Dada Adefolami

IDENTIFYING ENVIRONMENTAL COSTS
Much of the information that is needed to prepare environmental management accounts could be found in a business’ general ledger. A close review of it should reveal the costs of materials, utilities and waste disposal. 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 organization. The fact that environmental costs are often ‘hidden’ in this way makes it difficult for management to identify opportunities to cut environmental costs and yet it is crucial that they do so in a way which is becoming increasingly regulated and where scarce resources are becoming scarcer.

It is equally important to allocate environmental costs to the processes or products which give rise to them. Only by doing this can an organization 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.

In 2003, the UNDSD identified four management accounting techniques for the identification and allocation of environmental costs: input/outflow analysis, flow cost accounting, activity based costing and life cycle costing. These are referred to later under ‘different methods of accounting for environmental costs’.

ENVIRONMENTAL COSTS CONTROL
It is only when environmental costs have been defined, identified and allocated that a business can begin the task of trying to control them.
Environmental costs will vary greatly from business to business and, to be honest, a lot of the environmental costs that a large, highly industrialized business will incur will be difficult for the average person to understand, since that person won’t have a detailed knowledge of the industry concerned.
Easy-to-understand environmental costs when considering how an organization may go about controlling such costs. Let’s consider an organization 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.

Each of these costs is considered below.

Waste
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 organization, 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.

Water
You have probably never thought about it but businesses 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 organizations to identify where water is used and how consumption can be decreased.

Energy
The costs can be reduced significantly at very little cost. Environmental management accounts may help to identify inefficiencies and wasteful practices and, therefore, opportunities for cost savings.

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, for example.

Consumables and raw materials
These costs are usually easy to identify and discussions,the 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 organization and a waste saving for the environment toner cartridges are difficult to dispose of and less waste is created.

ACCOUNTING FOR ENVIRONMENTAL COSTS
Aims to cover two areas:
1. Internal reporting of environmental costs,
2. Management accounting techniques for the identification and allocation of environmental costs: the most appropriate ones for the Performance Management are those identified by the UNDSD, namely input/outflow analysis, flow cost accounting, activity-based costing and life cycle costing.

INPUT/OUTFLOW ANALYSIS
The technique records material inflows and balances this with outflows on the basis that, what comes in, must go out. So, if 80kg of materials have been bought and only 60kg of materials have been produced, for instance, then the 20kg difference must be accounted for in some way. It may be, for example, that 10% of it has been sold as scrap and 90% of it is waste. By accounting for outputs in this way, both in terms of physical quantities and, at the end of the process, in monetary terms too, businesses are forced to focus on environmental costs.

FLOW COST ACCOUNTING
This technique uses not only material flows but also the organizational structure. It makes material flows transparent by looking at the physical quantities involved, their costs and their value. It divides the material flows into three categories: material, system and delivery and disposal. The values and costs of each of these three flows are then calculated. The aim of flow cost accounting is to reduce the quantity of materials which, as well as having a positive effect on the environment, should have a positive effect on a business’ total costs in the long run.

ACTIVITY-BASED COSTING
YZ allocates internal costs to cost centres and cost drivers on the basis of the activities that give rise to the costs. In an environmental accounting context, it distinguishes between environment-related costs, which can be attributed to joint cost centres, and environment driven costs, which tend to be hidden on general overheads.

COST LIFE CYCLE
Within the context of environmental accounting, life cycle costing is a technique which requires the full environmental consequences, and, therefore, costs, arising from production of a product to be taken account across its whole life cycle, literally ‘from cradle to grave’.

Finally
We can now have a clearer idea about exactly what environmental management accounting is and why it’s important. One of the main reasons that environmental management is important is to promote health and safety within the workplace. Even workplaces that are not considered dangerous have other risks associated with them, and with effective management, those risks can be lowered significantly

The main goal of environmental management is to protect the environment. This is usually achieved through minimizing a company’s impact on their surroundings

An Environmental Management System (EMS) is a set of processes and practices that enable an organization to reduce its environmental impacts and increase its operating efficiency.

• Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]; 08052043855