3.

2 ACCOUNTING PROCEDURE AT IOCL

IOCL runs its operation throughout the length and breadth of this country, controlling
a humongous market share in the oil and gas sector being the most prominent supplier
of fuel and gas. Its operation and organisation structure is such that certain degree of
balance needs to be maintained between centralisation and de-centralisation.
At the helm of all activities is the Head Office which controls and monitors nationwide
operations of Indian Oil however in order to allow hindrance free timely operations the
Regional Offices are granted sufficient control over its domain area such that there is no
hindrance in timely execution of activities.
The Head Office keeps a tab over all Regional Operations through Budgeting and
continuous monitoring of transactions through the SAP application. All transactions are
automatically updated for all regions through SAP.
As per the SAP application each entity for which a Trail Balance can be prepared is
granted a specific company code, using which all accounting entries relevant for that
specific entity is passed. Under the present system each Regional Office and each State
Office is granted a specific company code. Further, under each State Office there are
Administration Centre and Supply points (Terminals and Depots) which function as
Plant CodesThe final compilation of Marketing Division accounts is done by the Head
Office in Mumbai. Apart from the final company account, Balance Sheet is also
prepared by each regional office for every year end by accumulating impact of Trail
Balance prepared by each State Office. At present profits are only calculated at the Head
Office and Regional Level. Thus, all Regional offices are treated as Profit Centers while
State Offices are considered to be Cost Centers.
Hence, the present accounting structure is such that the profitability and efficiency of
State level activities cannot be judged.
3.2 COST CENTER V/S PROFIT CENTER

Profit Center model is suitable where we wish to identify the efficiency of a unit in
monetary terms. Its relevant for units where there is high degree of de-centralization
along with certain degree of self-sufficiency in sourcing and outsourcing the activities.
Decentralization units with well placed transfer price mechanism can opt for profit
center model.
Business Units where efficiency cannot be directly measured in monetary terms, it is
difficult to use profit centre model for such units like support service departments. For
example HR, IT, Finance, Administration, S & D , Engineering Department, Operations
department in specific to IOCL.
Also, for units which are not self sufficient in terms of revenue generation may be
considered non- viable however they might be having strategic importance, but for the
purpose of monetary evaluation they are irrelevant. Also, several independent units
within organization may lead to inter-company price war.
In case of cost center model the efficiency and productivity of each unit cannot be
determined. This makes fixation of responsibility difficult and hence gives rise to
inefficiencies.
Also, no direct correlation can be drawn between the costs incurred and revenue
generated which makes determination of selling price and cost policies extremely
difficult. All intention of managers is towards reduction of costs while revenue
generation aspects are ignored.
Cost center model works best where policies are centrally determined and units lack
autonomy.
In case of Indian Oil, Regional Offices are Profit Centers while all State Offices are
treated as Cost Centers. This model of accounting prevents determination of
profitability at the state office level.

3.3 PROFITABLITY AS PER THE PRESENT STRUCTURE

As per the present accounting norm at IOCL profit analysis is only done at the regional
level. For the State Offices only a Trial Balance is prepared.
In order to analyse the present accounting scenario the following table presents the
gross profit calculation from the Trial Balance for the Quarter April June 2013.
(Rs. In 000)
Particulars DHSO PBSO RJSO UPSO-1 UPSO-2
Sales
Cost
Profit
56792031 -55169738 -42772735 -58252434 2867065


The above Gross Profit figures present an extremely lop sided picture. Delhi State Office
and UP State Office 2 show profit figures while the other State Offices show negative
results. This is due to the presence of Mathura Refinery under UP State Office 2 and
Panipat Refinery under Delhi State Office.
Sale booking is done for the location from where sale is done and not the State Office
under which the customer belong.
Hence, a sale transaction for a customer of Punjab State Office done from Panipat
Refinery shall be booked under Delhi State Office and not Punjab State Office. There is
no transfer of sale or profit to the PSO since PSO and DSO belong to the same region,
that is, the Northern Region.



3.4 MAJOR ISSUES REGADING ACCOUNTING OF
PROFIT AT STATE LEVEL

At broad level all transactions can be divided into three categories-
1. Outside IOCL
2. Outside Region
3. Within Region.
-For all sale outside IOCL, that is, the sale made to competitors like HPC/BPC/GAIL
profit is directly booked at the vendor office, that is, the state office from where sale has
been made.
Hence, no problem of profit sharing arises in this case.

-In case of outside region a sale entry is passed at the Regional Level and not the state
level.
ILLUSTRATION
KANDLA(WESTERN OFFICE) >>> STOCK TRANSFER>>>JODHPUR
TERMINAL(NRO)
Here the following entry will be passed at the year end-
Purchases at Northern Region ...........Dr.
To Western Region
Even though Jodhpur Terminal is under Rajasthan State Office and the above purchase
is a part of RSO yet the entry is passed for the Regional Company Code.
Now, when the above stock will be sold by RSO the sales will be booked however the
co-existent cost, i.e., purchases is recorded under NRO.
This is one area where the gap between costs and revenue arises.
-Incase of transactions within a Regional Office between the states no entry is passes.
Thus, limiting the prospects of accounting profit at the state level.
ILLUSTRATION OF ACCOUNTING TREATMENT
Sale is booked on realisation basis at the geographical level. Based on the cost, a
standard profit margin is determined by the Head Office which acts as the basis of profit
distribution among the regions.
Consider the following illustration.
NFL (Bhatinda) Customer of Punjab Office Under Northern region

Derives it supply from three location-
A. Koyali (Western Region, Gujrat State Office)
B. Mathura (Northern Region, Utttar Pradesh State Office 2)
C. Panipat (Northern Region, Delhi State Office)
D. Barauni (Eastern Region, Bihar State Office)

Sale is booked under the geographical location from where actual sales take place, that
is, Gujrat State Office, UPSO-2, DSO and Bihar State Office.
However, the customer actually belongs to Punjab State Office which is under the
Northern Region. Hence the profit which actually belongs to PSO has been recorded
under other State Offices from where supply was procured. In order to rectify this
situation profit margins are transferred from Western Region and Eastern Region to
Northern Region. However this exercise is conducted only for inter- regional
transactions.


Hence the following entry is passed at the regional level-
Western Region............Dr.
Eastern Region..............Dr.
To Northern Region Profit Margin
Here again we witness another gap between the sale and cost placement for state offices
under the same region. The cost of maintain and procuring the customer is borne by
Punjab State Office whereas sale is booked under DSO and UPSO-2.