, while WBS is used for a

normal capital project, internal order is used for a special capital asset

i.e. An Oil or Gas well.

When an oil well is drilled, huge cost is incurred in its drilling. To keep a

separate record of cost incurred for such well, separate internal order is

created in SAP for each well drilled. All the costs incurred in drilling of

that well is initially booked in that particular internal order. Then if it is

found that the there exists oil or gas in that well, all the cost of the

internal order is transferred to the capital asset i.e. Oil or gas well.

S.K.P.I.M.C.S 39


However, if it is found that there is no oil or gas in the well drilled, all

the cost booked in the internal order is transferred to cost centre which

gets allocated further depending upon the mapping in SAP. However,

since no drilling activity takes place in Hazira plant, internal orders are

not used costing system of Hazira plant.

2. Statistical key figure (SKF)

In SAP SKF means “the basis for allocation of cost” from one cost object

to other and finally to finished products. From the above discussion, it is

clear that costs are initially booked in cost objects like cost centres, pm

orders, WBS and internal orders. In order to allocate these costs booked,

it is required to define some basis so that cost booked can be allocated

to products. For example, as explained above, the cost of project group

cost centre MUMHPSP910 is allocated to secondary cost centres

MUMHPECXP1 & MUMHPECXP2 on the basis of number of persons of

project group sections engaged in revenue projects and in capital

projects. Thus SKF for allocating cost of MUMHPSP910 is manpower. At

the end of each period, when allocation of cost takes place, it is

determined that how many employees of project group cost centres were

engaged in revenue projects and how many were engaged in capital

projects. These numbers are fed in SAP system and on the basis of SKF

fed, SAP makes automatic calculations and allocation of cost takes

place.

Similarly, the cost of transportation cost centres like products dispatch –

rail (MUMHPTP321), product dispatch – pipeline (MUMHPTP301) is

allocated to products on the basis of quantity of final products dispatched

S.K.P.I.M.C.S 40


through these mode of transports. Thus SKF for these transport cost

centres is dispatch quantity. These dispatch quantities are fed in SAP

system at the end of every period on the basis of which allocation of cost

booked in transportation cost centres takes place.

Again for some of the cost centres, basis has been fixed permanently,

depending upon past experience and records. For example, it has been

determined that waste water treatment plant of Hazira plant processes

waste water coming out of various other plants in the following

proportion:

Thus every time, the

cost of waste water

treatment plant cost

centre

(MUMHPUT201) gets allocated to the above plant cost centres

proportionately. Thus SKF for allocation of waste water treatment plant

cost is fixed percentage.

3. Activity type:

For the purpose of allocation of some of the cost centres, SAP system

uses utility called activity. It is assumed that some cost centres are

engaged in rendering services to other cost centres. Thus these cost

centres generate activities which are consumed by other cost centres.

For example, electrical maintenance cost centre of Hazira plant is

engaged in electrical maintenance of all other cost centres of the plant.

S.K.P.I.M.C.S

MUMHPPl101 Slug catcher unit

5.00%

MUMHPPl102 GSU plant 20.00%

MUMHPPl103 LPG plant 40.00%

MUMHPPl105 Dpd plant 15.00%

MUMHPPl106 Sru plant 15.00%

MUMHPPl301 Cfu plant 5.00%

41


Thus electrical maintenance cost centre generates activity called maintn

(maintenance) and the same is consumed by other cost centres.

SAP system facilitates (through pm orders) keeping a record of

consumption by all other cost centres of activity maintn during a period.

At the end of the period, the cost of electrical maintenance cost centre

will get allocated to other cost centres on the basis of this record.

7.Cost cycles:

This is one of the important parts of costing system in SAP. A cost cycle

is a small computer programme which facilitates allocation of cost initially

booked in different cost objects like cost centres, pm orders, WBS etc to

final products. In this computer programme, mapping is done which

defines how cost will flow from one cost object to other and finally to

finished products and the basis of such flow.

At the end of the period, when this computer programme (i.e. Cost cycle)

is executed and SAP system, on the basis of mapping done in that

programme and the inputs provided, automatically makes all the complex

calculations and provides final output in the form of product costs.

S.K.P.I.M.C.S 42


8. Allocation of cost in the costing system of

Hazira plant

Once we obtain an understanding of the above terms, it becomes easier

to understand the cost allocation system of Hazira plants.

As stated above, the entire process of allocation of cost of Hazira plant is

automated through cost cycles already created in SAP system. Cost

cycles are executed one by one and the allocation takes place

accordingly. Thus, it does not involve any manual calculations.

For the purpose of allocation of costs in Hazira, the following cost cycles

are executed:

I. Cost cycle for separating non allocable expenses

II. Cost cycle for allocation of cost of support cost centres to other

cost centres which receive services of these support cost centres

III. Cost cycle for allocation of cost of maintenance cost centres to

plant maintenance orders.

IV. Cost cycles for allocation of plant maintenance orders to other

cost centres.

