[Environmental Management Accounting] EMA techniques

EMA Techniques

• Activity-based costing (ABC)
• Input/output analysis
• Lifecycle costing

 

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1. Activity-based costing

 

Environmental-related costs (2C/2R)

Attributed directly to a cost center, i.e waste filtration plant 

• Conventional costs
• Contingent costs
• Relationship costs
• Reputational costs

Environmental cost	Description	Problem
Conventional costs	costs such as raw material and energey costs	often hidden within overheads
Contingent costs	costs such as future compliance costs or remediation costs when a site is decommissioned	oftern be ignored by managers who focus on short-term performance
Relationship costs	image costs such as the cost of producing environmental information for public reporting	ignored by managers who are unaware of their existence
Reputational costs	costs associated with failing to address environemntal issues, i.e lost sales	ignored by managers who are unware of the risk of incurring them

Environment-driven costs

• Costs are generally hidden in overheads
• Environmental costs are removed from general overheads 
• Cost drivers are determined for cost pools
• Products are charged for use of environmental costs based on the amount of cost drivers that they contribute to the activity.
• Environmental costs to individual products and should result in better control of costs

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2. Input/output analysis

• Record the physical quantities of inflows and outflows, what comes in, must come out

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3. Lifecycle costing

• Considers costs and revenues of a product over its whole life cycle rather than one acconting period
• The full environmental costs of producing a product will be taken into account.
• In order to reduce lifecycle costs, TQM approach may be appropriate

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EMA's effect on financial performance

 

Improving revenue

Producing products which meet the environmental needs or concerns of customers can lead to increased sales

 

Increased costs

Cost of complying with environmental regulations and laws will incur more expenses on a company and possibly result in decrease in net income in short-term

 

Costs reductions

Managers may contribute cost reductions in production processes by closely paying attention of using resources and effectively reducing waste and scrap.

 

Costs of failure

Poor environemntal management may result in significant costs, for example fines and penalities for not being complied with laws and regualtions.