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1.

INTRODUCTION

1.1 Management Accounting

Management accounting is an internal business function that includes the recording


and reporting of a company's financial transactions. The accounting department also supports
management in different business operations, providing analysis and support for different
decisions and investments.

For example, managerial accounting answers such questions as:

• What is the company's average cost per unit of labor?


• How many dollars in sales does each marketing dollar bring in?
• What is the required rate of return to make a new investment worthwhile?
• Which activities require the greatest expenditures and which earn the greatest profits?

1.2 Application of Management Accounting

The application of managerial accounting is to increase knowledge within an


organization and therefore reduce the risk associated with making decisions. Accountants
prepare reports on the cost of producing goods, expenditures related to employee training
programs, and the cost of marketing programs, among other activities. These reports are used by
managers to measure the difference, or "variance," between what they planned and what they
actually accomplished, or to compare performance to other benchmarks.

For example, an assembly line supervisor might be interested in finding out how efficient
his/her line is in comparison to those of fellow supervisors, or compared to productivity in a
previous time period. An accounting report showing inventory waste, average hourly labor costs,
and overall per-unit costs, among other statistics, might help the supervisor and superiors to
identify and correct inefficiencies. A detailed report might evaluate the assembly line data and
estimate trends and the long-term effects of those trends on the overall profitability of the
organization.

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1.3 Role of Management Accounting

1.3.1Financial Reporting
Management accountants work at the beginning of the accounting cycle, recording the
financial transactions of a company as they occur. This business role ensures that companies
have a good understanding of their financial health, giving executive management the ability to
make informed decisions. Financial reporting also allows external stakeholders to review the
company based on financial information and deciding whether to invest money into the
company. Financial reporting leads to other business roles for management accountants,
including budgeting, forecasting and internal controls.

1.3.2 Budgets
Companies use budgets to ensure that they do not spend more money on business
operations than is necessary to generate profits. Management accountants will prepare budgets
for each department and then add them together to create one companywide budget. The
accounting department is responsible for managing the budget and tracking expenses that are
higher than the budgeted expense. Most budgets are created on an annual basis; capital
improvements are also included in the budgeting process so businesses can plan on improving
current facilities.

1.3.3 Forecasting
Forecasting is the crucial part of determining the amount of sales a business can generate
from current operations and production facilities. Management accountants will conduct a
market analysis and determine where the industry is in the business cycle. If the current industry
is in a declining stage, then management accountants will help produce information for executive
managers to use when finding new consumer markets. Forecasting also includes reviewing
current competitors and finding ways to take market share from those companies through
improved products and services.

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1.3.4Internal Controls
Most private accounting departments create and implement the internal controls needed
to protect a company's financial information. Internal controls protect cash, fixed assets and the
integrity of financial statements. While most companies have existing internal controls, publicly
held companies are required to meet the standards of the Sarbanes-Oxley Act of 2002 (SOX).
SOX requires companies to prepare financial statements under tight preparation and review
functions; after the statements are prepared, executive management must sign off on the
financials to declare the statements are a true and accurate representation of the company.

1.3.5Management Support
Accountants support management decisions by evaluating the company's investment
decisions. Businesses choose investments based on the future profitability of cash flows; these
calculations are prepared by the accounting department and submitted to executive management.
Most investment decisions require large amounts of financial information so the best decisions
can be made. Most businesses accept investments with low risk and moderate reward, although a
high-risk/high-reward investment may be considered.

1.4 Importance of Management Accounting in an Organization

Consistent with other importance in today's corporation, management accountants have a


dual reporting relationship. As a strategic partner and provider of decision based financial and
operational information, management accountants are responsible for managing the business
team and at the same time having to report relationships and responsibilities to the corporation's
finance organization.