V. Cost cycle for allocation of cost booked in WBS to final capital

assets

VI. Cost cycle for allocation of cost of operation support cost centres

to plant & utility cost centres

VII. Cost cycle for allocation of utility & plant cost centres cost to

finished products

Each of these cost cycles have been explained hereunder one by one:

S.K.P.I.M.C.S 43


8.1Cost cycle for separating non allocable expenses

In ONGC, certain elements of expenditure are considered as non-

allocable. In other words this expenditure is not allocated to final

products. This expenditure includes:

1. Prior period expenditure

2. Leave encashment

3. Ex-gratia & bonus

4. Financial costs

5. Advances, inventory and assets written off

6. Statutory levies like sales tax, excise duty etc

7. Donations, etc

In SAP, any expenditure can be booked only when some cost object is

specified at the time of booking of such expenditure. Therefore, to book

the above mentioned non- allocable expenditure cost object (normally a

cost centre) has to be specified. For this reason, it becomes necessary to

take this expenditure out of the costing activities before allocation begins.

For the purpose of separating this expenditure, a cost cycle called

“distribution cost cycle” is executed. This cost cycle takes out from all the

cost centres the non-allocable cost elements and put them in cost centre

MUMHPGEEXP. No further allocation of these cost elements from

MUMHPGEEXP takes place in any of the cost cycles which are executed

after distribution cost cycle.

S.K.P.I.M.C.S 44


8.2Cost cycle for allocation of cost of support cost centres to

other cost centres which receive services of these support cost

centres:

As mentioned above, there are several support cost centres which render

services to other cost centres. For example, finance & accounts section

(cost centre MUMHPSP902) renders services to all the other cost

centres. Similarly, human resources & employee relations section (cost

centre MUMHPSP903) too renders services to all other cost centres.

These cost centres known as administrative support cost centres.

Cost of these cost centres is allocated to all the other cost centres which

are receiving services of these support cost centres.

This is done by executing “support cost centres assessment cycle” after

executing this cost cycle, the cost in the administrative support cost

centres become nil.

8.3Cost cycle for allocation of maintenance cost centres to plant

maintenance orders:

The cost of maintenance cost centres of Hazira plant does not straight

away get allocated to the cost centres who receive their services. The

cost of these maintenance cost centres is routed through plant

maintenance orders. In other words, first the cost of maintenance cost

centres will get allocated to plant maintenance orders then from plant

maintenance orders, the cost will get allocated to other cost centres

which are maintained by these maintenance cost centres.

The flow diagram here below shows the flow of cost of maintenance cost

centres:

S.K.P.I.M.C.S 45


The entire process of allocation of cost of maintenance cost centres to

other cost centres through plant maintenance orders can be understood as

under:

8.3.1 Creation of plant maintenance order:

Whenever the maintenance people are requested to carry out

maintenance work in any of the plants, they are mandatory required to

create a plant maintenance order in SAP system. When a plant

maintenance order is created, SAP system allots a unique number to such p

m order. The maintenance order contains all the details related to that

particular maintenance job for which it has been created. Like, the nature of

maintenance job, the place in plant where the job is to be carried out, the

plant officer on the request of whom the maintenance job is to be carried

S.K.P.I.M.C.S

MAINTENANCE COST CENTRE

PM Order 1

PM Order 2

PM Order 3

Cost Centre1

Cost Centre 2

Cost Centre 3

46


out, the scheduled date as well as actual date of start of maintenance job,

the scheduled as well as actual date of completion, the time (in hours) taken

for the job and the cost (stores, spares, or any other expenditure) incurred

for the maintenance job.

8.3.2 Confirmation of job in the plant maintenance order:

When the maintenance job is over, the person carrying out job is

required to confirm the completion of job in the SAP system. While

confirming the job, he is required to fill up all the details of job relating to

completion such as date and time of completion, time taken for the job etc.

8.3.3 Closing of plant maintenance order:

After confirming the completion of job in the plant maintenance order,

the concerned person is required to change the status of the plant

maintenance order to “close”. Once the plant maintenance order is closed,

no further modification in the information fed in that order can be changed.

Nor can that order be used for any other purpose. Thus, closing of plant

maintenance order is important to ensure correctness of data fed therein.

8.3.4 Computation of maintenance cost at the end of the period:

The activity of allocation of cost takes place at the end of the period

for which product cost is to be calculated.

It has been stated above that in every plant maintenance order, the

time (in hours) taken for completion of the job is booked. For allocation of

cost booked in maintenance cost centre, this time forms basis.

S.K.P.I.M.C.S 47


We take an example to explain how cost of a maintenance cost centre

gets allocated to plant maintenance orders:

Suppose, during the month of April 06, the cost centre MUMHPMT101

(mechanical process maintenance cost centre), carried out 10 maintenance

jobs at various locations in the plant. These jobs are as under:

It should be noted here that in real situation far more than 10 plant

maintenance orders are prepared by a maintenance section during a month.

However, for the sake ok convenience and simplicity, we have assumed

that only 10 plant maintenance orders were created by the maintenance

section during a month.

S.K.P.I.M.C.S

Pm order no

Nature of job done LocationCost centre for

which R&M carried out

Time taken for job done

Cost incurred

10012658 Repairing of abnormal sound from acid transfer pump in SRU plant at locationct-3

Sru plant MUMHPPl106 2 hours Nil

10012793 Fixing up of pressure gauge problem in LPG sphere (c2)

LPG storage area

MUMHPTP910 5 hours 2,500.00

10012806 Repairing of mdea tank leakage from tank no. 31E301 in GSU plant

GSU plant MUMHPPl102 6 hours 6,000.00

10012883 Fixing up of coupling disconnected in CFU plant at location no. 62P604B

Cfu plant MUMHPPl301 4 hours 10,000.00

10012886 Repairing of poor pumping of chemical from NGL tank of KRU

Kru plant MUMHPPl108 2 hours Nil

10012887 Cleaning of air filter of 63B601A at GSU plant

GSU plant MUMHPPl102 3 hours 1,500.00

10012888 Fixing up malfunctioning of motor no. 90FIC1304 in KRU

Kru plant MUMHPPl108 4 hours 2,000.00

10012906 Cleaning of suction strainer at location p901b in LPG plant

LPG plant MUMHPPl103 8 hours 1,000.00

10012915 De-choking the sampling point at slug catcher

Slug catcher unit

MUMHPPl101 3 hours 3,000.00

10012916 Repairing of flange leakage at location 77LV1303 in Wwtp plant

Wwtp MUMHPUT201 4 hours 2,500.00

Total 41 hours 28,500.00

48


The cost of a maintenance cost centre is allocated on the basis of

normal capacity of the cost centre.

