Environmental Accounting

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Environmental Accounting
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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

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Environmental Accounting Overview

• What is environmental accounting?
• A flexible tool to provide information not
  necessarily provided in traditional managerial
  systems.

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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

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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

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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

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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.

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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.

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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).

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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

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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 managements
  decision making criteria

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System Strategies

• Environmental Accounting systems typically fall
  into one of three categories
• Reactive
• Proactive
• Leadership

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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.

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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.).

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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.

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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

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Cost Allocationan 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

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Traditional Cost System
Other Overhead
Toxic Waste Product B
Allocated Overhead
Product A
Product B
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Modified Allocation System
Other Overhead
Toxic Waste Product B
Allocated Overhead
Product A
Product B
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MethodologiesRelated 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