Accounting Research Paper
Waste Management System For A Gas Retail Fueling Station A thesis proposal submitted to the College of Accountancy In partial fulfillment for the requirement of the course in Internship/Accounting Thesis INTRODUCTION Any stock that a firm keeps to meet its future requirement of production and sales is called “INVENTORY”. The basic reason for holding inventory is to keep up to the production activities unhampered. It is neither physically possible nor economically justifiable to wait for the stock to arrive at the time when they are actually required.
Therefore, keeping of inventory is a must for the efficient working of a business unit. Finished goods are completed goods awaiting sale in a manufacturing concern; they are the final output of the production process. The nature of inventory depends upon the type of activity carried on. In the case of a trading concern, it will comprise only finished goods or stock-in-trade owned by it for sale to customers in the normal course of business. Inventory needs proper control as it is one of the largest assets of a business.
Accounting Research Paper Essay Example
Inventories should neither be excessive nor inadequate. If inventories are kept at a high level, higher interest and storage costs would be incurred; on the other hand, a low level of inventories may result in frequent interruption in the production schedule resulting in under utilization of capacity and lower sales. Some businesses have another concern for their inventory. Spoilage, evaporation and other kind of inventory losses are incurred depending on the type of products offered. All businesses strived to prevent these losses but are also prepared to account for them.
They have established procedures and standards to accurately determine and measure the appropriate amount of losses incurred. These losses are considered as waste. Proper measurement of inventory, especially those that have the tendency for normal loss, is vital to a good inventory management. Inventory management consists of everything from accurate record-keeping to shipping and receiving of products on time. An Inventory management that is properly maintained can keep a company’s supply chain running smoothly and efficiently.
The objective of inventory management is therefore to determine and maintain the optimum level of investment in inventories which help in achieving the required objective. The focus of this study is to enhance the current system and practices on inventory management and the procedures used in dealing with losses by a Gasoline Retailing Station located in Km. 53, National Highway, Brgy. Real, Calamba City, Laguna. The business offers four different kinds of fuels to motorists for thirty years. Statement of the Problem
The study, entitled “Inventory and Waste Management in a Gas Retailing Station” is intended to develop and enhance the inventory and waste management system. The objective may be achieved by evaluating the internal control practices applied in the company particularly on current assets specifically on its inventory management. Further, the study is aimed to answer what development and enhancement the company may be able to adopt. The study aims to answer the following questions: 1) What are the current system and control measures being adopted with regard to their inventory system? ) What standards and practices does the company apply with their waste management system? 3) What are the strengths and weaknesses of their current inventory system and waste management practices? 4) What improvements can be made regarding the inventory and waste management system? 5) What enhancements can be adopted to improve the inventory and waste management system of the company? Objectives of the Study The main goal of the study is to evaluate the current inventory and waste management system of the company. Thus, the study shall be conducted to come up with an enhancement and development in the inventory management process.
Specifically, the researcher aims: 1. To determine the current system and control measures being adopted. 2. To determine the standards and practices that the company apply with their waste management system. 3. To determine the strengths and weaknesses of their current inventory system and waste management practices 4. To determine the improvements that can be made regarding the inventory and waste management system. 5. To determine the enhancements that can be adopted to improve the inventory and waste management system. Scope and Limitation
The study focuses on the evaluation and assessment of practices that the company has regarding the management of their inventory and waste system. It shall include customs the company has on maintaining the level of inventory and also the internal controls they carry out to assure its quality. The valuation of inventory considering its evaporation tendency shall also be discussed in this paper. The study shall not cover the efficiency of the management in carrying the tasks, merely its traditions on dealing with inventory. Theoretical Framework
To aid the researcher in conducting the research, the book Fundamentals of Oil and Gas Accounting by Linda M. Nichols will be used. Conceptual Framework PROCESS Evaluation of Inventory and Waste Management System through analysis and interpretation of data OUTPUT Enhancement and development of the Inventory and Waste Management System INPUT Current practices in Inventory and Waste Management System FEEDBACK Current practices in Inventory and Waste Management System The current practices, system, and procedures of the business shall be the primary data needed in the study.