For the sake of convenience, we assume that the normal capacity of

MUMHPMT101 is to render 50 hours of service during a month.

From the above list, it can be seen that the work done by

MUMHPMT101 during the month is only 41 hours. Thus 9 hours remained

idle. However, it should be noted that in a company like ONGC, a

maintenance section is not always engaged in maintenance work only.

There are several other works which the people of a maintenance cost

centre have to perform like, attending meetings, trainings, preparation of

files for various purposes like approvals, sanctions for expenditure,

preparation of miscellaneous reports etc,

Therefore, it is assumed that remaining hours are got consumed in

these other works.

Therefore the work distributions in hours for the maintenance cost

centre MUMHPMT101 in the above example will be as under”

(i) Hours consumed in maintenance jobs: 41 hours

(ii) Hours consumed in other misc work: 09 hours

Total : 50 hours

Now, for 41 hours we have 10 different pm orders but for rest of the 09

hours we don’t have any pm orders.

S.K.P.I.M.C.S 49


For this purpose, there is a facility in SAP which, at the end of the

period automatically creates a pm order which shows these remaining hours

of normal capacity of that cost centres.

Thus we assume that at the end of the period, SAP generated one

more pm order (no. 10012917) with 09 hours.

Now, we assume that during the month of April, the cost booked in the

cost centre MUMHPMT101 was as follows:

(i) Expenditure: Rs. 500000/-

(i) Depreciation of the assets used by the cost centre: 50000/-

When the cycle for allocation of maintenance cost centres is executed,

SAP first calculate cost per hour by dividing the cost booked in the

maintenance cost centre by the normal capacity of that cost centre.

In the above example, the rates will be as under:

Rate of expenditure per hour = 500000 / 50 = Rs. 10000 per hour

Rate of depreciation per hour = 50000 / 50 = Rs.1000 per hour.

Now the allocation of cost will be as under:

S.K.P.I.M.C.S 50


It may be noted here that the past pm order (no. 10012917) here is

the one which is automatically generated by SAP system in case there is an

underutilization of normal capacity of the cost centre. The cost centre

MUMHPSP901 which is presumed to be the cost centre where services

have been rendered by this pm order. Is a general cost centre cost of which

flows to all the plants and utility cost centres in suitable proportion. By

picking up this general cost centre, SAP system ensures that the cost of

unutilized (or utilized in general work) hours of maintenance cost centre gets

spread over to all the cost centres fairly.

S.K.P.I.M.C.S

Pm order no

Cost centre for which repair & maintenance

job carried out

Time taken for job done

Exp rate per hour

Depreciation rate

per hour

Exp cost of the

job done

Dep cost of the job done

Direct cost

incurred

Total cost of

job done

(a) (b) (c) (d) (e) (f)=(cxd)(g)=(cx

e)(h)

(i)=(f+g+h)

HoursRs

/hoursRs /hours Rs Rs Rs Rs

10012658 MUMHPPl106 2 10,000 1,000

20,000

2,000

-

22,000

10012793 MUMHPTP910 5 10,000 1,000

50,000

5,000

2,500

57,500

10012806 MUMHPPl102 6 10,000 1,000

60,000

6,000

6,000

72,000

10012883 MUMHPPl301 4 10,000 1,000

40,000

4,000

10,000

54,000

10012886 MUMHPPl108 2 10,000 1,000

20,000

2,000

-

22,000

10012887 MUMHPPl102 3 10,000 1,000

30,000

3,000

1,500

34,500

10012888 MUMHPPl108 4 10,000 1,000

40,000

4,000

2,000

46,000

10012906 MUMHPPl103 8 10,000 1,000

80,000

8,000

1,000

89,000

10012915 MUMHPPl101 3 10,000 1,000

30,000

3,000

3,000

36,000

10012916 MUMHPUT201 4 10,000 1,000

40,000

4,000

2,500

46,500

41 10,000 1,000

410,000

41,000

28,500

479,500

10012917 MUMHPSP901 9 10,000 1,000

90,000

9,000

-

99,000

50 10,000 1,000

500,000

50,000

-

550,000

51


Cost cycles for allocation of plant maintenance orders to other cost

centres:

Through this step, the cost of plant maintenance orders flows to other

cost centres where the maintenance job has been carried out.

In the above example, the cost shown in column “i” of the table above

will flow to respective cost centres appearing in column “b”.

