lOMoARcPSD|20058336
Chapter 21
Measuring and reporting
sustainability
Assignment material
Questions
21.1
Define sustainability.
Solution:
There are over 300 definitions for the term ‘sustainability’.
The text definition is the best-known one from the Brundtland Commission of the
United Nations on March 20, 1987: ‘Sustainable development is development that
meets the needs of the present without compromising the ability of future
generations to meet their own needs.’
In 2005 at the World Summit this definition was interpreted to require the
reconciliation of environmental, social and economic performance. Some argue
that performance in these three dimensions can be mutually reinforcing, on the
other hand some environmentalists see economic development as irreconcilable
with protection of the environment.
Sustainability can be seen as a broad term conveying a general goal, much in the
same way that quality can be used in an ill-defined manner. The wide-ranging
nature of sustainability encompasses social (employees and the community),
environmental and financial (including resources) facets.
An interesting issue to explore is the importance of a shared understanding of the
goal (i.e., agreement on what sustainability means) in order to guide
organisational behaviour. When organisations use the term ‘sustainability’ in their
internal and external communications a complex set of values is implicit.
21.2
Explain what is meant by corporate social responsibility (CSR). How does
your definition of CSR differ from sustainability?
Solution:
Corporate social responsibility (CSR) is also known as corporate responsibility,
corporate citizenship, responsible business, sustainable responsible business
(SRB) or corporate social performance. Definitions include:
 the continuing commitment by business to behave ethically and
contribute to economic development while improving the quality of life of
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
1
lOMoARcPSD|20058336




the workforce and their families, as well as of the local community and
society at large.
<www.wbcsd.org/work-program/business-role/previous-work/corporatesocial-responsibility.aspx> accessed 5 January 2014
a concept whereby organisations take responsibility for their impact on
society and the environment.
<www.science.org.au/nova/034/034glo.htm> accessed 5 January 2014
the awareness, acceptance and management of the implications and
effects of all corporate decision making.
<http://wps.prenhall.com/wps/media/objects/213/218150/glossary.html#C
> accessed 5 January 2014
the concept that all companies have obligations to the wider community and
that good corporate citizenship extends further than simply following the law
<www.cirano.qc.ca/icirano/public/pdf/20101118_M-Boyer.pdf> accessed 5
January 2014
The Government sees CSR as the business contribution to our sustainable
development goals.
<http://webarchive.nationalarchives.gov.uk/
+/http://www.dti.gov.uk/innovation/sustainability/index.html> accessed 5
January 2014
Definitions and key constructs for CSR and sustainability have proliferated in the
past two decades. Historically, social issues have been grounded mainly in CSR,
and environmental issues under environmental management. The term
sustainability has been discussed in the textbook as inclusive of both social and
environmental issues.
CSR and Sustainability are terminologies used which are both seen as intending
to balance economic responsibilities with social and environmental issues (i.e.,
responding to issues beyond the traditional economic realm of profit
maximisation).
Some researchers argue that Sustainability (or corporate sustainability) is a
subset of CSR.
Another point of difference, particularly when it comes to research is the
application of the terms CSR and sustainability. Corporate sustainability
researchers tend to highlight the interconnectedness/interrelationships of issues
(i.e., ‘systems thinking’ as discussed in this chapter); whilst CSR researchers tend
to treat social and economic performance as independent issues.
Similarities between CSR and sustainability can be seen in definitions that include
terms like ‘equity’ or ‘fairness’. Social, environmental and economic performance
is also mentioned or implicit in these definitions. Sustainability is generally a
broader term, however, whereas CSR tends to focus on the organisation’s more
direct impacts.
21.3
Distinguish between intergenerational equity and intragenerational equity.
Solution:
Intergenerational equity is within an existing generation. The idea being that
sustainability relates to the distribution and consumption of the earth’s resources
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
2
lOMoARcPSD|20058336
by peoples in different countries, and within different socio-economic brackets
within countries. Intragenerational equity recognises the impact that existing
generations have on the ability of future generations to meet their needs.
21.4
How does ‘systems thinking’ differ from conventional approaches to
decision making?
Solution:
Systems thinking:
1. Recognises the larger context. These contexts include the economic,
social and environmental contexts that influence, and are influenced by,
decision making within the organisation.
2. Accepts uncertainty and ambiguity. The consequences of decisions are not
always easily predicted given the complex interrelationships between
economic, social and environmental performance. It is often necessary to
make subjective predictions.
3. Challenges our worldview. Values and attitudes differ greatly. Given the
global, intragenerational focus of sustainability it is important to challenge
our current worldview. For example, different cultural values should be
recognised as being equally valid.
4. Emphasises inclusion. Both within the organisation and between the
organisation and its external stakeholders, inclusion and consultation are
important to ensure that alternative viewpoints and values are considered
in the organisation’s decision making.
Note that these characteristics are highly related—e.g., the larger context creates
uncertainty and ambiguity which requires us to challenge our worldview by
obtaining input from various stakeholders.
Conventional approaches to decision making tends to be aligned with reactive
thinking (i.e., identifying and analysing past/existing data/issue/problem—and
identifying actions to resolve it). Hence, the conventional approach is more
aligned with ‘scientific thinking’: a scientific, linear process by breaking problems
into parts and resolving them separately; while systems thinking examines the
interrelations of various contexts that influence or an influenced by the given
issue/problem and solving the whole.
Systems thinking improves one’s ability to understand complex issues by
recognising and acknowledging the complexity by evaluating the ‘whole’ (i.e., the
bigger picture) and the interrelations of the parts.
Conventional approaches break the problems into parts or snapshots and tend to
seek for ‘cause-effect’ relations.
21.5
Why is systems thinking so important for managing sustainability?
Solution:
Systems thinking recognises the interdependencies between various inputs and
outcomes. This is particularly appropriate for managing sustainability given the
multiple dimensions of interrelated performance (economic, social and
environmental) that interact in complex ways over time.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
3
lOMoARcPSD|20058336
21.6
In what ways can environmental damage be seen as ‘market failure’?
Solution:
Market failure occurs when the allocation of resources is not optimal (i.e., it does
not maximise the welfare of society). Environmental damage can be seen as
resources being consumed (e.g., future productive capacity). This environmental
damage often involves a cost being borne by some (either now or in the future),
while the profit accrues to others. This is an example of an externality.
Externalities lead to ‘market failure’ because decision-makers do not bear, and
therefore do not fully incorporate, those costs into their decision-making. Ignoring
societal costs, now and future costs, leads to overconsumption.
21.7
How might market forces create incentives for organisations to be more
socially and environmentally responsible?
Solution:
When externalities are incorporated into decision-making, organisations will have
economic incentives to be more socially and environmentally responsible. This
may occur as governments impose fines or legal sanctions on organisations. A
carbon trading scheme is also an example of changing externalities into costs
that are borne by organisations, thereby creating incentives to be responsible.
As customers seek-out responsible organisations, or put pressure on existing
suppliers there will be greater incentives to behave responsibly.
Many organisations are also recognising that costs (particularly future costs) and
risk can be reduced through socially and environmentally responsible behaviour.
For example, current cost savings can be made by reducing waste and having a
more satisfied, and therefore productive, workforce. Future savings include
avoiding litigation, damage to reputation, improving ability to attract high-quality
employees.
21.8
Identify three business opportunities that have emerged with the
increasing concern for the environment.
Solution:
This solution lends itself to a variety of answers. For example, building and
installing solar panels, auditing energy use, producing and installing insulation,
inventing energy efficient products, monitoring and reducing water consumption,
recycling, certifying environmental performance, and the rise of organic
farming/agriculture.
As society became more environmentally aware and concerned, we saw a surge
of ‘environmentally-friendly’ products or services. For example, recycling services
(inks/toners for printers, mobile phones, computer accessories) We have seen
new products manufactured and sold, and services which make use of renewable
energy. For example, hybrid cars, alternative building and home-construction
methods.
21.9
Identify three business opportunities that have emerged with the
increasing concern for the welfare of society.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
4
lOMoARcPSD|20058336
Solution:
This solution lends itself to a variety of answers. For example, preparing CSR
reports, certifying CSR reports, training programs to increase sensitivity,
inspecting working conditions, providing services for disadvantaged members of
society, providing training (such as agricultural) to improve the living standards in
disadvantaged parts of the world, etc.
21.10 ‘Provide an example of a decision that would require managers to balance
the competing objectives of social, environmental and economic
performance.
Solution:
This solution lends itself to a variety of answers. For example, a decision about
whether to included palm oil as an ingredient in the manufacture of food products
has many implications:
Cost and Quality—Palm oil has characteristics that improve the quality of a food
item and which may increase its shelf life. There are also cost implications of
replacing palm oil with more expensive oils to achieve the same characteristics.
Environmental—Large tracts of land are being deforested so that palms can be
planted to produce palm oil. Converting forests to palm plantations has a
negative impact on biodiversity and reduces already limited areas that are
suitable for certain endangered animals.
Social—Small rural communities have relied on the forests for their livelihood.
Converting these to plantations eliminates their ability to gather food. Palm
plantations have a limited productive life, after which the land may be unsuitable
for agriculture. Furthermore, the rural communities often do not get the economic
gain from the conversion to palm plantations when they are run by large
corporations.
21.11 Provide an example of a decision that would lead to an improvement in
social, environmental and economic performance.
Solution:
This solution lends itself to a variety of answers. One example is given in the
Sustainability in Action feature, whereby Daimler–Chrysler sourced the headrests
for the Mercedes from coconut fibre. This was cheaper (economic benefit),
improved the functional characteristics of the headrests (economic benefit), used
a waste product that would otherwise go to landfill (environmental benefit) and
provided employment opportunities to a poor community (social benefit).
