Introduction to Environmental Management Accounting
Tuesday 21st of July 2015
Work time!. Jumped off my bed and quickly got ready for work. Did my usual because I was still awaiting a computer. So I brought out my books and started reading there. Then suddenly the HR lady came in and asked if i had been given a system, and I said no. In anger she asked me to follow her to the I.T department and said I should sit there and not go out till they go fix up a computer for me. This action quickly brought the IT staff to their senses and they came to set up a system for me. Now that’s more like it. I hate being idle, especially in an office environment where I am expected to be working.
So fixing it took the whole day and I left around 6 o’clock. On my way out, my senior colleague in charge of salaries told me that my cheque was ready. Omo if you see the way I was dancing shoki inside me eehn….lol….but he said that before I receive it I had to open a pension account. I said no ‘p’ ,that someone In the marketing unit has offered to open one for me.
So because my Cds was the next day, I would be receiving it on Thursday. Yaaay.. ’wonti sanwo oo!!’(Meaning they have paid money in Yoruba)…Got home elated and hit my books again and then read something on Environmental Management accounting.
Here it goes:
Environmental Management Accounting
Environmental management accounting is concerned with the accounting information needs of managers in relation to corporate activities that affect the environment as well as environment related impacts on the corporation.
All organizations are faced with issues relating to their environment, this includes:
a) Increasing legal and regulatory requirements relating to environmental management
b) Need to demonstrate effective environmental management to maintain a good public image
c) Need to meet customer’s needs and concerns relating to the environment.
d) Need to manage the risk and potential impact of environmental disasters
e) Recognizing the importance of sustainable development
Accounting helps managers identify and estimate the costs of environment, identify and separately monitor the usage and cost of resources such as water , electricity and fuel to enable costs to be reduced.
When companies take decisions, environmental management accounting would help in decision making on capital investment decision. This is because companies need to be socially responsible and carry out their business in such a way that would not bring in negative externalities to the populace.
Martin Bennett and Peter James, Green bottom line: management accounting for environmental and business benefit’ management accounting, November 1998. Came up with ways in which a company’s concern for the environment can impact on its performance. They include:
a) Short term savings through waste minimization and energy efficiency schemes can be substantial
b) Companies with poor environment performance may face increased cost of capital because investors and lenders demand a higher risk premium.
c) Pressure group campaigns can cause damage to reputation or additional costs.
d) Environmental legislation may cause the ‘sun setting’ of products and opportunities for ‘sun rise’ replacements.
e) The cost of processing input which becomes waste is equivalent to 5- 10 % of some organizations revenue.
Bennett and James went on to suggest six main ways in which business and environmental benefits can be achieved. They are:
a) Integrating the environment into capital expenditure decisions by considering environmental opposition to projects which would affect cash flows.
b) Understanding and managing environmental costs which are often hidden in overheads and environmental and energy costs.
c) Introducing waste minimization schemes
d) Understanding and managing life cycle costs.
e) Measuring environmental performance
f) Involving management accounting in a strategic approach to environment related management accounting and performance evaluation.
An environmental friendly organization should analyze the strategic picture and identify opportunities for practical initiatives. It should analyze short, medium and long term impact of possible changes in:
i) Government policies
ii) Legislation and regulation
iii) Supply condition
iv) Market conditions
v) Social attitudes
vi) Competitor strategies
Environmental costs to a company can be subdivided into two, which are Internal costs and external costs. Internal costs are environmental costs borne by the company, they have a direct impact on the income statement of the company. They may include:
a) Waste disposal costs
b) Regulatory costs such as taxes (companies with poor environmental management policies often have to bear a higher tax burden.)
c) Upfront costs for example costs of obtaining permits.
d) Back end costs such as decommissioning costs on project completion.
External costs are costs imposed on the society at large. They are not borne by the company that generates it in the first instance. They may include:
a) Carbon emissions
b) Usage of energy and water
c) Health care costs
d) Social welfare costs
e) Forest degradation
Accounting methods that may be used in environmental management accounting include:
1) Activity based costing: ABC allocates internal costs to cost centers and cost drivers on the basis of activities that give rise to the costs. In activity based costing, there might be environment related costs, which can be attributed to joint cost centers, and environment driver costs which tend to be hidden on general overheads.
2) Life cycle costing: Life cycle costing views a product’s cost throughout its life cycle from inception to its death. In terms of environmental accounting , life cycle costing is a technique which requires the full environmental consequences and costs arising from the production of a product to be taken account across its whole life cycle.
3) Input / outflow analysis: This records material inflow and balances this with outflows on the basis that what comes in must go out.
4) Flow cost accounting: The aim of flow cost accounting is to reduce the quantity of materials which as well as having a positive effect on the business total cost. In the long run. Flow cost accounting divides material flows into three categories which are material, systems and delivery & disposal.