Evaluation of Inventory and Waste Management System through analysis and interpretation of data Through questionnaires and interviews, the data gathered shall be the source of evaluating the inventory and waste management system. Enhancement and development of the Inventory and Waste Management System With the evaluation of the inventory and waste management system, provided by the analysis and interpretations conducted, the researchers shall identify the strength and weaknesses of the company and summarized the results. The generated results shall be the basis for improving the inventory and waste management system.
Feedback Mechanism- The output of this study shall be communicated to the company’s management, and would be available for use of future researchers. Significance of the Study The study shall be beneficial to the following: Management of the company Business owners in the same field Researchers Future Researchers Definition of Terms Inventory- The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale( http://www. investopedia. com/terms/i/inventory. sp). In this study, the inventory pertains to the fuels offered by the company for sale. Normal Loss- is unavoidable losses arising due to the nature of the material or the process (http://wiki. answers. com/Q/What_is_normal_loss_in_cost_accounting). Waste Management- is the collection, transport, processing or disposal, managing and monitoring of waste materials CHAPTER 2: REVIEW OF RELATED LITERATURE The review of related literature shall focus on the practices done by the management in the administration and supervision of its inventory and also he customs and standards used in managing its wastes or loss. A background of how the business operates shall also be included in this section as it is essential for a better understanding of the operation. Gasoline Refueling Station A filling station, fueling station, garage, gasbar (Canada), gas station (United States and Canada), petrol bunk or petrol pump (India), petrol garage, petrol kiosk (Singapore), petrol station (United Kingdom, Ireland, Malaysia and Hong Kong), service station, or servo (Australia), is a facility which sells fuel and usually lubricants for motor vehicles.
The most common fuels sold today are gasoline (gasoline or gas in the U. S. and Canada, typically petrol elsewhere), diesel fuel, and electric energy. Filling stations that sell only electric energy are also known as charging stations. http://www. answers. com/topic/filling-station#ixzz2SiFdPBMW Process of Refilling Cars The Check Valve The route that the gas takes from the tanks to the aboveground dispenser isn’t terribly complicated, though it may take a few minor twists and turns. When pumping is complete and the pump motor is turned off, the gas inside the pipe doesn’t simply fall back into the tank.
Instead, it’s held inside the pipe by a check valve. The check valve, which is located above the gas inside the pipe, creates an airtight seal above the fluid. Although the bottom of the pipe remains open, the vacuum pressure created by the check valve holds the gas in place. This is a process known as keeping the prime. Using a check valve to hold the gas inside the pipe prevents unnecessary wear and tear on the suction pump and assures that a supply of gas will remain in the pipe so that the next customer won’t have to wait for it to be drawn all the way up from the tank.
It may not seem like a big deal, but the process can take 10 to 15 seconds. That isn’t a very long wait by any means, but it can be an eternity when you’re waiting for gas to be pumped. The power that drives the pumps usually comes from the same electric grid that powers the lights and appliances in your home, though a few states require that service stations maintain a backup power supply in case of power failure. The Flow Meter As a driver, your primary objective at the pump is to get your tank filled so that you can get your car back on the road.
The goal of the service station owner and the company that supplies the gas, however, is to know just how much gas you’ve pumped so they can properly charge you for it. That’s where the flow meter comes in. As the gasoline travels upward into the dispenser, it passes through a flow control valve that regulates the gasoline’s flow speed. It does this via a plastic diaphragm that gets squeezed more and more tightly into the pipe as the flow of gas increases, always leaving just enough room for the proper amount of gasoline to get through.
If you’ve set a predetermined amount of gas to be pumped, the flow of gas will slow down as you approach the limit. This pipe also contains the flow meter, which is a cast iron or aluminum chamber containing a series of gears or a simple rotor that ticks off units of gas as they pass through. Information about the gas flow is passed on to a computer located in the dispenser, which displays the metered amount of gas in tenths of a gallon. As the temperature of the gas changes — on particularly hot and cold days, for instance — the density of the gas may change, causing an error in the amount of fluid measured by the flow meter.