8.5 cost cycle for allocation of cost booked in WBS to final

capital assets:

The term WBS has been explained in the start at point no. 1.3. In

ONGC, when cost is incurred for a capital project which is expected to be

completed over a period of time, it is not directly booked in the account

pertaining to capital work in progress. There is a separate series of

accounts in which cost is first booked. Further, the cost booked under these

accounts is not booked with reference to a cost centre, but it is booked with

reference to a WBS. Then at the end of the period, the cost booked under

these WBSs is transferred to accounts related to capital work in progress or

in case the capital project is complete, to the final fixed asset.

For this transfer of cost to capital work in progress /final fixed asset,

the cost cycle for allocation of cost from WBS to capital WIP / final fixed

asset is executed.

8.6 Cost cycle for allocation of cost of operation support cost

centres to plant & utility cost centres:

S.K.P.I.M.C.S 52


This is a sample cost cycle in which the cost of operation support cost

centres like cost centre MUMHPSP930 (corrosion monitoring section),

MUMHPSP931 (condition monitoring section) etc, gets allocated to all other

plants & utility cost centres.

Under this cycle only, cost of certain utility cost centres like

MUMHPUT101 (co-gen power plant), MUMHPUT105 (gas turbine i & ii),

MUMHPUT106 (gas turbine iii), MUMHPUT103 (mp boiler), MUMHPUT106

(Hitachi boiler) flows to final cost centres of these utilities like

MUMHPUT102 (power utility cost centre) & MUMHPT 104 (steam utility cost

centre).

8.7 Cost cycle for allocation of utility & plant cost centres cost to

finished products:

So far, we have discussed six steps of cost cycles above. As a result

of these steps, all the cost of Hazira plant gets allocated to two types of cost

centres namely:

Utility cost centres like power, water, steam etc.

Plant cost centres like LPG plant, GSU, KRU etc.

From these two type of cost centres, the cost ultimately flows to finished

products like GAS, LPG, ARN, SKO, HC & HSD

8.7.1 The basis of allocation to finished products:

While implementing SAP system in ONGC, Hazira plant, on the basis

of past 15 years experience, it was determined that how much of various

S.K.P.I.M.C.S 53


inputs will be required to produce on unit of finished product. For example,

for generation of one unit of LPG, the following inputs are as required:

Natural gas : 2 units Power : 4 units

Steam : 3.5 units De-mineralized water: 1 unit

Inert gas : 7 unitsCooling water : 2 units

S.K.P.I.M.C.S 54

These standards have been fed in SAP system for every finished product

which is produced in Hazira. In SAP terminology, it is called “recipe”. This

recipe in fact, forms the basis for allocation of cost of plant and utility cost

centres to finished products. This recipe is revised every time when

there is a major change in the production process which results in

change in the input requirements of finished products. Every day, the

production people make a process order for production of each of

finished products. At the end of the day, the actual quantity of finished

products produced is confirmed in that process order. This process order

is linked to the recipe. Through this link, it calculates the total inputs

required for production of the quantity of finished product confirmed at

the end of the day. And finally at the end of the period for which cost is to

be ascertained, SAP system sums up all the inputs required as well as

the out put of finished products for allocation of cost. It may please be

noted here that the actual system in SAP is complex. For the sake of

convenience, certain steps have been eliminated in the example below.

Process order no Process order description

Qty of LPG planned

Qty of LPG actually produced

Metric tonne Metric tonne1100054052 LPG through LPG plant 200 2181100054053 LPG through LPG plant 225 2151100054054 LPG through LPG plant 225 2231100054055 LPG through LPG plant 220 2221100054056 LPG through LPG plant 230 2321100054057 LPG through LPG plant 210 2001100054058 LPG through LPG plant 250 2401100054059 LPG through LPG plant 215 2151100054060 LPG through LPG plant 220 2101100054061 LPG through LPG plant 235 2331100054062 LPG through LPG plant 210 2071100054063 LPG through LPG plant 220 2241100054064 LPG through LPG plant 200 1981100054065 LPG through LPG plant 225 2301100054066 LPG through LPG plant 225 2201100054067 LPG through LPG plant 220 2201100054068 LPG through LPG plant 230 2261100054069 LPG through LPG plant 210 2061100054070 LPG through LPG plant 250 2411100054071 LPG through LPG plant 215 2141100054072 LPG through LPG plant 220 2231100054073 LPG through LPG plant 235 2331100054074 LPG through LPG plant 210 2011100054075 LPG through LPG plant 220 2121100054076 LPG through LPG plant 200 1961100054077 LPG through LPG plant 225 2141100054078 LPG through LPG plant 225 2221100054079 LPG through LPG plant 220 2141100054080 LPG through LPG plant 230 2281100054081 LPG through LPG plant 210 2031100054082 LPG through LPG plant 250 245

6880 6785

8.7.2 Example of calculation of cost of LPG produced from LPG plant:

Suppose, during the month of April, 30 batches of LPG were produced

and accordingly, thirty process orders were generated as follows:

As mentioned above, we assume that the recipe for production of LPG

from LPG plant is as under:

1. Natural gas : 2 units

2. Power : 4 units

3. Steam : 3.5 units

4. De-mineralized water : 1 unit

5. Inert gas : 7 units

6. Cooling water : 2 units

Again, the cost booked in various cost centres which produce the input

materials required for production of LPG as well as the output of these cost

centres are shown in the table below. And on the basis of output quantity

and the cost, per unit cost of these items too is shown in the column “f” of

the table:

Cost centreCost centre out

putOut put quantity

Unit of output

Cost incurred during April

Rate ( Rs / unit of output)

(a) (b) (c) (d) (e) (f)=(e/c)

MUMHPPl102 Gas 12000 Tm3 1500000 125.