21.12 Define the term ‘externality’ and provide an example.
Solution:
An externality ‘is a cost or benefit arising from an economic transaction that falls
on a third party and that is not taken into account by those who undertake the
transaction.’ (D McTaggart, C Findlay & M Parkin, Economics, Addison Wesley
Publishers Ltd, Sydney, 1992, p. 467.) In other words, an externality occurs
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
5
lOMoARcPSD|20058336
where there is ‘a direct effect of the actions of one person or firm on the welfare
of another person or firm in a way which is not transmitted by market prices.’ (M
Katz & H Rosen, Microeconomics (2nd ed.), Irwin Inc., Sydney, 1991, p. 611).
A common form of externality is the impact on the environment. For example,
externalities generated by cars include: oil spills, ecological impact, noise,
congestion, consumption of fossil fuels that will therefore be unavailable to
future generations, etc.
21.13 Explain why it is difficult to identify and measure externalities.
Solution:
The possible environmental impacts of externalities are almost limitless and so
some boundary has to be placed on what will be recognised. Furthermore, placing
a value on ecological resources is also extremely difficult—value to whom and
from what use? Indeed, some would argue that putting a value on ecological
resources is inappropriate and leads to inappropriate decisions. For example, if
the introduction of a wood-chipping operation would lead to the extinction of a
particular type of moth, is it appropriate if the profit from the wood chipping
exceeds the notional value placed on the moth? What this highlights is the
subjectivity in establishing the value of the moth, and the significant implications
it can have on decision-making.
21.14 Provide examples of social and environmental costs that would be
incurred by an organization but which are unlikely to be identified in the
management accounting reports.
Solution:
The range of social and environmental costs is huge.
Some of the most obvious social costs come from producers of alcohol and
cigarettes. Estimates of economic costs of smoking, for example, include the cost
of healthcare, lost working days and lost earnings due to premature death. These
costs are borne by taxpayers, business and smokers and their families.
The social costs of alcohol abuse include both physical and emotional impacts.
Tangible costs include losses to the community relating to:
 Labour in the workforce (reduction in workforce, absenteeism),
 Labour in the household (premature death, sickness),
 Healthcare (net) (medical, hospital, nursing homes, pharmaceuticals,
ambulances, road accidents, fires), and
 Crime (police, criminal courts, prisons, property, insurance administration,
productivity of prisoners and resources used in abusive consumption)
Intangible costs in most studies worldwide, are estimated in terms of the dollar
value of loss of life—considered to be the loss of a year's living, and the pain and
suffering of road accident victims.
It is plain, however, that intangible costs to the community are far more than may
be measured in dollars. Isolation, neglect, aggression and disruption within the
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
6
lOMoARcPSD|20058336
family, particularly spouse abuse, are social costs that are intangible, though
profoundly important.
Environmental costs can include pollution from employees commuting to work,
which is influenced by the organisation’s decision about where to locate their
facility. More generally, the effects of climate change are expected to impose
significant costs including quality of life. Consider the populations of Pacific Islands
that are already being affected by rising water levels and increasingly severe
weather events. These climate change impacts then exacerbate social and
political tensions.
The range of possible costs is endless, which highlights the difficulty in
establishing the boundaries for reporting. Some organisations are beginning to
recognise and report on the costs that they impose, but focusing on positive social
and environmental impact is more common. In addition to attempting to portray a
positive image, this may also be because admitting the cost may make the
organisation liable to legal consequences.
See: Collins DJ, Lapsley HM. The costs of tobacco, alcohol and illicit drug abuse to
Australian society in 2004-05. Canberra: Commonwealth Department of Health and
Ageing, 2008. Available at
<www.nationaldrugstrategy.gov.au/internet/drugstrategy/publishing.nsf/Content/mo
no64/$File/mono64.pdf> accessed 5 January 2014.
World Health Organization, Strategies to reduce the harmful use of alcohol. Sixtyfirst World Health Assembly, A61/13, 20 March 2008.
<www.who.int/substance_abuse/facts/en/> accessed 5 January 2014.
21.15 Explain how the main types of emissions trading scheme (ETS) work.
Solution:
Emissions-trading schemes and associated policies generally include incentives
for carbon sequestration. Companies can offset the costs of emissions by
capturing and sequestering carbon. This could be through planting trees,
changing production methods, or investing in particular equipment and processes
to capture their own carbon emissions, or carbon dioxide from the environment.
21.16 Explain how the introduction of an ETS creates incentives to reduce
emissions.
Solution:
An emissions trading scheme (ETS) is designed to reduce greenhouse gas
pollution by providing economic incentives to companies to achieve a reduction in
greenhouse gas emissions, which are a cause of climate change. The value of
emissions trading (worldwide) is estimated to be US$3.5 trillion by the year 2020
and is growing rapidly as more countries join the international market.
ETS schemes broadly fall into two categories: cap and trade systems and baseline
and
credit systems.
 In baseline and credit systems, organisations that reduce their greenhouse
gas emissions are issued with credits that can be sold to the government,
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
7
lOMoARcPSD|20058336

or to other organisations that need the credits to comply with regulations
they are subject to. Funds available from the government or from other
organisations act as an incentive for organisations to seek out innovative
ways to reduce emissions.
In a cap and trade approach, the government sets a cap on the number of
greenhouse gas credits. A greenhouse gas credit is the right to emit a
certain amount of greenhouse gas. The government issues a certain
number of these credits to key industries, such as electricity producers.
Organisations can then sell unused credits, and this creates the incentive
to reduce emissions. The government can also reduce total levels of
pollution by progressively taking credits out of the market. Based on the
laws of demand and supply, this then increases the price. As the price of
credits goes up, the cost of emitting the pollutants also goes up and so
alternative, less-polluting technologies become more economical and
hence more competitive.
21.17 Provide an example of how an organisation might reduce the overall
environmental impact of its operations by working closely with suppliers
and customers.
Solution:
Examples in the chapter include car manufacturers working closely with
suppliers to minimise the cost of packaging. As noted in the opening vignette,
Toyota and Ford found costs savings and reduced their environmental impact by
working with their suppliers to reduce single-use transport packaging.
A number of case studies, many of which demonstrate cooperation between
suppliers and customers, can be found at:
<www.environment.nsw.gov.au/sustainbus/casestudies.htm>
accessed
7
January 2014. For example, a number of poultry producers got together to find
cleaner production processes. Some of the benefits they achieved are as follows:
‘Summertime, Cordina and Steggles worked with their suppliers to
implement initiatives to reduce packaging. After conducting a trial with a
major customer, Summertime replaced non-reusable cardboard cartons
used for transporting chicken products with reusable tubs. This has
yielded annual savings of over $60,000 and diverted over 38 tonnes of
cartons from landfill each year.
Cordina replaced product trays that had to be shrink-wrap sealed with
top-seal trays, resulting in a 4.5 tonne reduction in packaging used each
year.
Working with chemical suppliers, Cordina and Red Lea optimised
chemical use by improving application methods and switched to
environmentally preferred alternatives. This has reduced the toxicity of
the wastewater from the cleaning process.
Red Lea installed a unit which applies chemicals as foam and controls their
application during equipment cleaning, reducing chemicals used in the cleaning
process by 20–25%.’
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
8
lOMoARcPSD|20058336
21.18 List three potential
sustainability.
benefits
for
an
organisation
from
pursuing
Solution:
Three potential benefits for an organisation from pursuing sustainability are:
1. Costs may be reduced:
Less waste
Less risk of undesirable impacts of poor social or environmental
performance

More productive employees




2. Reputational effects:
Customers may prefer to purchase from a more sustainable organisation
Reduced threat of government intervention
Employees may prefer to work at a sustainable organisation
3. Competitive advantage from being prepared for future developments. For
example, changes that require less energy in the production process may
lead to a competitive advantage if the cost of electricity increases rapidly.
Creating a reputation for environmentally friendly processes may be
increasingly important if the community becomes more concerned about
the environment.
Also refer to Figure 21-5 which illustrates the realisation of returns as companies
move from left to right of the CSR curve. Figure 21.6 also looks at how an
organisation’s environmental performance can impact on cash flows.
21.19 List and briefly describe in your own words the principles for defining
report content as established by the Global Reporting Initiative (GRI).
Solution:
The Global Reporting Initiative (GRI) provides the world’s most widely used
sustainability reporting framework. The vision of GRI is that reporting on
economic, environmental and social performance becomes as commonplace and
comparable as financial reporting, and equally as important to an organisation’s
success. Such reporting is a demonstration of an organisation’s commitment to
sustainable development and provides a framework against which the
organisation can benchmark its performance across a wide range of economic,
social and environmental indicators. See Table 21.2.
21.20 List and briefly describe in your own words the principles for defining
report quality as established by the GRI.
Solution:
See Table 21.3
21.21 Consider the specific disclosures of economic, social and environmental
performance identified by the GRI in Table 21.4. Identify three measures
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
9
lOMoARcPSD|20058336
that you believe would be particularly difficult to obtain. Why is it
important that each of these be measured?
Solution:
Table 21.4 provides examples of the indicators, demonstrating the breadth of the
aspects of performance reported on within the following categories:
 strategy and analysis
 organisational profile
 report parameters
 governance, commitments and engagements
 environmental
 human rights
 labour practices and decent work
 society
 product responsibility
 economic.
The GRI helps organisations identify the scope of their impact. Measuring their
performance on this wide range of indicators presents a challenge for
management accountants. Furthermore, sector supplements recognise the
specific impacts of the activities of organisations in certain industries, such as
airports, construction and real estate, electric utilities, event organisers, financial
services, food processing, mining and metals, non-government organisations, oil
and gas, and media.
