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Subtle nuances of costing the complex crude refining processes

Subtle nuances of costing the complex crude refining processes


Provide value addition and useful insights to major oil marketing companies (OMCs) in India, through the regulatory framework of Cost Audits u/s 148 of the Companies Act, 2013.


The client seeks assurance of their cost accounting system from an independent cost accounting firm.


After in-depth deliberations and continuous collaboration with multiple OMCs for over two decades, our team at Chandra Wadhwa & Co. came up with an analytical framework as follows:

1) Product Cost Accounting

Refining breaks crude oil into various components, which are then selectively reconfigured into new products [1]. Refining involves utilising resources to produce a diverse portfolio of petroleum products from a crude oil basket. The refining process entails CDU (Crude Distillation Unit), VDU (Vacuum Distillation Unit), Hydrocracker Unit, CCR (Catalytic Cracker Unit), etc., with common resources and common costs like crude cost, chemicals cost, plant overheads, conversion cost, etc. Therefore, the entire common cost in the refining process is first processed and then segregated based on the allocation methodology prescribed in accordance with the Cost Accounting Standard - 19 (CAS-19) as issued by The Institute of Cost Accountants of India [2]. Generally, the allocation methodology used for segregating costs is:

Post crude refining, the output of final petroleum products is stored in large product handling tanks near the refinery (split-off point) [1]. All joint costs are loaded onto these products. Any successive costs are separately identified and specifically charged to the final petroleum product. Subsequently, some of the final products are used as captive feedstock for the petrochemical plant (if the company has also invested in the petrochemical business). The associated manufacturing cost shall also be loaded onto the final petrochemical products.

Apart from joint cost allocation, some costs are separately identified with petroleum products, which are as follows:

  • Cetane Improver (Chemical dozing): Used for diesel production only

  • Special Charges for product handling

  • Export incentives/ Export charges

  • Special Packing charges

  • Testing/ Inspection fees

  • Disposable charges

2) Cost Audit Annexures

Following is the audit approach (check-points) for business processes:

I. Quantitative Reconciliation

Installed Capacity

  • Is the plant's installed capacity certified by the management and the refinery team?

  • Whether capacity enhanced during the year has been annualised to determine accurate capacity?

Production Quantity

  • Whether production quantity is as per ER-1? (Since Excise Duty is still applicable for the majority of petroleum products)

Sales Quantity

  • Is sales quantity as per sales register, and whether sales value appearing in the register is appropriately reconciled with the audited financial statements?

II. Cost Statement

Material Consumed

  • Whether the material valuation is in accordance with CAS-6 [3]?

  • Whether foreign exchange fluctuation, demurrage/ detention charges excluded from material cost?

  • Are there any material handling losses? If yes, highlight abnormal losses.

  • Are there any transit losses of raw material? If yes, state insurance coverage and highlight abnormal losses.

  • Whether hedging of crude oil and other feedstock taken to material cost?

  • Perform variance analysis of crude consumption.

Utilities Cost

  • Whether the cost of utilities is in accordance with CAS 8 [4]?

  • Perform analytical review of fuel consumption per unit of utility generation. Whether the same is in a tolerable range?

  • Perform analytical review of cost per unit of utility generated vis-à-vis utility purchased. Whether the same is in tolerable range?

  • Whether unutilised capacity is used judiciously? Are there any avenues for further third-party sales of available capacity? (Understand unit economics of revenue per unit of available capacity, i.e., if the variable cost per unit of generation is ~Rs. 5 then any sales price that fetches greater than Rs. 5 is beneficial).

Direct Employees Cost

  • Whether the cost of employees is in accordance with CAS 7 [5]?

  • Ensure that only employees/ labour deployed at the refinery site are included in this cost. Indirect labour/ employees deployed at other locations will be treated as overheads.

Repairs & Maintenance

  • Whether repairs and maintenance, cost is in accordance with CAS 12 [6]?

  • Review scenarios of breakdown maintenance. Check whether it is material enough to be treated as abnormal.

  • Analyse planned maintenance and whether it is in a tolerable range.

  • Analyse the cost of in-house maintenance vis-à-vis outsourced maintenance (AMC/ CAMC) [7] and conclude which is more economical for the company.

Research and Development Costs

  • Is research and development cost in accordance with CAS 18 [8]?

  • Whether R&D cost pertains to new product/ process development or existing product/ process development? If the former, then the same shall form part of the reconciliation statement between cost accounting records and financial statements.

Technical know-how Fee/ Royalty

  • Is the royalty and technical know-how fee in accordance with CAS 20 [9]?

  • Suppose royalty and technical know-how fees are directly traceable to a cost object. In that case, they shall be assigned to that cost object. If not, then it should be allocated on any of the following reasonable basis (aligning with the particulars as specified in the royalty agreement):

a. Units produced

b. Units sold

c. Sales value

  • If the amount of royalty and technical know-how fee is assigned based on units produced, then the cost should form part of the cost of production. However, if it is assigned based on units sold or sales value, the cost should be part of the sales cost.


