Energy costing methods

There are two definite considerations to the study of energy costing:
a) cost of providing the energy service;
b) expenditure on energy by the user.
Both aspects must be considered since wastage can occur in either area. Furthermore, it must be decided if the user department is to be designated a portion of the fixed costs or if they are to be absorbed into the same manner, the method of allocation dose not matter. Controlling these costs should be undertaken using management accountancy techniques, and two methods useful for the control of future energy costs are budgeting and standard costing.
Budgeting
Budgeting is simply estimating future energy demand, in terms of steam, electricity, oil, gas, by the various departments. This may be done in terms of energy units, such as terms, kWh, Btu, or in monetary units. Controlling the system is exercised by comparing the budgeted unit costs with actual costs and accounting for any variation. The process of accounting for variation is called variance analysis and variations from the budget can be caused by:
a) different production volume (volume variance);
b) different energy consumption per unit (energy efficiency variance);
c) different cost of energy to firm (price variance).
The total variance is obtained from the sum of the three component variances. A sophisticated budget would project energy costs for various levels of output and is termed a flexible budget.
Standard costing
Standard costs are the expected costs of the various energy-related inputs into the plant (oil, gas, electricity, wages etc.). These standards costs divided by budgeted consumption by the user/departments gives the standard unit cost.