21.22 Why is it important that an organisation’s environmental management
system (EMS) has the support of both senior management and operational
employees?
Solution:
An EMS requires organisational resources to be implemented and maintained. It
also needs to be integrated into the organisation’s strategy and so top level
support is necessary. This top level support must also be communicated
throughout the organisation to generate support from all employees since their
daily operations will determine the success of the EMS.
21.23 Identify three of the benefits that an organisation can gain from
implementing an EMS.
Solution:
The benefits from an effective Environmental Management Systems (EMS) include
financial, operational and external.
Financial benefits include
 Cost savings from waste reduction
 Improved performance and efficiency
 Avoiding fines and penalties associated with environmental protection
legislation
 Lower insurance costs by demonstrating risk management
Operational and Internal
 A clear set of standards against which to benchmark performance
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
10
lOMoARcPSD|20058336

A systematic way to analyse, redesign and audit internal business processes
External
 Certification from an independent body.
 Improved reputation leading to improved sales
Community goodwill associated with better management of impact (e.g., noises,
smells, dust).
21.24 Explain how a balanced scorecard can be
organisation’s efforts to be more sustainable.
used
to
support
an
Solution:
The benefits of a balanced scorecard come from identifying important dimensions
of performance (thereby raising awareness) and showing how those specific
performance measures relate to each other (i.e., a strategy map).
Social and environmental performance can be captured in a separate balanced
scorecard, in which case the benefit comes from measuring and monitoring those
aspects of performance, and showing the lead indicators that must be invested in
to achieve the ultimate social and environmental objectives (e.g., cultural
sensitivity training to ultimately reduce the incidence of discrimination).
Alternatively, social and environmental performance can be integrated into the
more traditional balanced scorecard. This communicates the links between social,
environmental and economic performance and also communicates a higher level
of organisational commitment to these dimensions of performance.
21.25 Explain how activity-based costing (ABC) can be used to support an
organisation’s efforts to be more sustainable.
Solution:
Activity Based Costing (ABC) focuses on the activity as the unit of analysis.
Activities are then linked to costs by identifying the cause-effect relationships
(i.e., cost–drivers). This emphasis on managing effects by identifying and
managing the root causes can also be applied to the drivers of social and
environmental performance.
Understanding the costs of social and environmental activities can also be very
important in improving decision-making. For example, understanding the actual
costs (at least those that are incurred, externalities are still excluded) associated
with waste can be important in justifying investments to reduce waste.
21.26 Explain how life-cycle analysis (LCA) can be used to support an
organisation’s efforts to be more sustainable.
Solution:
Life Cycle Analysis (LCA) is a more comprehensive analysis of a product or
service’s impact across its entire lifecycle than Activity Based Costing (ABC).
Recognising the extent of the impact can be important in justifying changes.
Furthermore, because the analysis extends to suppliers and customers the effects
of decisions in one can be seen on the other. The economic and environmental
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
11
lOMoARcPSD|20058336
costs of a product’s disposal will be influenced by decisions made in the
production of the raw materials. For example, if a biodegradable alternative to
rubber could be found for tyres it would greatly reduce the economic and
environmental costs that the ultimate consumer (and society) bear in getting rid
of old tyres.
Similarly, LCA recognises that an organisation’s sustainability includes the
sustainability of its suppliers. In addition to the ethical issues of supporting
suppliers that are damaging the environment or mistreating people, connections
to such suppliers can impose a significant risk on the company.
21.27 Explain the key features of environmental management accounting (EMA).
Solution:
The key features of environmental management accounting are captured in the
definition provided by the US EPA (<http://www.epa.gov/ppic/pubs/busmgt.pdf>
accessed 7 January 2014) ‘the process of identifying, collecting and analysing
information about environmental costs and performance to help an organisation's
decision-making’.
These are also reflected in the International Federation of Accountants (1998)
definition of environmental management accounting:
The management of environmental and economic performance through the
development and implementation of appropriate environment-related accounting
systems and practices. While this may include reporting and auditing in some
companies, environmental management accounting typically involves life cycle
costing, full cost accounting, benefits assessment, and strategic planning for
environmental management.
The United Nations Division for Sustainable Development (UNCSD)
(<http://sustainabledevelopment.un.org/content/documents/policiesandlinkages.
pdf> accessed 7 January 2014) provides a slightly different perspective of
environmental management accounting. It emphasises that environmental
management accounting systems generate information for internal decisionmaking, where such information can be either physical or monetary in focus. As
the UNDSD states:
EMA (environmental management accounting) procedures for internal decisionmaking include both physical procedures for material and energy consumption,
flows and final disposal, and monetarised procedures for costs, savings and
revenues related to activities with a potential environmental impact.
Environmental management accounting can therefore, depending on the system
implemented, provide a broad range of information about financial and nonfinancial aspects of an organisation's environmental performance.
With the growing prevalence of environmental (and social) performance
indicators being used as a basis for assessing an organisation and its managers
(for example, in management remuneration plans) there is a need to have a mix
of both financial and non-financial indicators to assess an organisation's
environmental performance. For example, some managers might be rewarded in
terms of dollar savings in waste costs (a financial measure), whereas other
managers might be rewarded in terms of reduction in spillage rates (a nonfinancial measure).
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
12
lOMoARcPSD|20058336
According to definitions such as those provided above, environmental
management accounting systems have the dual purpose of managing and
improving the financial and environmental performance of an entity.
This can be contrasted to conventional management accounting systems
typically in use within organisations. Such systems do not give separate
recognition to environment-related costs or impacts, but instead focus on
particular issues on the basis of their economic or financial decision-making
relevance.
It should be appreciated that environmental management accounting can
generate information about how the use of resources with environmentally
related impacts affects the financial position and performance of organisations.
Environmental management accounting can also consider how organisational
operations impact environmental systems.
21.28 Explain the role of EMA in an EMS.
Solution:
Performance measures are essential in an effective EMS. Thus, organisational
managers will require a variety of information regarding their environmental
impact. EMA supplements the organisation’s accounting system by providing this
type of information (environmental impacts).
An EMS does not set environmental standards, but sets out procedures designed
to meet environmental performance requirements that are most relevant to the
organisation. It can also be integrated with other management systems (such as
occupational health and safety) to give a whole of business approach.
By implementing an EMS, an organisation can ensure that addressing
environmental issues is explicitly incorporated into normal business operations.
21.29 Identify the stages that an organisation might go through in its move
towards greater sustainability.
Solution:
The Seven faces identified by Interface (Figure 21-7) that an organisation might go
through in its move towards greater sustainability are: Eliminate waste, benign
emissions, renewable energy, closing the loop, resource-efficient transportation,
sensitising stakeholders, and redesigning commerce.
Note the increasing level of cooperation with outside stakeholders—i.e., suppliers
and customers.
Figure 21-5 identifies 5 stages: Legal compliance, strategic philanthropy, valuesbased self-regulation, efficiency, and growth platform.
21.30 Explain what ‘cradle to cradle’ means in regard to LCA.
Solution:
From the text, we were given the following description of ‘closing the loop’ in
Figure 21-7:
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
13
lOMoARcPSD|20058336
This involves designing the product to use recovered and bio-based materials in
the first place, and finding ways to recycle them at the end of their life cycle. This
is referred to as ‘cradle to cradle’—a continuous loop of reprocessing and reuse.
To be able to define ‘cradle to grave’: the instructor might advise students to look
at the article which was referenced on p561 of the text:
Schulz, T. 2009, ‘Surfboard Cradle-to-Grave Project’,
<http://best.berkeley.edu/~schultz/documents/The%20Surfboard%20Cradle-toGrave.pdf>, accessed 6 February 2013.’,
Life cycle analysis (LCA) assesses the environmental impact of a product or
service throughout all stage of its life from ‘cradle’ to ‘grave’. The stages of a
product or service often include:
 material extraction and processing of the raw materials
 manufacturing
 distribution and packaging
 product use
 disposal at end of product life
At each stages energy and raw materials will be consumed and there will outputs,
including pollution.
The scope of the analysis can be adjusted:
 Cradle-to-grave is the full Life Cycle Assessment from manufacture to
disposal.
 Cradle-to-gate is a partial life cycle analysis that stops when omits the use
and disposal phase.
 Cradle-to-cradle is the term used when the product is recycled, for
example glass bottles re-entering the manufacture process for glass
bottles, or a different product, such as glass wool insulation.
Gate-to-Gate is limited to the impact within the organisation.
21.31 Explain how social and environmental concerns may be consistent or
inconsistent with maximising shareholder wealth.
Solution:
There are examples of organisations that have made significant profits for
shareholders, at least in the short term, from activities that are exploitive of
either society or the environment. In such cases it is important to note that other
stakeholders have a legitimate interest in the organisation. Unfettered
investments in social and environmental performance are obviously untenable,
however. Not all such investments will be in the shareholder’s fiduciary interests
and an organisation cannot continue unless shareholders receive a reasonable
return on their investment.
Spending money to achieve social or environmental performance may seem
inconsistent with maximising shareholder value. However, there are reasons,
often not obvious, why good social and environmental performance is good for
shareholders. Figure 21-6 identifies the cash flows that may be associated with
environmental performance. Generally, the business case for sustainability
relates to improved reputation, which can increase revenues and decrease costs,
and direct costs savings through operating benefits from decreased waste and
increased productivity. In these instances, the interests of shareholders are
consistent with social and environmental performance. Even so, since the
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
14
lOMoARcPSD|20058336
benefits of investing in social and environmental performance are not often
immediate or easily identified it can be difficult to justify them to shareholders.
21.32 What incentives exist for organisations voluntarily to disclose their
performance in accordance with the GRI?
