AC220

BACHELOR OF ACCOUNTANCY (HONS.)

SEMINAR IN MANAGEMENT ACCOUNTING

(MAF651)
JUST-IN-TIME (JIT) SYSTEM

SUBMITTED TO:
AHMAD AKBAL BIN MOHAMED

PREPARED BY: NACAB8A

NAME MATRIC NO.
NURUL SYAKIRIN BINTI NORIZAN 2017842216
NUR HAFAIZI BINTI ISHAK 2017416602
ATIRAH ZAWANI BINTI ASHAR 2016744811
SITI NURFARAHIN BINTI JOHARI 2016771193
NUR NADIAH RAFIDI 2017162299

SUBMISSION DATE:
22nd May 2022
 TABLE OF CONTENT

NO. CONTENT PAGE

1.0 JUST IN TIME DEFINITION & HISTORY 2

1.1 OBJECTIVES OF JUST IN TIME 3

1.2 PROCESS OF JUST IN TIME 4

1.3 STEPS IN CYCLE OF CONTINUOUS 5-6

IMPROVEMENT OF JUST IN TIME

1.4 ADVANTAGES AND DISADVANTAGES OF JUST IN 7-10

TIME

1.5 CHALLENGES IN JUST IN TIME PRODUCTION 11-13

1.6 IMPACT OF JUST IN TIME IN WORK 14

ENVIRONMENT

1.7 USER OF JUST IN TIME AND EXAMPLE 15

1.8 COMPANIES THAT USE JUST-IN-TIME 16

INVENTORY MANAGEMENT

CONCLUSION 17

REFERENCES 18

1
1.0 JUST IN TIME

Just In Time (JIT) system is a Japanese management philosophy which has been applied in
practice since the early 1970s in many Japanese manufacturing organisations. It was first
developed and perfected within the Toyota manufacturing plants by Taiichi Ohno as a means
of meeting consumer demands with minimum delays. Taiichi Ohno is frequently referred to as
the father of JIT.
Toyota was able to meet the increasing challenges for survival through an approach that
focused on people, plants and systems. Toyota realised that JIT would only be successful if
every individual within the organisation was involved and committed to it, if the plant and
processes were arranged for maximum output and efficiency, and if quality and production
programs were scheduled to meet demands exactly.

JIT manufacturing has the capacity, when properly adapted to the organisation, to strengthen
the organisation's competitiveness in the marketplace substantially by reducing wastes and
improving product quality and efficiency of production.

There are strong cultural aspects associated with the emergence of JIT in Japan. The
Japanese work ethic involves the following concepts.

● Workers are highly motivated to seek constant improvement upon that which
already exists. Although high standards are currently being met, there exist even
higher standards to achieve.
● Companies focus on group effort which involves the combining of talents and
sharing knowledge, problem-solving skills, ideas and the achievement of a
common goal.
● Work itself takes precedence over leisure. It is not unusual for a Japanese
employee to work 14-hour days.
● Employees tend to remain with one company throughout the course of their
career span. This allows the opportunity for them to hone their skills and abilities
at a constant rate while offering numerous benefits to the company.

These benefits manifest themselves in employee loyalty, low turnover costs and fulfilment of
company goals.

2
1.1 OBJECTIVES OF JUST IN TIME

Just In Time is the manufacturing production system and its main objectives are listed below:

1. Reduce or eliminate the storage of inventories.

One of the just-in-time objectives is to reduce or eliminate the storage of inventories.
In the old manufacturing production system, the raw material is purchased, products
or goods are produced, and stores. This concept costs a lot of money to store not only
raw materials but also store finish goods. Also, the production process is quite slow as
the company might not seek a new way to improve the process. Therefore, JIT tries to
overcome this problem. The productions are processed only if there are orders from
customers.

2. No material is purchase
In implementing the JIT, the material will not purchase if there are no productions.
Unlike the old system, the raw material is purchased due to production forecasting
demand and production. The old system normally has low networking with suppliers,
and most of the raw materials required during the years are purchased in advance and
spend a lot of money and space on storing the raw material and taking care of them.
Just In Time System is trying to overcome this by ensuring that there is a good
relationship with the supplier and the raw materials are purchased only if there is
production. However, this meets this objective. The company that implements Just In
time needs to build a perfect relationship with its suppliers or, in order words, suppliers
could access the company system to understand the demand. Otherwise, suppliers
might not be able to supplies the raw material on time and as required. This is the
warning point for the company that wishes to implement this system.

3. Improve the Production System & Control the timeliness of the production and
delivery products.
Another main objective of Just in Time Production systems is to help the company
improve the production process. To improve quality, companies should experience the
scrap and reward and more effective communication among department and
employees. In addition, long term commitment with fewest suppliers should results in
fewest such inspection. The achievement of this results required an even production
flow of small large size shadow’s ability product quality, short product time, preventive
maintenance and efficient process layout.

3
1.2 PROCESS OF JUST IN TIME

The above image shows how a just-in-time model works. First, a customer places an order
with the manufacturer. When the manufacturer receives the order, they place an order with
their suppliers. The suppliers receive the order and then supply the manufacturer with the
materials needed to meet the customer’s order. The raw materials are then received by the
manufacturer, assembled, and sold to the customer.

