Environmental management accounting Learning objectives (On completion of this chapter, you should be able to: Syllabus reference no. ~ Discuss the issues businesses face in the BS (a) management of environmental costs Describe the different methods a business BS (b) may use to account for its environmental costs Exam context Environmental accounting is the fifth and final management accounting technique in Section 8 of the syllabus. Environmental issues are becoming increasingly important in the business world. Businesses are responsible for the environmental impact of their operations and are becoming increasingly aware of problems such as carbon emissions. The growth of environmental issues and regulations has also brought greater focus on how businesses manage and account for environmental costs. The focus of this chapter is on methods of providing information to management on ervironmental costs. It does not deal with environmental reporting to shareholders and other stakeholders, For your exam, you should try to understand the nature of environmental costs, and you should be able to recognise the four methods of environmental management accounting that ore sebed in this chapter. A question on environmental costing could appear in the exam, either in Oreo” Aas an objective test (OT) question or in Section B as a scenario question containing fiveWw Man, ging envir, Manage fonmental costs ment a Octivites, The genereh ons Need tobe aware ofthe environmental costs ossociated with by Eustomer habits ong ener becoming more consclous about the ervronment thee choices ore being influenced by envi factors an: Sinessee are perceived as being pi by environmental factors and whet Businesses, h irene however, often face difficulties environment a ce difficulties with defining, Identifying and controling Environmental oats Such as energy costs are often treated os production overheads o {herefore effectively hidden from management seruting: he wel ce being more diffcut ts Sarntty: environmental costs may also be more difficult to quantify, For exoMple, busing, Suffer a loss of reputation if problems arise. Moy Even where environmental costs ore captured within accounting systems, the itficulty eg Pinpointing them and allocating them to a specific product or service. Tupical environment) Costs are listed below. ies * Consumables and raw materials + Transport and travel + Waste + Waste and effluent disposal + Water consumption + Energy Once a business hos defined, identified ond allocated environmental costs it con begin the os of trying to control them through environmental management systems. Environmental management accounting (EMA): Environmental management ‘accounting (EMA) is the generation and analysis of both financial and non-financial information in oder to support internal environmental management processes. Benefits of understanding environmental costs Many benefits accrue from a clear understanding and effective Management of the environmen related costs of business activities, (©) Environmental costs may be significant for some companies. Once identified, environment costs can be controlled and reduced. (©) There is increasing worldwide regulation and a need for regulatory reporting of environmental costs. (©) Ethical issues ~ businesses should be aware of how their production methods wil fect be environment (eg carbon emissions). (@) Improved brand image ‘green’ ways of doing business can be a selling point. (©) Associating environmental costs with individual products will lead to more accurate pres ‘and improved profitability. Activity 1: Environmental budget cost Activity 1: Environmental budget cost : ; futuro! Raxo ple is « multinational organisation, manufacturing chemicals for use in the agricd dustry. Required a i | cost bus Which of these environmental costs should NOT be included in an environmental © Cost of disposal of unused raw materials © Cost of fines for environmental contamination0. Cost of disposal of chemical packaging prevention methods and technology (9 Costof using pollution’ environmental costs ry widely. This They may be hidden inside rental costs could be classified as: is can make it difficult to identify the costs ‘general overheads’ 2 Defining ronmental costs Va! control them. (4999) suggested that environ angen ond Mendoza Pc ass pr i iti ken | Forming environmental Serv ental prevention | Costs of activities underta a aaa to prevent environmental policies | joe pacts before they occur Performing site ond feasibility studies Stoff training | Oe rT me " Emvironmental detection costs | Costs involved with | Developing performance | | ‘establishing whether activities | measures | comply with environmental Monitoring, testing and inspection costs | standards and policies | | Site survey costs Maintaining pollution equipment Emironmental internal filure | Costs of activities thot must costs 3 be undertaken when contaminants and waste have | Recycling scrap been created by c business but not released intothe environment | | Costs that arise when a | Cleaning up oil spills | business releases harmful —_| Decontaminating land waste into the environment | Environmental external failure costs ‘To cid comparison with future periods, the environmental