Solution:
There are a number of theories that help explain why a firm may voluntarily
disclose information about its social and environmental performance. Legitimacy
theory suggests that an organisation must conform to societal values to maintain
its ‘license’ to operate. It can also be argued that presenting such information is a
costly signal of good performance that distinguishes the organisation from poorly
performing organisations. That signal is valuable because it increases the
organisation’s reputation, which may be important for investors, customers, and
the government. It may also indicate that the organisation has less risk
associated with the negative consequences of poor social or environmental
performance (e.g., law suits or costly accidents).
The GRI, specifically, provides an assurance that the organisation has reported
according to a set of standards, rather than just those aspects of performance that
are positive.
The GRI identifies the following reasons for sustainability reporting:
 Stimulates internal and external communication about sustainability goals
and progress towards those goals;
 Enhances intra- and inter-departmental coordination in implementing
sustainability strategies;
 Enhances participation by various stakeholders in decision making and
governance;
 Assists in the integration of sustainability into operations, resulting in
enhanced operating efficiency and cost savings;
 Provides a stepping stone for establishing sustainability management
systems;
 Deeper knowledge of an agency’s activities enhances staff satisfaction,
which improves service quality and their overall confidence within the
organisation;
 Adds credibility to an agency’s work and allows them to serve as a role
model when calling upon other organisations to improve their
transparency and commitment to sustainability reporting;
 Allows for comparison and exchange of information among public
agencies in the same governmental level or similar public policy area
locally, regionally, nationally or globally; and
Offers a common reporting framework for the public and private sector to
synergise communication between different parties.
21.33 What are the arguments for the broad coverage of social and
environmental performance found in GRI reports? Can you think of any
arguments against such broad requirements?
Solution:
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
15
lOMoARcPSD|20058336
A broad coverage ensures that the organisation does not just report on
favourable aspects of performance. It also ensures that comparisons can be
made between firms on common measures of their social, environmental and
economic impacts.
Such a broad coverage, however, does increase the cost to the organisation. It
might be argued that the organisation should focus on those aspects of its
performance that have the greatest impact. Having so many measures may
distract attention from the most important (but as noted above, allowing
organisations to ignore the measures that they are underperforming in can create
a problem too). It is difficult to determine a set a measures that will be
appropriate for all organisations. For this reason, the GRI has special reports for
particular industries.
21.34 Why might the ‘invisible hand’, as Adam Smith described it, fail to achieve
the optimal use of raw materials?
Solution:
Adam Smith’s argument for the ‘invisible hand’ is discussed in the chapter. It
states in the argument that:
The prices paid for raw materials ensure that the world’s finite resources are
allocated to the production of goods and services that generate the greatest
revenue.
Hence, limited raw materials are allocated to goods and services with the highest
prices (where the highest value for most people is created).
In optimising the use of raw materials, organisations should consider various
impacts of the given raw material; the example in text book is the cost of coalelectricity generation. This includes looking at various internalised and
externalised costs. But also note that (from the chapter): ‘One of the
consequences of externalities is that the ‘invisible hand’ does not achieve the
optimal outcomes for society. This is because our behaviour as individual
consumers is driven by prices. When the full cost of utilising a resource, such as
water, is not incorporated into the pricing mechanism, we over consume it. In
contrast, when the costs of externalities are incorporated into the prices that we
pay for products and services, the decisions of billions of consumers around the
world will change.’
The ‘invisible hand’ is the notion that the market with achieve allocative
efficiency through the pressure of supply and demand. Products and services will
be supplied to the extent that individuals are willing to pay for them; therefore,
the total supply will equal the value that society places on those products and
services.
This allocative efficiency, however, relies on only the customer paying the cost,
and receiving the benefit, from the product or service. As costs are incurred on
others (for example the cost of dealing with pollution) the product or service will
be over-consumed. If the benefits accrue to individuals that do not have to pay
for them (for example, pedestrians benefit from cars with good brakes) the
product or service will be underprovided (hence the argument for government
regulation of safety).
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
16
lOMoARcPSD|20058336
21.35 Explain how recognising and incorporating the costs of externalities into
an organisation’s cost structure can change consumer behaviour.
Solution:
As the costs of externalities are recognised and passed on to consumers they will
put pressure on organisations to minimise that cost by managing the externality.
To the extent that the externality cannot be reduced, and consumers have to pay
the price, their level of consumption will decrease.
21.36 How can social and environmental impacts be incorporated into the
analysis of capital expenditure?
Solution:
Some social and environmental impacts of capital expenditure can be identified
and a monetary cost of benefit determined. For example, cost savings generated
from reducing waste or increased sales from environmentally sensitive customers
might be anticipated. Social costs that can lead to financial consequences such
as law suits can also be anticipated. The risk of possible environmental damage
or social backlash may also be incorporated through a higher discount factor to
reflect the higher risk. For example, considering an investment in a shipping
option that includes passage through, or close to, the Barrier Reef, may increase
the risk associated with running aground or having a spill.
It should also be noted that many social and environmental implications of a
decision can be very difficult to anticipate and express in financial terms.
Therefore, the result of a financial analysis of a capital investment decision
provides an input to the decision making process that must be augmented by
non-financial factors. Consequences.
21.37 Waste associated with computers and printers is an increasing problem
around the world. How might electronics manufacturers be involved in
reducing the problem by applying Ray Anderson’s ‘Seven faces of Mount
Sustainability’?
Solution:
Ray Anderson’s ‘Seven Faces of Mount Sustainability’ (Figure 21-7) include
eliminating waste, benign emissions, renewable energy, closing the loop,
resource-efficient transportation, sensitising stakeholders, and redesigning
commerce.
Possible ways to achieve these will differ greatly, however, the following are
illustrative examples.
1. Eliminating waste. This could apply to the production process and might
involve decreasing the raw materials used in production. Design changes
that decrease materials used, or more efficient production processes that
produce less waste.
2. Benign emissions. The choice of raw materials and materials used in the
production process to reduce the use of harmful materials.
3. Renewable energy. The production process might use renewable
energy, such as solar panels on the roof of the production plant.
4. Closing the loop. Designing the product so that it can be reused from
used products that are recovered from the customer.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
17
lOMoARcPSD|20058336
5. Resource-efficient transportation. Locating production facilities close
to the customer. Using the trucks that deliver the product to stores to take
back old products that the customers have returned.
6. Sensitising stakeholders. Stakeholders include suppliers, the
distribution chain and customers. Since significant savings can be
achieved by working together with stakeholders it is important that
stakeholders share a commitment to carefully managing the
environmental impact of the product and its use. For examples, customers
might be educated in the environmental benefits of reused and recycled
components, and the environmental damage of sending old products to
landfill.
7. Redesigning commerce. This is where entire business models are
rethought. As in the case of Ray Anderson’s Interface Company this might
involve selling the computing/ printing service to customers. This then
creates incentives for the company to design the product so that it lasts
and can be easily recycled since those costs are directly borne by the
company.
Exercises
21.38 Ecological footprint
Calculate your ecological footprint (a measure of the demands you place on the
earth’s ecosystem) by visiting the following website:
<http://www.footprintnetwork.org/en/index.php/gfn/page/calculators>. How could
you reduce your ecological footprint? If you were the management accountant
employed to assess the ecological footprint of your university, what sort of
ecological impacts would you expect and be looking for? What proposals might
you have to reduce the ecological footprint at your university?
Solution:
Ecological Footprint is the land and water area necessary to produce the
resources we consume and absorb the waste we create. The Environmental
Protection Agency of the Victorian Government defines Ecological Footprint as
follows:
In general, the Ecological Footprint measures resource consumption of human
activities across the whole lifecycle of a product or service and converts this to
the amount of land needed to supply the resources consumed and assimilate the
waste generated...
The Ecological Footprint does not account for hazardous impacts of products such
as the impact of dioxins released in the atmosphere, nor does it measure water
usage against water availability. The Footprint tool does, however, measure the
land required to eliminate Carbon dioxide (CO2) emissions and the impact of the
energy required to provide the water we consume.
Ecological Footprint accounts calculate humanity's demand on nature in specific,
understandable terms, using official government statistics. The accounts are
helping hundreds of individuals, businesses, governments and sustainability
practitioners around the world to more effectively manage the earth's ecological
assets and move society toward a sustainable way of living.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
18
lOMoARcPSD|20058336
Source:<www.epa.vic.gov.au/ecologicalfootprint/about/howitworks.asp>
accessed 7 January 2014
Factors that influence the footprint include location, diet (note the impact of
animal based products), amount of waste, extent to which resources are shared,
nature and size of buildings, and transportation choices. You can experiment with
the calculator to see the effect of making alternative choices. For example, how
often you eat meat, your transportation choices, etc.
Many of these factors are analogous to factors faced by organisations.
Furthermore, the exercise highlights the importance of quantifying the impact.
Although we expect that the type of diet is going to influence the footprint, the
extent of that impact may not have been known. In other words, the relative
impact of the various factors is important so that organisations can prioritise their
efforts to reduce that impact.
21.39 Sustainability issues
Imagine that you are a management accountant in one of the below
organisations listed below, and upper management has recently decided to begin
taking more proactive steps in managing sustainability issues and risks. What are
some of the key issues you might identify at each of the organisations?
a. Qantas Airways Limited
b. Commonwealth Bank of Australia
c. Coca-Cola Amatil
d. PwC Australia
e. The Australian Taxation Office
Solution:
Energy consumption, with its associated impact on greenhouse gases and fossil
fuel consumption will apply to all, but to different extents. Employee welfare
(conditions) is also important for all of these. A review of the GRI guidelines
identifies other general issues.
Some examples of specific issues that would be important are as follows:
a. Qantas Airways Limited
b. Commonwealth Bank of Australia
Banks often have a significant impact on the communities in which they
operate, particularly small, isolated communities for which banking services
may be otherwise difficult to obtain. Lending policies can be important. Some
banks, particularly in developing nations, have promoted social justice by
offering finance to women who had previously not been able to access debt.