4
1.3 STEPS IN CYCLE OF CONTINUOUS IMPROVEMENT OF JUST IN TIME

This diagram shows the cycle of continuous improvement in JIT inventory management.

Steps in Cycle of Continuous Improvement for JIT Inventory

1. Design
The first step includes in just-in-time inventory is designing and planning of products,
processes, and production and employees. The strategy helps the business in
minimizing wastage, disruption and making the system more flexible.

2. Manage
The second step includes the management of the entire process to ensure ongoing
improvement in the whole process. In this phase, the roles and tasks are defined so
that quality can achieve its set standard. A management review defines worker roles
and responsibilities, sets and analyses statistical quality control, stabilises schedules,
and confirms load and capacity levels.

5
3. Pull
The third step is to implement in the cycle of continuous improvement for just-in-time
inventory. In this stage, employees are trained and educated to use the production
methods such as the Kanban method for better quality control.

4. Establish
The fourth phase in JIT is to develop a supplier or vendor relationship with the
company. There should be discussion regarding lead times, contract negotiation,
preferred providers and delivery objectives.

5. Fine-Tune
The fifth step is to fine-tune inventory requirements, regulations, and controls, as well
as inventory movement. The fine-tuning is used to minimize and control the movement
of inventory so that costs can be reduced.

6. Build
The sixth step involves building an effective communication relationship. By educating
the team members, they should be informed about the skills requirement and
capabilities to complete the work successfully.

7. Refine
The seventh step is to refine the entire process so that production steps can reduce
the number of parts and stages in manufacturing.

8. Review
The last step in the JIT inventory is to review quality measures that are defined and
implemented to measure the improvement in the JIT process. Define and implement
quality measures and measurements, as well as conduct root cause analysis on any
issues that occur.

6
1.4 ADVANTAGES AND DISADVANTAGES OF JUST IN TIME

Advantages of Just-in-Time

Smaller investments

In a JIT model, only essential stocks are obtained and therefore less working capital is needed
for finance procurement. Therefore, because of the less amount of stock held in the inventory,
the organization’s return on investment would be high. The Just-in-time models uses the “right
first time” concept whose meaning is to carry out the activities right the first time when it’s done,
thereby reducing inspection and rework costs. This requires less amount of investment for the
company, less money reinvested for rectifying errors and more profit generated out of selling an
item. On the other hand, the benefits of JIT extend beyond the obvious savings in inventory
carrying costs: reduced storage and handling costs; lower insurance costs; fewer losses due to
spoilage, obsolescence and theft; and decreased opportunity costs associated with having
resources tied up in inventory. The aim of JIT is to eliminate all non-value-added activity, not just
excessive inventories. Just-in-time can improve productivity, manufacturing lead times and
quality. Under a successful JIT system, customers’ needs are satisfied more quickly and more
effectively.

Improved Efficiency

JIT eliminates the costs that come with extra raw materials, unneeded inventory and product
storage. Raise inventory turnover ratios, greater efficiency brings higher inventory turnover.
Minimal inventory obsolescence, the higher inventory turnover rate keeps items from sitting in
your facility for too long and becoming obsolete. Minimize raw materials on hand, receiving
deliveries in the smallest possible quantities sometimes multiple times per day virtually eliminates
raw material inventories. Local sourcing, when suppliers are located near a company's production
facility, the shortened distances contribute to timely deliveries. On-time, reliable delivery of goods
reduces the need for safety stock.

7
Reduces inventory waste

A just-in-time strategy eliminates overproduction, which happens when the supply of an item in
the market exceeds the demand and leads to an accumulation of unsalable inventories. These
unsalable products turn into inventory dead stock, which increases waste and consumes
inventory space. In a just-in-time system you order only what you need, so there’s no risk of
accumulating unusable inventory.

Greater Productivity

JIT enhances productivity by reducing the time and resources involved in manufacturing
processes. Faster product turnaround, manufacturers can more quickly produce products.
Shorter production runs, with JIT, manufacturers can deliver new products more quickly and
easily. Simplify change orders, having less raw material stock to draw down before product
changes makes it easier to implement engineering change orders to existing products.

8
Disadvantages of Just-in-Time

Risk of Running Out of Stock

With JIT manufacturing, you do not carry as much stock. This is because you are base on your
stock on a demand forecast, and if those are incorrect, then you will not have the correct amount
of stock readily available for your consumers. This is one of the most common issues with
manufacturing that utilize methodologies such as JIT and lean. However, as inventory can be a
major cause of non-value-added activity, inventory management is a critical component of JIT.
One of the biggest potential risks relates to disruption in supply of inventory. The disadvantages
of JIT inventory systems involve potential disruptions in the supply chain. If a raw-materials
supplier has a breakdown and cannot deliver the goods promptly, this could conceivably stall the
entire production line. A sudden unexpected order for goods may delay the delivery of finished
products to end clients.

More Planning Required

JIT inventory management requires companies to understand sales trends and variances in close
detail. Many companies have seasonal sales periods, meaning that a number of products will
need a higher stock level to combat consumer demand. Therefore, you must plan ahead for
instances like this and ensure that your suppliers are able to fulfil the requirements.

