37 SEPTEMBER 2022 WorldWide Drilling Resource® Drilling Into Money Not Boring by Mark E. Battersby Accounting for Costs What does it cost the drilling operation or business to open its doors each day? How much does it cost the operation to show up at a jobsite or perform any of its services? Or, equally important, how much does it cost to keep the operation’s best customer or customers happy? The answers may lie with cost accounting. It’s no secret the ability to control costs in a business is directly related to profitability. Nowhere is this more evident than in the delivery of services which, if not closely tracked, can easily eat into or even eliminate profits. Cost accounting is the practice of recording, examining, summarizing, and studying the drilling operation’s funds spent on any product, service, customer/client, or anything else in the organization. In other words, cost accounting involves the recording of all the costs incurred in a drilling business in a way that can be used to improve its management - and its profitability. Regardless of what system is employed or how technical the accounting for costs is, it is based on three principal elements, materials, labor, and overhead. a Materials are inputs to productions and typically broken into two groups: direct and indirect. j Direct materials are raw materials and parts used in producing finished goods or products. j Indirect materials are usually treated as an overhead expense and include safety equipment and cleaning supplies. a Labor directly involved in production or distribution or delivering services must be paid. Their salaries and wages might include overtime and bonuses, employee benefits as part of the total labor cost. Indirect costs are treated as an overhead expense, not a labor expense. a Overhead includes the costs related to the production or distribution of goods or providing services, but which cannot be directly attributed to specific goods or services. Typical overhead costs for a drilling business might include: j Equipment j Utilities j Facility costs including mortgage and property taxes j Payroll taxes and pension contributions j Depreciation of fixed assets j Interest payments Cost accounting helps a drilling business identify areas where they may be better able to control their costs, as well as set or adjust pricing to maintain profitability. In fact, cost accounting can help protect the operation’s profit margins by tracking all direct and indirect expenses to provide important insights which can lead to better budgeting, increased efficiency and, ultimately, higher profits. Mark Mark E. Battersby may be contacted via e-mail to michele@worldwidedrillingresource.com
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