This has allowed them to start businesses and thereby escape from poverty.
Interestingly, many of these ‘microfinance’ banks have also been very
successful. On the other hand, the Global Financial Crises (GFC) has imposed
significant costs of societies through irresponsible lending.
A specific supplement in the GRI exists for financial services. It identifies such things
as:
 EC2. Financial implications and other risks and opportunities for the
Organisation’s activities due to climate change.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
19
lOMoARcPSD|20058336

EC6. Policy, practices and proportion of spending on locally based
suppliers at significant locations of operation.
Financial institutions should report their policies and practices regarding threats
and violence in place to assist workforce members, their families or community
members which might occur, for example:
 attacks and aggressions by customers (verbal or physical) or others;
 bank robberies (e.g. kidnapping etc.); and
 as a result of legal reporting requirements on criminal activities
(e.g., money laundering, terrorism).
Policies and practices include education, training, counselling, and prevention and
risk-control programs.
Total direct and indirect greenhouse gas emissions by weight:
Financial institutions should estimate the greenhouse gas (GHG) emissions
resulting from their business travel as this represents one of the major direct
impacts of financial institutions. This estimate should include:
 travel on behalf of the company or use of the company fleet; and
 the use of courier services.
The DMA should include an explanation of the Organisation’s community
investment strategy in association with the data reported on community
investment (see EC1 and related commentary). This should identify strategy
elements related to:
 businesses goals for community investment across each community
investment type (see below);
 the intended benefits for the recipient and your business;
 desire/expected outcomes from the community investment activity;
 how community investment activities are identified and
management; and
 how performance and value for money is assessed.
FS10. Percentage and number of companies held in the institution’s portfolio with
which the reporting Organisation has interacted on environmental or social issues.
Community FS13. Access points in low-populated or economically disadvantaged
areas by type.
Community FS14. Initiatives
disadvantaged people.
to
improve
access
to
financial
services
for
c. Coca-Cola Amatil
d. PwC Australia
Accounting firms have an environmental impact based on their energy and
paper consumption. As a service, however, perhaps their biggest impact is
social. Legal and ethical behaviour is a particularly important issue for
accounting firms.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
20
lOMoARcPSD|20058336
A specific supplement in the GRI exists for financial services. The issues
associated with improving financial literacy of the community and involvement
with unethical or illegal customers would be particularly applicable.
e. The Australian Taxation Office:
Social equity and wealth redistribution are significantly influenced by the
income tax assessment act and the way in which the act is enforced based on
decisions made within the ATO. A specific supplement in the GRI exists for a
Public Agency. It identifies the following examples of performance indicators for
Public Agencies:
Economic:
 Total payroll and benefits;
 Total income broken down by capital and operating/recurrent revenue;
 Gross expenditures broken down by types of payment;
 Costs of all goods, materials and services purchased;
 Procurement policy as related to sustainable development; and
 Economic, environmental and social criteria applied to expenditures and
financial commitments.
Environmental:
 Direct and indirect energy use;
 Total water use and recycling and reuse of water;
 Land owned, leased, or managed in biologically diverse habitats;
 Greenhouse gas emissions;
 Total amount of waste by type and destination (includes recycling); and
 Incidents of and fines for non-compliance with all applicable
environmental laws.
Social






Organisational breakdown of workforce;
Practices on the recording and notification of occupational accidents
and diseases;
Average hours of employee training per year;
Senior management composition, including female to male ratio;
Descriptions of human rights policies, including applicability of those
policies to sub-contractors; and
Assessments of the efficiency and effectiveness of services provided by
the public agency.
PA 11. Describe procurement policy of the public agency as relates to sustainable
development.
Most public agencies have formal procurement policies that govern a significant
portion (but not all) of their expenditures. This indicator focuses on how these
policies; specifically address sustainability issues.
PA 12. Describe economic, environmental and social criteria that apply to
expenditures and financial commitments.
21.40 Externalities
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
21
lOMoARcPSD|20058336
Outline the key externalities that would be associated with the following
businesses. What steps might be taken by a government seeking to internalise
these externalities?
1. A large cotton farm based in northern NSW
2. Your university
3. A coal-fired electricity generator
4. A large supermarket chain
Solution:
1. A large cotton farm based in northern NSW.
2. Universities:
Whether education provides positive externalities or not is controversial. Some
argue that education decreases crime (with benefits for society), increases ability
to pay taxes (which also benefits others). Perhaps education can also make a
person more interesting (and even more attractive) and thus raise the utility of
others.
3. Coal-fired electricity generation:
These are identified in the chapter. They include health, ecosystem, roads,
pollution and quality of life.
4. Food processing:
Waste and pollution.
21.41 Ecological footprint, life-cycle analysis (LCA)
Outback Air Ltd provides an air-freight service to remote areas of Western
Australia. Outback Air’s operations manager is performing a life-cycle analysis to
determine the best approach to replacing the company’s ageing fleet of aircraft.
The following alternatives have been identified:
A. Purchase two new aircraft, each with a capacity of 1.5 tonnes. The aircraft
would cost $300 000 each and would consume around 33 litres of fuel per hour.
The planes would be flown for around 3000 hours per year. Annual maintenance
and registration would be around $15 000 per year. The aircraft would have an
effective life of 30 000 hours with zero residual value.
B. Purchase five new aircraft, each with a capacity of 0.5 tonnes. The aircraft
would cost $200 000 each and would consume around 25 litres of fuel per hour.
The planes would be flown for around 1500 hours per year. Annual maintenance
and registration would be around $12 000 per year. The aircraft would have an
effective life of 30 000 hours with zero residual value.
Required
1. What option would you prefer on financial grounds if the price of aircraft
fuel is $1.50 per litre?
2. What impact would the expectation of significantly decreased fuel prices
in the coming year have on your decision?
3. What other factors would you consider?
Solution:
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
22
lOMoARcPSD|20058336
Ecological footprint, life-cycle analysis (LCA)
Option A
2 x 1.5 = 3 tonnes
Option B
5 x 0.5 = 2.5 tonnes
Purchase cost
2 x A$300 000 =
A$600 000
5 x A$200 000 =
A$1 000 000
Depreciation per truck
A$300 000 x3 000hrs/30
000 per plane = $30 000
per year depreciation
A$200 000 x 1 500
hrs/30 000 per plane =
A$10 000 per year
depreciation
Total Annual Depreciation
(a)
Total Annual maintenance
(b)
A$60 000
A$50 000
2 x A$15 000 = $30 000
5 x A$12 000 =
A$60 000
Fuel
consumption
vehicle
33 litres/hour x 3000
hours= 99 000 litres
25 litres/hour x 1 500
hours = 37 500 litres
198 000 litres
187 500 litres
1.50
A$297 000
A$387 000
1.50
A$281 250
A$391 250
Total capacity
per
Total Annual Fuel
consumption
Cost per litre
Total Annual fuel cost (c)
Total Annual Running Costs
(a+b+c)
1.
2.
3.
Option A is preferable at current fuel prices.
Option B is less susceptible to increases in fuel prices.
Option B offers more employment (positive social impact but will also
increase the cost). Option A involves more total kilometres travelled, with
consequent negative externalities such as congestion.
21.42 Environmental cost analysis
Extreme Sensations produces deodorant. The production process for the
deodorant requires the use of a highly toxic chemical that acts as a catalyst in a
critical chemical reaction. After production is complete the waste must be treated
to neutralise the chemical before it can be released. Managing the environmental
impact of that chemical is very important to Extreme Sensations. The following
activities are involved in managing this toxic chemical:


Special employee training. Employees need to be trained in the correct
handling procedures to keep themselves safe and to avoid spills that
would get into the drains, and subsequently into the waterways.
Depreciation on treatment equipment. Prior to its disposal, the toxic
chemical, which is used as a catalyst in the production process, must
be treated.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
23
lOMoARcPSD|20058336



Fines. The government conducts surprise visits to the production
facilities and tests the level of toxic chemical in the emissions. Fines
are imposed if emission levels exceed the allowable levels.
Self-monitoring. Extreme Sensations monitors the output of their
treatment process prior to releasing the waste.
Emissions treatment. There are labour costs associated with operating
the treatment equipment.
Over the past six years the costs involved in each of these activities has been
determined as follows:
Required
1. Classify the environmental management costs as prevention, appraisal,
internal failure and external failure.
2. Evaluate the environmental management strategy over the six-year
period.
Solution:
Environmental cost analysis
1.
Extreme Sensations can classify their environmental management costs as
follows:
 Special employee training: Prevention because it is training to avoid the
spill occurring in the first place.
 Depreciation on treatment equipment: The emissions have been created
and this is part of the cost of dealing with them, so it is internal failure.
 Monitoring emissions: Appraisal to determine the extent of the emissions
 Treating emissions before release: The toxic emission has been created,
but is treated internally to avoid it being external failure
 Fines: External failure, because the impact extends beyond the organisation
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
24
lOMoARcPSD|20058336
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
25
lOMoARcPSD|20058336
2. Points in the analysis:
Total costs rose from 2013 to 2015 and then began to drop. Prevention, in total
and as a percentage, has increased steadily over the six years. Appraisal initially
increased, and then began to decrease. Reducing appraisal is appropriate given
the significant decreases in external and internal failure costs. This appears to be a
successful strategy. The initial investment in prevention and appraisal to improve
processes that are emitting toxic chemicals and resulting in fines can be reduced
when the production processes become safe and reliable.