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In corporations that derive much of their profits from the information economy, such as
banks, publishing houses, telecommunications companies and defense contractors, IT costs are a
significant source of uncontrollable spending, which in size is often the greatest corporate cost
after total compensation costs and property related costs. A function of management accounting
in such organizations is to work closely with the IT department to provide IT Cost Transparency.

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2. PAKISTAN OIL FIELDS
2.1 Introduction

Pakistan Oilfields Limited (POL) is a leading oil and gas exploration and production
company listed on all the three stock exchanges of Pakistan. The Company's prime focus is to
deliver performance through excellence in the field of exploration, drilling and production of
crude oil and gas.

Pakistan Oilflelds Limited (POL), a subsidiary of The Attock Oil Company Limited
(AOC), was incorporated on November 25, 1950. AOC was founded in 1913 and made its first
oil discovery in 1915 at Khaur, District Attock. AOC has, therefore, pioneered exploration and
production of oil and gas in this region nearly a century ago. In 1978, POL took over the
exploration and production business of AOC. Since then, POL has been investing independently
and in joint venture with various exploration and production companies for the search of oil and
gas in the country.

In addition to exploration and production of oil and gas, POL also manufactures LPG,
Solvent Oil and Sulphur. POL markets LPG under its own brand named POLGAS as well as
through its subsidiary CAPGAS (Private) Limited. POL also operates a network of pipelines for
transportation of its own as well as other companies' crude oil to Attock Refinery Limited.

In 2005, the Company acquired a 25% share in National Refinery Limited, which is the
only refining complex in the country producing fuel products as well as lube base oils.

2.2 Exploration & Production

Pakistan Oilfields Limited maintains a highly diversified exploration and production portfolio.
POL is presently operating nine Development and Production leases i.e. Pariwali, Meyal,
Joyamair, Minwal, Dhulian, Khaur, Pindori, Turkwal and Balkassar.
The Company has Joint Venture agreements with the following E&P companies:

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i) The Attock Oil Company Limited in Central Potwar (Turkwal), Pindori, Kirthar and Ikhlas.
ii) Oil & Gas Development Company Limited (OGDCL) in Pindori, Chak Naurang, Gurgalot
Block and Kotra.
iii) Orient Petroleum Inc. in Dhurnal, Ratana and Bhangali.
iv) Tullow Pakistan (Development) Limited in East Badin Extension Block-B.
v) MOL Pakistan in Tal Block, Margala and Margala North. In Tal Block Oil & Gas
discoveries have been made in Manzalai, Makori, Mamikhel and Maramzai fields.
Manzalai Central Gas Processing facility, having capacity of 300 MMSCFD, has been
commissioned on October 28, 2009 to process gas from Manzalai field. The plant is
currently processing 233 MMSCFD of gas. POL has a 25% pre-commerciality working
interest in this venture.
vi) Pakistan Petroleum Limited in Adhi.
vii) Government Holding (Pvt) Limited in Pariwali, Minwal.
Two new exploration licenses have been awarded to POL in Dera Ghazi Khan and Rajanpur
Blocks in January 2010. POL exploration team is proactively evaluating exploration and
exploitation opportunities within and outside Pakistan with an ultimate aim to sustain long-term
production goals and bring value for the shareholders.

2.3 Products of POF

2.3.1 Crude Oil:

An oily, flammable liquid that occurs naturally in deposits, usually beneath the surface of
the earth; it is also called crude oil. It consists principally of a mixture of hydrocarbons ,with
traces of various nitrogenous and Sulphurous compounds. During the past 600 million years
incompletely decayed plant and animal remains have become buried under thick layers of rock.

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2.3.2 Natural Gas:

Natural mixture of gaseous hydrocarbons found issuing from the ground or obtained from
specially driven wells. The composition of natural gas varies in different localities. Its chief
component, methane, usually makes up from 80% to 95%, and the balance is composed of
varying amounts of ethane, propane, butane and other hydrocarbon compounds. Although
commonly associated with petroleum deposits, it also occurs separately in sand, sandstone, and
limestone deposits.

