Businesses are becoming more and more conscious of the environmental implications of their operations, products and services. Environmental risks cannot be ignored.
Consequences of poor environmental behaviour Punishment includes fines, more environmental taxes, loss in land value, destruction in brand values, loss of sales, consumer boycotts, inability to secure finance, loss of insurance cover, law suits and damage to corporate image. Traditional Management Accounting
Many existing conventional accounting systems are unable to deal adequately with environmental costs and as a result simply attribute them to general overhead accounts. Consequently managers are unaware of these costs, have no information with which to manage them and have no incentive to reduce them.
Environmental Management Accounting-EMA EMA is an attempt to integrate best management accounting thinking and practice with best environmental management thinking and practice. EMA is the generation and analysis of both financial and non-financial information in order to support internal environmental management processes.
Major areas for the application for EMA are: * In the assessment of annual environmental costs/expenditures * Product pricing * Budgeting * Investment appraisal * Setting quantifiable targets in performance measurements
Definition of Environmental costs
1. US Environmental Protection Agency argued that the definition of environment cost depends on how a company intends to use the information, for example in capital budgeting or product design. * Conventional costs are those raw material and energy costs having environmental relevance * Potentially hidden costs- captured by accounting system, but lose their identity in overheads * Contingent costs may be incurred at a future date for example costs for cleaning up * Image and relationship costs- intangible in nature like the costs of producing environmental reports.
2. ACCA has also published a research report outlining an agenda for action on full cost accounting, which contains a detailed review of the business case for adopting full environmental costing. One example of the potential gains from using full costing referred to as lifecycle costing- the case of Xerox Limited where the whole chain cost analysis was made to make savings.
3. United Nations Division for Sustainable Development (UNDSD 2003) total corporate environmental costs = environmental protection costs + costs of wasted materials + costs of wasted capital and labour Waste = production inefficiency (purchase value of non material output)
Conventional accounting systems tend to attribute many of the environmental costs to general overhead accounts with the result that they are ‘hidden’ from management.
UNDSD identifies management accounting techniques which are useful for the identification and allocation of environmental costs as:
A. Input/output analysis- mass balance. This technique records material flows with the idea that ‘what comes in must go out- or be stored’
Figure 3: Input/output analysis according to Envirowise (2003)
B. Flow cost accounting- is a tool of a new management accounting approach- flow management. It makes material flows transparent by using various data, which are quantities (physical data), costs (monetary data) and values (quantities x costs). The material flows are divided into 3 categories: * The material values and costs- materials which are involved in the various processes * The system values and costs are the in-house handling costs, which are incurred inside the company for the purpose of maintaining and supporting material throughput, e.g personnel costs or depreciation, * The delivery and disposal values and costs refer to the costs of flows leaving the company, for e.g transport costs or costs of disposing waste
EMA can benefit from flow cost accounting because it aims to reduce the quantities of materials, which leads to increased ecological efficiency.
Figure 4: The basic idea of flow cost accounting according to UNDSD (2003)
C. Environmental Activity Based Accounting
Activity Based Costing- A method of managerial cost accounting that allocates overhead costs to the cost pools and cost drivers on the basis of the activities that caused the costs. ABC applied to environmental cost identifies:
* Environment related costs- joint environmental cost centres, for e.g incinerators or sewage plants * Environmental driven costs- hidden in the general overheads and do not relate directly to a joint environmental cost centre, e.g increased depreciation of higher cost of staff. Nevertheless they vary with the amount of throughput.