Importantly, in percentage terms the relative proportion of external failure costs
has decreased steadily and significantly over the six years. This is particularly
important because external failure costs are often underspecified. In other words,
the fines that have been measured are probably only the tip of the iceberg when
it comes to external failure costs. The detriment to company reputation, risk of
large emissions resulting in law suits, etc., are more difficult to measure and
incorporate into the analysis.
21.43 Activity-based costing, activity-based management (continuation
of 21.42)
In addition to their standard deodorant, Extreme Sensations has developed a
revolutionary product that is highly effective. It is specially designed for mine
workers in North Queensland and Western Australia where temperatures often
exceed 40 degrees. One application of the new deodorant is enough to keep the
miners smelling sweetly all day long. Unfortunately, the process requires much
more of the highly toxic chemical. The activities involved in managing this toxic
chemical were described in Question 21.42. Extreme Sensations is also
concerned about allocating the costs of those environmental management
activities to the two products that utilise the toxic chemical, Seabreeze and
Rough Diamond. The total cost of the environmental management activities in
2013 was $25 600 and in 2018 was $29 750. These environmental management
costs have not previously been included in manufacturing overhead; however, an
analysis of the costs suggests that they can be allocated to the two products
based on the quantity of the toxic chemical used in production. Other information
for the two products is as follows:
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
26
lOMoARcPSD|20058336
Required
1. Calculate the environmental cost per gram of the toxic chemical in 2013
and 2018.
2. Allocate the environmental costs to the two products based on the
quantity of toxic chemical used in the production process for both years
and determine the total costs of production for the two products.
3. Calculate the profitability of each product and comment on your results for
2013 and 2018.
Solution:
Activity-based costing, activity-based management (continuation of
21.42)
1. Environmental cost per gram = total environmental costs divided by the total
number of grams used in production.
2009 = $25 600/ ((20 000 x 0.003) + (5 500 x 0.025)) = $129.62025 per gram
2014 = $29 750/ ((55 000 x 0.003) + (16 500 x 0.025)) = $51.51515 per
gram
2.
Environmental costs can initially be allocated to each product in total.
Seabreeze 2009: (20 000 x 0.003) x $129.62025 = $7777.22
Seabreeze 2014: (55 000 x 0.003) x $51.51515 =$8500.00
Rough Diamond 2009: (5 500 x 0.025) x $129.62025= $17 822.78
Rough Diamond 2014: (16 500 x 0.025) x $51.51515 = $21 250.00
3.
The unit cost of production for the two products:
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
27
lOMoARcPSD|20058336
Points to note:
a. The environmental cost management strategy discussed in question 14.42
has been effective in reducing the per gram cost of using the toxic
chemical. This is further emphasised by the fact that production levels
have increased significantly over the six year period, while total
environmental costs have decreased.
b. The profit per unit has increased for both products, this is despite a
reduction in price and the direct materials, direct labour, and
manufacturing overhead costs remaining the same. The increase in profit
per unit is particularly large for the Rough Diamond, which uses more of
the toxic chemical in its production process.
c. Extreme Sensations could further reduce their costs if they could find a
way to reduce, or eliminate, the use of the toxic chemical in the
production process.
21.44 Life-cycle cost (LCC)
Softly Ltd has three options to consider for the packaging of its fabric softener: a
4-litre bottle for the conventional product, a 1-litre bottle for a concentrated
version and a refill pouch (1 litre). An evaluation of these options will focus on the
materials used in the consumer package (the bottle) and the cardboard box used
to ship the product to the retailer.
The 4-litre bottle is the usual package for fabric softener in many countries. The
bottle and its lid are both high-density polyethylene (PET), each bottle has two
paper labels and four bottles are packed in one cardboard container.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
28
lOMoARcPSD|20058336
The 1-litre bottle contains a concentrated fabric softener that is equivalent to 4
litres of conventional product.
The bottle and cap are still made of PET, and there are two paper labels;
however, 16 bottles can be packed in one cardboard container.
The 1-litre pouch is a refill package. The contents of the pouch have to be added
to 3 litres of water in a conventional 4-litre bottle. The pouch is made of lowdensity PET and has a thin layer of high-density PET to provide the necessary
barrier. Twenty refill pouches are packed in a cardboard box.
Required
Analyse these three options. What additional information would you require?
Solution:
Life-cycle cost (LCC)
Transportation
Labels
4-litre bottles
4
2
1-litre bottles
4/16 = 1/4
2
1-litre pouches
4/20 = 1/5
Apart from knowing that the bottles use 1/4 as much cardboard and
transportation, and the pouches use no paper labels and 1/5 as much cardboard
and transportation as the 4-litre bottles we don’t know much at all. It would be
useful to obtain the following information:
 How far are the boxes transported
 What are the costs (environmental and economic) of transportation
 To what extent is transport cost determined by weight or volume?
 What is the environmental impact of PET
 What is the difference between the impact of high and low density PET
 What is the impact of cardboard production and disposal
 To what extent is the cardboard recycled
21.45 Environmental risk analysis
Jerrico Limited is an air-conditioning installation company that operates in
Sydney, Melbourne and Brisbane. The air-conditioners that Jerrico installs require
the use of a sealant which is known to be damaging to the environment. The
installation business also uses a fleet of vans which it services in-house at its
depots in each city.
Required
You have been asked by the Chief Operating Officer to prepare an environmental
risk analysis that includes an assessment of the measurement and control
requirements.
Solution:
Environmental risk analysis
Environmen
tal Aspect
Environmen
tal Impact
Likelihood
A: Almost
daily
B: Likely/
weekly
Conseque
nce
1:
Catastrop
hic
Risk
Significant?
rating
(yes / no)
(based
on
likelihood
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
29
lOMoARcPSD|20058336
Consumptio
n of Oil
Electricity
for the
office
Accidental
release of
oil
Accidental
release of
coolant
Controlled
disposal of
oil
Controlled
disposal of
coolant
C: Possible/
monthly
D: Unlikely/
annually
E: Rare
(may be
based on
assessment
or past
experience)
A
2: Major
3:
Moderate
4: Minor
5:
Insignifica
nt
and
conseque
nce from
Figure
21-4)
4
High
Yes
A
4
High
Yes
C
4
Medium
Yes
Pollution
C
3
High
Yes
Pollution
from byproducts
and energy
used in
process
Pollution
from byproducts
and energy
used in
process
Use
of
limited
resource
A
2
Extreme
Yes
A
4
High
Yes
Consumptio
n of nonrenewable
resource
Greenhouse
gas
emission
and use of
fossil fuel
Pollution
Washing
C
5
Low
No
down shop
floor with
tank water
Numerous assumptions need to be made to complete this risk assessment. This
highlights the importance of gathering information. Environmental aspects with a
high risk rating should be managed carefully. This will include measures that
capture the incidence of certain aspects (particularly those where the likelihood is
high) so that efforts to reduce their occurrence can be evaluated. Where the
likelihood is low, because the event is rare, attention should be directed at
identifying, measuring, and managing performance in preventing or managing
the event if it occurs. For example, training employees in safe procedures and
having appropriate equipment to avoid spilling oil, and having clean-up
equipment and training in place and maintained.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
30
lOMoARcPSD|20058336
21.46 Calculating environmental impact (continuation of 17.23)
Winchel Ltd provides an interstate moving service. Each year Winchel moves
approximately 5000 families. The average move requires 25 cardboard boxes.
Winchel Ltd purchases these cardboard boxes at a cost of $2.75 each. A
cardboard box has a useful life, on average, of three moves, after which it is
discarded to landfill at a cost of $25.10 per tonne. It requires one tonne of
cardboard to produce 350 cardboard boxes. Each tonne of cardboard requires 17
trees to produce and results in the emission of 1.52 tonnes of carbon dioxide.
Greg Lambert, the CEO, is considering changing from the use of cardboard boxes
to plastic crates. This would involve an initial purchase of 3000 plastic crates at a
cost of $15.75 each. Plastic crates are made from recycled bottles and last for
approximately 125 moves, on average, after which they are recycled. One plastic
crate is equivalent in volume to one cardboard box. Furthermore, they are more
easily handled by employees, resulting in fewer injuries and they provide more
effective protection for
customers’ goods.
Required
1. Calculate the annual cost savings of changing to plastic crates.
2. Calculate the savings in carbon dioxide emissions and trees from swapping
to plastic crates.
3. Discuss the other potential benefits of moving to plastic crates, and how
they might be incorporated into Greg’s decision about whether to change
to plastic crates.
Solution:
Calculating environmental impact (continuation of 17.23)
1. Cost savings:
Number of boxes moved each year = moves x boxes required per move = 125
000
Annual cost of cardboard boxes:
Boxes consumed per year: 125 000 boxes moved / 3 moves per box = 41 667
Replacing cardboard boxes: 41 667 x $2.75 = $114 584.25
Boxes to landfill: 41 667/ 350 = 119.05 tonnes x 25.10 per tonne = $2988.16
Total cost incurred: $114 584.25 + $2988.16 = $117 572.41
Annual cost of plastic containers:
Plastic containers consumed each year: 125 000 containers moved / 125 = 1000
Replacing plastic containers = 1000 x $15.75 = $15 750.
Annual cost savings: 117 572.41 – 15 750.00 = $101 822.41
Initial investment in purchase of plastic crates: 3000 x $15.75 = $47 250
Note that this initial investment would be recouped through costs savings in
less than six months.
2. Savings in carbon emissions = 119.05 tonnes of cardboard boxes that are
replaced x 1.52 tonnes of carbon dioxide per tonne of cardboard = 180.956
tonnes of carbon dioxide emissions.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
31
lOMoARcPSD|20058336
119.05 tonnes of cardboard x 17 = 2023.85 trees needed to produce the
cardboard that is discarded to landfill.
