OPAL or the Oman society for Petroleum services is a non-profit organization and is the first society of the Oman’s Petroleum Industry that become officially registered as a society with Sultanate of Oman in 27 October, 2001.The registration of the OPAL society has been done according to the regulation that is governing the registration of the society as per the Ministry of Social development. There are 400 members in the organisation and the organization includes the Producers of Oil & Gas companies and the large and small operators, contractors and suppliers of the oil and gas industry of Oman.
Leaders of OPAL meet on a quarterly basis in order to identify the area and strategies that will be beneficial for all the members of the society. An elected board of directors govern the society for ensuring the highest standard of good corporate governance.
The main objective OPAL is to provide to work as an umbrella body that will promote the standard, work efficiency and professionalism in the Oman Petroleum Industry. The standard will be set in such a way so that it will be equivalent to the standard and practices of international petroleum industry which will ensure the optimum allocation of the petroleum resources of the country(Opaloman.org, 2017).
The chosen organization regulates their accounting process of resources and inventories as per the International Financial Reporting Standards that is issued by International Accounting Standards Board (IASB) and the interpretation of the accounting policy of the organization has been given as per the International Financial Reporting Interpretations Committee (IFRIC)
As per the IFRS (International Financial Reporting Standards) the non-manufacturing overheads of the company can be identified as the Selling, General & Administrative (SG&A) expenses and Interest expense as these costs can not be identified with the cost object or the units of production. These costs are identified as the non-manufacturing overheads as these indirect costs are not related to the manufacturing process carried out within the organization. The non-manufacturing indirect costs or overheads are represented in the income statement as expense in the period in which the expenditure has been incurred(Ho et al.,2015).
As decried in the 2017 annual report of the company, OPAL it can be seen that the different components of the Administrative and General Expenses can be identified as the non-manufacturing overheads of the company. Thus the some o the non manufacturing overheads of the company are Rent , Function, expenses, Professional charges, Stationery and printing, Office maintenance ,Legal Expenses, Communication expenses Travelling expenses Electricity and water expenses, Office refreshments Miscellaneous expenses
The manufacturing overhead on the other hand refers to the factory overhead, factory burden, and manufacturing support costs all that are indirect expenditures incurred by the organization that are related to the factory and is incurred for carrying out the manufacturing process.
The cost related to the depreciation and repairment of the factory equipments is the manufacturing overhead with respect to the chosen organization.
The overhead allocation of the process of the chosen organization has been done as per the IFRS accounting standard and on historical cost basis.
The accounting of the overheads of the chosen organization as per the historical costs indicates that the expenses or the cots will be recognized in terms of the actual cost that has been incurred by the business instead of the current market price or cost of the respective overheads
According to IFRS, the overheads are allocated in the organization as per the absorption costing method. According to the absorption costing method the overhead cost items are first identified and categorised, then all the identified cost items that are of same category are put in the cost pool [of the same category].After that the cost base is decided for each category of overhead cost and then the total cost of a particular category will be assigned to the cost base according to the per unit basis(Noreen et al.,2011)
For example the “rent“ is a component of the Administrative and General Expenses and is a particular category overhead cost and the allocation based of the cost will be the square foot of the office premises.
The absorption technique or method is used for the purpose of overhead allocation by the chosen organization as the method is followed for the allocation of the overhead cost in those organizations that follows the accounting standards as described by the IFRS.
The application of the overhead absorption method visualises the proportion of the total overhead cost that has been absorbed by a particular cost object. Now the proportion of the overhead absorbed by a cost unit depend s upon two factors; the total overhead attributed to the cost centre or cost object and the number of units of the absorption base is in use which determines the predefined overhead rate.
The overhead rate = [Total overhead assigned/Number of units of the absorption base that has been applied to the cost object]
The overhead rate for rent = [total rent paid/number of square foots (units of cost absorption) applied to the office premise (cost object here)
Thus the absorption method helps to keep track of the amount of overhead absorbed by the different cost objects of the organization.
The most important merit of applying the overhead method is that it clearly visualises the proportion of the overhead cost absorbed by the cost object of the organization and thus also keep track of any possibility of over and under absorption of overhead with respect to the different cost objects of the organization.
If under absorption of overhead happens with respect to the cost object then it indicates that the cost object has absorbed more overhead than expected and the difference is identified as expense in the income statement. Thus an identified under absorption of overhead cost indicates that the cost object has absorbed more expense than expected and proportionately generated a lower return and the accelerated recognition expense clubbed with lower return leads to the reduction of the recognized profit with respect to the particular accounting period. Thus the absorption method helps that manager to decide the amount of overhead that will be most appropriate to absorb by a cost object for the generation of the target return(Haskin,2010.)
