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Environmental Management Accounting (EMA), Management Accounting including Environmental Management - a literature review

Abstract

This thesis highlights on the utilization and benefits of using environmental management accounting for firms. In order to realize the uses and benefits of such a system, a framework is drawn to develop and implement an environmental management accounting system within an organization. The paper also compares and finds the difference between traditional financial accounting method and environmental management accounting to outline the importance of the later system in the current business environment. The research paper also discusses the methods of finding environmental costs and how the companies can accrue saving and generate revenues by separating environmental costs from general accounting.

The thesis attempts to find out the basic benefits companies can garner by adopting an efficient environment management accounting practice which has the primary role to lead a company in the path of progress through eco-friendly initiatives. Furthermore, the research would validate the use of system in aiding management decisions regarding designing environmental friendly products, attuning production process and managing wastes.

Although, environmental management accounting is a new approach to improve the environmental performance of a company, proper implementation of the system can assure transparency for the company to report the environmental costs clearly and help them in accessing their corporate social responsibility initiatives as well. All this, in turn enhance the image of the company in the media as well as amongst its shareholders.

Chapter 1: Introduction

In today’s globalized economy, companies have become too competitive and are even using unethical means to pip the other firms in the race. The greatest concern these days have been on the effect of environment that these companies are putting to earn higher revenues and increasing their bottomline. Thus, government, non-governmental organizations as well as the general public are increasingly putting pressure on the companies to become responsible towards the environment and invest substantial amount of money and effort to protect the environment.

Therefore, the issue of safeguarding the environment has gained prominence throughout the world in the past few decades, which has in turn made it important for companies to re-think their accounting structure and emphasise on accounting for environmental and other such related issues in the annual reports and management decisions. Thus, the need of the hour for companies are not just analysing financial data but also to take into account various environment-related information in the end-of-the year results.

The issues related to environment has garnered greater media and public attention in the past few decades due to major incidents like the Exxon Valdez oil spill of 1989 and the Bhopal chemical leak of 1984. These incidents were not just individual corporate failures but infact became global talking points which in turn steered the attention of the world towards issues such as global warming, climate change, fast depletion of fuel and other non-renewable resources, deforestation and the loss of natural habitats (Adams 2004).

Such issues have also pointed fingers and raised questions against the unethical business practices followed by the companies and many since have called for change in policies to regulate the corporates and make them more responsible towards the environment. Not just non-governmental organizations such as the Greenpeace and Friends of the Earth has raised their voice about environmental issues but even the United Nations, the European Union, and several other governments around the world have also adopted various policies to safeguard the environment. Many agreements are also formulated on the global level to prevent the future damage of the environment. Some of these prominent agreements include the Kyoto Protocol, the Rio Declaration and the Montreal Protocol (Adams 2004).

In an environmental management accounting system, the accountants play a potent role and they are one to access the data and analyse the variables associated with various environmental-related costs. They also need to find out whether the cost has been sufficiently handled, utilized and have given the desired result. This requires greater skills other than just accounting knowledge and the person should be well-aware of the various environmental policies and guidelines that a company needs to follow, and tally whether such regulations are imposed and followed by the company through the analysis in the environmental accounting system. In order to help the accountants many accounting associations have also introduced courses to teach the importance and analysis of environmental accounting system. Some of the associations that has adopted this kind of course include the Chartered Institute of Management Accountants (CIMA), the Association of Chartered Certified Accountants (ACCA), the European Federation of Accountants (FEE), the Society of Management Accountants of Canada (CMA Canada), the Japanese Institute of CPAs (JICPA), the Australian Society of Certified Public Accountants (CPAAustralia), the Instituteof Chartered Accountants of New Zealand (ICANZ), and the Philippine Institute of Certified Public Accountants (PICPA).

There are many organizations that have also published guidance to calculate environmental costs by using such a system of accounting. However, in order to adopt an environmental management accounting system, a company should attune it according to the environmental policies and regulations laid down by the government of the country the company is operating in. Therefore, every company would have a different set of goals and visions when it comes to allocating resources for environmental-related activities. As the environmental management accounting is still at a nascent stage, it is expected that the system would emerge only through experimentation and by customizing it according to the need of the company (Ratnatunga 2005).

1.1: Research objectives

The central theme of this paper is to illustrate the benefits of environmental management accounting system and find out how businesses can implement this system to garner better market value and position. Some of the major benefits of the environmental management accounting include aiding companies to take responsible decisions relating to issues such as allocating costs, capital budgeting or designing processes. Experts believe that companies can use the following steps to implement the accounting system in an effective manner. The first and the foremost step are to identify the opportunities so that unnecessary costs are eliminated that does not give any value to a product or process.

Furthermore, companies need to find out the environmental costs from the account sheets which are often hidden under the overhead accounts, direct labor accounts or direct material accounts. It has been found that in most cases, environmental costs are hidden in different parts of the management accounting system. For instance, the below diagram illustrates that the environmental cost is being hidden under direct labor, direct material and overheads.

To accrue greater benefits from the environmental management accounting system the company should also identify opportunities that may generate revenue by selling waste by-products and integrating the environment with various other aspects of business management that support and implement the system. The firm should also determine the costs and savings that the system might generate, and identify the precise method for pricing products as per industry standards. Last but not the least; companies should also focus on designing more environmental friendly products and attuning the processes that might provide a competitive edge to the company over its nearest rivals (Hansen 2005).

Most businesses have therefore become aware of the implication of environmental issues on its operations, services and products. The firms are aware that risks associated to environment cannot be ignored and form an integral part of running a business successfully by implementing innovative product designs, marketing concepts and managing the finances. On the other hand, ignoring environmental issues may result into adverse impact on the businesses. Oftentimes, government and other regulatory authorities impose fines and environmental taxes on companies that do not abide by the rules and damage the environment. Other punishments or losses include decrease of land value, devaluation of brands, loss of sales, boycotts by consumers, loss of insurance, legal notices and law suits, and damage of the company’s image in the market (Hansen 2005).

Most of the businesses are affected by pressures due to environmental issues, and therefore, from the accounting viewpoint, the pressure is felt on external reporting, which includes disclosing environmental issues in financial or annual reports under separate accounts. Although, experts have differing views about the quality and nature of such accounts, most environmental issues can not just be dealt through external reporting. However, it is important to mange environmental issues even before reporting them for which a sound environmental management accounting system is required.

1.2: Rationale

The idea of environmental management accounting has gained prominence from the past few decades due to the rise in environmental-related problems and issues. In general terms, the concept of environmental management accounting is defined as a system that identifies, collects, analyses, estimates, reports, and uses information related to environmental costs that are used to make decisions within a firm. In the contemporary world, it has become a widely used tool to balance economic, technological and social factors while developing processes and policies for a sustainable business environment. The implementation of the environmental management accounting system has also increased manifold with the growth in awarding ISO 14001 certificates to companies that are environmentally conscious. This has also promoted the governments to promote environmental management accounting within their countries.

Environmental management accounting is often positioned within the framework of social accounting which has a wider scope and covers issues such as health and safety, local community, training and education as well as environmental objectives. However, it is the last category i.e. the environmental concern that constitutes the environmental management accounting system, the central theme of this paper. By studying the various benefits of the environmental management accounting system, this paper would attempt to identify its implication on businesses and how such a system may help a business to take better management decisions, thereby, enhancing its market image and forging better stakeholder relationships. The paper would also consider the relevance of the system in today’s society, which is driven by environmental agenda.

1.3: Dissertation Outline

This thesis highlights on the utilization and benefits of using environmental management accounting for firms. The paper compares and finds the difference between traditional financial accounting method and environmental management accounting to outline the importance of the later system in the current business environment. The research paper also discusses the methods of finding environmental costs and how the companies can accrue saving and generate revenues by separating environmental costs from general accounting.

In order to achieve this, the paper has been segregated into different segments. In the background section, I would first understand the concept of environmental management accounting and its relevance for businesses in today’s globalised economy. Furthermore, it would intend to find out the significance of environmental management accounting for the making decisions related to cost savings and environmental costs.