3. The savings in injuries can be expected to lead to fewer sick days, and
fewer workers compensation claims, and less recruitment costs associated
with replacing injured employees. The reduction in sick days and worker
compensation claims could be monitored and the cost savings calculated in
terms of sick-leave payments and workers compensation premiums. More
difficult to calculate would be the savings in lost productivity from
rescheduling work rosters when employees are injured, and worker
satisfaction from safer working conditions.
Decreases in customer claims for damaged goods has immediate cost savings
(the claims themselves and administering those claims) that can be
monitored. Improved reputation associated with safer transportation is more
difficult to measure but it is likely to lead to more business and perhaps more
valuable business (the company could specialise in transporting fragile items).
Safer containers might also lead to less time spent packing because less
wrapping is necessary if the container provides more protection.
21.47 Measuring social and environmental performance
Jamie Manon is the management accountant for LIFT, a not-for-profit organisation
that helps place intellectually disabled people (clients) into the workforce. LIFT
receives donations from the public and a placement fee from the government for
each individual who receives employment. Jamie works very closely with local
employers to find a good match between clients and employers. The Vision
Statement for LIFT is to recognise the value of all people and to strengthen the
communities in which they operate. Their mission is to deliver exceptional
training that is client focused and appropriate to employers’ needs. They are also
committed to growth and geographical expansion.
Required
1. Identify at least two measures each for social, environmental and financial
performance that you believe would be important for LIFT’s sustainability.
For each measure, indicate why it is critical to achieving Lift’s vision and
mission.
2. In what ways might LIFT benefit from adopting an external reporting
framework?
Solution:
Measuring social and environmental performance
1. Possible measures may include:
 Social: Social performance is fundamental to LIFT’s mission. Measures
might include: Number of individuals placed per annum, length of time
that individuals stay within the organisation at which they are placed,
customers (those placed and employers) satisfaction ratings.

Environmental: Although not central to their mission, LIFT will have an
environmental impact that can be measured and managed. For example,
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
32
lOMoARcPSD|20058336
the kilometres travelled by those making the placements, or even the
kilometres travelled by clients (if they can be matched with a nearby firm
the travel will be reduced). Paper and photocopying, and energy use (air
conditioners, etc.) are also common environmental impacts of service
organisations.

Financial: Costs must be managed very carefully. Since resources available
from government and the community are limited their efficient use
determines how the service that can be provided. The efficiency of
achieving the mission can be measured in cost per placement, or the
proportion of funds spent in providing services, compared with funds spent
in administration.
2. An external reporting framework provides guidance that can help to
identify important factors that should be measured. It also provides
comparability—LIFT and LIFT’s stakeholders can benchmark performance
against other similar organisations, or other organisations that are leaders
in particular aspects of performance. LIFT relies on donations from the
public and from the placement fee from the government.
In both cases, LIFT must be able to demonstrate the effectiveness of their
services. An external reporting framework provides an external benchmark and a
set of performance measures that increases the confidence of the public and the
government in LIFT’s performance.
21.48 Incorporating externalities into economic decisions
PJ Limbo Ltd operates a call centre for a number of insurance companies and
banks. PJ Limbo is currently located in the centre of Sydney; however, they are
considering relocating their operations due to very high rents and wages. The
manager of PJ Limbo, Jeff Hadley, is considering two options for the relocation.
The first option is Wamboa, a small rural town in central NSW, where the main
employer, a coal mine, has recently closed down and there is very high
unemployment. The second option is to outsource the call centre to a company
located in the Philippines where rent and labour costs are very low. Training for
the call centre can be completed in approximately two weeks and both the rural
town and the operation in the Philippines are serviced by reliable phone and
internet connections.
Required
Identify two social, two environmental and two economic factors that might affect
this decision.
Solution:
Incorporating externalities into economic decisions
Various responses, for example:
 Social: Average wage, total wages injected into the local community, age
of employees, gender diversity, etc.
 Environmental: Distance travelled by employees to work, methods
travelled to work, energy consumed, etc.
Economic: Average wage, cost per call, rent, etc.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
33
lOMoARcPSD|20058336
Problems
21.49 Sustainable supply chains, GRI Standards
Review the following GRI 400 series standards that focus on the Social dimension
(the
full
standards
are
available
at
the
GRI
website,
<www.globalreporting.org/standards>).
401:
409:
412:
413:
416:
417:
419:
Employment
Forced or Compulsory Labour
Human Rights Assessment
Local Communities
Customer Health Safety
Marketing and Labelling
Socioeconomic Compliance
Required
Consider what issues would be likely to be relevant to the disclosures required
under these standards by Australian retailers, such as David Jones, that source
products from across Asia.
Solution: (30 min.)
Sustainable supply chains, GRI Standards
Tables 21.2 and 21.3 present the GRI principles for defining report content and
report quality. The standard disclosures required in a GRI report illustrate the
broad economic, social and environmental impacts that organisations have. Table
21.4 provides examples of the indicators, demonstrating the breadth of the
aspects of performance reported on within the following categories:
 Strategy and analysis
 Organisational profile
 Report parameters
 Governance, commitments and engagements
 Environmental
 Human rights
 Labour practices and decent work
 Society
 Product responsibility
 Economic.
For additional information, see https://www.globalreporting.org/standards
21.50 Life-cycle analysis
Prepare a life-cycle analysis for a smartphone. Try to identify as many of the steps
and inputs as possible, from inception to consumers using and ultimately
disposing of the phone (make assumptions where necessary).
At each stage, identify as many social and environmental impacts as you can.
Solution:
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
34
lOMoARcPSD|20058336
Life-cycle analysis
21.51 GRI reporting
Referring
to
GRI
103,
which
deals
with
boundary
setting
(<https://www.globalreporting.org/standards/media/1038/gri-103-managementapproach-2016.pdf#page=6>), identify one key topic and the main factors that
would need to be considered in determining boundaries for that topic in a
sustainability report for the following businesses:
1. Nike
2. Kmart
3. Origin Energy
4. Rio Tinto
Solution:
GRI reporting
1. Performance data
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
35
lOMoARcPSD|20058336
a. Control and significant impact—e.g., a subsidiary in Africa that is using
child labour.
2. Disclosures on management approach
a. Significant influence and significant impact—e.g., a major customer, such
as Cadbury, of a supplier that is devastating the ecology of some Asian
countries to produce palm oil.
3. Narrative reporting on issues and dilemmas.
a. No influence but significant impact—e.g., a small scale diamond retailer
may comment on the issue of conflict diamonds and express a
commitment to purchasing from a reputable wholesaler even though their
small purchasing power means they have little or no influence (at least
individually).
21.52 Emissions trading schemes
Orange Energy is an Australian electricity company operating one hydroelectric
and two coal-fired power plants in central New South Wales. You have been
tasked by the CFO to prepare a brief memo with a high-level overview of how
Australia’s Emissions Reduction Fund (or other current government greenhouse
gas emissions reduction policy) may affect or provide opportunities for the
business.
Required
Referring to the relevant Australian government websites, outline what impacts
and what opportunities might be available to Orange Energy through the relevant
government program. The memo should be kept brief and does not need to go
beyond the high-level impacts and opportunities.
Solution: (20 min.)
Emissions trading schemes
21.53 Cost classification and relevant costs—incorporating
environmental impact
Hinterland Feijoas produces a variety of products from feijoas (a type of fruit).
Their product is certified organic and their jams, chutneys and balsamic glazes
are shipped throughout New Zealand. The CEO, Anna Tearoa, is considering a
new product line of dried feijoa. The drying process requires significant amounts
of energy. Two alternatives are being considered. The first option, which is the
standard process in the dried-food industry, is an electric dryer. The alternative is
a solar kiln. Anna is committed to sustainability and has developed a customer
base on the basis of Hinterland’s organic
production practices. She believes that an additional premium can be charged,
and that more product will be sold, if the product is dried using a solar kiln. The
projected fixed and variable costs are outlined in the following table:
Sales price per package
Projected annual sales
500
Capital investment—annual fixed cost
(electric kiln or solar kiln)
Electric kiln
$4.55
20 000
$4500
Solar kiln
$4.65
22
$11 000
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
36
lOMoARcPSD|20058336
Electricity consumption per package
Other variable costs per package
Electricity cost per kWh
1.68 kWh
$3.95
$0.136 kWh
nil
$3.95
Required
1. Determine the break-even point for the two options.
2. Assume that both the electric and the solar kiln will last for 10 years.
Calculate the total profit for both options.
3. The price of electricity is expected to increase by 500% over the next 10
years. Calculate the profit for the electric kiln option in year one (where
electricity is $0.136 per kWh) and year 10 (where electricity is expected to
be $0.68). Assume that all other factors remain constant.
4. Evaluate the two options and make your recommendation.
Solution: (20 min.)