In other words the absorption methods lead to the most appropriate allocation of the overhead among the different cost objects of an organization,
The application of the absorption method of overhead allocation is a very comprehensive and simplified method of overhead allocation
Finally the application of the absorption method for overhead allocation leads to the organization to follow a standardized method of overhead allocation that is used globally b y the other b ig organizations which follows the accounting standards of IFRS (Bragg and Bragg, 2018)
The accounting of inventory of the organization is done as per accounting standard AS2 under IFRS and according to the accounting standards the inventory valuation methods of FIFO or the First in- First out and the valuation method of the weighted-average costing can be used for the valuation of the inventory. The Organization will not be able to apply the LIFO method of inventory valuation as this valuation method is not permitted under IFRS (Mulyadi, et al.,2012).
The Techniques of labour accounting chosen by the organization is the direct costing of labour as per the accounting standard prescribed under IFRS. Under the method of direct costing of labour the organization has to calculate the all kinds of cost that the organization is going to spend for buying one hour of labour. The all kind of labour cost includes all the costs that are related to the wage payment, social security related cost, cost related to the medical expenses and the insurance compensation that are paid to the workers.
Once the cost of buying one hour of labour has been determined, and then for the purpose of allocation of the labour hours to the production units the managers of the organization has to calculate the hours of labour needed for manufacturing one unit of output. If in the chosen organization the total cost including the wage of buying one-hour of labour is 12 Rials Omani(RO) and two-hours of labour are needed for producing 1 unit of output, then the direct labour cost of producing one unit of output of the organization is 24 Rials Omani(RO)( Davidson et al.,2010).
From the above discussion it can be seen that the organization follows the different costing techniques as defined by the IFRS as the accounting policy of the organization follows the accounting standards that are described by IFRS which is issued by the issued by the International Accounting Standards Board (IASB)
Following the recommendations o the accounting standard, the chosen organization follows the absorption method for allocation and evaluation of the overhead cost among the different cost objects of the organization on the basis of the available volume of the overhead cost and the predetermined overhead rate.
The organization follows the method of FIFO and Weighted average method for calculating the cost of the inventory held at stock and also to calculate the cost of finished goods sold. The FIFO method of inventory valuation requires that the inventory that is purchased first is sold first. The underlying logic of using this method of inventory costing is that the old raw materials should be used earlier in the manufacturing process in order to minimize the cost of deprecation and to maintain a good flow of inventory purchase and utilization. On the other hand the FIFO method required that the finished goods inventories that are being manufactured first will b e sold first.
The weighted average method of inventory costing requires that all the units of inventories that are purchased in a particular accounting period at different prices will be valued at a same common cost.
The labour and manufacturing methods are valued using the direct costing methods. Under the direct costing methods the cost of buying each unit of labour and material is calculated, then the amount of labour and material needed is decided for producing one unit of output. Thus the unit cost of producing 1 unit of output is calculated which includes the cost of labour hours and the material input that are needed to produce that one unit.
The different costing techniques as described above which are followed by the chosen organization following the accounting standard of IFRS is suitable as these costing methods are quite comprehensive. But as per the accounting policy of the chosen organization as the costing is done on the basis of the historical cost instead of the market cost, the relevance of the costing procedure in terms of the current market cost and future costing projection is quiet low.
References
Bragg, S. and Bragg, S. (2018). Overhead absorption. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/what-is-overhead-absorption.html [Accessed 23 May 2018].
Davidson, M.C., Timo, N. and Wang, Y., 2010. How much does labour turnover cost? A case study of Australian four-and five-star hotels. International Journal of Contemporary Hospitality Management, 22(4), pp.451-466.
Haskin, D., 2010. Teaching special decisions in a lean accounting environment. American Journal of Business Education, 3(6), p.91.
Ho, L.C.J., Liao, Q. and Taylor, M., 2015. Real and Accrual?Based Earnings Management in the Pre?and Post?IFRS Periods: Evidence from China. Journal of International Financial Management & Accounting, 26(3), pp.294-335.
Mulyadi, M.S., Soepriyanto, G. and Anwar, Y., 2012. IFRS adoption and taxation issue. International Journal of Arts and Commerce, 1(7), pp.159-165.
Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2011. Managerial accounting for managers. McGraw-Hill Irwin.
Opaloman.org. (2017). [online] Available at: https://opaloman.org/wp-content/uploads/2015/10/Annual-Report-2016-ENG.pdf [Accessed 23 May 2018].
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