ACCA PM Syllabus B. Specialist Cost And Management Accounting Techniques - How Do Organisations Control Environmental Costs? - Notes ^{7 / 7}

It is only after environmental costs have been defined, identified and allocated that a business can begin the task of trying to control them.

Let us consider an organisation whose main environmental costs are as follows:

1. waste and effluent disposal

2. water consumption

3. energy

4.  transport and travel

5. consumables and raw materials.

Environmental costs

1. Waste and effluent disposal

   There are lots of environmental costs associated with waste. 

   For example, the costs of unused raw materials and disposal; taxes for landfill; fines for compliance failures such as pollution. 

   It is possible to identify how much material is wasted in production by using the ‘mass balance’ approach, whereby the weight of materials bought is compared to the product yield. From this process, potential cost savings may be identified.

   In addition to these monetary costs to the organisation, waste has environmental costs in terms of lost land resources (because waste has been buried) and the generation of greenhouse gases in the form of methane.

2. Water

   Businesses actually pay for water twice – first, to buy it and second, to dispose of it.

   If savings are to be made in terms of reduced water bills, it is important for organisations to identify where water is used and how consumption can be decreased.

3. Energy

   A recent UK government publicity campaign reports that companies are spending, on average, an extra 30% on energy through inefficient practices.  

   With good energy management, we could reduce the environmental impact of energy production by 30% and slash 30% of the organisations’ energy expenditure.

   For example, environmental management accounts may help to identify inefficiencies and wasteful practices and, therefore, opportunities for cost savings.

4. Transport and travel

   Again, environmental management accounting can often help to identify savings in terms of business travel and transport of goods and materials. 

   At a simple level, a business can invest in more fuel-efficient vehicles.

5. Consumables and raw materials

   These costs are usually easy to identify and discussions with senior managers may help to identify where savings can be made. 

   For example, toner cartridges for printers could be refilled rather than replaced. 

   This should produce a saving both in terms of the financial cost for the organisation and a waste saving for the environment (toner cartridges are difficult to dispose of and less waste is created this way).

   It is equally important to allocate environmental costs to the processes or products which give rise to them. Only by doing this can an organisation make well-informed business decisions.

   For example, a pharmaceutical company may be deciding whether to continue with the production of one of its drugs. 

   In order to incorporate environmental aspects into its decision, it needs to know exactly how many products are input into the process compared to its outputs; how much waste is created during the process; how much labour and fuel is used in making the drug; how much packaging the drug uses and what percentage of that is recyclable etc. 

   Only by identifying these costs and allocating them to the product can an informed decision be made about the environmental effects of continued production.

Hansen and Mendoza (1999) stated that environmental costs are incurred because of poor quality controls.

Therefore, they advocate the use of a periodical environmental cost report that is produced in the format of a cost of quality report, with each category of cost being expressed as a percentage of sales revenues or operating costs so that comparisons can be made between different periods and/or organisations.

The categories of costs would be as follows:

1. Environmental prevention costs: the costs of activities undertaken to prevent the production of waste.

2. Environmental detection costs: costs incurred to ensure that the organisation complies with regulations and voluntary standards.

3. Environmental internal failure costs: costs incurred from performing activities that have produced contaminants and waste that have not been discharged into the environment.

4. Environmental external failure costs: costs incurred on activities performed after discharging waste into the environment.

Much of the information that is needed to prepare environmental management accounts could actually be found in a business’ general ledger.

A close review of it should reveal the costs of materials, utilities and waste disposal, at the least. The main problem is, however, that most of the costs will have to be found within the category of ‘general overheads’ if they are to be accurately identified.

Identifying them could be a lengthy process, particularly in a large organisation.

The management of environmental costs can be a difficult process.

This is because:

1. just as EMA is difficult to define, so too are the actual costs involved.

2. having defined them, some of the costs are difficult to separate out and identify.

3. the costs can need to be controlled but this can only be done if they have been correctly identified in the first place.

Environmental costs can be:

1. External costs

   Are costs that have an effect on society.

   For example:
   Carbon emissions
   Pollution
   Energy usage
   Use and waste of natural resources

2. Internal costs

   Are costs that influence only company itself.

   They have no impact on society.

   For example:
   Inspection of products to ensure regulatory compliance
   Emission permits
   Environmental fines and taxes
   Training of employees
   Decontamination and cleaning