The computer compensates this error by taking the gas temperature into account as it records the flow and adjusts the price accordingly. Wear and tear on the meter may degrade its accuracy over time, which is why periodic inspections are necessary. Typically, inspectors will use a container of a certain volume, pump gas into it and compare the amount in the container with the amount metered on the dispenser. If the amounts don’t match, the flow meter will need to be recalibrated and possibly refurbished or replaced. The Blend Valve One of the first things that a customer will notice at the pump is the variety of choices offered.
In most cases, a dispenser will offer several grades of gas — sometimes as many as five — each with a different octane rating. The desired octane rating is usually chosen simply by pushing a button. Does this mean that there are five different underground tanks feeding into that dispenser, each offering a different grade of gas? That’s not usually the case. In fact, the dispenser can produce as many grades as it wants from as few as two underground tanks, as long as one tank contains the highest grade of octane available at that station and the other contains the lowest.
The grades are blended together at the pump. The precise proportion in which the grades are blended determines the octane of the gas that enters the customer’s tank. This feat of gas pump bartending is performed by something called a blend valve. This valve has inputs consisting of two grades of gasoline, each from different tanks. A single, moveable barrier called a shoe is connected to both in such a way that it can be moved across the inputs with a single motor-driven ratchet. As the ratchet opens one valve, it closes the other valve in precise but opposite proportion.
This means that when one valve is, for example, 90 percent open, the other valve is 10 percent open, creating a mixture that consists of 90 percent of one octane and 10 percent of the other. By shifting the ratchet back and forth, the blend valve can produce any octane of gas, ranging from the highest to the lowest grades stored in the tanks — and all octanes in between. The Automatic Shut-off When the customer removes the pump handle from its place on the side of the dispenser, this action activates a switch that starts the dispenser operation. In some cases the switch is spring-loaded and activates automatically; in others, the customer must raise a small lever manually to begin the process. ) At that point, the customer simply inserts the nozzle into the car’s gas tank and pulls the lever. Stopping the flow of gas is just as simple — the customer need only release the lever to cut off the stream of fuel. But what if the tank fills unexpectedly to the brim and the gasoline threatens to overflow? As anyone who’s ever operated a gas pump knows, the pump will switch off automatically.
But how does the pump know when to stop pumping? As the gas level in the tank rises, the distance between the dispenser nozzle and the fuel grows smaller. A small pipe called a venturi runs alongside the gas nozzle. When the end of the venturi pipe becomes submerged in the rising gas, it chokes off the air pressure that holds the nozzle handle open and shuts down the flow of gas. Unfortunately, this shutdown can sometimes happen before the tank is full as the rapidly flowing gas backs up on its way into the tank.
This can cause the gas handle to spring open before pumping is complete, leaving the annoyed customer to squeeze the handle again and risk the possibility of overflow. Pausing briefly will allow the gas to continue into the tank and the pump nozzle to start pouring gas again. Inventory Management Effective inventory management is all about knowing what is on hand, where it is in use, and how much finished product results. Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory.
This process usually involves controlling the transfer in of units in order to prevent the inventory from becoming too high, or dwindling to levels that could put the operation of the company into jeopardy. Competent inventory management also seeks to control the costs associated with the inventory, both from the perspective of the total value of the goods included and the tax burden generated by the cumulative value of the inventory. Balancing the various tasks of inventory management means paying attention to three key aspects of any inventory. The first aspect has to do with time.
In terms of materials acquired for inclusion in the total inventory, this means understanding how long it takes for a supplier to process an order and execute a delivery. Inventory management also demands that a solid understanding of how long it will take for those materials to transfer out of the inventory be established. Knowing these two important lead times makes it possible to know when to place an order and how many units must be ordered to keep production running smoothly. Calculating what is known as buffer stock is also key to effective inventory management.
Essentially, buffer stock is additional units above and beyond the minimum number required to maintain production levels. For example, the manager may determine that it would be a good idea to keep one or two extra units of a given machine part on hand, just in case an emergency situation arises or one of the units proves to be defective once installed. Creating this cushion or buffer helps to minimize the chance for production to be interrupted due to a lack of essential parts in the operation supply inventory.
