Environmental Accounting

• Environmental Accounting Overview
– What is environmental accounting
– Why do environmental accounting
– What is an environmental cost
• System Strategies
– Reactive, Proactive, Leadership
• Business Purpose and Application
– Example - Cost Allocation
• Methodologies
Environmental Accounting Overview
What is environmental accounting?
– A flexible tool to provide information not
necessarily provided in traditional managerial
• Goal of environmental accounting is to
increase the amount of relevant data for
those who need or can use it.
• “Relevant data ” depends on the scale
and scope of coverage
Scale and Scope
• Applicable at different scales of use and
scopes (types) of coverage.
– Application at an individual process level
(production line), a system, a product, a
facility, or an entire company level.
– Coverage (focus) may include specific costs,
avoidable costs, future costs and/or social
external costs
Scale and Scope
• Decisions on scale and scope of
application significantly impact ability to
assess and measure environmental costs
– Process vs Facility
– Discreet costs vs Hidden vs Contingent vs
Image Costs
Why do Environmental
Accounting ?
• Environmental cost can be significantly reduced
or eliminated as a result of business decisions.
• Environmental costs may provide no added value
to a process, system or product (i.e. waste raw
material )
• Environmental costs may be obscured in general
overhead accounts and overlooked during the
decision making process.
Why do Environmental
Accounting ?
• Understanding environmental costs can lead to
more accurate costing and pricing of products.
• Competitive advantage with customers is
possible where processes and products can be
shown as environmentally preferable.
Environmental Costs
• Major challenge in application of
environmental accounting as a
management tool is identifying relevant
• Cost definition determined by intended use
of data (i.e. cost allocation, budgeting,
product/process design or other
management decision support).
Environmental Costs
• Types of Environmental Costs
– Conventional: material, supplies, structure and capital
costs need to be examined for environmental impact
on decisions.
– Potentially Hidden:
• Regulatory (fees, licenses, reporting, training, remediation)
• Upfront and back end (site prep, engineering, installation,
closure and disposal)
• Voluntary (training, audits, monitoring and reporting)
– Contingent: penalties/fines, property liability, legal)
– Image: Relationship with employees, customers,
suppliers, regulators and shareholders
Overview Summary
• Flexible tool to provide relevant data not
ordinarily captured in traditional systems.
• Successful application requires up-front
understanding of scale and scope of application.
• Once identified, information needs to be
communicated/distributed to decision makers and
considered as a component of management’s
decision making criteria
System Strategies
• Environmental Accounting systems
typically fall into one of three categories:
– Reactive
– Proactive
– Leadership
Reactive Systems
• Typically spread costs (capital and expense)
across various overhead categories.
• Environmental costs typically not assigned to
specific line/process or activity.
• Reactive system fails to provide indication or
quantification of environmental costs.
• As a result it fails to identify cost drivers and
minimizes opportunity to develop tactics to
reduce these costs.
Proactive systems
• Costs are categorized and assigned to specific
process and activities.
• Costs incurred can be identified, classified and
quantified but are limited to discreet costs.
• Decisions typically focus on incremental
activities ( i.e. minimize waste, etc.).
Leadership Systems
• Includes both financial and non-financial issues
in the relevant data used in the business decision
• Systems are designed to include value chain
• Both the process as well as the product are
evaluated for relationship between inputs and
overall value provided to minimize “total costs”.
• Utilization of data generated from
application of environmental accounting
tool can be used for a variety of decision
classes including:
Cost allocation
Capital budgeting
Product design
Cost Allocation
an example
• Goal - Bring environmental costs to
attention of corporate stakeholders.
• Four steps in environmental cost
Determine scale and scope of the application
Identify environmental costs
Quantify those costs
Allocate those costs to responsible product,
process or system
Traditional Cost System
Toxic Waste
Product B
Product A
Product B
Modified Allocation System
Toxic Waste
Product B
Product A
Product B
Related Accounting Topics
• Application of Environmental Accounting
typically used in conjunction with:
Activity Based Costing (ABC)
Total Quality Management (TQM)
Business Process Re-engineering
Balanced Score Card