Environmental
Accounting
Discussion
• 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
systems.
Goal
• 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
costs.
• 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
process.
• Systems are designed to include value chain
perspectives.
• Both the process as well as the product are
evaluated for relationship between inputs and
overall value provided to minimize “total costs”.
Application
• 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
allocation:
–
–
–
–
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
Other
Overhead
Toxic Waste
Product B
Allocated
Overhead
Product A
Product B
Modified Allocation System
Other
Overhead
Toxic Waste
Product B
Allocated
Overhead
Product A
Product B
Methodologies
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