Inventory management is not limited to documenting the delivery of raw materials and the movement of those materials into operational process. The movement of those materials as they go through the various stages of the operation is also important. Typically known as a goods or work in progress inventory, tracking materials as they are used to create finished goods also helps to identify the need to adjust ordering amounts before the raw materials inventory gets dangerously low or is inflated to an unfavorable level.
Finally, inventory management has to do with keeping accurate records of finished goods that are ready for shipment. This often means posting the production of newly completed goods to the inventory totals as well as subtracting the most recent shipments of finished goods to buyers. When the company has a return policy in place, there is usually a sub-category contained in the finished goods inventory to account for any returned goods that are reclassified as refurbished or second grade quality.
Accurately maintaining figures on the finished goods inventory makes it possible to quickly convey information to sales personnel as to what is available and ready for shipment at any given time. In addition to maintaining control of the volume and movement of various inventories, inventory management also makes it possible to prepare accurate records that are used for accessing any taxes due on each inventory type. Without precise data regarding unit volumes within each phase of the overall operation, the company cannot accurately calculate the tax amounts.
This could lead to underpaying the taxes due and possibly incurring stiff penalties in the event of an independent audit. Inventory Storage The Gasoline Storage Tanks The gasoline sold at service stations is stored underground in buried tanks. Each holds several thousand gallons of gas. There are at least two of these tanks per station and each tank usually holds a different grade of gas. Having the gas tanks underground presents an obvious problem: If the gas must get to a dispenser (and your car’s gas tank) located above ground, it has to defy gravity in order to get there — like a waterfall flowing uphill.
But moving the gas from its subterranean hideaway up to street level isn’t as difficult as you might think. Most service stations do the job using one of two types of pump — a submersible pump or a suction pump: * A submersible pump, as its name implies, is submerged below the surface of the liquid, where it uses a propellerlike device called an impeller to move the fuel upward. Slanted blades on the rotating impeller push the water the way the blades on an electric fan push air. * A suction pump moves the gas using the principle of unequal pressure.
A pipe is inserted in the water. A motor above the fluid level removes enough air from the pipe to decrease the air pressure above the gasoline. The motor continues to remove air until the air pressure above the gasoline is lower than the air pressure pushing down on the gas outside the pipe. The weight of the surrounding air forces the gas inside the pipe upward even as gravity tries to pull it back down. When the air pressure inside the pipe is low enough, the gas simply climbs up into the aboveground dispenser.
The major advantage of a submersible pump over a suction pump is that the impeller can push water over longer vertical distances. However, because the gas tanks at most service stations are located only a few feet below the dispenser, a suction pump is usually more than adequate for the task at hand. Inventory Control Petrol and other motor fuels are inherently hazardous. At room temperatures petrol gives off flammable vapours which, when mixed with air, will burn with explosive force if ignited. If released into the environment, it is also injurious to aquatic life and presents a particular risk to drinking water supplies.
Whenever petrol leaks or escapes from an underground storage tank or pipelines it can travel significant distances dependent on whether there is a high water-table or underground river in the vicinity. Petrol can find its way into basements of buildings and public drains with serious consequences should the vapours come into contact with an ignition source. The level of risk is increased when petrol stations are located in urban areas, as then they are frequently surrounded by private or commercial premises thereby necessitating early detection of leaks and corrective action.
Therefore the need for consistent and accurate monitoring of petrol delivered, stored and dispensed at any petrol station in order to detect leaks from each underground tank and connected pipeline system is essential. To reduce the risks from petrol leaking from an underground tank or pipeline it must be detected at the earliest possible time and its escape prevented. For new or recently refurbished petrol stations automatic detection systems can be incorporated into the underground tank and pipeline installation to monitor for leaks and raise an alarm.