Missed Opportunities

With few or no finished goods on hand, a company may not be able to meet massive and
unexpected orders immediately. JIT inventory management relies heavily on precise forecasting
and strong relationships with key suppliers. When something goes wrong with either of those,
that’s a problem because there are no backup options in place. For example, a single supplier
that can’t deliver for any period of time can disrupt the entire supply chain and halt your operations.
In addition, companies practicing strict JIT inventory management probably won’t have extra stock
to satisfy unexpected orders.

9
Dependency on Suppliers

Having to rely on the timelessness of suppliers for each order puts you at risk of delaying your
customers’ receipt of goods. If you are unable to meet consumer expectations, then they could
take their business elsewhere. This is why it is important to choose reliable suppliers and have a
strong relationship with them so that you can make sure that you have the materials you need to
meet your customer demands.

10
1.5 CHALLENGES IN JUST IN TIME PRODUCTION

1. Reduction in Safety stock

Traditional manufacturing has been followed by most of the organizations which have encouraged
the concept of Safety stock due to the benefits of surplus resources. However, modern
manufacturing mechanisms ignore the maintenance of Safety stock due to the benefits realized
from the absence which include decreasing costs, increasing in efficiency and effectiveness. For
example, in 1992, the case of United Automobile Workers v General Motors parts plant. Within
five days, four major assembly factories were closed. Then within the next three days, seven more
major assembly factories were closed due to lack of parts. Thus, the challenge of moving from
holding Safety stock in different forms of inventory to holding a negligible quantity of Safety stock
arises while implementing JIT. One of the solutions to the traditional mindset of holding Safety
stock include Increased data processing involvement in implementation planning efforts in order
to upgrade systems to JIT level.

2. Improper method of production

The reduction in the available Lead time is one of the challenges to the organization when
implementing the JIT system. This is due to the improper manufacturing practices that have been
followed in the Traditional manufacturing mechanism. (Young, 1992) The whole system is built
on the basis of ‘Push’ mechanism of manufacturing. Each worker is responsible for producing a
subassembly target based on a self-paced production rate. The higher level of the Work in
Progress inventory separates the process and creates slack in the system. The worker will be
compensated on the basis of hourly or Piece rate method of production. The qualifying output is
of maximum quantity and lowest quality in nature, incurring an increased cost and displaying
decreased effectiveness. The product is only checked once by the quality control personnel after
it is finalized. For example, in the case of the Honda Motor Company plant, a man got crushed
on the rear door welding line due to a speed-up in production and dangerous working conditions.
The solutions to the improper manufacturing practices include redesigning the pre-designed
system on the ‘’Pull’’ based manufacturing mechanism, promoting teamwork, reducing job
classification, modifying work rules for the manufacturing premises, cross training, developing
lead by final stage production workers over the flow of production subassemblies, ensuring
multiple quality checks over the production process with individual accounting, compensating on
the basis of individual or group performance and investing in upgrading the existing systems to
redesign the existing methods of production.

11
3. Industry-specific success factors.

JIT has been adopted in some industries over the period of time while it is in the process of being
adopted in the others. The constraints involved in JIT vary across different industries. Thus, the
challenge of Industry specific success of JIT arises while implementing and practicing JIT. For
example, in 2010, Hokoma, Khan, & Hussain had made an observation specifically from the Iron
and Steel industry. It is observed that JIT is formally implemented to only 8.3% respondent levels
in the study cited above, signifying the existence of different challenges associated with JIT in the
Iron and Steel industry. The challenge of unfamiliarity with JIT philosophies and practices, due to
lack of management support which account for 77% respondent levels while Lack of management
support accounts for 11% respondent levels and lack of interest within the companies towards
JIT accounts for 11% respondent levels. This signifies a modest level of implementation exists to
eliminate waste, and needs to be further worked upon and developed. The solutions to the
challenge of Industry-specific success, referring to the Iron and Steel industry, include re-
designing the applied strategy, providing applied education and training and research and
development into industry specific manufacturing details. The success of implementing JIT will
vary for each industry due to the existence of industry-specific factors that demand alteration of
methods and solutions in JIT during its implementation and execution.

4. Reduction in Setup time

Implementation and execution of JIT implies a reduction in the available setup time. In 2002,
B.Biggart & Gargeya said that total inventory to sales ratio and raw material inventory to sales
ratio reduced substantially at a significance level of 0.01 post JIT implementation. Work in
progress inventory to sales ratio and finished goods inventory to sales ratio did not show any
statistically significant change at 0.01 level post-JIT implementation. This signifies that
organizations reduced their total inventory primarily through reductions in the raw material by over
stocking their suppliers’ raw material inventory in order to reduce their own inventory, and not
through significant reductions in work in progress and finished goods inventory. Reduced setup
time in JIT highlights weak internal processes resulting in piling up of work in progress and finished
goods inventory, leading to increased organizational inventory management expenses due to the
cost of the excess inventory held, increased space requirements, decreased efficiency and
effectiveness, etc. The solutions include making strategic changes with regard to layout re-
configuration with cellular manufacturing/ group technology and adoption of setup time reduction
technologies. However, tackling the challenge of excessive work in progress inventory due to
reduced setup time, by introducing statistical changes requires a long post-implementation time
period.

