Syllabus B

Specialist Cost and Management Accounting Techniques

1. Activity Based Costing

2. Target costing

3. Life-cycle costing

4. Throughput accounting

5. Environmental accounting
 ADVANCED COSTING METHODS
Environmental management accounting
Organisations are beginning to recognise that environmental awareness and management are not optional, but
are important for long-term survival and profitability. All organisations:

• are faced with increasing legal and regulatory requirements relating to environmental management

• need to meet customers’ needs and concerns relating to the environment

• need to demonstrate effective environmental management to maintain a 


good public image

• need to manage the risk and potential impact of environmental disasters

• can make cost savings by improved use of resources such as water and fuel

• are recognising the importance of sustainable development, which is the meeting of current needs without
compromising the ability of future generations to meet their needs. 

EMA is concerned with the accounting information needs of managers in relation to corporate activities
that affect the environment as well as environment-related impacts on the corporation. This includes:

• identifying and estimating the costs of environment-related activities

• identifying and separately monitoring the usage and cost of resources 


such as water, electricity and fuel and to enable costs to be reduced

• ensuring environmental considerations form a part of capital investment decisions

• assessing the likelihood and impact of environmental risks

• including environment-related indicators as part of routine performance 


monitoring

• benchmarking activities against environmental best practice.

 ADVANCED COSTING METHODS
Environmental management accounting

Environmental concern and performance

Martin Bennett and Peter James ('The Green Bottom Line: Management Accounting for Environmental
Improvement and Business Benefit', Management Accounting, November 1998), looked at the ways in
which a company's concern for the environment can impact on its performance:

• Short-term savings through waste minimisation and energy efficiency schemes can be substantial.

• Companies with poor environmental performance may face increased cost of capital because investors
and lenders demand a higher risk premium.

• There are a number of energy and environmental taxes, such as the landfill tax in the UK.

• Pressure group campaigns can cause damage to reputation, or additional costs.

• Environmental legislation may cause the 'sunsetting' of products and opportunities for 'sunrise'
replacements.

• The cost of processing input which becomes waste is equivalent to 5– 10% of some organisations'
revenue.

• The phasing out of CFCs has led to markets for alternative products.

EM and effect on financial performance

Improving Cost Increases in costs Costs of failure

revenue reductions
 ADVANCED COSTING METHODS
Environmental management accounting
Identifying and accounting for environmental costs

Management are often unaware of the extent of environmental costs and cannot identify
opportunities for cost savings. Environmental costs can be split into two categories:

Internal Costs
These are costs that directly impact on the income statement of a company. There are many
different types, for example:

• improved systems and checks in order to avoid penalties/fines

• waste disposal costs

• product take back costs (i.e. in the EU, for example, companies must provide facilities for
customers to return items such as batteries, printer cartridges etc. for recycling. The seller of
such items must bear the cost of these "take backs”)

• regulatory costs such as taxes (e.g. companies with poor environmental management
policies often have to bear a higher tax burden)

• upfront costs such as obtaining permits (e.g. for achieving certain levels of emissions)

• back-end costs such as decommissioning costs on project completion.

 ADVANCED COSTING METHODS
Environmental management accounting
Identifying and accounting for environmental costs
External Costs 

These are costs that are imposed on society at large, but not borne by the company that
generates the cost in the first instance. For example,

• carbon emissions

• usage of energy and water

• forest degradation

• health care costs

• social welfare costs. 


However, governments are becoming increasingly aware of these external costs and
are using taxes and regulations to convert them to internal costs. For example,
companies might have to have a tree replacement programme if they cause forest
degradation, or they receive lower tax allowances on vehicles that cause a high degree
of harm to the environment. On top of this, some companies are voluntarily converting
external costs to internal costs.
 ADVANCED COSTING METHODS
Environmental management accounting

Other classifications
Other classification include:

(1)  Hansen and Mendoza:

(i)  Environmental prevention costs: the costs of activities undertaken to prevent the production
of waste. Examples include the costs of the design and operation of processes to reduce
contaminants, training employees, recycling products and obtaining certification relating to
meeting the requirements of national and international standards. 


(ii)  Environmental detection costs: costs incurred to ensure that the organisation complies with
regulations and voluntary standards. Examples include performing contamination tests and
inspecting products to ensure regulatory compliance. 