However, for older petrol stations this is not always feasible and some other method must be adopted to provide a similar level of leak detection. These guidelines are intended to outline a manual system of leak detection suitable for use in older petrol stations. The Dangerous Substances (Retail and Private Petroleum Stores)Regulations, 1979 & 1988 requires the periodic recording of the tank contents and dispenser pump meter readings for all underground storage tanks, for the purpose of precautions against the risk of leakage of petrol, where – • the soundness or integrity of a tank is suspect, or the tank has been installed for over 20 years, or • it is specified as a licence condition, or • it is required by a Licensing Authority Notice. These mandatory records can be utilised as the basis of an early warning system in the form of wetstock inventory control to help detect any escape of petrol from underground storage tanks and pipelines. Equipment and Procedures To properly implement a wetstock inventory control system certain procedures must be followed and appropriate equipment must be in place. Dipstick / Tank Gauging
Underground petrol storage tanks may be measured by using the tank dipstick. The dipstick should be clearly marked to indicate the quantity measured starting with zero at the bottom. The end of the dipstick must not be worn or cut off and the dipstick should not be warped. The dipstick must be made of non-sparking material. If the dipstick is wooden it must be varnished to prevent petrol creeping up the stick above the actual level in the tank thus preventing a false reading. Mechanical or electronic remote tank level gauges may also be used.
These units should already be installed where the underground petrol storage tanks are filled through offset fill-pipes. The gauges should be installed, calibrated and maintained according to the manufacturers’ instructions. Water in petrol detection All underground petrol storage tanks should be checked for water in the bottom of the tank at least once a month. Water-finding paste may be used for this, the paste changes colour when it comes into contact with water. The results should be recorded on the Weekly Loss / Gain Sheet. Records
Tank dips, dispenser pump meter readings and the results of all calculations should be permanently recorded on suitable forms. Samples forms are included at the back of this booklet. Tank chart A tank chart contains the detail needed to convert the level of liquid measured on a tank dipstick into litres for each tank. Note: Tank charts and dipsticks are unique to each tank and can only be used with the specific tank for which they were produced. Dipsticks may already be marked to read the number of litres or gallons in a tank. If your dipstick is marked in gallons then you must multiply this number by 4. 4 to get litres. Dispenser Pump Meter Most modern petrol dispensers will have meters that record the total number of litres dispensed. The calibration of these meters should be checked and maintained in accordance with the requirements of the pump manufacturer. Manifolded tanks If there are two tanks connected by a siphon pipe then these tanks must be treated as a single unit. All readings should be combined and a single calculation made as if you are dealing with a single tank. Step 1 – Dip Your Tanks The contents of all petrol storage tanks must be measured at the same time every day.
Measurements may be taken using either a dipstick or a remote t a n k c o n t e n t s g a u g e . NOTE: No petrol can be added or taken from the tank while carrying out this STEP Dipstick method Slowly and gently lower the dipstick until it touches the tank’s bottom. Quickly raise the dipstick and read the level of petrol or number of gallons/litres in the tank. The use of fuel finding paste can make it easier to read the dipstick and make the reading more accurate. Fuel finding paste is similar to water finding past except it changes colour on contact with petroleum fuel.
Convert the tank contents measurements to litres if necessary and record in a separate daily loss/gain sheet kept for each tank. Copies of these sheets may be found at the back of this booklet. Step 2 – Read Pump Meter Readings from all petrol pump meters must be taken at the same time as the tanks are dipped. NOTE: No petrol can be added or taken from the tank while carrying out this STEP. The petrol pump meter reading totals must be recorded on the daily loss / gain sheet for the tank to which they are connected.
Where more than one dispenser is connected to a single tank then the meter readings should be added together. The totals from the petrol pump meter readings must be subtracted from the totals for the previous day to give the amount dispensed from each tank for that day. The total dispensed must be recorded on the daily loss / gain sheet. Step 3 – Record Petrol Deliveries If a delivery of petrol has been made into a tank the amount must be measured and included in the loss or gain calculation for that day. Before the delivery begins the tank contents should be measured and recorded.
After the delivery, wait about 5 minutes for the petrol level to stabilise in the tank, and then measure the contents again. Subtract the tank contents before delivery from the tank contents after delivery to get the amount delivered and record this amount on the daily loss/gain sheet for the tank. To make sure all the petrol delivered has gone into the correct tank, and as an extra check compare the amount delivered as calculated with the amount on the delivery docket. Both amounts should match roughly. Step 4 – Daily Loss/Gain
When all tank dips, petrol deliveries and pump meter readings are recorded then the daily loss or gain must be calculated. DON’T FORGET: Where two tanks and connected by a siphon tube the figures for both tanks must be combined. First the previous days tank dip is added to any petrol deliveries made. Second the amount dispensed is subtracted from that result to get the book stock. This figure will be the amount of petrol that should be in the tank. Next today’s tank dip is subtracted from the book stock figure to give the amount of litres lost or gained.