2.3.3 Liquid Petroleum Gas:

LPG is a mixture of gases, chiefly propane and butane, produced commercially from
petroleum and stored under pressure to keep it in a liquid state. The boiling point of liquefied
petroleum gas varies from about -44°C to 0°C (-47°F to 32°F), so that the pressure required to
liquefy it is considerable and the containers for it must be of heavy steel. When prepared as fuel,
LPG is largely propane; common uses are for cooking and heating and lighting.

2.3.4 Sulphur:

Sulphur is found in group VIa of the periodic table. Solid Sulphur occurs principally in
three forms, all of which are brittle, yellow in color, odorless, tasteless, and insoluble in water. It
is a chemically active element and forms many compounds, both by itself (sulfides) and in
combination with other elements. It is part of many organic compounds. Sulphur burns in air
with a blue flame forming Sulphur dioxide.

2.3.5 Solvent Oil:

Solvent oil is one of the 5 major oil products closely related to people's daily life. Its
application sectors also have a constant expansion. The variety with the greatest consumption is
coating solvent oil (usually called paint solvent oil).

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3. MANAGEMENT ACCOUNTING IN POF

3.1 Planning & Controlling

In POF managerial accounting applications, information produced for managers is used


to make decisions about the future and to judge the effectiveness of past decisions and actions.

The plans of management are formally communicated as budgets. The controller oversees the
development of budgets by the accounting department, usually on annual basis. Budgets are
commonly prepared not only for the overall organization, but also for divisions and departments
within the company.

Once the managers’ plans, or budgets, have been established, managerial accountants
begin gathering information generated by the managers that indicates whether or not they are
achieving their goals. The accounting department presents its findings in the form of
performance reports tailored for individual executives. The detailed performance reports
essentially compare budgets with actual results for a given time period, allowing managers to
identify problem areas.

Besides producing routine reports, management accountants also create special reports
for other managers that help them to make decisions about proposed projects or problems that
arise. Special reports are often created to analyze the relationship between costs and benefits
related to different alternatives in the decision-making process.

3.2 Cost Information

Information gathered by cost accounting methods within an POF make up most of the
detailed data used to create managerial accounting reports. Understanding the costs associated
with services of exploration is vital to the decision-making process because that comprehension
can help place a measurable value on the results of a company's individual decisions.

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Four basic cost accounting activities that support the managerial accounting function are

• Cost determination: Involves determining the actual cost of a product or an


activity, such as marketing.
• Cost recording: Costs are recorded in journals and ledgers;
• Cost analyzing: Refers to accountants and managers analyzing the data to
help solve problems and make plans.
• Cost Reporting: Entails showing the costs in detail, including showing how
the costs were measured, what characteristics the costs have, and what the costs
actually mean and how they should be interpreted.

3.3 Managerial Accounting Practices in POF:

• Information: The costs of an organization’s products and services.


For Example, managers can use product costs to guide the setting of selling prices. In
addition, these product costs are used for inventory valuation and income determination
• Budgets: A budget is a quantitative expression of a plan.
• Performance reports: Reports often consist of comparisons of budgets with actual results.
The deviations of actual results from budget are called variances.
• Other information: Assist managers in their planning and control activities.
Examples are information on revenues of an organization’s products and services, sales
back logs, unit quantities and demands on capacity resources.

It has been found that management accounts are invaluable when it comes to a company making
important and timely management decisions about their business. It is clear that different
businesses will have different management accounting needs and this will depend on the areas
that the business finds are most important to them.

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References

[1]. www.wikipedia.com

[2]. www.ehow.com

[3]. www.pakoil.com.pk

[4]. Bruns, William J. Accounting for Managers: Text and Cases, 2nd ed. Cincinnati: South

Western, 1999.

[5]. Bisgay, Louis. "Trends in Financial Management." Management Accounting, May 1997.

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