The first chapter provides an introduction to several topics. The chapter briefly reviews the need for organizations and accountants to care for environmental issues. It also focuses on how the finance providers, regulatory agencies, supply chain, and other stakeholders are putting pressure on the organizations for disclosing their environmental performance. In the literature review section, the concept of environmental management accounting is further explained, with the focus on studying about what major experts have written on the particular topic.

In chapter five, an in-depth analysis on the concept of environmental management accounting is conducted, wherein the focus is given on distinguishing between traditional management accounting and environmental management accounting. It also discusses about the various definitions and concepts coined by experts and major organizations globally. Furthermore, this chapter also outlines the kinds of information that comes under environmental management accounting. It also gives an in-depth view about the benefits of environmental management accounting in the later sections. The chapter also deals with various challenges faced by organizations to implement environmental management accounting system in their companies. It later elucidates on the cost categories that needs to calculated or accounted for in this kind of system.

The next chapter focuses on various case studies, wherein examples of companies that have successfully implemented environmental management accounting are illustrated. The companies/countries that are profiled in this section includes SCA Graphic Laakirchen AG- Austria, United Kingdom Government, The Verbund group– Austria, Ciba Specialty Chemicals- Germany, Canon– Japan, Raytheon – USA, Fujitsu Group- Japan, and Paper mill- USA.

In chapter seven, the thesis analyses various findings and observations. It discusses the need to have the environmental management accounting system as a tool for companies to make decisions related to managing environmental costs. It further talks about the benefit of the system in maximizing stakeholder value and corporate social responsibility image of a company. This chapter also analyzes the methods to implement environmental management accounting for businesses. It also focuses on the role of government to implement the system in the companies based out of that country.

1.4: Methodology

I propose to use qualitative research methodology for undertaking this thesis, as I believe that qualitative research is significant for analysing the concept of environmental management accounting and how handling of environmental issues inappropriately can damage the reputation of a business in the market. Furthermore, it is also imperative to conduct an in-depth secondary research to understand the surrounding world. A qualitative methodology is the best fit for this topic because it provides an initial understanding and benefits of environmental management accounting system while also providing a base for further research. This methodology will be more subjective than quantitative surveys because I will be able to decide which specific examples to report. As the thesis deals with larger social question of the need to incorporate environmental issues in the accounting system, I consider that quantitative research methodology would not be suitable for this thesis. On the other hand, qualitative methodology would not only help in summarising a few key issues such as finding out the elements that constitute a environmental management accounting system but at the micro level, finding out the differences between the traditional accounting system and the environmental management accounting system. Therefore, to understand this complex correlation, I propose to base my research on qualitative methodology. Qualitative research, being more subjective in comparison to quantitative methodology, would help in examining the intangible aspects of the research subject, for example: identifying environmental costs, which are often hidden under the overhead accounts (Seidel 1995).

I have also relied heavily on secondary data and research, as the topic demanded an in-depth knowledge about not just the system but also about how environmental issues can create or destroy businesses. Such intensive research could only have been possible through secondary data searches. I have undertaken a secondary search of available literature on the topic from secondary sources, such as published media reports and published research reports on the subject line. Some of the common sources of secondary data undertaken for this research paper include academic papers, organisational surveys, and government records.

The vast scope and access of the study makes it imperative to undertake a qualitative research. This kind of research is also chosen for the fact that while one understands the phenomenon of a particular topic, one simultaneously get more experienced and informed about the same. It is the current thinking that gives way to the future thought, resulting in the emergence of new, interesting and more viable theories.

Chapter 2: Background

2.1: Defining Environmental Management Accounting

Environmental management accounting (EMA) is considered to be a subset of environmental accounting and is generally used to provide information for decision-making in an organization. EMA related to proving information for internal decision-making is consistent across all levels as defined by US EPA (1995). Per the EPA, the process of collecting, identifying and analyzing data/information about environmental costs and performance in order make good decision making. As per International Federation of Accountants (1998), EMA is defined as management of environmental and economic performance by developing and implementing appropriate environment-related systems and practices. This might include reporting and auditing in some companies, environmental management accounting basically involves life cycle costing, benefit assessment, full cost accounting and strategic planning for environmental management.

According to United Nations Division for Sustainable Development (UNDSD) (2001), environmental management accounting systems generate information for making internal decision, where this kind of information can either be physical or monetary in focus. And according to UNDSD, EMA is generally used for internal organizational calculations and decision-making. Environmental management accounting procedures used for internal decision making include both physical procedures for material and energy consumption, final disposal and flows and monetarized procedures for costs, revenue and savings related activities with a potential environmental impact.

Environmental management accounting can be dependent on the system implemented, provide a broad range of information about financial and non-financial aspects of a firm’s environmental performance. The growing prevalence of environmental performance indicators being used as basis for evaluating an organization should have a mix of non-financial and financial indicators in order to assess an organization’s environmental performance. For instance, in organization’s some of the managers are rewarded in terms of dollar savings in waste costs on the hand, some of them are rewarded in terms of reduction in the spillage rates. Environmental accounting systems have the dual purpose of improving and managing the environmental and financial performance of an entity (Hansen 2005).

On a contrast in comparison to conventional management accounting systems used in the organizations does not separate recognition to environment-related costs and impacts. Organizations focus on particular issues on the basis of financial or economic decision-making relevance. Environmental management accounting can generate information about using resources with environmentally-related impacts affects the performance of the organization and affects the financial position. EMA also considers how operations in an organizations impacts environmental systems.

Data generated from EMA supports environmental management systems and decision-making for improving targets and investment options. Indicators such as linked financial and environmental performance are important way for benchmarking and controlling purposes. Material flow balance and derived indicators important information for environmental reporting. Ranking agencies have always been interested look at combined physical and monetary approaches for sustainability (Adams 2002).

Over the past twenty years, the costs for industry of environmental protection, waste management, including pollution reduction, regulatory reporting, monitoring, legal fees and insurance has seen an increase due to increasingly stringent environmental regulations. In conventional management accounting systems segregate environmental costs under overhead accounts so that product and production managers do not have incentive to reduce environmental costs. Most of the time, executives are often unaware of the definition and benefits of environmental costs (Turnbull 2004).

Also in conventional cost accounting the compilation of non-environmental and environmental costs are clubbed under overhead accounts. This is the most likely to be hidden from management, which results in inconsistent decision-making. Evidence projects that management has underestimated the growth of such costs. Organizations can save costs by identifying, allocating and assessing environmental costs. Some of the examples elucidated by UN and reportedly used in all the subjects, is the savings that a company can incur by replacing toxic organic solvents by non-toxic substitutes. This helps eliminating growing costs of regulatory reporting, waste handling which are hazardous and other costs by using toxic materials. Other examples also briefs about the efficient use of material that highlights the issue that waste can be expensive because of purchase value of the wasted material and not because of the regulatory issues for disposing. Thus, it has been noted that emissions and waste are signs of inefficient production (Turnbull 2004).

EMA can be used for using cleaner technologies that are considered to be more efficient and helps prevent emissions at the source. In most of the cases, it has been observed, that incase a solution is 100 per cent environmental friendly, most often, it is not. Critics believe that end of the pipe treatment does not solve the problem at the source but only shifts to another environmental media. These so called solutions are costly and not even efficient. It has been believed that underlying assumption of purchasing materials that are environmental friendly only leave organization with investing heavily and not finding the most effective solution. In all the approaches dealing with EMA, it is believed that waste is sign of inefficient production. Therefore, while calculating environmental costs, disposal fees and purchase value of the wasted material also with the production costs of emissions and waste are aggregated (Turnbull 2004).

As a rule in environmental management, nearly 20 per cent of production activities undertaken are responsible for 80 per cent of environmental costs. While accounting, when environmental costs is blocked under overhead accounts, which is shared by all other product lines, it has been seen that products that have a low environmental costs subsidize the ones with high costs. This results in estimating an incorrect product price which reduces overall profitability of an organization (Bennett 2003).