Note: This result will show positive ( + ) for a gain and negative ( – ) for a loss. The result must also be recorded as a percentage by multiplying the daily loss or gain by 100 and dividing by the tank size in litres. Note: This result will also show positive ( + ) for a gain and negative ( – ) for a loss. At the end of each week the daily loss / gain totals must then be added up taking note of the positive and negative values to get a weekly loss / gain. Step 5 – Weekly Loss/Gain The amount of book stock may not always match exactly the amount measured at each tank dip.
The differences (loss or gain)may be explained by a number of reasons – • the accuracy and skill of the person taking the dip, or • correct interpolation when the liquid level lies between the marks on the dipstick, or • petrol has leaked from the tank, or • water has leaked into the tank due to a high water table. Persons taking tank dips must exercise due care to ensure consistency in the results obtained and thus give a truer picture of what is happening with the petrol in the tanks. Failure to do this will mean unnecessary expense in investigating possible leaks from tanks and pipelines.
However, as required by law, the main purpose of a wetstock inventory control system is to get the earliest possible warning that a tank may be leaking. Therefore the calculated weekly loss and gain results must be recorded on Weekly Loss / Gain Sheets. These sheets can then be used to compare loss and gain trends over time and appropriate action taken by staff if significant and or unexplained results emerge at any time. Accordingly, the site owner or operator must review the loss and gain trends at least once a month and the persons who fill in these forms must be aware of the action to take when loss or gains exceed acceptable levels.
Step 6 – Leakproofness Testing A wetstock inventory control system even when used with good record keeping will not by itself be sufficient to ensure that petrol storage tanks or pipelines will not leak. The most effective arrangements are for an inventory control system to operate in conjunction with periodic leakproofness testing. Leakproofness testing should be carried out at two-year intervals for tanks between 20 and 30 year old. For tanks more than 30 years in service annual leakproofness testing is required.
Tanks can be tested by means of either hydraulic or precision testing methods. However, due to the difficulties associated with the disposal of contaminated water the use of precision testing methods is the preferred option. Precision testing systems must be capable of detecting a leak of 380ml per hour from any portion of the petrol storage tank and pipelines. The testing equipment used must be certified as meeting a recognised standard such as that used by the United States Environmental Protection Agency. Suspected Leak Action Plan
Small losses or gains, indicated by a wetstock inventory control system, from any petrol storage tank installation are normal and usually due to a number of factors such as – • the accuracy of tank dips and pump meters readings, • the accuracy of loss / gain calculations, • losses due to evaporation of petrol through tank vents, • temperature difference between deliveries and petrol in tank. Therefore it is important that the loss / gain pattern or trend in the daily and weekly sheets are recognised and taken into account in deciding on what type of action is required to investigate a possible leak.
Losses or gains which are steadily getting worse, suddenly increase or change from a loss to a gain and / or back again may indicate that a leak has occurred and should be investigated. Purchasing of Inventory Retailers obtain gasoline supplies based on the nature of their relationship with their suppliers, and because there are several different ways that retailers can purchase gasoline, the cost structure and availability of gasoline may vary greatly from one retailer to another – even those operating under the same gasoline brand. There are three primary supply arrangements influencing a retailer’s operations: . Major Oil Owned and Operated: Major Oil Owned and Operated: These retail locations receive product directly from the corporation’s refinery assets and their profit or loss is integrated into that of the corporation. 2. Branded Independent Retailer: These are retail gasoline facilities that are operated by independent business owners who sign a supply contract and sell gasoline under a brand owned or controlled by a refining company. Not every contract is drafted equally, and various market conditions can influence the terms of the contract.