costs should also be expressed as a percentage of turnover or operating costs. The US Environmental Protection Agency (1998) as cited by ACCA (2016) defined the following costs: Ce Pend Seen Conventional costs Ordinary use of equipment, | Electricity material and overhead costs j where the environment would pane benefit from decreased use| Potentially hidden costs Costs hidden in overheads | Design cost of more at | environmentally friend i oe i processes: ia | | ingent costs Costs that may be incurred at | Decontaminating land ‘| | aloter date | nog and ghaazi cas | Coase “ f 198 nd relationship costs | Costs incurred to manage —_| Tree planting | perception/image ‘a BPP ha Fy Grecieneeial detabtinent tell aMuch busi isiness activi by society os oat takes place atthe cot ofthe environment, and some ofthese cost are an element - eg globes Externalised costs are those for which wider society has to ‘pay’ at least are contat &9 global warming. Costs can also be classified as internalised in that the impact ntained within the organisation. zl (e Activity 2: Environmental costs Which of the following is an example of an environmental external failure cost? © Maintaining pollution equipment © Decontaminating land © Recycling scrap © Record keeping 3 Accounting for environmental costs The PM syllabus is concerned with information for internal decision making only. It is not ‘concerned with how environmental information is reported externally. techniques for the identification and allocation of ‘There are a range of management accounting pment (UNDSD, 2003) as ‘environmental costs. The United Nations Division for Sustainable Develoy cited by ACCA (2016) identified four techniques. 3.1. Input/output flow analysis The idea of this analysis is that what comes in, must go out. Material inflows are recorded and balanced with outflows. This forces the business to account for the difference between material input and material output and focus on environmental costs. Finished output 75% Input 100% (Frocess} Residual = waste 15% 3.2 Flow cost accounting Material flows through an organisation are divided into three categories. + Material + System and delivery + Disposal ‘The value and cost of each material flow is then calculated. The aim is to reduce the quantity f materials thereby saving costs. 3.3 Activity based costing In order to fully integrate environmental costs into their management accounting, can apply activity based costing principles to environmental costs. Environmental costs would be grouped together into environmental cost pools, and each Ped! would be associated with an environmental cost driver. ‘absorb Individual products that passed through the most polluting processes would therefore more environmental costs than cleaner or more ‘green’ products. organisations 104 Peromance Managemént ON34 ‘As for ABC in general, this will lead to: (@) Increased awareness of how environmental costs behave (b) Better product pricing (©) Better production decisions Environment related cos! Fe costs th at ri cost centre such as a waste treatment centre, eee Environmental driven costs: Environment driven costs are costs that are caused by events in the environment but usually hidden in general ‘overheads, such as an increase in electricity costs. Life cycle 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. Essential reading There is no Essential reading for this chapter. ‘The Essential reading is available as an Appendix of the digital edition of the Workbook.Chapter summary Principles of environmental costing environmental costs : Managing environmental costs ! Historically environmental costs + Environmental detection costs + Environmental internal failure were treated as production oe Sa eeaar ae re een hg Enonmpentaloxtomol fare costs accounting Environmental manag ! + Environmental prevention costs! Accounting to | environmental costs ! Input/output flow analysis + What comes in, must go out + Material inflows are balanced ! with outflows eae Flow cost accounting + Material flows are divided into — Material — System and delivery - Disposal ! Activity based costing } Using environmental cost pools et : Life cycle costing ; Environmental costs are ; considered from design stage to nd of lifecag ed age diagnostic knowledge dlagnestig 1s of environmental costing 1. Principle environmental costs need t0 Be clearly understood by management, and not ‘hidden’ in with production overheads: 2. Defining environmental costs external failure. prevention, detection, internal failure, Conventional, potentially hidden, conting 4, Accounting for environmental costs There ore four management accounting techniques for the id Treronmental costs: input/output analysis, flow cost accounting cycle costing. rent, image and relationship. lentification and allocation of activity based costing and lifeActivity answers AcE EO ——___—__—_————_—_———___ Activity 1 Environmental budget cost The correct answer is: Cost of fines for environmental contamination may incur costs for contamination of the environment, but this cost should not be Acompany included within budgeted environmental costs as this implies that it is an acceptable cost. Activity 2: Environmental costs The correct answer is: Decontaminating land