(iii)  Environmental internal failure costs: costs incurred from performing activities that have
produced contaminants and waste that have not been discharged into the environment. Recycling
scrap, or disposing of toxic materials, are examples. 


(iv)  Environmental external failure costs: costs incurred on activities performed after discharging
waste into the environment. Examples include the costs of cleaning up contaminated soil, oil spills,
or restoring land to its natural state. 

 ADVANCED COSTING METHODS
Environmental management accounting

(2)  The US Environmental Protection Agency makes a distinction between four types
of costs: 


(a) Conventional costs : raw materials and energy costs having environmental
relevance

(b) Potentially hidden costs: costs captured by accounting systems but then losing
their identity in 'general overheads'

(b) Contingent costs: costs to be incurred at a future date, e.g. clean-up costs

(d) Image and relationship costs: costs that, by their nature, are intangible, for
example the costs of preparing environmental reports.

(4) The United Nations Division for Sustainable Development describes environmental
costs as comprising of costs incurred to protect the environment (for example,
measures taken to prevent pollution) and costs of wasted material, capital and labour,
i.e. inefficiencies in the production process.

 ADVANCED COSTING METHODS

Environmental management accounting
Further examples of environmental costs
Regulatory Upfront Voluntary (beyond
compliance)
• Notification Reporting Site studies
 Community relations/outreach
Monitoring/testing Studies/ Site preparation Permitting
 Monitoring/testing Training

modelling
R&D
 Audits

• Remediation Record keeping Engineering and procurement Qualifying suppliers Reports
Plans
Installation Conventional costs (e.g. annual environmental
• Training
Capital equipment Materials
 reports)

• Inspections
Labour
 Insurance

• Manifesting
Supplies
 Planning

• Labelling
Utilities
 Feasibility studies Remediation
• Preparedness
Structures Salvage value
Recycling Environmental studies
• Protective equipment
R&D

• Medical surveillance
Habitat and wetland protection
• Environmental insurance
Landscaping

• Financial assurance
Other environmental projects

• Pollution control
Financial support to
• Spill response
environmental groups and/or
• Storm water management
researchers

• Waste management Taxes/

fees
Back-end

Closure/ decommissioning
Disposal of inventory Post-
closure care Site survey

 ADVANCED COSTING METHODS

Environmental management accounting
EMA Techniques

Input/outflow analysis Flow cost accounting Activity-based costing 
 Lifecycle costing

This technique records This technique uses not
material inflows and ABC allocates internal Within the context of
only material flows, but also
balances this with costs to cost centres environmental
the organisational structure.
outflows on the basis and cost drivers on the
It makes material flows accounting, lifecycle
that what comes in, basis of the activities
transparent by looking at costing is a
must go out.
that give rise to the
the physical quantities technique which
costs. In an
For example, if 100 kg of involved, their costs and re q u i re s t h e f u l l
environmental
materials have been their value. It divides the environmental
accounting context, it
bought and only 80 kg material flows into three
distinguishes between consequences, and,
of materials have been categories : material,
environment-related t h e re f o re , c o s t s ,
produced, then the 20 system and delivery and
costs, which can be a r i s i n g f ro m t h e
kg difference must be disposal. The values and
attributed to joint cost production of a
accounted for in some costs of each of these three
centres, and product to be taken
way. It may be, for flows are then calculated. 

environment-driven account across its
example, that 10% of it T h e a i m o f fl o w c o s t
costs, which tend to
has been sold as scrap accounting is to reduce the whole lifecycle,
be hidden on general
and 90% of it is waste. quantity of materials which, literally ‘from cradle
overheads. 

By accounting for as well as having a positive to grave’. 

outputs in this way, both effect on the environment,
in terms of physical should have a positive
quantities, and, at the effect on a business' total
end of the process, in costs in the long run. 

monetary terms too,
businesses are forced to
focus on environmental
costs.
 ADVANCED COSTING METHODS
Environmental management accounting

• What is environmental
accounting R
• Environmental concerns
E
and performance
• Identifying and accounting
for environmental costs C
• Other Classification
• Examples of environmental A
costs
• EMA Techniques P