ACCOUNTING FOR PRODUCTION COSTS CH 4 ALSARHANI YAHYA 1

THE DEFINITION OF PRODUCTION COSTS Financial Accounting Standards Board (FASB) definition of production costs as those costs are paid for the operation of wells, equipment and facilities related there to and maintenance including depletion. ALSARHANI YAHYA 2

Examples of production costs: 1.Cost of labor required to operate the wells 2.Reform and ongoing maintenance costs 3.Materials and supplies, fuel and services used in the operation of wells 4.It imposed taxes on oil and insurance areas ALSARHANI YAHYA 3

CHALLENGES OF THE PRODUCTION COSTS 1.Cost control 2.Profitability analysis 3.Documentary session needed to assess operations and keep track of costs ALSARHANI YAHYA 4

The accounting treatment of the costs of oil production requires the identification of the concepts of cost centers and the method of collection and costs classified as direct and indirect ALSARHANI YAHYA 5

COST CENTERS It can be grouped expenses at the level of each country or geographical area Operating expenses proved possible at the level of the well (as we have studied previously) in order to determine the administrative control and up and prepare income tax reports ALSARHANI YAHYA 6

Some possible costs linked to the level of the well, or a specific contract, but some of the other costs that must be assembled within an intermediate accounts and then re-loaded into the wells, areas or specific contracts... ALSARHANI YAHYA 7

COST AGGREGATION The operating expenses are loaded with accurately fixed directly on the operating expenses account and are non-cost assembly directly in temporary control called the accounts of liquidation and distribution accounts are then uploaded to the operating expenses relating to specific contracts Some costs are not directly ALSARHANI YAHYA 8

COST AGGREGATION because of the nature of the cost item itself while longer costs another is a direct result of practical shape to assemble cost. Overall rating quality as direct costs and indirect varies from company to company ALSARHANI YAHYA 9

DIRECT PRODUCTION COSTS These costs that can be directly linked to the production of oil from Examples include: 1. salaries and wages 2. Surcharges 3. pumping decades 4. Repair and maintenance of equipment 5. Services of the well workover and maintenance work ALSARHANI YAHYA 10

INDIRECT PRODUCTION COSTS: Are all costs not directly related to the production of oil from Examples include: 1. support and assistance facilities where consumption that way Successful efforts require the capitalization of these costs and the depreciation method in either leave the company the freedom to choose the way where it is usually choose the straight-line method consumption. 2. to get rid of salt water 3. Other distribution accounts: ultimately be distributed to the operating expenses or to assets accounts. ALSARHANI YAHYA 11

EXAMPLE FOR TO GET RID OF SALT WATER Suppose that the rate of oil production of water is almost the same in all wells and operating costs were 40,000 and that the system serves the contract (b), which includes 2wells produce,and Contract No. (c) Contract No. (d), which includes every one of them four wells productivity ALSARHANI YAHYA 12

ANSWER rid of salt water Contract No(B).8000 rid of salt water Contract No. (c)16000 rid of saltwater Contract No. (d)16000 support costs ALSARHANI YAHYA 13

PRODUCTION COST LIST These cost prepare in regular basis (monthly) for each well or holding companies usually bother to prepare operating on a cash basis method. ALSARHANI YAHYA 14

EXAMPLE The actual production and sales data during the month following 1/2008 own company ABC: 1. Oil sales reached barrels and gas thousand cubic feet, which represents all output. 2. production costs amounted to 870,000, including 20,000 Real carrying costs. ALSARHANI YAHYA 15

3. The price of a barrel of oil and the price of Riyals mcf 1.70 riyals 4. royalty rate 1/8 5. ABC percentage share in the company the benefit of running this region 60% 6. Each barrel is equivalent to 6000 cubic feet of gas. ALSARHANI YAHYA 16