00

MUMHPUT102 Power 750000 Kwh 1000000 1.3

3

MUMHPUT104 Steam 750000 Mt 500000 0.6

7

MUMHPUT206De-mineralized water 1000000 KL 750000

0.75

MUMHPUT204 Inert gas plant 1000000 Mt 900000 0.9

0

MUMHPUT205 Cooling water 2000000 KL 1200000 0.6

0

Now, when the total quantity of LPG produced and per unit cost of

inputs required for production of LPG are available, we can calculate the

cost of production of LPG. This calculation is shown in the table below:

Input

Qty of input required to

produce one unit of LPG

LPG produced

Total input consumptio

n in production

of LPG

Cost of per unit of input

Cost of LPG produced

(a) (b) (c) (d)=(bxc) (e) (f)=(dxe)

Gas 2 6785 13570 125

.00 1,696,

250

Power 4 6785 27140 1

.33 36,

187

Steam 3.5 6785 23747.5 0

.67 15,

832 De-mineralized water 1 6785 6785

0.75

5,089

Inert gas plant 7 6785 47495 0

.90 42,

746

Cooling water 2 6785 13570 0

.60 8,

142

1,804,

245

Thus cost of production of 6785 MT of LPG is Rs 1,804,245/-

Therefore cost of production of 1 MT of LPG will be = 1,808,245/6875

= Rs. 263.02 per MT

This is how the cost of production of finished product is arrived at finally.

Conclusion:

From the above discussion, it is clear that ONGC, Hazira plant has

sound system of costing. Through this project, an attempt has been made to

describe the costing method of the plant is a simple manner. The system is

yet more complex than what has been described here. Incorporating and

explaining all of its complexities and explaining them in this project was not

possible as almost all of its costing system is handled by SAP system which

involves great amount of back ground calculations on the basis of

programming designed therein.

9. EXPLAINATION OF CALCULATION

FIRST COST CYCLE C2HPOO –HAZIRA SUPPORT COST CYCLE

The first cost cycle which is executed is C2HPOO (Hazira support

cycle). This cost cycle has certain segments. In each segment, cost of one

(or more) cost centres gets allocated to other cost centres.

Each of the segments of this cost cycle has been briefly described

here below:

SEGMENT 1:HPLOGISEXP: LOGISTICS EXPENSE:

In this segment, the cost booked in cost centre MUMHPSP923

(TRANSPORT-BASE OFFICE) gets allocated to all the other cost centres in

proportion to the expenditure booked in the receiver cost centres.

SEGMENT 2: HPLOGISDEP: LOGISTICS DEPRECIATION:

In this segment, the depreciation booked in cost centre

MUMHPSP923 (TRANSPORT-BASE OFFICE) gets allocated to all the

other cost centres in proportion to the expenditure booked in the receiver

cost centres.

SEGMENT 3: HPOTHERSUP: OTHER SUPPORT EXPENSES AND

DEPRECIATION:

Through this segment of the cost cycle, the expenditure and

depreciation of the support cost centres like Finance, P&A, Material

Management section etc gets allocated to all the other cost centres in

proportion to the expenditure booked in the receiver cost centres.

The receiver cost centres in this segment are all the cost centres

except the support cost centres.

SEGMENT 4: HPENGSEREX: HAZIRA PROJECT GROUP EXPENSES:

Under this segment, the cost of cost centre MUMHPSP910 (Hazira

project group cost centre) is allocated to two secondary cost centres

namely, MUMHPECXP1 & MUMHPECXP2.

The project group section of the Hazira plant is engaged in execution

of revenue and capital projects. On the basis of manpower of project group

section, engaged in revenue and capital projects, the cost of this section

flows to these two cost centres MUMHPECXP1 & MUMHPECXP2. For

example, if during a quarter, out of total 40 people of the project group

section, 30 were engaged in revenue projects while rest 10 were engaged in

capital projects and the total cost incurred by the project group section

during that quarter was 100 Rs., then, rs.25 will flow to cost centre

mumhpecxp1 and remaining rs.75 will flow to cost centre MUMHPECXP2.

SEGMENT 5: HPESCAPEX: HAZIRA PROJECT GROUP EXP – ASSET

In the fourth segment above, the cost from project group cost centre

flows to cost centre MUMHPECXP1 & MUMHPECXP2.

In this segment, the cost of cost centre MUMHPECXP1 flows to

capital projects which were under execution by the project group section.

Continuing the example of segment 4, Rs. 25 which are attributable to

capital projects, will flow to these capital projects in proportion to the cost

booked in these respective capital projects.

SEGMENT 6: HPESCAPDP: HAZIRA PROJECT GROUP DEP

The depreciation of project group section which flows to cost centre

MUMHPECXP 1 is not capitalized with the cost of capital projects in the

segment 5. This depreciation amount is thus not capitalized. This

depreciation is, through this segment, gets transferred to cost centre

MUMHPECXP. Thus, this depreciation is treated as general depreciation

and flows to all the cost centres (except support cost centres).

SEGMENT 6: HPESREV: HAZIRA PROJECT GROUP – REVENUE JOBS

The cost of project group cost centre which has flown to cost centre

MUMHPECXP2 which is attributable to revenue jobs, flows to all the cost

centres (excluding support cost centres) in this segment in proportion to

cost booked in the receiver cost centres.