  • Whether depreciation and amortisation are in accordance with CAS 16 [10]?

  • Ensure that impairment loss on assets shall form part of the reconciliation statement between cost accounting records and financial statements.

  • Review and ensure that the company maintains the fixed assets register cost centre-wise. Perform physical verification of fixed assets on a sample basis to validate the asset location and cost centre.

Production Cost

  • Whether manufacturing cost is in accordance with CAS 22 [11]?

Administrative Overheads

  • Whether administrative overheads are in accordance with CAS 11 [12]?

Selling and Distribution Overheads

  • Whether S&D overheads are in accordance with CAS 15 [13]?

III. Indirect Taxes Reconciliation

Excise Duty

  • Whether excise duty payable and paid as per ER1?


  • Are VAT/ CST payable and paid as per VAT/ CST returns?


  • Whether GST tax payable and paid is as per GSTR 1/ 3B?

3) Performance Appraisal Report:

Crude Throughput Analysis (Capacity Utilization Analysis):

Perform month-on-month analysis and refinery-wise analysis on the output of final petroleum products from the crude oil basket. This helps to examine and study transit losses, crude sourcing, crude price fluctuations, crude hedging, refinery complexity, own fuel consumption, unproductive wastages, etc.

Flare Loss Analysis:

Perform month-on-month and refinery-wise flare loss analysis with crude oil refining. This helps to examine and benchmark crude loss incurred due to the gas flaring process. Given that crude oil is a precious commodity contributing to over a third of the world's energy consumption, even a ~0.5% crude loss in a refinery can significantly impact the Gross Refining Margin of a company. Therefore, thorough analysis and due diligence are required to investigate the reasons for gas flaring variances.

Utility Consumption Analysis and Fuel Analysis:

Utility is the next significant cost incurred in any oil refinery after crude oil. Perform monthly, utility-wise, and refinery-wise analyses of utility units generated with crude oil consumed. The other analyses used for examining utility costs are fuel quantity and quality (consumed in utilities), which help give valuable insights on fuel efficiency, fuel losses, utility rates and prices, utility wastages, etc.

Also, different petroleum products output (Naphtha, Low sulphur fuel oil (LSFO), Fuel Gas (FG), etc.) used as own fuel consumption in utilities/ refining process are also analysed to evaluate from the perspective of cost-benefit analysis and productivity for making the refining process more efficient.

Customer/ Market Profitability Analysis:

Perform net margin analysis of oil and gas retail/ wholesale marketing distribution units. This analysis helps provide concrete insights into profit and loss-making markets and geographies. Also, it enables control of selling and distribution (S&D) costs through adopting best practices in one market and their replication in another. Products like Petrol pumps, CNG stations, etc., that are non-performing in terms of cost-efficiency can be analysed, and reasons thereof may be evaluated. Consequently, this might also mitigate the inefficiencies that have risen over time.


Following are some of our key contributions to the oil refining industry, implemented through our efficient cost audit mechanism:

Crude Throughput Analysis (Capacity Utilization Analysis): Identification of capacity bottlenecks incurred due to (forced) maintenance and inspection (M&I) shut down. As a consequence, the flare loss increased. The issue was highlighted during the company's audit committee, and the refinery team was instructed to take the necessary steps. Subsequently, rigorous action was taken, including preparing better-planned maintenance schedules. As a

result, the company could reduce their year-on-year (YOY) flare loss by ~2 basis points.

Utility Consumption Analysis and Fuel Analysis:

  • Observed that naphtha (used in utilities/ refining process) should be replaced with other cheaper petroleum product outputs like natural gas (NG) and fuel oil (FO). During the company's audit committee, the issue was highlighted. As a result, it was advised to optimise the fuel mix through rigorous actions, which reduced the company's year-on-year (YOY) fuel cost by ~1 basis point.

  • Recommended the company to cover its storage tank with floating solar panels as this will reduce evaporation loss and generate electricity at a nominal cost.

  • The company was advised to use pipelines instead of tankers for dispensing water in the green belt, which helped reduce costs by ~Rs. 20 lacs.

Customer/ Market Profitability Analysis: Advised the company to take necessary steps against company-owned petrol pumps that are not performing consistently for three years or more.


2. In crude oil refining, joint costs are ascertained and allocated to joint products in accordance with CAS-19 issued by The Institute of Cost Accountants of India.

Important Definitions
Joint costs are the cost of common resources used to produce two or more products or services simultaneously.
Joint product: two or more products produced by the same process and separated in processing, each having a sufficiently high saleable value to merit recognition as a main product.
Split-off point: The point in the production process at which joint products become separately identifiable. The terms split-off point and separation point are used interchangeably.

7. Refer case study on In-house vs. Outsourcing decision making


What is crude refining?

What are the different types of costs associated with crude refining?

What are some challenges in costing the complex crude refining processes?

What are some of the best practices for costing complex crude refining processes?

What are the benefits of accurate cost accounting for crude refining?



Reach us if you have any concerns regarding cost management accounting issues in your organization.


Former Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, ACMA

Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail:

Tel: +91-8800018190, +91-9999215489.



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