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 its various components, which are then selectively, reconfigured into new products [1]. A refining process involves utilization of resources to produce a diverse portfolio of petroleum products from 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, 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 petrochemical plant (if the company has invested in petrochemical business as well). The associated manufacturing cost shall also be loaded on to 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

  • Whether installed capacity of the plant is certified by the management and the refinery team?

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

Production Quantity

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

Sales Quantity

  • Whether sales quantity is 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 material valuation is in accordance with [3]?

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

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

  • Whether there are 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 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 tolerable range?

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

  • Perform analytical review of capacity utilized for utility generated. Whether unutilized 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 cost of employees is in accordance with CAS 7 [5]?

  • Ensure that only employees/ labour deployed at refinery site are included in this cost. Indirect labour/ employees deployed at other locations are to 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 substantial enough to be treated as abnormal?

  • Analyze planned maintenance and whether it is in tolerable range?

  • Analyze 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

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

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

Technical know-how Fee/ Royalty

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

  • If royalty and technical know-how fee is directly traceable to a cost object, it shall be assigned to that cost object. If not, then it should be assigned on any of the following reasonable basis (being in consonance 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 on the basis of units produced, then the cost should form part of cost of production. If it is assigned on the basis of units sold or sales value, then the cost should form part of cost of sales.


  • Whether depreciation and amortization is in accordance with CAS 16 [10]?

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

  • Review and ensure that fixed assets register is maintained cost centerwise by the company. Perform physical verification of fixed assets on sample basis.

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 is as per ER1?


  • Whether VAT/CST payable and paid is 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 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 analysis and refinery-wise analysis of flare loss with crude oil refined. This helps to examine and benchmark crude loss incurred due to gas flaring process. Given that crude oil is a precious commodity contributing to over a third of world’s energy consumption, even a ~0.5% crude loss in refinery can significantly impact the Gross Refining Margin of a company. Therefore, thorough analysis and due diligence is required in investigating the reasons for variances in gas flaring.

Utility Consumption Analysis and Fuel Analysis:

After crude oil, utility serves as the next major cost incurred in any oil refinery. Perform month-on-month analysis, utility-wise analysis as well as refinery-wise analysis of utilities units generated with crude oil consumed. The other analyses used for examining utility cost are fuel quantity and fuel quality (that gets consumed in utilities) which help in giving useful 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 to provide concrete insights on profit and loss-making markets as well as geographies. Also, it enables to control selling and distribution (S&D) costs through adoption of best practices in one market and its 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. As a consequence, this might also mitigate the inefficiencies risen over a period of time.


Following are some of our key contributions in 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. During the company’s audit committee, the issue was highlighted and the refinery team was instructed to take necessary steps. Subsequently, rigorous action was taken including preparation of better planned maintenance schedules via which 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 and it was advised to optimize the fuel mix through rigorous actions which led to reduction in the companys’ year-on-year (YOY) fuel cost by ~1 basis points.

  • Recommended the company to cover the storage tank with floating solar panels as this will not only reduce evaporation loss, but also 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 in reducing costs by ~Rs. 20 lacs.

Customer/ Market Profitability Analysis: Advised the company to take necessary steps against company owned petrol pumps which are not performing consistently for a period of 3 years or more.


1. Understand refining crude oil process in depth 🡕

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.
CAS-19: Cost Accounting Standard on Joint Costs 🡕

3. CAS-6: Cost Accounting Standard on Material Cost 🡕

4. CAS-8: Cost Accounting Standard on Cost Of Utilities 🡕
5. CAS-7: Cost Accounting Standard on Cost Of Utilities 🡕

6. CAS-12: Cost Accounting Standard on Repairs And Maintenance Cost 🡕

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

8. CAS-18 Cost Accounting Standard On Research And Development Costs 🡕

9. CAS-20 Cost Accounting Standard On Royalty And Technical Know-how Fee 🡕

10. CAS-16 Cost Accounting Standard On Depreciation and Amortisation 🡕

11. CAS-22 Cost Accounting Standard On Manufacturing Cost 🡕

12. CAS-11 Cost Accounting Standard On Administrative Overheads 🡕

13. CAS-15 Cost Accounting Standard On Selling And Distribution Overheads 🡕



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

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