Simple applications of EMA can help organizations to save huge savings by appropriately manage waste. It has been cited that costs of disposing and handling waste is easy to handle and defined in matrix that is simple to follow. On the other hand, environmental costs such as costs of regulatory compliance, damage to the corporate image, legal costs, environmental liabilities and risks have been difficult to assess over the period of time. The largest portion of the all environmental costs is material purchase value of the non-product output, which can be to 10 to 100 times the costs of the disposed items depending on industry an organization operates in the market (Bennett 2003).

It has been seen often times that management accounting techniques can skew and misread environmental issues. This has lead managers in making decisions that are upsetting for businesses also detrimental for the environment. Again, most often used example is related to use of energy. UK government campaign proclaimed that spending 30% on buying material is investing heavily into energy through inefficient practices. By conducting good energy management, a firm can reduce the environmental impact of energy production by 30%. They can also reduce 30% of organizations' energy expenditure. It has been seen that failing to incorporate environmental concerns in the accounting practices might impact profit and loss accounts. Also, it has been noticed that most often managers do not identify cost reduction and improvement opportunities but employ inappropriate product/service pricing and take decisions based on numbers that are incorrect. This leads to failure by the organization for enhancing customer value and thereby increase risk profile of the important investments and other long-term consequences (Gray 2001).

Organizations can choose some of the framework that can help mobilize profits such as environmental lifecycle costing or can implement environmental cost accounting which can stretch profits. The management of the firms can use tools that are appropriate as per the businesses. Bennett and James notify that EMA help evaluate new systems for efficiently using their resources. EMA has been chosen for gathering data which is related to the environment that are converted through techniques into information which can be used by managers who are the top level. The data generated are both financial and non-financial in nature.

Chapter 3: Literature Review

3.1: Defining environmental management accounting

The idea of environmental management accounting has gained prominence from the past few decades due to the rise in environmental-related problems and issues. In general terms, the concept of environmental management accounting is defined as a system that identifies, collects, analyses, estimates, reports, and uses information related to environmental costs that are used to make decisions within a firm. In the contemporary world, it has become a widely used tool to balance economic, technological and social factors while developing processes and policies for a sustainable business environment. The implementation of the environmental management accounting system has also increased manifold with the growth in awarding ISO 14001 certificates to companies that are environmentally conscious. This has also promoted the governments to promote environmental management accounting within their countries.

Environmental management accounting is often positioned within the framework of social accounting. Experts such as Gray et al. (1996) in fact suggest that social accounting is the process through which social and environmental effects of organizations are communicated. Gray says that the social accounting system “as such involves extending the accountability of companies beyond the provision of financial accounts to the owners of capital (particularly shareholders).” Taking the cue further, experts such as Epstein also echoed similar opinions and said, “Social accounting and accountability, social responsibility reporting, and sustainability reporting are all terms that refer to the measurement and reporting of an organization’s social, environmental, and economic impacts” (Epstein, 2004).

Thus, social accounting in its wider scope covers issues such as health and safety, local community, training and education as well as environmental objectives. However, it is the last category i.e. the environmental concern that constitutes the environmental management accounting system, the central theme of this paper. By studying the various benefits of the environmental management accounting system, this paper would attempt to identify its implication on businesses and how such a system may help a business to take better management decisions, thereby, enhancing its market image and forging better stakeholder relationships. The paper would also consider the relevance of the system in today’s society, which is driven by environmental agenda.

Although, the environmental management accounting system can be implemented at various levels, in this paper, we would attempt to find out its implications and relevance for businesses in today’s contemporary business scenario. Generally, organizations reflect or calculate environmental factors by identifying the environmental costs reflected in processes, products and services. However, the current conventional accounting systems are not able to calculate appropriate environmental costs which results in attributing these costs under the more generic overhead accounts.

Furthermore, most of the managers are also not aware of such costs as information on how to manage environmental costs are rarely found or documented within an organization (United Nations Division for Sustainable Development (UNDSD), 2003). It is found that most management accounting systems either underestimate or overestimate the environmental costs, which result to either creates poor environmental behavior or are not able to project the benefits of environmental practices.

. Often times, traditional management accounting systems can result into misrepresented or distorted environmental issues, which might lead managers to take decisions that can have adverse effects on the businesses as well as on the environment. In this regard, the most common issue is related to energy usage by firms. For instance, a publicity campaign by the UK government has reported that most companies on an average spend 30 per cent higher on energy consumption due to inefficient practices. This clearly shows that by adopting efficient energy management policies, companies may decrease the environmental effect of energy production by as much as 30 per cent and reduce the company’s energy expenditure by 30 per cent as well. Frost and Wilmhurst (2000) suggest that companies are often not aware of the impact of environment-related activities on the balance sheet and profit and loss accounts, as they fail to reform the practices of management accounting to include environmental concerns. Furthermore, most companies fail to identify cost reduction opportunities and often use incorrect service and product pricing, which effect taking product or service development decisions. This increases the risks associated with investments and other decisions which further leads to failure to improve customer value (Moller 2005).

Therefore, management accounting needs to be changed to make it a discipline that contributes for improving the environmental performance of companies. Environmental Management Accounting system attempts to incorporate the best environmental management thoughts and practices with the best management accounting thoughts and practices. Environmental Management Accounting generates and analyses both non-financial as well as financial information to sustain internal environmental management processes. It corresponds with the traditional financial management accounting system, with the plan to build proper mechanisms that aid in identifying and allocating environment-related costs (Bennett and James (1998a), Frost and Wilmhurst (2000)). Some of the major areas in which environmental management accounting can be applied include:

• To assess annual environmental costs and expenditures
• For creating appropriate product pricing
• For budgeting purposes
• To create investment appraisals
• For calculating costs
• To save on environmental projects
• To set measurable performance targets

Environmental management accounting has wide scope and techniques, similar to normal management accounting systems. In fact, experts such as Burritt et al (2001) said that “there is still no precision in the terminology associated with EMA”.

Such experts view environmental management account as an application similar to the traditional accounting system with the focus on calculating the environmentally-induced effects of companies, which are measured in financial units, and company-related effects on environmental systems, that are articulated in physical units. Often times, environmental management accounting is seen as a part of the framework for environmental accounting and is defined as “using monetary and physical information for internal management use”.

Burritt et al also created a multi-dimensional framework for environmental management accounting that considers the differences between five dimensions, namely physical versus monetary classifications, internal versus external, short and long terms, past and future timeframes and ad hoc versus routine information that are gathered for the application of environmental management accounting. This framework helps in placing and assigning various environmental management accounting techniques such as environmental cost accounting and environmental lifecycle costing. It is up to the management of the company to decide and choose the proper tools that might suit their information needs.

In a similar manner, Bennett and James also explained the scope and diverse range of environmental management accounting. They proposed various useful models, which also included 'The Environment-Related Management Accounting Pyramid' that helps in evaluating practices related to environmental management accounting and even aid companies to design and implementation new systems.

As per Bennett and James (1998a) environmental management accounting is concerned with collecting data that is related to the environment which are further transformed through processes and techniques into useful information for managers. The data used for this kind of analysis is both financial and non-financial in nature. In order to perform this kind of transformation, management accounting techniques such as operational budgeting, performance measurement and costing or pricing are used.

Environmental costs can be defined by using various approaches which is revealed through analysing various literatures. The US Environmental Protection Agency in 1998, for instance, discussed that the concept of environmental costs differs for every company as it is up to a company how it intends to use the information, whether, the company wants to utilize environmental costs for product design or capital budgeting. Some of the companies have come up with definitions to differentiate between hidden costs, conventional costs, contingent costs and relationship and image costs. While conventional costs are associated with raw material and energy costs that has environmental relevance, potentially hidden costs which might be captured by accounting systems however, loses their identity and gets hidden under overhead account. Often times contingent costs gets incurred in future – for instance costs associated with cleaning up. Such costs are also called contingent liabilities. On the other hand, relationship and image costs are intangible and include things such as costs of producing environmental reports (Bebbington 2001).

