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As one of the direct materials used in the production of petroleum products, the cost of crude oil eventually affects the price of gas price. Therefore, in decision making, the management accountant has to convert the expenses, and operating costs are put as a variable, or fixed. In order for the conversion to be reliable and perfect, the management accountant has to employ a deep knowledge of the theory of cost behavior. Therefore, the paper presents an analysis of the ways in which crude oil affects gas prices in Canada.
Using the theory of cost behavior, the management accountant underscores that sometimes, the price fluctuations of crude oil are complex (Drury, 2008). In essence, some of the assumptions in the price changes are invalid, making the data for the cost variables to be of no use. In this case, the faulty operating cost leads to wrong information, and when such data is used in decision making, then, the overall outcome might not yield the intended outcome. This indicates that measuring and recognizing the cost behavior of crude oil is essential in determining the prices of gas in the country (Williamson, 2008).
Notably, an increase in the volume of crude oil has an impact on the presumed variable costs, because the cost changes with a corresponding increase in the volume of production. However, determining this variation makes the work of management accountants complicated and time consuming (Drury, 2008). In reality, when one considers the economic theory, specifically cost variable and its application in management accounting, determining the volume of production and the variable cost is done through assumption. This indicates that there is no specific accounting measure that the management accountants could apply to arrive at the truth in the financial statement (Horngren et al., 2011).
Assuming the production of crude oil increases at the rate of 100 units, there would be a corresponding increase in the total cost of the material. This relationship is fixed and assumes that the increase in production always results in a rise (Horngren et al., 2011). However, there are variable costs, which arise and might affect the total price of the material. Therefore, in management accounting,
TVC = V (Q)
Where:
- TVC is the total variable cost.
- V is the variable cost rate.
- Q is the unit quantity manufactured or sold.
From this kind of relationship, the management accountant would agree that the volume of production and cost of crude oil would have an effect on the prices of gas, for domestic and industrial use. Essentially, the by-products of crude oil including paraffin, petrol, and diesel can be used to supplement the use of the gas domestic and industrial setup (Williamson, 2008). For example, in Canada, an increase in the volume of crude oil production increases the supply quantity of petrol, diesel, and paraffin to the market. In this case, the total variable cost also increases since it is directly proportional to the supply quantity and the variable cost rate. In fact, petrol and diesel could supplement the use of gas in the industrial production system.
For example, the of activities Exxon Mobil Corporation, including high or low production, lead to notable fluctuation in the prices of gas. Since the company forms the benchmark in the world’s energy production, its activities are expected to continue and the shares are projected to increase in demand. Therefore, the anticipated increase in oil production of the company, despite imminent market fluctuations, would automatically increase gas prices. However, the company is still in its best position to deliver on the global energy needs, which is growing in a steady way. The Chairperson of the company argues that the company could manipulate the economic challenges to deliver the needed energy for global economic development.
In summary, the availability of crude oil and its by-products increases its industrial use and reduces the demand for gas, thereby, reducing the latter’s market price. Alternatively, the low supply of crude oil and its by-products increases the demand for the gas for industrial use, thus, increasing its market price.
References
Drury, C. (2008). Management and Cost Accounting. Canada: Pat Band Publishers.
Horngren, C. T., et al., (2011). Cost Accounting-A Managerial Emphasis. Canada: Pearson Education.
Williamson, D. (2008). Cost & Management Accounting. Canada: Pearson Education.
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