12
5. Supply Chain Management

The challenge of late delivery is the foremost challenge to be dealt with for the supply chain
managers. This challenge is due to external stakeholders involved in the supply chain at the very
first instinct. However, it is proved that the challenge may also exist due to the organization’s
internal procedures and internal inefficiency. For example, long purchasing procedures and delay
in approvals. In 2015, Kram, Tosanovic, & Hegedic had a case study research conducted in a
suspension and joining equipment factory in Croatia producing electrical equipment for high
voltage transmission lines. It was observed that the suppliers had an impact on delivery delays
as the supplies delivered by them were of poor quality and were delivered with a delay. These
factors lead to delayed production lines eventually leading to late product deliveries to the
company’s clients.

13
1.6 IMPACT OF JUST IN TIME IN WORK ENVIRONMENT

1. Performance evaluation
With JIT, a worker cannot produce another unit until the worker at the next station signals that
another unit is needed. Performance, then, must be evaluated on the output of the entire group
rather than of the individual. Workers who excel at meeting individual production goals receive
high evaluations in a batch processing system, but may not be evaluated highly in a JIT system
which emphasizes contribution to their group’s production output.

2. Group interaction

Under JIT, each worker depends on the preceding station for a continuous supply of units to work
on, but cannot begin work on a unit until the person at the next station signals that another unit is
needed. All workers must act as a team, then, rather than as individuals.

3. Job flexibility

Because the goal of JIT is to produce to demand rather than achieve smooth production runs,
each worker must be cross-trained to perform several tasks so that he or she can fill in where
needed. Performance evaluations under JIT are based partly on a worker’s flexibility to accept a
wide range of tasks. On the typical batch method production line, a worker’s primary responsibility
is to achieve a high output on a single task.

4. Mode of supervision.

With JIT, work groups are expected to solve some of their own problems, so more power is
bestowed upon workers. Supervisors, therefore, have to give up a certain amount of control. For
those supervisors in our study company with an authoritative management style, accepting group
decision making was difficult.

5. Potential loss of security.

In a batch-processing environment, workers have the security of knowing what their job is each
day. In addition, seeing all the work-in-process sitting around indicates there is work to be done.
Under JIT, not only is work-in-process greatly reduced but the worker does not know what he or
she will be doing each day.

14
1.7 USERS OF JUST-IN-TIME INVENTORY MANAGEMENT

Apparel
JIT is a great way to cut the high cost of inventory in the garment sector. Stocking clothes is
expensive and complex since more inventory is needed to meet the variety of styles, sizes, and
colours expected by customers.

Automotive
JIT was developed in the automotive sector to improve capacity and competitiveness. The method
is still used by automakers all over the world today. By relying on daily deliveries of most goods,
it prevents waste caused by overproduction and reduces warehousing expenses.

Construction
JIT delivery is a significant tool for improving construction output and can aid in the overhaul. Any
construction company that completely knows a project's objectives and is confident in its ability
to meet goals on time and within budget is immediately ahead of the competition.

Florist
A florist that works from home will always use JIT inventory to cover her clients, save time and
money, and yet provide quality finished products to her customers. The florist will take orders for
the event and rush to the flower shop to create them.

On-demand Publishing
On-demand publishing is an excellent example of the JIT inventory technique, and it is growing
in popularity among independent publishers and self-publishing businesses. Books' master
manuscripts are maintained on hand, but the texts are only printed and collated when a retail
transaction is made. This minimizes book store returns and unnecessary pulping of unsold
inventory.

Retailers
The Just-in-Time (JIT) method of inventory management takes a more as-needed approach.
Retailers who use JIT order inventory based on sales data. This strategy minimizes risk and
expenses while increasing profit.

15
1.8 COMPANIES THAT USE JUST-IN-TIME INVENTORY MANAGEMENT

Apple
They developed stable and trustworthy relationships with their suppliers, allowing them to acquire
products with significantly shorter preparation times and be confident that orders would be filled.
Furthermore, Apple began to adopt drop shipping, in which products are sent directly from the
manufacturer to the buyer, eliminating "middlemen" and therefore cutting shipping and storage
costs.

Dell
Their approach differs from the majority of their competitors in that they provide shorter lead times.
They do so by negotiating with suppliers to carry inventory rather than carrying it themselves. Dell
can simply produce and ship to clients by requesting components with short lead times. Their
strategy is regarded as a success due to their dependable suppliers and low lead times.

McDonalds
McDonald's illustrated how this strategy works in practise, storing components on-site for the
foreseeable future but not manufacturing anything until a client placed an order. As a result of this
method, each time a consumer receives an order, they have a consistent experience.

Toyota
Toyota is a well-known example of a huge firm that makes use of just-in-time delivery. Toyota
receives raw materials on their manufacturing floor only once a client's requests have been
completed and a car is ready for production. As a result, inventory storage costs are lowered,
resulting in fewer expenses. This also suggests that Toyota will be able to respond quickly to
changes in demand without having to dispose of expensive inventory.

