Accounting for environmental and sustainability factors

1 Introduction

Environmental management accounting (EMA) focuses on the efficient use of resources, and the disposal of waste and effluent.

In this chapter we will discuss the types of costs faced by businesses, and describe the different methods a business may use to account for these costs.

2 The importance of considering environmental costs

If a company is wasteful in its use of resources, or alternatively causes pollution, then this impacts in three ways:

1. there is the direct cost to the company of spending more than is needed on resources, or having to spend money cleaning up the pollution

2. there is the damage to the reputation of the company – consumers are becoming more and more environmentally aware

3. there are possible fines or penalties as a result of breaking environmental regulations.

For all of the above reasons it is important for the company to attempt to identify and to manage the various costs involved.

3 Typical environmental costs

The cost that comes to the mind of most people immediately are those relating to dealing with waste. However there are many other costs that are likely to be just as important.

For example:

The amount of raw materials used in production. A publisher should consider ways of using less paper (or recyclable paper) as a way of saving costs for themselves as well as helping the environment.

Transport costs. Consideration of alternative ways of delivering goods could perhaps reduce costs and reduce the impact on the environment.

Water and energy consumption. EMA may help to identify inefficiencies and wasteful practices and, therefore, opportunities for cost savings.

4 Different methods of accounting for environmental costs

Although you cannot be required to perform any calculations for this section of the syllabus, you should be able to explain briefly four methods that have been suggested as ways of accounting for environmental costs.

1. Inflow / Outflow analysis

   This approach balances the quantity of resources that is input with the quantity that is output either as production or as waste. Measuring these in physical quantities and in monetary terms forces the business to focus on environmental costs.

   (Resources includes not simply raw materials but also energy and water. i.e. all resources)

2. Flow cost accounting

   This is really inflow/outflow analysis (as described above) but instead of applying simply to the business as a whole, it takes into account the organisational structure. Resources input into the business are divided into three categories:

   Material: the resources used in storing raw materials and in production

   System: the resources used in (for example) storing production and quality control

   Delivery and disposal: resources used in delivering to the customer and in disposing of any waste.

   As in (a), the aim is to reduce the quantities of resources used, which saves costs for the company and leads to increased ecological efficiency.

3. Lifecycle costing

   This has been discussed in an earlier chapter. The relevance to EMA is that it is important to include environmentally driven costs such as the costs of disposal of waste. It may be possible to design-out these costs before the product is launched.

4. Environmental Activity Based Costing

   Activity Based Costing has been discussed in an earlier chapter. Its application to environmental costs is that those costs that are environment-related (e.g. costs related to a sewage plant) are attributed to joint environmental cost centres.

   As with ABC in general, this focusses more attention on these costs and potentially leads to greater efficiency and cost reduction.