However, these costs loose its relevance when compared with the costs that are associated with such factors that might be seen to behave in a careless manner. The potent example to this effect is the Brent Spar incident which resulted in oil company Shell loosing millions of pounds in revenues due to the consumer boycott. This definitely shows the influence of environmental issues on contemporary business scenario. Shell eventually learnt the lesson and decided to re-engineer its environmental management system completely in order to meet the demands of its consumers and other stakeholders (Bebbington 2001).

Economic Management Accounting can be defined in broad term as the management of economic and environmental performance via management accounting systems and practices that focus on physical information on the flow of energy, material, water and wastes along with monetary information related to earnings costs, and savings. As per IFAC’s, environmental management accounting has been defined as the management of economic and environmental performance by developing and implementing appropriate environment-related accounting practices and systems. This may include auditing and reporting by some of the companies. Environmental management accounting basically involves life-cycle costing, full-cost accounting, benefits assessment and strategic planning for environmental management (Envirowise 2003).

Furthermore, United Nations Expert Working Group on EMA defined it as including physical and monetary sides of environmental management accounting. The definition has been developed through international consensus wherein 30 plus nations represented their views and ideas. Environmental management accounting has been defined as identifying, collecting, analyzing and using of two types of data for taking internal decision. It can be physical information for the purpose of using, flows and destinies of water, energy or material which includes wasted. On the other hand, it also includes monetary information on environment-related costs, savings and earning. The definitions basically highlight the types of information organization should take into consideration under EMA and also the analysis techniques adopted for taking sound internal decisions for earning maximum profit (Burritt 2001).

For assessing costs in a proper manner, an organization needs to collect monetary data and non-monetary data on personnel hours and other cost drivers. Environmental management accounting places importance to the materials and cost driven from material because of the use of the energy, materials and water and also place importance to the generation of waste and emissions. These are also related to many impacts that the organizations may have in the environment or material purchase costs have always been considered to be the main cost driver for many organizations. In most cases, organizations purchase energy, common materials and water in order to support their activities (Gray 2001).

For reducing and managing the environmental impacts of waste and emissions effectively, and also for any physical products, an organization needs to have accurate data on the cost and destinies of all the energy, water and materials used for supporting it activities. Organizations need to be aware of the quantity of energy; material and water are brought in that become physical products thereby becoming waste and emissions. Physical accounting information does not provide adequate information; it may be required to be quantified by general accounting practices. Some organizations that have the capacity to control large amounts of property such as oil companies, timber companies and agriculture, are likely to adopt physical accounting which is also a type of natural resource accounting. For instance, a timber company keeps a track of the timber stock (Gray 2001).

In most of the organizations environment-related costs are defined differently, as per the use of cost information, point of view of “environmental,” its economic and environmental goals. Some of the organizations prefer to focus the EMA activities on narrower range of costs. This is encompassed under environmental protection expenditures (EPEs). Others consider only boarder and strategic point of view on environmental management and environment-related costs. They may be comfortably attributed to broader bucket of costs to the environment although some of those costs can be considered as quality or efficiency related.

3.2: Environmental management accounting and cost factor

Some of the cost information that managers need to identify and project are environmental performance and the associated economic performance. EMA practitioners and researchers have developed various EMA methodologies and approaches that can be followed by various organizations. It has been seen and dealt with that not all emissions and waste can be reduced. Some of them are inevitable but it is financial best interest of the organizations to use the materials, water and energy in as much less quantity for achieving their goals. Proactive and preventive environmental management that can help reduce the amount of the waste generation, also treating the waste material for reuse can reduce purchase costs of the material not used or lost as wastes. Therefore, assessment of these costs allows the managers to better understand the potential monetary value of the environmental management for preventive measures. In operations related to manufacturing includes, the processing cost of raw material and other materials. This has been adjudged till the point that till the point it is converted into waste and emissions. The processing costs can also include the proportion of equipment depreciation also the labor costs that can be aided to generate the emission and waste rather than producing the final product (Jasch)

Waste and emission control cost covers the costs of handling, treating and disposing emissions and waste. It may also include compensation costs and remediation related to environmental damage. Also, any regulatory compliance costs related to waste and emission control (Rimer 2000).

Environmental accounting system is often influenced by the end treatment of the data analysed, which might be used for reporting financial figures, evaluating the overall performance of the company or to analyze the role of the management in general. For instance, while using environmental accounting in terms of monetary analysis, it is important to take into account the environmental performance results. Thus, in the absence of an environmental accounting system, it would become difficult to collect the facts and information for making a corporate environmental report card. Such a reporting system would also rely heavily on the financial units of measurement (Rimer 2000).

Additionally, the social costs are also taken into account. These costs are incurred by a company are those that represent the organisation’s expenditure towards environment and society. For these costs, the businesses can not be held legally accountable. These costs are met by public funding and are mostly labelled as externalities. Although, calculating social costs can be difficult and often controversial, it is nonetheless, important for an organization to incur these costs, as these costs provide the precision to publish claims about environmental costs.

3.3: Environmental management accounting and businesses

Irrespective of being employed by a small or large company, the success of an environmental management accounting system depends on the effectiveness of measuring and collecting facts and information related to the environmental impacts and aspects. For small companies, such an elaborate system might not be in place, and therefore, to evaluate the environmental impacts they may highlight on issues such as cost management system or quality management. However, for a big company, the information related to environmental costs might be gathered from various sources such as the environmental management system, assessments of life-cycles, environmental management plans and indicators that evaluate environmental performance.

The initial steps of adopting an environmental management accounting system require buy-ins from the upper management as well as important stakeholders. They can also provide interesting insights into the various categories one needs to consider while drafting an environmental accounting system. Furthermore, the company needs to identify the kinds of environmental information that would be sorted out for making the right decisions. However, while assessing environmental costs and revenues, it is important to attach various individual environmental elements such as air and climate protection, waste management, noise and vibration abatement, waste water management, protection and sanitation of soil, ground and surface water, protection against radiation, protection of biodiversity and landscape, research and development, and other environmental protection activities (Deegan 2003).

Chapter 4: Methodology

This chapter analyses the methodology to be used for conducting the research on finding about the benefits and uses of environmental management accounting for firms. Furthermore, the research attempts to undertake an in-depth analysis of environmental management accounting system and the need to draw a framework to develop and implement an environmental management accounting system within an organization. It would further discuss the use of qualitative methodology for conducting this research to understand the importance of environmental management accounting system in today’s business scenario, while also providing a base for further research.

I propose to use qualitative research methodology for undertaking this thesis, as I believe that qualitative research is significant for analysing the concept of environmental management accounting and how handling of environmental issues inappropriately can damage the reputation of a business in the market. Furthermore, it is also imperative to conduct an in-depth secondary research to understand the surrounding world (Saunders et al, 2007).

4.1: Using qualitative and secondary research methodology

A qualitative methodology is the best fit for this topic because it provides an initial understanding and benefits of environmental management accounting system while also providing a base for further research. This methodology will be more subjective than quantitative surveys because I will be able to decide which specific examples to report. As the thesis deals with larger social question of the need to incorporate environmental issues in the accounting system, I consider that quantitative research methodology would not be suitable for this thesis. On the other hand, qualitative methodology would not only help in summarising a few key issues such as finding out the elements that constitute a environmental management accounting system but at the micro level, finding out the differences between the traditional accounting system and the environmental management accounting system. Therefore, to understand this complex correlation, I propose to base my research on qualitative methodology. Qualitative research, being more subjective in comparison to quantitative methodology, would help in examining the intangible aspects of the research subject, for example: identifying environmental costs, which are often hidden under the overhead accounts (Seidel 1995).

