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 Product A Allocated Overhead Product B

Modified Allocation System Other Overhead Toxic Waste Product B Product A Allocated Overhead 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