Zara
Zara's design methodology is primarily concerned with the general audience who uses Zara's
products. This information is typically gathered by the store manager or store personnel and
saved at each store's collection counter, with the details and information saved being
communicated to the distribution centre in the evening. This information is provided to Zara's
design team on a daily basis. The designer uses this information to establish the customer's
desires and major issues, allowing them to carefully construct the product and alleviate the
customer's concerns.

16
CONCLUSION

JIT Inventory Control is a highly efficient and effective waste reduction approach. As a
result of the process, companies may utilise more of the warehouse for assembly and
manufacturing. As a result, space is not wasted but rather utilised to its utmost capacity. This
saves money on inventory as well. JIT Inventory Control demands both cooperation and
commitment of suppliers and manufacturers. Without a strong supplier-manufacturer connection
and dependability, JIT Inventory Control is worthless. Because there are so many suppliers,
manufacturers may anticipate price wars and lower pricing.

JIT allows for small batch production while simultaneously maintaining a commitment to
continuous process and product development. In today's market, many organisations are
concerned with delivering a high-quality, low-cost product in order to grab the majority of the
market share. For the majority of businesses, JIT helps to alleviate this worry. JIT helps
businesses save money by eliminating the need for inventory storage and upkeep. JIT is
commonly employed in 'Pull' management to assist maintain supply during high demand.

17
REFERENCES

 Management Accounting Information for Creating and Managing Value

8th Edition
Langfield-Smith, Smith, Andon, Hilton, Thorne

 https://www.zoho.com/inventory/guides/what-is-just-in-
time.html#:~:text=Just%2Din%2Dtime%2C%20or,costs%20and%20increase%20inventor
y%20turnover.
 https://www.investopedia.com/terms/j/jit.asp
 https://www.netsuite.com/portal/resource/articles/inventory-management/just-in-
time-inventory.shtml
 https://www.cips.org/knowledge/procurement-topics-and-skills/operations-
management/just-in-time/
 https://www.planettogether.com/blog/advantages-and-disadvantages-of-just-in-time-
jit-manufacturing

18
 AC220
BACHELOR OF ACCOUNTANCY (HONS.)

SEMINAR IN MANAGEMENT ACCOUNTING

(MAF651)
ENVIRONMENTAL COSTS & BENEFITS

SUBMITTED TO:
AHMAD AKBAL BIN MOHAMED

PREPARED BY: NACAB8A

NAME MATRIC NO.
NUR HAFAIZI BINTI ISHAK 2017416602
ATIRAH ZAWANI BINTI ASHAR 2016744811
NURUL SYAKIRIN BINTI NORIZAN 2017842216
NUR NADIAH RAFIDI 2017162299
SITI NURFARAHIN BINTI JOHARI 2016771193

SUBMISSION DATE:
22nd May 2022
19
 TABLE OF CONTENT

NO. CONTENT PAGE

2.0 DEFINITION 21

2.1 HISTORY OF ENVIRONMENTAL COST 22

2.2 PURPOSE OF ENVIRONMENTAL COST 23

2.3 CLASSIFICATION OF ENVIRONMENTAL COST 24-26

2.4 TIERS OF ENVIRONMENTAL COST 27-28

2.5 IMPORTANCE OF CONSIDERING 29

ENVIRONMENTAL COST

2.6 APPLICATION OF ENVIRONMENTAL COST 30

RELATED TO COMPANIES

2.7 ADVANTAGES AND DISADVANTAGES OF 31

ENVIRONMENTAL COST

CONCLUSION 32

REFERENCE 33

20
2.0 DEFINITION

Environmental management accounting (EMA) is a collection of management accounting

systems and procedures that offer data on an organization's environmental effect (IFAC, 2005).
Life cycle costing, environmental cost accounting, environmental performance metrics,
environmental benefit assessment, and environmental strategic planning are all examples of
environmental management accounting (IFAC, 2005). Financial data on environmental costs and
savings will be included in EMA, as well as physical data on the use, flows, and results of energy,
water, and materials, including trash. We can enhance traditional management accounting
methods and methodologies, including as costing, performance measurement, and capital
expenditure investment appraisal, to include broader sustainability views when seeking
management information to promote sustainability.

Environmental costs are the expenses incurred by a company to avoid, monitor, and report
environmental problems. They can also include the expenditures incurred by an organisation
when it fails to comply with environmental standards, some of which may last for years. Some
companies may define environmental costs very narrowly, only include costs that directly affect
profits. Other organisations may contain costs that are incurred because of the organization's
activities and operations but are not related to it. An organisation may report any or all these sorts
of environmental expenses as part of a management accounting system, depending on how
managers intend to use the information.

Environmental benefit is a benefit that is enjoyed by the organization from action taken to reduce
the impact on environment. It accesses to a healthy environment and clean natural resources,
such as air, water, land, constructed playgrounds, and other outdoor recreational facilities and
venues; affordable clean renewable energy sources; public transportation; fulfilling and dignified
green jobs; healthy homes and buildings. The product stewardship encourages all parties that
design, manufacture, sell and use a product to share responsibility for reducing the environmental
impacts associated with that product’s life.