I have also relied heavily on secondary data and research, as the topic demanded an in-depth knowledge about not just the system but also about how environmental issues can create or destroy businesses. Such intensive research could only have been possible through secondary data searches. I have undertaken a secondary search of available literature on the topic from secondary sources, such as published media reports and published research reports on the subject line. Some of the common sources of secondary data undertaken for this research paper include academic papers, organisational surveys, and government records. There are several advantages of collecting data through secondary research, which includes saving time, and collecting a large database. However, the major disadvantage of this kind of research is that the researcher could not personally check the reliability of the data. Secondary data analysis is usually conducted by researchers to get a better understanding of a concept. Secondary data helps a researcher to support his or her concept and define the goals of the research by interpreting the data. However, as secondary research totally relies on already published reports, it is imperative to collect the data from reliable sources and check the validity of the data. The data can be easily located with advanced online searches, but one needs to be careful about using out of date or inappropriate data. In order to evaluate the validity of the data a researcher should examine the secondary data and ensure that it is appropriate for the purpose of their study (Seidel 1998).

Thus, for this particular report, I have used various secondary data as it allowed me to conduct analyses of various accounting processes and find out the relevant system that can find out environmental costs effectively. It also saved me time and money since the work has already been done and helped me in avoiding the problems associated with the data collection process.

I would not be conducting any sample surveys for this research, since this dissertation will be based on secondary data taken from articles, journals and case studies. Furthermore, this dissertation will not only analyse and summarise data, but also identify the different factors involved. Therefore, analytical and predictive research will also be used in the dissertation. Analytical research is an extension of descriptive research and predictive research is to speculate on future possibilities, based on analysis of available evidence of cause and effect.

The vast scope and access of the study makes it imperative to undertake a qualitative research. This kind of research is also chosen for the fact that while one understands the phenomenon of a particular topic, one simultaneously get more experienced and informed about the same. It is the current thinking that gives way to the future thought, resulting in the emergence of new, interesting and more viable theories. Not only that, qualitative research also has unique value for investigating complex topics as this one. Qualitative research also has the distinction of generating more interesting and detailed information of value. Though dubbed as a curse, the detail in most qualitative research is more than a blessing too, since it tells the story from the participant's viewpoint, replete with rich descriptive and element.

4.2: Data collection

Since data will be gathered throughout the research process, it requires the use of conceptualisation and classification for data analysis. In order to produce a well-grounded conclusion, qualitative data analysis will be used in this dissertation. To conduct a good-structured qualitative analysis, data should be classified into categories, then allocate data into appropriate categories. Afterwards, recognise and develop relationships within and between categories of data. Finally, develop and test hypotheses or propositions (Saunders et al, 2007). For this dissertation, I have collected data through various secondary sources and academic papers, which outlines the benefits and utilization of environmental management accounting. The gathered information is then researched further and bucketed into separate segments to come out with a hypothesis for the thesis. Secondary data helped me in basing my research on the available information and thereby, saving my time in collecting the data. Furthermore, as the research topic demands in-depth understanding of various accounting methods, therefore, it is easier to base the research on already published materials, rather than undertaking huge surveys (Saunders et al, 2007).

As the thesis attempts to find out the basic benefits that the companies can garner by adopting an efficient environment management accounting practice which has the primary role to lead a company in the path of progress through eco-friendly initiatives, the paper has outlined these benefits through the presentation of various case studies.

Although, environmental management accounting is a new approach to improve the environmental performance of a company, proper implementation of the system can assure transparency for the company to report the environmental costs clearly and help them in accessing their corporate social responsibility initiatives as well. All this, in turn enhance the image of the company in the media as well as amongst its shareholders. Thus, the concept of environmental management accounting is worth exploring and investing into.

Chapter 5: Analyzing environmental management accounting

In broad term, the management of economic and environmental performance via management accounting systems and practices that focus on physical information on the flow of energy, material, water and wastes along with monetary information related to earnings costs, and savings can be defined as Economic Management Accounting. As per IFAC’s, EMA has been defined as the management of economic and environmental performance by developing and implementing appropriate environment-related accounting practices and systems. This may include auditing and reporting by some of the companies. Environmental management accounting basically involves life-cycle costing, full-cost accounting, benefits assessment and strategic planning for environmental management (Deegan 2003).

As per United Nations Expert Working Group on EMA defines it as including physical and monetary sides of EMA. The definition has been developed by international consensus representing 30 plus nations. EMA has been defined as identifying, collecting, analyzing and using of two types of data for taking internal decision. It can be physical information for the purpose of using, flows and destinies of water, energy or material which includes wasted. On the other hand, it also includes monetary information on environment-related costs, savings and earning. The definitions basically highlight the types of information organization should take into consideration under EMA and also the analysis techniques adopted for taking sound internal decisions for earning maximum profit (Turnbull 2004).

In all practical purpose, EMA ranges from conducting simple adjustments to existing accounting systems to more complex or integrated practices that is a link between the conventional physical as well as monetary information systems. That said, without being too considerate about the structure or the format, it has been seen that Management Accounting and EMA most of the time have many common goals. The idea has been to utilize the resources to the maximum in the long run because of the externalities associated in an organization.

5.1: Types of information included under EMA

In order to assess costs in a correct manner, an organization should collect monetary data and non-monetary data on personnel hours and other cost drivers. EMA gives importance to the materials and cost driven from material because of the use of the energy, materials and water also, with regards to the generation of waste and emissions. These are also related to many impacts that the organizations may have in the environment or material purchase costs have always been considered to be the main cost driver for many organizations. In most cases, organizations purchase energy, common materials and water in order to support their activities. For a is converted into final product, in such a scenario, organization also produce waste materials that are intended to be assembled in the final product and were thrown into waste because of design issues, quality standard issues, operating inefficiencies. These organizations also use water, energy and materials that are never intended to be a part of the final product but are produced as a bi-product for producing the final material, for instance water is used to rinse chemical tanks between product batches. It has been seen that materials become waste streams that must be managed efficiently. In the case of non-manufacturing operations, for instance agriculture and resource, livestock, service sector or public sector use energy, water and other material to help run their operations. This may be the cause of huge or significant generation of emissions and waste (Ratnatunga 2005).

Therefore, the example of material-related environmental impact is the generation of emissions and waste. This may affect the health of humans and ecosystems including animals and plants. It can leave the water, air and land contaminated or polluted. The other holistic area of materials-related environmental impact can be considered to be the potential impact of the physical products which includes by-products and packaging that is manufactured by organizations. The final products have environmental impacts when they are leaving the company. For instance, in the case where product ends up in a landfill at end of the life cycle can be considered for reducing environmental impact. The potential environmental hazards can be mitigated by changing the product design like decreasing the quantum of paper used while packaging or replacing a physical product in comparison to equivalent service. In many of the manufacturing units, majority of the materials used are the part of the end product rather than being the part of emissions or waste. In consequence, the potential environmental measured is drastically very high. Along with this, the potential environmental benefit improving the product is correspondingly high (Pojasek 1997).

The idea of tracking and reducing the amount of water, energy and materials used by manufacturing companies can have indirect environmental benefits upstream. This is because the extraction the raw materials have impact that can be conventional in nature. For instance, because the methodology of extracting may have environmental impacts with activities such as extraction of material and forestry have high impact on the environment around the extraction sites. The impact can include pollution and waste generated while conducting the extraction operations. The eroded and removal topsoil and vegetation, sediments of water bodies and disruption of the wildlife feeding, migration habitat and reproduction may have impact on the entire eco-system. The trimming of non-renewable and renewable natural resources may also be the cause of grave concern (Quinn 1997).

In order to effectively reduce and manage the environmental impacts of waste and emissions, also for any physical products, a firm should have accurate data on the cost and destinies of all the energy, water and materials used for supporting it activities. They need to be aware of the quantity of energy; material and water are brought in that become physical products thereby becoming waste and emissions. Physical accounting information does not provide adequate information; it may be required to be quantified by general accounting practices. Some organizations that have the capacity to control large amounts of property such as oil companies, timber companies and agriculture, are likely to adopt physical accounting which is also a type of natural resource accounting. For instance, a timber company keeps a track of the timber stock (Cochin 1998).

