Environmental Management Accounting (EMA)
In a bid to help control environmental costs many firms are adopting environmental management accounting techniques.
Environmental costs can be split into two categories:
These are costs that directly impact on the income statement of a company.
- improved systems and checks in order to avoid penalties/fines
- waste disposal costs
- product take back costs
- regulatory costs such as taxes
- upfront costs such as obtaining permits
- back-end costs such as decommissioning costs on project completion
These are costs that are imposed on society at large, but not borne by the company that generates the cost in the first instance.
- carbon emissions
- usage of energy and water
- forest degradation
- health care costs
- social welfare costs
However, governments are becoming increasingly aware of these external costs and are using taxes and regulations to convert them to internal costs. For example, companies might have to have a tree replacement programme if they cause forest degradation, or they receive lower tax allowances on vehicles that cause a high degree of harm to the environment.
Drawbacks of traditional management accounting
Management accounts provide us with an analysis of the performance of the business. However, traditional accounting systems are unable to deal adequately with environmental costs. As a result, managers are unaware of these costs and have no information with which to manage or reduce them.
Illustration - Reputational costs
In April 2010 a blast at the Deepwater Horizon rig in the Gulf of Mexico killed eleven people and caused one of the worst oil spills in history. The US presidential commission concluded that the oil spill was an avoidable disaster caused by a series of failures and blunders made by BP, its partners and the government departments assigned to regulate them. It also warned that such a disaster was likely to recur because of complacency in the industry.
For BP, the company at the heart of the disaster, the effects have had a deep and widespread impact. The company has become synonymous with everything that is dangerous about oil exploration causing massive reputational damage.
Using environmental management accounting to address these problems
To ensure that environmental costs are fully considered and to improve the environmental performance of an organisation, a new technique called environmental management accounting (EMA) has been introduced.
- identifies and estimates the costs of environment-related activities and seeks to control these costs
- identifies and separately monitors the usage and cost of resources such as water, electricity and fuel and enables these costs to be reduced
- ensures environmental considerations form a part of capital investment decisions
- assesses the likelihood and impact of environmental risks
- includes environment-related indicators as part of routine performance monitoring
- benchmarks activities against environmental best practice.
In summary, the focus of EMA is not all on financial costs but it also considers the environmental cost or benefit of any decisions made.
Four key techniques are often used within EMA. The techniques can assist an organisation in improving its performance. They are not mutually exclusive.
Activity-based costing (ABC)
ABC distinguishes between:
- environment-related costs which can be attributed directly to a cost centre, e.g. a waste filtration plant, and
- environment-driven costs which are generally hidden in overheads.
The environment-driven costs are removed from general overheads and traced to products or services. This means that cost drivers are determined for these costs and products are charged for the use of these environmental costs based on the amount of cost drivers that they contribute to the activity. This should give a good attribution of environmental costs to individual products and should result in better control of costs.
This technique records material inflows and balances this with outflows on the basis that what comes in, must go out.
For example, if 100kg of materials have been bought and only 80kg of materials have been produced, then the 20kg difference must be accounted for in some way. It may be, for example, that 10% of it has been sold as scrap and 90% of it is waste. By accounting for outputs in this way, both in terms of physical quantities, and, at the end of the process, in monetary terms too, businesses are forced to focus on environmental costs.
Flow cost accounting
This technique uses not only material flows, but also the organisational structure.
It makes material flows transparent by looking at the physical quantities involved, their costs and their value.
It divides the material flows into three categories : material, system and delivery and disposal. The values and costs of each of these three flows are then calculated. The aim of flow cost accounting is to reduce the quantity of materials which, as well as having a positive effect on the environment, should have a positive effect on a business' total costs in the long run.
Lifecycle costing considers the costs and revenues of a product over its whole life rather than one accounting period. Therefore, the full environmental cost of producing a product will be taken into account. In order to reduce lifecycle costs an organisation may adopt a TQM approach.
It is arguable that TQM and environmental management accounting are inextricably linked insofar as good environmental management is increasingly recognised as an essential component of TQM. Such organisations pursue objectives that may include zero complaints, zero spills, zero pollution, zero waste and zero accidents. Information systems need to be able to support such environmental objectives via the provision of feedback - on the success or otherwise - of the organisational efforts in achieving such objectives.
NB: The benefit of each of the techniques must be weighed against the cost of providing the additional information.
Illustration - Cost reduction at McCain Foods
One example of energy saving is McCain Foods, which buys an eighth of the UK's potatoes to make chips.
It has cut its Peterborough plant's CO2 footprint by two-thirds, says corporate affairs director Bill Bartlett. It invested £10m in three 3MW turbines to meet 60 per cent of its annual electricity demand. McCain spent another £4.5m on a lagoon to catch the methane from fermenting waste water and particulates, which generates another 10 per cent of the site's electricity usage. It also wants to refine its used cooking oil, either for its own vehicles fleet or for selling on.
McCain want to become more competitive and more efficient.
EMA and effect on financial performance
There are a number of ways in which environmental issues can have an impact on the financial performance of organisations.
Producing new products or services which meet the environmental needs or concerns of customers can lead to increased sales. It may also be possible to sell such products for a premium price. Improved sales may also be a consequence of improving the reputation of the business.
It is possible that in the future, rather than good environmental management resulting in improved sales, poor management will lead to losses. All businesses will be expected to meet a minimum standard related to environmental issues.
Paying close attention to the use of resources can lead to reductions in cost. Often simple improvements in processes can lead to significant costs savings.
Increases in costs
There may be increases in some costs, for example the cost of complying with legal and regulatory requirements, and additional costs to improve the environmental image of the organisation. However some of these costs may be offset by government grants and this expenditure may save money in the long-term as measures taken may prevent future losses.
Costs of failure
Poor environmental management can result in significant costs, for example the cost of clean-up and fines following an environmental disaster.
Created at 8/7/2012 11:44 AM by System Account
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Last modified at 9/25/2013 3:40 PM by System Account
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