Branded retailers pay a slight surcharge per gallon for using the refiner’s brand, benefiting from the supplier’s marketing and ensuring a more secure supply of product. Their refiner supplier establishes their wholesale costs. When supplies are constrained, these retailers are given a higher level of priority for accessing product, although access to supplies may be restricted. 3. Unbranded Independent Retailer: These are retail gasoline facilities operated by independent business owners who do not sell gasoline under a brand owned or controlled by a refining company.
These retailers purchase gasoline from the unbranded wholesale market, which is made up of gallons not dedicated to fulfill a refiner’s contracts. These retailers do not pay a marketing surcharge like their branded competitors do; consequently, unbranded gasoline is typically sold at all levels of trade for a lower price than branded gasoline. However, when supplies are constrained, these retailers have the lowest level of priority to access gasoline, often incur the largest wholesale price increases and may be completely denied access to product. Their wholesale costs are also established by the refiner supplier(s).
A company’s supply contracts and size determine its options for obtaining gasoline. Branded independent retailers have one option for gasoline: the refiner that provides it with supply. Some larger unbranded independent retailers also may have contracts with a specific refiner, or even multiple refiners. Others may simply purchase product off the open market. Most retailers are small businesses that obtain their gasoline at a terminal, also known as “the rack. ” Prices at the terminal are known as “spot” prices, and these typically experience the most price volatility.
For those purchasing fuel at the rack, there are two options for delivery. Some companies may elect to have gasoline delivered to their stores by a “jobber” who delivers fuel to their store – branded or unbranded – for a delivery fee. Other retailers have invested in their own fleets of trucks that go to a specific terminal – or terminals – to obtain gasoline. These companies may also serve as jobbers to other retailers. Some larger unbranded retailers may purchase gasoline futures, attempting to lock in specific prices for delivery on a specific date in the future.
This type of purchase, commonly referred to as “hedging,” helps these retailers manage their costs in anticipation of volatile wholesale prices. http://www. brabhamoil. com/new_images/pdf/getsell. pdf Retail Gasoline Pricing Retail motor fuel pricing is a complex relationship between wholesale costs and competitive market analysis. Wholesale Costs Wholesale gasoline is a commodity that is traded on the open market. As such, its price can change by the minute, which may influence the cost structure for a retailer.
On average, retailers sell approximately 4,000 gallons of fuel each day and receive about three deliveries (approximately 9,000 gallons per delivery) each week. Higher volume retailers may receive multiple deliveries each day depending on their storage capacity. Considering the volatility of wholesale prices, the cost of each delivery can vary significantly even within a short time frame. Competitive Considerations While wholesale costs are a significant factor in retailer prices, the retail pricing decision also is heavily influenced by market conditions and local competition.
Ultimately, movements in wholesale gasoline prices influence the cost structure of a retail facility, but competition for customers will dictate the store’s profitability. Consumer research, as reported in the 2008 gas price kit, reveals that price is the most important criteria when consumers select a gasoline retailer. Nearly one-third of consumers will go out of their way to save as little as three cents per gallon. Consequently, retailers must ensure their posted fuel prices are competitive within their market.
It is critical that posted fuel prices at worst do not deter in-store customers from visiting a particular retail location, for it is from these customers that convenience retailers generate most of their profits. Convenience retailers establish a target retail price based on the wholesale costs of the fuel, operating costs associated with selling the fuel, and a desired profit margin. This target retail price is then adjusted in accordance with competitive pressures, as the retailer seeks to set a price on fuel that will maximize customer traffic inside the store and generate the greatest overall profitability for the location.
Fuel Profitability As wholesale prices change daily, retailers are forced to constantly adjust their target retail price. However, because not every retailer receives deliveries at the same time nor incurs the same change in wholesale prices, competition does not always allow the retailer to immediately or completely adjust for changes in costs. This creates a volatile situation in which retail fuel profitability fluctuates continuously. Consequently, it is important for retailers to evaluate the profitability of their fuel operations over a period of time rather than at any one particular moment.
When wholesale prices are increasing, competition often prevents the retailer from passing the higher costs through to the consumer immediately, resulting in a lower retail markup and reducing the retailer’s profitability. However, once wholesale prices stabilize or begin to decline, competition often enables retailers to maintain retail prices for a while, thereby increasing their markup and recovering the profits lost when wholesale prices were rising. Over time, the average retail markup remains relatively stable.