SEGMENT 7: HPMAINTCMN: HAZIRA MAINTENANCE COMMON:

The cost of cost centre “MAINTENANCE COMMON –

MUMHPMT901” which is not allocated through plant maintenance orders, is

allocated under this segment to all the other maintenance cost centres in

proportion to the actual expenditure booked in the receiver cost centres.

SEGMENT 8: HPCIVILMTN: HAZIRA MAINTENANCE CIVIL:

The cost of cost centre “MAINTENANCE CIVIL – MUMHPMT902”

which is not allocated through plant maintenance orders is allocated under

this segment to all the other maintenance cost centres in proportion to the

actual expenditure booked in the receiver cost centres.

CALCULATION OF COSTS ALLOCATED THROUGH COST CYCLE

C2HPOO:

In the separate sheet enclosed here, an attempt has been made to

make calculations with hypothetical figures. In the first two columns of

expense & depreciation under heading “cost initially booked” it shows the

amount of expenditure & depreciation booked under various cost centres of

Hazira plant.

In the next columns, it shows how the cost initially booked in different

cost centres gets allocated to various other cost centres. The basis of

allocations of cost from one cost centre to others is the same as mentioned

in the brief description above of various segments of the cost cycle.

Finally, the last two columns under heading “cost in various cost

centres after cycle C2HPOO” shows the cost in various cost centres after

execution of cost cycle C2HPOO. From these columns it can be observed

that after execution of cycle C2HPOO, cost in some of the cost centres

(mainly support cost centres) will to other cost centres (mainly operations

related cost centres). This way, the cost of support cost centres will become

zero.

It can be seen that after execution of cost cycle C2HPOO, the cost of

following cost centres will become zero:

MUMHPSP901 PROJECT HEAD'S OFFICE

MUMHPSP902 F&A

MUMHPSP903 P&A/LEGAL/IR

MUMHPSP904 MM

MUMHPSP914 SHE

MUMHPSP915 PLANT TRAINING

MUMHPSP916 MEDICAL

MUMHPSP917 SECURITY & VIGILANCE

MUMHPSP919 TOWNSHIP

MUMHPSP929 HAZIRA INFO COM

MUMHPSP910 PROJECT GROUP

MUMHPSP923 TRANSPORT-BASE OFFIC

MUMHPMT901 MAINT_COMMON

MUMHPMT902 HAZIRA MAINTN CIVIL

SECOND COST CYCLE C4HPAO – HAZIRA OPERATION COST CYCLE – I

Under the second cost cycle C4HPAO, cost of some more cost

centres gets allocated to other cost centres who receive their services. The

sender cost centres in this cost cycle mainly are operation support cost

centres like, chemistry section, corrosion monitoring section, condition

monitoring section etc.

Like the first cycle, this cycle too has various segments, each one of

them has been explained briefly here below:

SEGMENT 1: HPPRODOPSUP: HEAD OPERATION OFFICE:

In this segment cost of cost centre MUMHPSP912 – head operation

office gets allocated to all the plants & utility cost centres in proportion to the

costs initially booked in the receiver cost centres.

SEGMENT 2: HPPRESENGEX: RESIDENT ENGINEER (PRODUCTION):

In this segment cost of cost centre MUMHPSP932 – RESIDENT

ENGINEER (PRODUCTION) gets allocated to all the plants & utility cost

centres in proportion to the costs initially booked in the receiver cost

centres.

SEGMENT 3: HPWWTPEXP: WASTE WATER TREATMENT PLANT

EXPENSES:

WWTP (waste water treatment plant) of Hazira process the water

coming out of various plants before its disposal into the river tapti. On the

basis of past experience, an estimate has been made of the quantity of

waste water coming out of various plants which is processed by WWTP. On

the basis of these quantities, a ration has been developed for allocation of

cost of WWTP to various other plant cost centres. This ratio is as under:

COST CENTRE PLANT RATIOMUMHPPL101 SLUG CATCHER UNIT 5MUMHPPL102 GSU PLANT 20MUMHPPL103 LPG PLANT 40MUMHPPL105 DPD PLANT 15MUMHPPL106 SRU PLANT 15MUMHPPL301 CFU PLANT 5

The ratio mentioned above has been fed in this segment of the cost

cycle and sap system follows this ratio for allocation of cost of WWTP to

these plant cost centres.

SEGMENT 4: HPPPPEMEXP: PLANNING, PRODUCTION EVACUATION

COST:

The cost centre MUMHPSP927 – product planning and evacuation

which is engaged in marketing of various products which are produced in

Hazira plant, is allocated to transportation cost centres on the basis of

quantity of products dispatched through various mode of transportation viz,

rail, pipeline and road.

Thus the receiver cost centres in this segment are:




SEGMENT 5: HPPAUEXP: PROCESS ANALYSIS, UP GRADATION:

Under this segment the cost of cost centre MUMHPPTAU1 -

PROCESS ANALYSIS, UP GRADATION flows to all other plants & utility

cost centres on the basis of cost booked in the receiver cost centres.

SEGMENT 6: HPQAEQMEXP: QUALITY & EQUIPMENT MANAGEMENT:

Under this segment the cost of cost centres MUMHPSP905 - HAZIRA

QAD / EM flows to all other plants & utility cost centres on the basis of cost

booked in the receiver cost centres.