21
2.1 HISTORY OF ENVIRONMENTAL COST

The worldwide environmental crisis has become increasingly prominent during the last two
decades. A chemical leak at Bophal, India, in 1984 caused many victims to suffer and die.
Meanwhile, an oil spill in the water in Alaska in 1989 killed many marine animals. These kinds of
events have gotten a lot of coverage in the media across the world. People are becoming more
aware of environmental issues such as global warming, pollution, loss of natural habitat, and non-
renewable resource depletion.

Some businesses are becoming more aware of the importance of environmental considerations
in their operations. Eco-link bridges, for example, were created in Singapore to allow animals to
traverse the Bukit Timah Expressway for the aim of wildlife conservation. As a result, the
corporation should not overlook this environmental risk; otherwise, it would have a negative
influence on its operations, particularly its financial performance. Fines, legal action, increased
environmental tax duty, and other penalties are possible.

The concept of Environmental Management Accounting (EMA) arose from a study of important
environmental cases and incidents around the world. Why is it so vital to integrate Environmental
Management Accounting in the business? This is because the number of environmental issues
has increased and continues to increase. For example, in March 2019, our country was surprised
by the issue of water pollution in the Kim Kim River in Johor, which was caused by an irresponsible
factory dumping chemical waste in the river. As a result, employing Environmental Management
Accounting will be one of the company's initiatives to incorporate environmental implications into
its operations.

22
2.2 PURPOSE OF ENVIRONMENTAL COST

The objective of environmental cost accounting is to enable economic organisations, including

local and governmental collectivises, to make accurate assessments of the environmental impact
of their productive activities. As a result, the entirety of the expenses sustained by the producing
economic unit for the reconditioning or protection of the environment as a result of the activity
carried out are based on the environmental costs. In other words, environmental expenses formed
the foundation of environmental accounting, which throughout time was reclassified according to
various variables.

Environmental costs and performance are subjected to management scrutiny for at least the
following reasons: certain environmental costs can be significantly lowered or even eliminated by
operational improvements, clean technology investments, and the redesign of manufacturing
processes and products. Environmental costs (and thus potential cost economies) may appear
modest at first glance; nonetheless, environmental costs and benefits have been brought to light
in many economic organisations through the employment of waste-reduction strategies. Improved
environmental performance and considerable benefits to people's health as well as commercial
success may result from improved management of environmental expenses. Correct localization
of environmental costs and benefits associated with manufacturing processes and products leads
to more accurate cost and price determinations, which may aid the entity in designing more
environmentally friendly processes, goods, and services in the future. The manifestation of an
environmental orientation of processes and services may result in concurrent advantages.

Pollution prevention practises such as redesign of products, substitution of material inputs, and
improvement practises on the maintenance operational level, for example, if the use of component
A is required for the completion of a finished product, but the respective component can be
substituted by component B to reduce the impact, then costs are reduced, and significant cost
savings can be realised. The statistical study of environmental costs is used to aid decision-
making at both the micro and macroeconomic levels. The macroeconomic issues concern the
usage of natural resources, both renewable and non-renewable, in physical units or, where
possible, in valuable units. The consumption of the variables that generated it is related to the
environmental cost content, which must have a value and quantitative expression in order to be
monitored and stressed.

23
2.3 CLASSIFICATION OF ENVIRONMENTAL COSTS

It should not be concerned with how environmental information is reported to stakeholders,

although it could include consideration of how such information could be reported internally. For
example, Hansen and Mendoza (1999) stated that environmental costs are incurred because of
poor quality controls. Therefore, they advocate the use of a periodical environmental cost report
that is produced in the format of a cost of quality report, with each category of cost being
expressed as a percentage of sales revenues or operating costs so that comparisons can be
made between different periods and/or organisations. The categories of costs would be as
follows:

Prevention costs

Prevention costs are the costs of activities undertaken by organisation to prevent the production
of waste. Prevention costs represent company’s efforts to solve problems before they occur and
turn them into opportunities. Prevention costs usually include employee training and supplier
certification. In general, the greatest improvements in product quality are associated with
preventing defects. It is also an investment. Companies can experience a long-term competitive
advantage when environmental engineering efforts are undertaken to reduce and eventually
eliminate pollutants. When business operations cause significant environmental damage, the
costs of recovery may be great enough to cause the company to fail and may bring about lawsuits
that may take years to close. Preventing environmental damage is a matter of educating
everyone in the company on how to do their job without harming the environment. The
company should establish policies and guidelines that clearly outline how they expect the job to
be done, while at the same time protecting the environment. When the company achieves these
goals, it will increase the potential value of the company. Prevention activities include
evaluate and selecting pollution control equipment, designing process, carrying out
environmental studies, and developing environmental management systems.

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Detection costs

Detection costs are costs incurred or cost of activities executed to determine if products,
processes and other activities within the firm are in complying with regulation and appropriate
environmental standards. The company are aware and concern on environmental issues,
therefore they will comply with the rules and environmental standard in order to protect
the environment to the society. Detection costs include auditing environmental activities,
inspecting products and processes, developing environmental performance measures, testing
for contamination, verifying supplier environmental performance and measuring contamination
levels. Such costs generally include inspection and testing, but may also extend to costs of quality
audits and even costs associated with quality certifications such as ISO 9000.