Replacement Costs Complicating a retailer’s ability to set competitive prices as wholesale prices move is the challenge of maintaining sufficient operating capital to cover the cost of the product that will replace the inventory being sold. A gasoline retailer typically seeks to establish a retail price based on the cost of replacing the gasoline currently at the retail location – not the cost of that product itself. Basing prices on “replacement costs” is especially critical when wholesale prices fluctuate frequently.
A retailer must generate sufficient cash from its current retail sales to purchase its next delivery of gasoline; otherwise, the retailer would be constantly using debt to finance wholesale gasoline purchases. With pricing influenced by replacement costs, there can be consumer misperceptions when gasoline prices rise, as some consumers observe prices changing at a retail location even though the station did not receive a new shipment of gasoline. However, the store may be responding to a notice from its supplier that explains how much the next shipment will cost.
But even these decisions to respond to anticipated changes in wholesale costs are strongly influenced by competitive pressures and, often, a retailer is unable to adjust retail prices to match the change in wholesale costs. When prices retreat, market competition again influences a retailer’s pricing decisions. During these periods, consumer interest in prices wanes and they usually don’t notice that prices dropped even though a new shipment has not arrived. Price Variation in a Given Market Area Because of consumer price sensitivity, retailers know the importance of setting their price to be as competitive as possible in a market area.
If their retail price is significantly higher – for whatever the reason – retailers lose not just the gas sale, but any chance of capturing the additional in-store sale. But, the fact remains that costs can vary in a market area, and that the retailer with the highest retail price may not be making the most money per gallon. Depending on the terms of supply arrangements, operating expenses and other factors, the store with the highest price in a market might actually realize less profit per gallon than the competition. There are usually several factors that could contribute, and some or all of them could be at work in a given area: Taxes: Competition does not recognize political boundaries, so the impact of varying tax policies on individual retailers can be quite different – a competitor operating in a higher taxed jurisdiction is at a disadvantage compared to the retailer in a lower taxed area. • Proximity to Product: Distribution costs affect the retail price of gas. In some cases, being a few dozen miles further away from a terminal can have a significant impact on costs. While most metropolitan areas are located near several wholesale terminals, retailers in more rural areas may be forced to drive more than 100 miles to obtain supplies. Fuel Requirements: Fuel requirements vary by region, state and even county. In general, the more densely populated areas of the country are required to sell a different blend of fuel in the summer months. • Business Costs: Rent is a considerable expense for retailers in some areas. Highly desirable locations cost more to operate. Across the country, factors include whether the site is owned or leased, when the property was bought or leased and the terms of this contract. These all can play a role in the costs required to sell fuel. Market Conditions: Some high-volume retailers may get new deliveries multiple times a day, but even average retailers get new deliveries several times a week. When wholesale prices are fluctuate rapidly, the day – or even the time of day – that fuel is delivered can significantly impact the cost. Today it is not uncommon to see wholesale prices move 10 cents or more in a given day. • Brand: A branded retailer typically pays a premium for fuel from a branded supplier in exchange for marketing support, supply guarantees, imaging assistance and other benefits, including the value of the brand, which is still important to many customers.
However, when supplies are tight, these retailers may see lower wholesale costs. In extreme cases, there is a “market inversion,” where branded retailers are selling fuel for a price less than unbranded retailers can find it on the spot market. Other factors that could impact the branded retailers’ costs are the terms of the contract, and market conditions at the time the contract was signed. Finally, there are situations where the branded supplier offers discounts to retailers in highly competitive areas, and these discounts may not be available to a retailer selling the same brand a short distance away where competition is less severe. Pricing Strategy: Ultimately, retailers examine how they want to go to market. The vast majority adjust their markup on gas depending upon current market conditions, settling for a lower markup when prices rise in return for the potential to make up for the lost margin when prices fall. A smaller percentage of retailers seek to have consistent, predictable margins throughout the year. When prices are rising, they may have a price higher than the completion; when prices fall, the reverse is true. http://www. brabhamoil. com/new_images/pdf/getsell. pdf