Monetary Information

In most of the organizations environment-related costs are defined differently, as per the use of cost information, point of view of “environmental,” its economic and environmental goals. Couple of widely used schemes for categorizing and defining organization-level environment-related costs for EMA purposes are based out of US. For example, the Japanese Ministry of Environment and 18 Environmental Protection Agency17. Cost taxonomies which have been developed for the purpose of financial reporting19 and system such as national reporting20 are important element that has influenced heavily the environment-related cost information collected are reported to the external stakeholders.

EPE is not included as a part of EMA, it also does not consider other important parameter such as managing environmental performance. One of the example that can be cited is the purchase cost of materials, that eventually become emission or waste. One another development in EMA is a push to view the purchase costs of all natural resources as environment related. In scenario where company in a manufacturing sector, also where most of the purchased materials are being converted into physical products, this eventually allows higher margins and is cost-effective management. It has been noticed that organization consider material purchase cost as a part of the internal management decision making but do not categories them as environment related (INFORM 1998). On the other hand, it can be viewed as environment related, as an organization should have this information accessible for reporting as well as for physical waste and physical products. The physical accounting part of EMA provides the required information on the quantum and the flow of water, energy, materials and wastes in order to assess purchase costs.

Some of the organizations prefer to focus the EMA activities on narrower range of costs. This is encompassed under environmental protection expenditures (EPEs). Others consider only boarder and strategic point of view on environmental management and environment-related costs. They may be comfortably attributed to broader bucket of costs to the environment although some of those costs can be considered as quality or efficiency related. Majority of EMA initiatives in the current context does not include “external” costs or environment-related costs which is incurred by individuals, society, business partners or the planet for which an organizations cannot be held legally responsible. Some organizations also consider these external costs, however, the arena between internal and external environmental costs has become increasingly fluid. This is due to changing environmental regulations and growing emphasis on corporate social responsibility.

5.2 Benefit of EMA

EMA is beneficial for internal management initiatives that have specific environmental focus. This can be cleaner production, “green” product or new service design, or environmentally preferable purchasing and also environmental management systems. Data from EMA information have been increasingly used for external reporting purposes. Therefore, EMA cannot be considered as only one environmental management tool amongst the others available. It can be considered as broad set of principles that provides information vital for the success environmental management activities. EMA has become important, not only for environmental management decisions, but also for all types of management activities (Frost 2000). Benefits has been demonstrated through graphical representation, please refer to the below diagram:

EMA researchers have stressed on the use of EMA approaches for Investment Appraisal. Investment Appraisal has been considered to be a vital management. With regards to investment appraisal, organizations should consider all potentially relevant and significant costs, that may include, environment-related costs which may affect the return on investment. It may also involves uncertain costs that may be the handled by scenario analysis (Jasch).

Researchers have stressed one of the sections for using EMA approaches for Investment Appraisal. Investment Appraisal is considered to be a core management accounting technique that informs both routine and strategic organizational decisions. Under investment appraisal firms are required to forecast significant costs that include environment-related costs that might have an influence on the return on investment. It may also include uncertain costs that can be best taken care of by the scenario analysis (Rimer 2000).

EMA approach can be used to help assess particular investment projects and also help assess the environmental and related cost implications for a similar type of materials and products. The assessment of a particular line is referred as Life-cycle Assessment (LCA) or Life-cycle Costing (LCC). Accumulation of EMA-type information from an organization’s suppliers and to the customers can be easily used to contribute to better Supply Chain Environmental Management (SCEM). One of the examples of focuses on assessment of a logistics chain for multiple sites for a large manufacturing organization and many of its subcontractors and has elements of both LCA and SCEM. Making decisions at various levels can be supported by continuing development and by using Environmental Performance Indicators (EPIs). EPIs are usually created by physical information that is collected under EMA or it can be purely monetary information which is aggregated under EMA, for example such as total cost of waste water treatment each year. Monetary and physical EPIs can be combined to develop cross-cutting EPIs that can link both type of information under one shed. For instance wastewater treatment costs per unit serviced to customer each year (Bebbington 2001).

In spite the fact that traditionally management accounting only supports internal decision making as its primary goal, many practitioners around the globe also considers EMA to be a support tool for external reporting that can be used to develop interest with the stakeholders who are interested in an organization-level environmental performance. For instance, in the current state of affairs, businesses report EMA-type physical information in the voluntary corporate environmental performance reports and also in some reports related to monetary information.

5.3: Challenges of EMA

Several parameters of conventional accounting systems make it difficult for EMA to be established in an organization. Most of the management accounting systems and practices followed by the organization make it difficult for effective collection and evaluation of environment-related data. These limitation can often times lead to management taking decisions missing or inaccurate data. In the consequence, managers do not understand the real cause of worry in an organization and often mislead the entire decision making exercise that may cause the firm more resources and money. One of the major culprit are the limitations of general management accounting which is practiced by some organization that does not take into account environmental liabilities that can be the root cause of heavy losses incurred by the company in the long run. Of the other limitations, it is related to environment-related information (Epstein 2004).

It has been seen that communication or other links between accounting and other departments in an organization is not well developed. Often, organization’s environmental professional has great deal of knowledge on environmental issues. On the same lines, even the technical staff may have experience with the flow of water, energy water and other materials within the organization. Technical and environmental and technical have only limited understanding about how those issues get reflected in the accounting records. On the other hand, the controller or the accountant has adequate knowledge of the information at hand but has only limited experience or information about the environmental issues the organization faces. Therefore, accounting personnel do not provide the type of accounting information that can be useful for the technical and environmental personnel.

In an organization, different departments may also have set goals for themselves with a perspective to earn larger profits that might or might not take EMA into consideration. This might get into a conflict with the larger agenda set by an organization. On the hand, different department mat also have deviated goals with regards to EMA. For example, departments may have different perspective on the issue which may seek adequate responsibilities for performing the activities of managing and performing different types of environment-related costs. In such a case, it may be seen that production center that produces waste might not have data on the costs of waste disposed during a period of time. Also, the design department might select might select materials or equipment that are not environmental friendly. In all worst case scenario, accounting department may hide the environment related cost by placing the item in the overhead accounts. Also, accounting, technical and environmental professionals often use different information systems that may not be checked for consistency. It has been seen in many cases, consistency check are often are not done because it quite difficult, as various information systems make use of different boundaries for tracking materials. In a case where, there are differences in knowledge, structure and information access due to language differences and difference in cultures between the personnel working in the accounts, environment and technical department, attaining parity is often a big problem. It has been seen that there is a need to improve communication between accounting and other department in environmental management. Unless the communication barriers are channelized to fill gaps EMA cannot be used strategically to attain highest profitability (Epstein 2004).

Often times, environment related cost information is often hidden in the overhead accounts. There are numerous instances where it has been found that environment related information is hidden by the accounts so that the profitability figures does not take a hit. It can also be accounted for the in inordinate figures that the accounts department of any organization wants to hide from the management because of the profits taken a hit. As overhead accounts is a convenient way to hide costs which may be difficult to be assigned directly to processes or products, practice like these often create problems later, where managers do not understand where to look for cost information. Although, it might be obvious for the managers that account named as “Divisional Overhead” may have all the cost, such as training costs, permit fees and legal expenses. The inclusion of significant environment related costs in the overhead charges may show a obscure picture that essentially clubs fixed costs which cannot be reduced significantly because it’s a fixed costs but environment management being a variable cost, it may be reduced or prevented if adequate are taken. The use of the overhead accounts for allocating the environmental related cost can be problematic when the overhead cost are later assigned to the cost centers for pricing and other purposes. Overhead cost are typically assigned back to the centers using variety of allocation bases such as machine hours, production volume or personnel hours to name a few. This might be seen as an inaccurate method to allocate some of the typical environmental related costs. An important example can be use of hazardous waste disposal costs, which may be on a higher side for a product line that uses product line that uses these chemicals on the basis of the production volume which may be completely inaccurate. This may be also seen in the product pricing module and other decisions based on the inaccurate data.