SEGMENT 7: HPCHEMEXP: CHEMISTRY EXPENSES:

Under this segment the cost of cost centres MUMHPSP911 – chemistry

section flows to all other plants & utility cost centres on the basis of cost


SEGMENT 8: HPERGEXP: ECONOMIC RESOURCE GROUP

EXPENSES:

Under this segment the cost of cost centres MUMHPSP913 – erg

section flows to all other plants & utility cost centres on the basis of cost


SEGMENT9: HPCORREXP: CORROSION MONITORING SECTION

EXPENSES:

Under this segment the cost of cost centres MUMHPSP930 –

CORROSION MONITORING section flows to all other plants & utility cost

centres on the basis of cost booked in the receiver cost centres.

SEGMENT 10: HPCONDEXP: CONDITION MONITORING SECTION

EXPENSES:

Under this segment the cost of cost centres MUMHPSP931 –

condition monitoring section flows to all other plants & utility cost centres on

the basis of cost booked in the receiver cost centres.

SEGMENT 11: HPUTWTREXP: UTILITY WATER EXPENSES:

Under this segment the cost of cost centre MUMHPUT202 – UTILITY

WATER SECTION flows to cost centre MUMHPSP913 (ERG GROUP) from

where it ultimately goes to all other plants & utility cost centres on the basis

of cost booked in the receiver cost centres.

SEGMENT 12: HPCOGENEXP: COGEN OFFICE EXPENSES:

Co-gen office is engaged in servicing the following cost centres.

MUMHPUT104 STEAM GENERATION

MUMHPUT105 HAZIRA TURBINE I&II

MUMHPUT108 HAZIRA TURBINE III

MUMHPUT206 DMW PLANT

Thus, it is obvious that the cost of co-gen office should flow to these

above mentioned cost centres only.

Accordingly, under this segment the cost of cost centre

MUMHPUT928 – co-gen office flows to these cost centres in the following

proportion:

COST CENTRE COST CENTRE NAME PROPORTIONMUMHPUT104 STEAM GENERATION 30.00 MUMHPUT105 HAZIRA TURBINE I&II 40.00 MUMHPUT108 HAZIRA TURBINE III 20.00 MUMHPUT206 DMW PLANT 10.00

This proportion is based on estimation as to how much time of co-gen

office is normally devoted to serve various cost centres mentioned above

based on the volume of work in these cost centres.

SEGMENT 13: HPPRODDES: PRODUCTION DESPATCH EXPENSE:

The cost centre MUMHPTP901 – product dispatch office which is

engaged in dispatch of various products which are produced in Hazira plant,

is allocated to transportation cost centres on the basis of quantity of

products dispatched through various mode of transportation viz, rail,

pipeline and road.

Thus the receiver cost centres in this segment are:




SEGMENT 14 TO 17: PRODUCT DISPATCH RELATED EXPENSES:

Under these four segments cost of product dispatch incurred in the

following cost centres is allocated to various product related cost centres on

the basis mentioned against each of these sender cost centres:

COST CENTRE COST CENTRE NAME BASIS OF ALLOCATIONMUMHPTP910 PRODUCT STORAGE OFFI DISPACTH QUANITY OF VARIOUS PRODUCTS


DISPACTH QUANITY OF VARIOUS PRODUCTS THROUGH PIPELINE


DISPACTH QUANITY OF VARIOUS PRODUCTS THROUGH ROAD


DISPACTH QUANITY OF VARIOUS PRODUCTS THROUGH RAIL

And the receiver cost centres in these all the four segments are the

product related cost centres as under:

MUMH10P2TA HP- TRANSPORTATION –ARN

MUMH10P2TH HP-TRANSPORTATION-HC

MUMH10P2TL HP-TRANSPORTATION-LPG

MUMH10P2TN HP-TRANSPORTATION-NGL

MUMH10P2TS HP-TRANSPORTATION-SKO

THIRD COST CYCLE C4HPB0 – HAZIRA OPERATION COST CYCLE – II

The third cost cycle of Hazira costing system is a small cycle with only

6 segments.

The main objective of this cost cycle is to transfer the cost of various

cost centres related to power generation and steam generation in to single

cost centres pertaining to power & steam so that cost of generation of power

& steam can be calculated.

In Hazira, for the purpose of identification of cost separately, for each

of gas turbines and also for each of the boilers, separate cost centres have

been created and cost relating respective turbines / boilers are booked in

the respective cost centres related thereto.

However, ultimately only one power cost and one steam cost is

calculated for the purpose of product costing. For this purpose, it is required

to transfer the cost booked in different cost centres of gas turbines to a

single cost centre of power. Similarly, it is required to transfer the cost of

different cost centres relating various boilers to a single cost centre of

steam.

For this purpose, this cost cycle has been designed.

Therefore under this cost centre, 100% cost of one cost centre flows

to another as under.

COST FLOWS FROM COST FLOWS TOMUMHPUT101 COGEN POWER PLANT

MUMHPUT102ELECTICITY DISTRIBUTION SYST

MUMHPUT105 HAZIRA TURBINE I&II MUMHPUT108 HAZIRA TURBINE III MUMHPUT103 MP BOILERS

MUMHPUT104STEAM GENERATION SYSTEM

MUMHPUT106 HZR- HITACHI BOILER MUMHPUT107 HAZIRA THERMAX BOILR

Thus it is clear that cost finally comes to one cost centre i.e.

MUMHPUT102 (FOR POWER) and MUMHPUT104 (FOR STEAM) from

where single rate for cost of power generation and steam generation can be

calculated.