Internal failure costs

Internal failure costs are the cost incurred from performing activities that have produced
contaminants and waste that have not been discharged into environment. The costs are incurred
to eliminate and manage the wastes product. Internal failure costs include operating pollution
control equipment, treating and disposing of toxic waste, maintaining pollution equipment,
licensing facilities for producing contaminants and recycle scrap. For example, if the company
manufactures the products that have produced contaminants, they should recycle scrap which
is the cost of product that cannot be rework or reused to protect the environment. These costs
are associated with either reworking the product or component to correct the defect, or scrapping
that item if rework is not possible. Such costs can actually be quite substantial, although they are
often overlooked because they usually are erroneously treated as a normal part of the
manufacturing cost.

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External failure costs

External failure costs are the costs incurred on activities performed after discharging waste
into the environment. External failure costs include cleaning up a polluted lake, cleaning up
contaminated soil, settling personal injury claims, losing sales due to poor environmental
reputation, receiving medical care due to polluted air and losing employment because of
contamination. The most common components of this cost are warranty work and returns.
However, lawsuits from customers may also be a component. Some individuals also believe that
a measure of the cost of lost goodwill should be included as a component of external failure cost.
In truth, it may be difficult to accurately estimate the real cost of external failures. External failure
costs can be subdivided into realized and unrealized categories. Realized external failure costs
those incurred and paid for by the company. For example if the company has contribute to
the harm toward the environment, so they need to pay for the consequences such as cost of
fine and penalties. Unrealized external failure (societal) costs are caused by the company but
are incurred and paid for by the parties outside the company. For example, members of society
bear these costs and the society will bear their own cost of medical health due to environmental
pollution that caused by the company

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2.4 TIERS OF ENVIRONMENTAL COST

1) Conventional Cost
Conventional costs are direct costs linked with capital expenditures, raw materials, and
other operational and maintenance expenses. Most organisations' accounting systems
include traditional costs. However, they may not be published in a format that managers
can easily use to assess environmental expenditure. These include the costs of
purchasing environmental-friendly equipment and plants. The costs of raw materials,
utilities, capital goods, and supplies are typically handled in cost accounting and capital
planning, but they are not typically considered environmental costs.

2) Hidden Cost
Hidden cost is the cost that can be found in the accounting system but it may be difficult
to find and report as it is often hidden in various overhead accounts. For instance,
monitoring and reporting the environmental, searching for environmentally responsible
suppliers, and ongoing cost of cleaning up contaminated land.

3) Contingent Cost
Contingent cost may be incurred in future depending on future events and recognized
within the organisations’ internal report. It also been disclosed in the notes to the financial
statements and external reports but only if there are material in the amount for example.
If the organisation fails to clean up the contaminated sites also fines and penalties for
non-compliance with the regulation. The cost of remedying and compensation for future
accidental release of substances into environment.

4) Relationship and Image Cost

Fewer tangible cost and benefit that reflects the perception of various stakeholders which
are rarely measured in standard information systems and are difficult to measure
objectively and are rarely assessed in a typical information system. The cost incurred is
voluntarily for environmental activities only. Usually, it includes environmental report and
community relations activities. The first four tiers can be described as private costs, as
these environmental costs that directly affect the profit of the organisation or are costs for
which an organization can be held legally accountable.

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5) Societal Cost
It is the cost that organization imposed on others which are the environment and society
for which they may not be held legally responsible and which cannot be compensated for
in the legal system. These costs are difficult to recognize and measure because of the
cost estimated the impact and specialized environmental knowledge that might be
needed to do so. In certain case it makes easier to measure physical measurement to
understand external impact.

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2.5 IMPORTANCE OF CONSIDERING ENVIRONMENTAL COST

Currently, the increasing public green awareness from the consumers has encouraged business
to consider environmental effects of their activities and also to take into considerations this matter
for the decision making of the business. Ensuring the business complies with environmental
legislation and adopts environmental best practice can benefit the business for the sustainability
in the industry.

One of the importance is, companies can increase their appeal to the customers by portraying
themselves as environmentally responsible. This practice can set the business apart from the
competitors and attract the customers who are eco-friendly. The Body Shop, one of the skincare
and perfume company who against the animal testing in cosmetics industry and strive to produce
the naturally beauty products. Thus, they gain attention from the customers and investors.

Besides that, considering environmental cost in practice of business, can helps company to
reduce waste and costs. The best example would be, the company who manages to increase
energy efficiency can save the utility costs and when they encourage reusing existing material in
creative ways means that fewer money is spent to purchase new stock to create products. At first,
the company will have incurred extra of money to be spent establishing green business
procedures, but it will save a lot of money over time.

Moreover, most states and countries have implemented the environmental compliance to be
followed by the businesses to protect the environment. In order to avoid penalties from the
authorities, the company should follow the laws by considering the environmental costs in their
business. The penalties include fines, increased liability to environmental taxes, loss of sales and
consumer boycotts.

When it comes down to it the benefits of going green for a business, the benefits far outweigh
any negatives and lastly, beneficial the business for the sustainability in the industry.
Sustainability is considered a part of the business’ core strategy and important to creating
competitive advantage.