In many cases, most types of environment-related cost information are not found in the accounting records. Accounting records typically does not account for information on projected environment-related costs, although it may not be significant but accounting systems have overlooked these due to the traditional practices. Accounting records also lack less tangible environment related costs. For instance, the costs incurred when environmental performance is poor or bleak translates into loss of sales to end users who take heed of environmental issues. It can also be loss in accessing the markets with environment-related product restrictions or loss accessed to insurance and financing when business partners reject to take onus of the potential environmental risk associated with partnership. Although these types of costs may be difficult to estimate but they can be significant to organization’s financial health. It should also be taken care that some of the cost accounting tools add an average risk premium to production costs in order to reflect less tangible issues (Moller 2005).

In cases where EMA is not taken into account, investment decisions are taken either on incomplete data or misleading information. Management decisions on investment projects, product pricing, materials choices and product mix take a hit when consistent and comprehensive environment-related information is not made available in a timely fashion. Investment decisions often suffer and pose challenges as they involve the uncertainty on questions such as

• What should an organization pay for at the current state if decisions are not sound?

• What can be the future consequences if decisions are not taken into consideration at the current state?

Lack of accurate estimates of environment-related cost and benefits adds to uncertainty on all the investment decisions. The approval of environmental agreements such as Kyoto Protocol only complicates the investment decisions further as it expands the various options available to the companies. For example, under the Kyoto, an organization involved in emissions trading may also choose not to invest in measures that might reduce emissions but instead can purchase sufficient permits in order to meet any emission targets imposed. Company would need to rely in the knowledge and skills of the management accounting professionals in order to help them difficult choices between trading and investment.

5.4: Relevance of Physical Information

Tracking of physical information on the flow of water, energy, materials and wastes is an important aspect under EMA because such information only allows an organization to assess the important materials-related information for equating its environmental performance. Additionally, material purchase costs are also key cost drivers in many organizations. It has been seen that traditional accounting procedures not define the legitimacy or systematically record the processes that reflects the real material flow in an organizations. Personnel working in other area have estimates of environmental, production, or other operations generally possess greater detail and also have measurements of physical flows of materials. Often than not, this information is not collated or checked with the accounting department. In a ideal scenario accountants need to work more closely with the personnel from various other departments to accurately measure and give information in order to estimate EMA accurately.

With regards to physical accounting side of EMA, a firm must try and track all physical inputs and outputs to ensure no significant amounts of water, energy or other materials are ignored or unaccounted. The accounting and measurement of all the water, energy, materials and wastes flowing out and inside an organization is called material balance and is also referred to input-out balance. Many organizations conduct energy balances. Material balances can be undertaken at different levels. The data or information can be collated or collected for an entire organization or for a particular division or site, product or service line, input materials, waste streams depending upon the intention to use the information for maximum benefit. In practices, it has been often found that material balances of different levels or divisions are not checked and therefore lacks consistency. For a complete cycle and integrated picture, details of the material use and details of the material flows must be traced through all the different organizational material management parameters. Examples can be steps involved for materials procurement, inventory, delivery, internal distribution, waste collection, treatment, recycling, and disposal with all the material balance numbers or data aggregated. This type of accounting is called “materials flow accounting.” (Bennett 2003)

After the physical accounting data has been collected, it can be used for supporting the cost accounting side of EMA. It can also be taken into account for creating environmental performance indicators (EPIs) which can help assess and report materials-related modalities of environmental performance. Even for organizations which do not possess the expertise to undertake comprehensive material balances or materials flow accounting can benefit exponentially from the estimation of key EPI.

5.5: Cost Categories

Some of the cost information that managers need to identify and project are environmental performance and the associated economic performance. EMA practitioners and researchers have developed various EMA methodologies and approaches that can be followed by various organizations.

In many if the manufacturing companies, material input are incorporated eventually into physical products including packaging and by-products. These are said to have potential environmental impacts when they leave the manufacturers. For instance, in the case where a product leaches out toxic materials after it has been disposed in a landfill at the end of its used cycle. Additionally, the extraction of natural resources has environmental impact such as disturbance in the ecosystem. Therefore, material related environmental impacts for a manufacturer product during the life-cycle from manufacturing and material extraction, final disposal and usage by the customer may outweigh the environmental impact of smaller amount of material left as emission and waste during the time of production. Also, this category includes cost involved for procuring material inputs that are then converted into product and then packaging (Hansen 2005).

The data on input or cost help an organization to manage cost effectively. Also, helps the organization for managing the material-related environmental impacts for all its product line. As an example, the firm may consider to replace toxic ingredient with less toxic material which can be a cost effective alternative in the long run. The physical accounting side of EMA also provides the information on the amounts and the flow of the material and product line needed to assess cost (Hansen 2005).

In spite the fact that the product outputs usually account for the biggest amount of the physical outputs for a manufacturing unit the total waste and emissions generated can be significantly higher and can prove to be large and costly. Thus, the cost category includes the costs associated for purchasing material inputs converted into NPOs. Although, it can be considered by organizations as related to efficiency or quality, they can be also taken as environment related as they help an organization to effectively manage cost and manage the environmental impacts of its emissions and waste. This can consider the cost for acquiring more efficient process equipment that only generates less waste per unit of product output. It has been seen that the material costs of non-product outputs are considered to be higher than the familiar environmental protection. Physical accounting side provides information on the amounts and the flows of materials and wastes needed to consider the cost in totality (Ratnatunga 2005).

It has been seen and dealt with that not all emissions and waste can be reduced. Some of them are inevitable but it is financial best interest of the organizations to use the materials, water and energy in as much less quantity for achieving their goals. Proactive and preventive environmental management that can help reduce the amount of the waste generation, also treating the waste material for reuse can reduce purchase costs of the material not used or lost as wastes. Therefore, assessment of these costs allows the managers to better understand the potential monetary value of the environmental management for preventive measures. In operations related to manufacturing includes, the processing cost of raw material and other materials. This has been adjudged till the point that till the point it is converted into waste and emissions. The processing costs can also include the proportion of equipment depreciation also the labor costs that can be aided to generate the emission and waste rather than producing the final product (Ratnatunga 2005).

Waste and emission control cost covers the costs of handling, treating and disposing emissions and waste. It may also include compensation costs and remediation related to environmental damage. Also, any regulatory compliance costs related to waste and emission control.

The prevention and other environmental management cost include the costs of preventive environmental management activities like the cleaner production, supply chain environmental management, extended producer responsibility etc. it also takes into account other costs for environmental management activities such as environmental systems and planning, measurement of environmental activities, and environmental communication.

Research and development costs include R&D activities undertaken for environment-related initiatives and activities. Examples cites are activities undertaken to research on toxicity of raw materials, developing of energy-efficient products and also testing and partnering in designing new equipment with higher materials use efficiency.

Under less tangible costs, both internal and external less tangible cost are included. This information is difficult to be located in organizations systems but can be potentially relevant in long term. Examples include liability, productivity, future regulation and stakeholder relations and externalities that effect the environment (Ratnatunga 2005).

Assessing the environment-related costs is undertaken at various levels. For instance, the total environment related costs of an organization can be assessed on the profit and loss account or on more detailed data on the information collected from a specific site or from the cost centers, product lines, materials or customer service. These cost data can help or aid in indicating the environmental performance into saving or potential cost incurred as used by traditional practices in an organization. Some of the individuals might prefer to see the environmental performance indicators expressed as monetary rather than in terms of physical. For instance, managers might not appreciate and do not want to pay attention to the total waste water generated each year but may take into consideration the estimated treatment costs of wastewater each year. Cost data along with the combined physical accounting data can create cross cutting EPI called eco-efficiency indicators. This concept bridges the gap between monetary and physical EMA for effective decision making (Adams 2004).