Cost classification and relevant costs—incorporating environmental
impact
1. Breakeven
Electric Kiln
Solar Kiln
a. Fixed Costs
4500
11 000
b. Selling Price
$4.55
$4.65
c. Variable Cost
4.17848*
3.95
d. Contribution Margin (b – c)
0.37152
0.70
e. Breakeven Point (a/d, i.e.,
12 113
15 715
fixed costs / CM)
*1.68 kWh x $0.136 = $0.22848 + 3.95 = $4.17848
2. Ten Years
Electric Kiln
Solar Kiln
Sales Price
$4.55
$4.65
Variable Cost
4.17848
3.95
Sales Volume
20 000
22 500
Revenue
less Variable Costs
Contribution Margin
Less Fixed Costs
Profit
91 000
83 569.6
7 430.4
4 500
2 930.4
104 625
88 875
15 750
11 000
4 750
3. Years 1 and 10, assuming electricity prices increase.
Electric Kiln
Year 1
Year 10
$4.55
$4.55
$4.17848
$5.0924*
20 000
20 000
a. Sales Price
b. Variable Cost
c. Sales Volume
Revenue (a x c)
Less Variable Costs (b x c)
91 000.00
83 569.60
91 000.00
101 848.00
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
37
lOMoARcPSD|20058336
Contribution Margin
Less Fixed Costs (given)
Profit
7430.40
4 500.00
$2 930.40
(10 848.00)
4 500.00
($15 348.00)
21.54 Life-cycle analysis and external reporting
Jonsen and Kimble Ltd (JKL) produces baby care products. JKL prides itself on its
commitment to environmental protection and many of its advertisements focus
on its slogan, ‘Taking care of your baby, and your baby’s future’. One of their
most popular products is a sky-blue nappy with pictures of the earth that glow
softly in the dark. Producing this effect requires a chemical process that produces
dioxins (a highly toxic and persistent organic chemical) as a waste product. The
Australian government introduced a national approach in 2000 to deal with
dioxins, which included measurement and reduction programs. In response, JKL
decided to outsource production to a Pacific island nation where unemployment is
a major problem. JKL does not have any ownership interests in this production
company, but is its only customer. The government of the Pacific nation was very
pleased to have this employment opportunity moving to its country and has been
willing to ignore the possible detrimental impact on the local environment. Now
the only problem facing JKL are criticisms that the nappies are not biodegradable.
JKL is not concerned, however, since that is a problem for its customers.
Required
1. Discuss the principle of life-cycle analysis and how it might apply to JKL.
2. JKL is considering preparing GRI reports. Will JKL be required to report on
the production of the nappies? Why or why not?
3. What options might be available to manage JKL’s environmental impact?
4. What arguments can you provide for JKL to incur additional costs to reduce
the environmental impact of the production and disposal of their nappies,
even though production and disposal are performed by others?
Solution:
Life-cycle analysis and external reporting
1. Life-cycle analysis extends beyond the company’s boundaries. There are a
number of impacts that might be considered. Although the creation of jobs
for the residents of this island nation is positive, it also comes with a loss
of jobs in Australia. Given that they have been purchasing from the island
nation for some time now, the company on the island is a major employer
and its closure would have significant implications for the people of the
island, any decision to move production back to Australia would have to
be made very carefully. LCA might also consider the energy requirements
involved in transporting the nappies to Australia.
Regardless of where the production takes place the production of Dioxin is
a significant impact on the environment. It is caused by a decision at JKL
to have nappies with particular features. Outsourcing production to the
island nation does not eliminate JKL’s responsibility. According to LCA, JKL
also has a responsibility to consider the effect that their product has after
it has been sold and used by their customer. Once again, the design
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
38
lOMoARcPSD|20058336
decisions made by JKL will significantly impact on the environmental
impact of the nappies.
2. Based on Figure 21-9 it can be argued that JKL has control over the entity
(the company that produces the nappies). Although there is no legal
ownership, the fact that it is the only customer and that JKL determines
the nature of the product being produced could be used to argue that JKL
has control. If not control, JKL certainly has significant influence.
Therefore, JKL must provide performance data or disclosures on their
management approach.
3. This is an open-ended question. Some ideas:
a.
Production:
 Change the design of the nappies to reduce or eliminate the
emission of dioxins;
 Change the production processes to reduce emissions;
 Use biodegradable raw materials;
 Source raw materials on the island to reduce transportation;
 Focus on efficient transportation to reduce the environmental
impact; and
 Move production back to Australia while finding an alternative use
for the production facilities that would maintain the employment
opportunities.
b. Disposal
 Change the design of the nappies (biodegradable, less size, have a
multi- use outer and a disposable liner, etc.); and
 Provide a collection service and recycle or dispose of the used
nappies responsibly.
4.
The arguments for incurring costs to be more environmentally
responsible include the risk of ruining their reputation through
association with environmental degradation. This would include media
attention to the environmental impact on the island nation. Furthermore,
the nappies continue to be recognised as a JKL product after they are
sold. If they are seen to be discarded irresponsibly that will have a
detrimental impact on the brand image. Conversely, be proactive in
managing the nappies across their entire lifecycle would contribute to
their brand image.
Changing government regulation may also create risks into the future
that can be dealt with proactively.
21.55 Environmental cost classification and management
Trevor Jackson operates a chartered diving business out of Cairns that takes
divers to remote areas of the Great Barrier Reef. The industry is heavily
regulated, with safety being a primary concern. Operating within the boundaries
of the Great Barrier Reef Marine Park means that special attention must be given
to managing the environmental impact of the boat and divers. Trevor’s licence to
operate in these waters is contingent on meeting strict standards that are
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
39
lOMoARcPSD|20058336
designed to protect the reef from damage. If Trevor is caught breaching any of
those regulations he will receive a warning and a $1500 fine.
After three warnings in a single year, his licence will be revoked. Breaches occur if
one of his boats is caught dumping its garbage, spilling fuel or damaging the reef
with its anchor. Divers’ actions can also lead to breaches that Trevor will be
responsible for, for example if they are found to be removing coral or killing any
marine life.
Trevor manages three boats that take approximately 900 divers to the reef each
year. Each boat has five crew members. Turnover in the industry is high, as
master divers come from around the world to work on the reef for 4–5 months
before moving on.
Trevor has identified the following costs for 2016–2018 that were associated with
managing the environmental impact of his operations:
2016
2018
Fines incurred (external failure cost)
—
3000
Training in marine park regulations for
new staff members
4500
1000
Regular inspections to ensure that boat
motors are not releasing oil into the water
1500
1500
Boat maintenance
250
1250
Regular assessment of employees’
environmental management skills
220
100
2017
1500
2000
1500
1300
150
Trevor has heard about the importance of minimising external failure costs and he
is very proud that his external failure costs are such a low percentage of his total
costs. He also notes that he does not have any internal failure costs.
Required
1. Classify the costs incurred as prevention, appraisal, internal failure and
external failure.
2. Calculate each as a percentage of the total environmental management
costs.
3. Comment on the management of environmental costs in the context of
Trevor’s business, and the value (or lack thereof) of classifying costs in this
manner.
Solution:
Environmental cost classification and management
1. and 2.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
40
lOMoARcPSD|20058336
Although it appears that Trevor is doing well in 2016 with no fines and the highest
proportion of costs incurred being for prevention, the reduced spending on
training in 2017 and 2018 is increasing the proportion of costs associated with
external failure. Although the total cost of environmental performance has
decreased over the three years, the level of risk has increased dramatically. In
2017 there was one fine, in 2018 there were two fines. Note that if Trevor has
three fines in a single year his license to operate will be withdrawn.
21.56 Environmental cost classification and management
Trevor is concerned about managing the risks of the operation. Use the risk
analysis tool to identify an example of a risk that is unlikely but would be
catastrophic, and a risk that is likely but has minimal environmental impact.
Comment on the importance of considering likelihood and consequence.
Solution:
Environmental cost classification and management
Based on Figure 21-4 and Table 21-5 environmental risks can be classified
according to likelihood and consequence. Many different examples might be
offered. For example, the risk that the boat’s anchor will cause some damage to
the reef is likely and so need to be managed carefully.
The risk that the boat will run aground and sink, releasing oil and other pollutants
and resulting in the loss of human life is very rare but the consequences are
catastrophic and so careful attention and prevention is warranted.
Collaborative Learning Problem
21.57 Life-cycle analysis and business case for sustainability
Coolum Springs Mountain Water (CSMW) bottles water at its plant in Coolum,
Queensland. The water comes from an aquifer deep below the surface. It is
bottled in 330 ml, 600 ml and 1 litre PET plastic bottles, packed in cardboard and
transported by truck to warehouses throughout the eastern states of Australia.
From the warehouses it is distributed to small shops. About 30% of the bottles
find their way into recycling.
Required
1. Prepare a diagram to show the life-cycle for a bottle of CSMW water.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
41
lOMoARcPSD|20058336
2. For each of the stages in the life-cycle, identify whatever impacts on
society and the environment that you can think of.
3. What might CSMW do to minimise any detrimental social or environmental
impacts that you have identified?
4. Prepare a brief report to the shareholders of CSMW explaining why it is in
their best interests to carefully manage the organisation’s environmental
impacts.
Solution:
Life-cycle analysis and business case for sustainability
1. Product life-cycle diagram for bottle of water:
2. The extraction of water from the aquifer may impact on water
can affect local water supplies. Transportation of water to
facility, or from the bottling facility to retailers is likely
significant environmental costs. Transportation also increases
on roads, increases the probability of road fatalities, etc.
tables that
a bottling
to impose
congestion
3. Providing employment, and otherwise injecting money into the local
community, is an important social contribution. Attention must be given,
however, to fair pay and good working conditions. The global reporting
initiative provides a comprehensive set of measures that include social
and environmental. For example, the ‘ratio of basic salary of men to
women by employee category’ (See Table 21.4).
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
42
lOMoARcPSD|20058336
4. The report can illustrate some of the ways in which the detrimental effects
of CSMW’s operations could be reduced by understanding the impacts of
their decisions throughout their product’s lifecycle, including production
and disposal of the bottles. Making ‘good’ choices can have important
social and environmental benefits. As noted in Figure 21-5, some
organisations may pursue such objectives for philanthropic reasons, or
because of a recognised responsibility. As the social and environmental
impact becomes significant, laws may require CSMW to take responsibility
for the impacts of their products. Being ahead of regulation and public
sentiment can provide a competitive advantage and have positive
economic benefits, as illustrated in Figure 14-6. In summary, an appeal to
the shareholders can be based on both corporate responsibility and
economic grounds.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost
Accounting 3e
Downloaded by Alex Keith (alxket97j@gmail.com)
43