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2.6 APPLICATION OF ENVIRONMENTAL COST RELATED TO COMPANIES

Starbucks

Starbucks has a bold aspiration to be a resource positive company, to take less and give more
to the planet in every aspect of its business – including coffee. Starbucks purchases coffee from
more than 400,000 farmers in 30 countries around the world and is committed to a sustainable
future for coffee. To protect the resiliency of this supply chain, the people that make it possible,
and the planet we all share, Starbucks set goals to achieve carbon neutral green coffee by 50%
by 2030.

The approach or implementation taking by Starbucks in order to coped this issue as follow :
1) Decreasing carbon emissions in Starbucks supply chain by equipping farmers with precision
agronomy tools.

Through Starbucks Farmer Support Centres and a new soil scanning mobile app, the company
is helping farmers understand the specific nutrients and fertilizer needed to increase farm
productivity. In fact, they have collected nearly 23,000 soil samples in Guatemala, Mexico, Peru,
Rwanda and Kenya to date. With these custom, farm-specific solutions, farmers can target and
decrease fertilizer use which helps to decrease carbon emissions on their farms and increase
farm productivity.

2) Promoting and distributing climate-resistant tree varietals.

With Starbucks open-source agronomy approach, the company shares research, seeds, and
seedlings with farmers all around the world, helping farmers to adapt to climate change. These
climate-resistant varietals are rust-resistant and enable farmers to grow more coffee on the same
amount of land, which then helps to reduce overall carbon emissions. In fiscal 2021, they
distributed more than 10 million trees to farmers in Mexico, Guatemala and El Salvador. Over the
past six years as part of our 10-year, 100 million-tree commitment, Starbucks has donated nearly
60 million coffee trees to farmers.

3) Protecting and restoring at-risk forests in key coffee landscapes.

Land use change and deforestation are the greatest climate risks facing the coffee industry.
Working in partnership with Conservation International, Starbucks will invest in forest and
landscape protection and restoration programs in coffee producing countries, starting in Colombia
and Peru. These agroforestry efforts will not only remove carbon and support the carbon neutral
pathway, but also will benefit freshwater ecosystems and coffee communities.

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2.7 ADVANTAGES AND DISADVANTAGES OF ENVIROMENTAL COST AND BENEFIT

Advantages of environmental cost and benefit

Environmental cost and benefit help to measure the environmental problem that impact of each
process and operation on the air, water, soil, worker’s health and safety and society at large.
With the collective database, a corrective action can be taken and future places can be
identified for the area in order to reducing the waste, raw materials and energy consumptions.

Besides that, it helps to measure the organization environmental performance by detecting any
leakage spills or any such problems with the operation and process at an early stage, thus the
risk of future problem can be reduced. The proper environmental accounting system facilitates a
proper reporting of the results of environmental performance towards stakeholders.

Environmental cost and benefit also can leads substance to verify compliance to local, national
and international standards or best available techniques as well as organization’s own standards
as stated in their environmental policy. The management also will be able to create its own
environment strategy for moving toward a greener corporate culture in enhancing the corporate
image of the organization.

Disadvantages of environmental cost and benefit

Input for environmental accounting is not available as the cost and the benefits relevant to
environment are not easily measurable that would be the disadvantage in measuring the
environmental performance or problem.

Additionally, the environmental cost and benefit mainly considers the cost internal to the company
and excludes the cost to society where it took a long term process in order to draw conclusion. It
must be explored along with other point and details of accounting because the environmental cost
and benefit will depend on the result of financial accounting, management accounting, tax
accounting and others.

There is various type of organization from the business and government do not adequately trace
the use of energy and material or the cost of inefficient material use, waste management and
related issue. The user of information contained in environmental accounting needs to have a
strong knowledge and info of the process in measuring the environmental cost and benefit as well
as rules and regulations prevailing in that country. This situation could lead some of organization
will significantly underestimate the cost of poor environment performance to their organization.

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CONCLUSION

Corporate sustainability requires organisations to think about the interrelated impacts of

their activities on the economy, the environment and also the society. Sustainability is a strategic
concern for many organisations, and adopting sustainability practises can lead to greater financial
performance through more efficient workflows and process redesign, as well as the creation of
new markets for new products.

In view of the fact that future ecological and social challenges are unknown, many costs
and benefits occur outside the organisation, and many costs and benefits are difficult to assess
in financial terms, environmental and social consequences can be difficult to recognise.

The environmental and social impacts of a proposed capital investment can be identified
and included in the evaluation of the proposal. The affects may include the cost of clean-up and
remediation of land, greenhouse gas emissions, the effect on employee health and wellbeing,
and increases in the generation of waste materials.

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REFERENCES

 Management Accounting Information for Creating and Managing Value

8th Edition
Langfield-Smith, Smith, Andon, Hilton, Thorne

 https://www.accaglobal.com/gb/en/student/exam-support-
resources/fundamentals-exams-study-resources/f5/technical-articles/Env-MA.html
 https://www.emerald.com/insight/search?q=Environmental+cost
 https://link.springer.com/referenceworkentry/10.1007/1-4020-0612-8_188
 https://www.cgma.org/resources/tools/cost-transformation-model/environmental-
management-accounting.html
 https://stories.starbucks.com/stories/2021/starbucks-announces-coffee-specific-
environmental-goals/

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