FOURTH COST CYCLE C4HPC0 – HAZIRA OPERATION COST CYCLE – III

This cost cycle has one segment only in which entire cost in sulphur

recovery unit cost centre (MUMHPPL106) gets transferred to gas

sweetening unit (MUMHPPL102).

Thus the cost of SRU ultimately goes to natural gas. This is because,

for the purpose of production of natural gas from sour gas, it is absolutely

necessary to establish sulphur recovery unit for environmental point of view.

Thus the sole purpose of SRU is to produce natural gas only.

ALLOCATION OF COST TO FINISHED PRODUCTS

After execution of the above referred cost cycles, the cost of various

cost centres gets accumulated in few cost centres mainly plant & utility type

cost centres.

From these cost centres, the cost gets allocated to finished products

through process orders (already explained in earlier sections

above).Detailed calculations of how cost gets allocated to finished products

is shown in next few pages.

11.SENSITIVITY ANALYSIS

TABLE-1: PRICE RISE IN GENERAL CONDITION

Inputs Units/ Unit of LPG

Unit of Measure

Rate (Rs / unit of output)

Cost for 1 unit LPG Production

A C D = (A x C) E = D x 1.01

F = D x 1.02

G = D x 1.05

At Present rates

1% 2% 5%

Natural gas 2 TM3 125 250 252.50 255.00 262.50Power 4 Kwh 1.33 5.32 5.37 5.43 5.59

Steam 3.5 MT 0.67 2.345 2.37 2.39 2.46De-mineralized Water 1 KL 0.75 0.75 0.76 0.77 0.79Inert Gas 7 MT 0.9 6.3 6.36 6.43 6.62Cooling Water 2 KL 0.6 1.2 1.21 1.22 1.26Total Cost Incidence 265.92 268.57 271.23 279.21% rise in Cost 1.00% 2.00% 5.00%

TABLE-2 : PRICE RISE IN PRESENT CONDITION

Inputs Units/ Unit of LPG

Unit of Measure

Rate (Rs / unit of output)

Cost for 1 unit LPG Production with increase in NGL & Power

A C D = (A x C) E = D x 1.01

F = D x 1.02

G = D x 1.05

At Present rates

1% 2% 5%

Natural gas 2 TM3 125 250 252.50 255.00 262.50Power 4 Kwh 1.33 5.32 5.37 5.43 5.59Steam 3.5 MT 0.67 2.345 2.35 2.35 2.35De-mineralized Water 1 KL 0.75 0.75 0.75 0.75 0.75Inert Gas 7 MT 0.9 6.3 6.30 6.30 6.30Cooling Water 2 KL 0.6 1.2 1.20 1.20 1.20Total Cost Incidence 265.92 268.47 271.02 278.68% rise in Cost 0.96% 1.92% 4.80%

Table-1 suggests about price rise in general condition in which the

cost of all the inputs increases together. Table shows the percentage of

increase in cost over at present rate at different levels.

Table-2 shows the present condition in which there is price rise in only

2 items i.e. Natural gas and Power, where as in other raw materials price is

stable

So from the Table-2 we can see if there is an increase in 1% of natural

gas & power there is 0.96% rise in cost, where as in 2% & 5% there is

1.92% & 4.80% rise in cost respectively.

In general condition there should be 1% increase in overall cost of all

the raw material but due to cost control practices at ONGC the cost of

steam, de-mineralized water, inert Gas and cooling water can be controlled

and it can save 0.04% total cost. In the same way though there is 2% and

5% increase in natural gas and power it can save 0.08% and 0.20% of total

cost

During the F.Y 2005-06 LPG productions was 1172 TM3.

LPG production in general condition at 1% = 1172 × 268.57= 314764.04

2% = 1172 x 271.23= 317881.56

5% = 1172 x 279.21= 327234.12

LPG production at present condition at 1% = 1172 x 268.47= 314646.84

2% = 1172 x 271.02= 317635.44

5% = 1172 x 278.68= 326612.96

LPG saved at 1% = 314764.04 - 314646.84=117.2

2% = 317881.56 - 317635.44=246.12

5% = 327234.12 - 326612.96=621.16

12.Improvement Opportunities

Sr. No.

Area Opportunities Impact

Operations Optimization of manpower and its utilization

Benchmarking with Global majors

Small group activities can be organized to improve

Reduction in manpowerPath for improvement in Delivery, Cost, Quality and Safety shall be evolved.

employee productivity.Costing Method At present, distribution

based costs are loaded on every cost centre.

ONGC should derive Activity based costing to firm the cost of each input.

Cost which are disproportionately higher can be trimmed

Concept of Costing

In present competitive era, profit can only be achieved with cost optimization, not by adding margin of profit to costs.

Benchmarking of similar industry should be undertaken to align the costs of ONGC to Global majors.

Six Sigma (DMAIC) methodologies shall identify such costs.

TQM philosophy of Plan/Do/Check & Act can be adopted for the whole site.

Costing tools Use of simple tools like sensitivity analysis, SWOT etc can be used in day-to-day cost analysis

This will identify the impact of % swing in cost constituents.

Value chain analysis

Models should be developed to identify the optimum value chain for a given input scenario.

Although complex, but such analysis shall be realized through right product-mix and utilization of resources

13.Bibliography

1. www.ongcindia.com

2. www.ongc.net

3. www.ongctsg.com

4. OPERATION RESEARCH – J.K. SHARMA

Research methodology

Business

Transcript of Research methodology