PERFORMANCE MANAGEMENT

Environmental Accounting
The general public are becoming more conscious about the environment and therefore
customer habits and choices are being influenced by environmental factors and
whether businesses are perceived as being ‘green’.

Environmental management accounting (EMA):

is the generation and analysis of both financial and non-financial information in order
to support internal environmental management processes.

Benefits of taking the environment into consideration

significant control and reduction of cost
in line with regulation
ethical issues
improved brand image
accurate pricing

Defining Environmental Cost

Prevention prevent environmental environmental policies

costs impacts before they site and feasibility studies
occur Staff training

Detection whether activities Developing performance

costs comply with environmental measures
standards and policies Monitoring, testing and
inspection costs
Site survey costs

Internal failure Costs of activities that must Maintaining pollution

costs be undertaken when equipment
contaminants and waste Recycling scrap
have been created by a
business but not released
into the environment

External failure Costs that arise when a Cleaning up oil spills

costs business releases harmful Decontaminating land
waste into the environment

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 SNK

Conventional costs Ordinary use of equipment, Energy

material and overhead costs
where the environment would
benefit from decreased use

Potentially hidden Costs hidden in overheads Design cost of more

costs environmentally friendly
processes

Contingent costs Costs that may be incurred at Decontaminating land

a later date

Image and Costs incurred to manage Planting trees

relationship costs perception/image

Accounting for environmental costs

Input/output flow analysis

What comes in, must go out. Material inflows are

20% 10%
recorded and balanced with outflows. This
forces the business to account for the difference
100%
between material input and material output and
70%
focus on environmental costs.

Flow cost accounting

Material flows through an organisation are a) Positive products: good output

divided into three categories. b) Negative products: measurement of
• Material waste
• System and delivery Positive products + Negative products =
• Disposal Total input
The value and cost of each material flow is then
calculated. The aim is to reduce the quantity of
materials thereby saving costs.

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Environmental ABC

Environmental costs would be grouped together into environmental cost pools, and
each pool would be associated with an environmental cost driver. Individual products
that passed through the most polluting processes would therefore absorb more
environmental costs than cleaner or more ‘green’ products.

As for ABC in general, this will lead to:

(a) Increased awareness of how environmental costs behave
(b) Better product pricing
(c) Better production decisions

Lifecycle costing

Environmental costs are considered from the design stage of a new product right up
to the end of life costs such as decommissioning and removal.
The consideration of future disposal or remediation costs at the design stage may
influence the design of the product itself, saving on future costs.

Advantages of environmental costing

Creation of realistic product costs.
Better pricing through an understanding of the cost.
Raising awareness of the environmental impact of the firm
Integration of environmental costs into the business

Disadvantages of environmental costing

It takes time and money to implement.
The calculation ifs difficult and and often inaccurate.
Many of the costs identified are not actually borne by the firm.
Some of the costs are intangible and therefore difficult to quantify.
It is disadvantageous to the company to include the cost.

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