• Some of the environment-related costs can fit into more than one cost category.
• The cost incurred on purchasing these materials can be used to implement waste treatment equipment, which can also be placed under various headings.

The cost category taken for including such costs will generally depend on the availability of the detailed information and the usability of the data and company preference to treat and use the information. If the goal of the organization is to estimate and cumulate the annual environment related costs, precaution should be taken that it’s not being double counted by accidentally including it in more than one category. Most of the categories related to cost have subcategories such as depreciation of the equipment depreciation, personnel and material. It should be thought carefully that cost categories and its subcategories are described and linked to physical information (Adams 2004).

Product output and material costs covers purchase costs of materials that are eventually converted into product output. This is relevant only to sectors that produce physical product that are tangible such as in the manufacturing sector. The physical accounting side of EMA provides in-depth information about the amount and flows of material needed to assess these cost on an overall basis.

For accounting the Material purchase cost, organizations need to take into consideration the purchase costs of the below listed materials input that eventually becomes the cost of the product costs (Adams 2002).

• Packaging Materials
• Water
• Raw and Auxiliary Materials

Operating material purchase cost is not included in the category because these materials are not intended to be a part of the final physical product. It is also seen that water may either restrict usage in the final product or may be a part of the operating material. The portion of water incorporated for producing the final product may be included under the category.

Non-product output material cost covers the purchase the costs of materials converted into Non-product output. There are costs that an organization incurs as a part of the emissions generated as a part of the operations. The physical side of EMA provides information on the cost and flows of materials needed to evaluate these costs (Gray 2001).

Under the waste and Emission control costs, activities taken for controlling and treating all forms of waste and emissions after they have been generated such as solid waste, waste water, hazardous waste and air emission. Under the waste and emission control activities include, internal waste handling, equipment maintenance, waste and emission treatment. It is considered to be in the best interest of an organization if they try and minimize these costs while maintaining and securing high level of environmental performance. The category does not include environmental management activities that are intended to prevent generation of waste (Gray 2001).

Equipment Depreciation costs are one of the investment costs that is considered for a piece of equipment that is expected to be used over the period of time or is expected to be used over a lifetime. The cost is recorded on an annual basis. Other assets acquired or to be brought is also included in the category. Examples may include annual equipment leasing costs, the annual cost for constructing building and emission control equipment or costs for the purchase of land for using as a dumping ground. Waste and emission control systems also include standalone and control equipment which is installed for the sole purpose of controlling emissions and waste. Also the integrated equipment is also installed so that they are closely integrated into the actual production equipment. Organizations that have large equipment that are standalone waste and emission control equipment like waste water treatment plans often record the cost incurred which is related to operations of this equipment in a separate cost centers while recording the item in an accounting systems. In many cases, associated waste and emission control costs can also be taken directly from the cost centers reports. For companies that do not record the emission control equipment would have to spend time and energy to locate the same to find a long term solution (Gray 2001).

Prevention and other environmental management costs deal with the cost associated with an initiative to prevent the generation of emission and waste. It also includes the cost of the preventive activities taken for environmental management, for instance, proactive eco-system management etc. it also includes costs that are more generic activities undertaken under EMA such as environmental planning and systems, environmental measurement etc. It is also important to understand that preventive activities such as adopting cleaner production, on-site recycling etc plat a special role in environmental management. Costs incurred that are incurred for running activities under preventive environmental management activities often times only improve environmental management performance and does not assure any financial payback.

Earning and saving related to environment take place with the sale of scrap or waste, sales of excess capacity of the facilities instituted for waste treatment. Environment-related Earnings are derived from sales of scrap or waste (for reuse by another, revenue earned from the insurance reimbursement with regards to the environment-related claims etc. On the other hand, environment environment-related savings can be realized when only a current and defined changes in some way. For instance, if efficiency improvements only reduce the materials use and waste generation, the resultant of this can be monetary savings. This can be calculated by comparing the reduced costs with the previous years/quarters high costs. The savings occur only when preventive environmental activities are initiated by the organizations. These types of savings tend to occur when preventive environmental. Activities such as cleaner production, green design and research can be accounted under the category. Savings can also happen if environmental planning and systems are implemented adequately such as by implementing EMA (Envirowise 2003).

Under the distribution of costs by environmental domain, environment-related cost schemes use four types of cost categories i.e.

• Type of the environmental activities reflected by a category for instance, waste control vs. waste prevention.
• Some of the categories or buckets that are more representative of the traditional accounting and methods for example labor vs. materials.
• Categories related to environmental domain which can be land vs. water vs. air
• Categories that reflect data visibility in the accounting records such as hidden costs vs. obvious costs.

Environmental domain categories are used for complying with the external reporting requirement and also show useful and interesting trends and results for internal management decision making. The most commonly used application is benchmarking environmental costs under one domain (Envirowise 2003). EMA data can be analyzed, collected and used at different organizational levels such as • Used in a particular operational, waste or raw material
• Used for a process or equipment line
• Used by a particular product line
• Used by a facility or a single site
• Used by a particular division
• Or by an entire organization

From a point of view of an accountant, the starting point for EMA is always a list of accounts which s is the common source of all the information or data that an organization possess. Analyzing or working on a list of accounts always allows a n assessment of the organization wide annual costs which is related to environmental issues. It is believed that assessment of the list of accounts only leads to improvement in accounting and information system control. This allows the organization to understand the inconsistencies in the accounts and missing information or any misleading information that might help in understanding the irregularity.

From a manager who takes care of the environmental measures in an organization, the starting point may be conducting an EMA analysis of a selected waste stream. Production manager is likely to be interested in the EMA analysis of particular product line or product equipment that features the capacity of the instrument. The analysis would always require the manager to understand the entire systems but they would also have to enhance their knowledge by deeper study of the accounting systems in order to make the information available to all people.

Chapter 6: Case studies

6.1: SCA Graphic Laakirchen AG- Austria

SCA Graphic Laakirchen AG, which is a pulp and paper manufacturer in Austria, has been tracking monetary and physical information by successfully implementing EMA from 1999. With the consistent system or capturing and assessing material flows and environment related costs, it has been able to perform various tasks effectively. The organization uses the information collated through the system to make decisions related to general production and environmental management. SCA Laakirchen calculates the costs incurred on environmental related activities annually and the percentage distribution is projected in its environmental statement.

It has been noted that processing cost is often higher than the familiar environment related costs of emission and waste control. It has been found that the processing cost is four times as high in the case of SCA Laakirchen. On the other hand, prevention and other management related to environmental issue at SCA were quite low. This was in spite the fact that the company had implemented a number of preventive projects in the past years in order to incur significant savings. For instance, manufacturing output had risen up to almost 23% in the year 2002 and 2003, the usage of newspaper machine had always kept the total environment-related costs incrementally increased to over 14.5% over the same period. This also illustrates the overall financial impact of the company which was positive with regards to environmental management accounting is concerned. A detailed analysis of the cost changes from the year 2002 to 2003 also revealed an interesting concept. For instance, the overall costs of treating waste water plant did not change although it had to be enlarged to handle large quantity of water resulting to expanded production. This was due to the operational efficiency and maintenance of wastewater treatment plant that improved in several ways as it was expanded.

Costs for maintenance in other categories also did not see an upsurge. For example, the purchase costs of auxiliary materials increased due to expanded production and also because of rise in the international price rise. SCA Laakirchen also observed that the total costs and earnings across the different environmental domains remained constant over the period i.e. air/climate: 22%, waste: 23%, wastewater: 54% and other: 1%. The physical result of SCA Laakirchen’s environmental management initiatives was presented in the company’s annual environmental statement. For example, although the production increased about 23%, the water procurement increased by only 11%, the wastewater volume was only 13%. The increase was reported in terms of absolute terms, but improvements are noted in per unit of production. Usage of physical inputs such as recovered energy and paper, physical inputs also increased in terms of absolute number. This was also reflected in the eco-efficiency improvements.

 

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