Evirometal Maagemet Accoutig (EMA): Reflectio of Evirometal Factors i the Accoutig Processes through the Idetificatio of the Evirometal Costs Attached to Products, Processes ad Services Cleopatra ªedroiu Lector uiversitar doctor Aureliaa Geta Roma Lector uiversitar doctorad Costati Roma Cofereþiar uiversitar doctor Academia de Studii Ecoomice Bucureºti Alexadru Maole Lector uiversitar doctorad Uiversitatea Artifex Bucureºti Abstract. EMA ca be defied as the idetificatio, collectio, estimatio, aalysis, iteral reportig, ad use of materials ad eergy flow iformatio, evirometal cost iformatio, ad other cost iformatio for both covetioal ad evirometal decisio-makig withi a orgaizatio. Thus EMA icorporates ad itegrates two of the three buildig blocks of sustaiable developmet eviromet ad ecoomics as they relate to a orgaizatio s iteral decisio-makig. EMA is a relatively ew tool i evirometal maagemet. Decades ago evirometal costs were very low, so it seemed wise to iclude them i the overhead accout for simplicity ad coveiece. Recetly there has bee a steep rise i all evirometal costs, icludig eergy ad water prices as well as liabilities. Key words: evirometal costs; fiacial ad evirometal decisios; Activity-based costig (ABC); evirometal maagemet system (EMS). Accordig to Beett ad James (1998a) EMA is cocered with gatherig data related to the eviromet (lowest levels), which are coverted through techiques ad processes (middle level) ito iformatio which is useful for maagers. Key data is both o-fiacial ad fiacial i ature. Maagemet accoutig techiques such as performace measuremet, operatioal budgetig, costig or pricig are used for the trasformatio. I Europe the Pollutio Prevetio Pays programme of 3M played a crucial role i the spread of the EMA cocept, while i the Uited States the high level of potetial liabilities pushed compaies to better evaluate their evirometal costs. Now, especially trasitio ecoomies are goig through a fast chage that will impose a requiremet for more accurate cotrol of productio iputs ad outputs. Evirometal Maagemet Accoutig (EMA): Reflectio of Evirometal Factors i the Accoutig Processes through the Idetificatio of the Evirometal Costs Attached to Products, Processes ad Services 81
Ecoomie teoreticã ºi aplicatã Still, may compaies eed exteral help i creatig or improvig their EMA, as those skills are ot widespread ad rarely available iterally. EMA has to be tailored to the special eeds of the compay rather tha be applied as a geeric system. The costs ad beefits of buildig such a system has to be cosidered ad the scope of the EMA properly selected. It must be recogised that most maagemet accoutig techiques sigificatly uderestimate the cost of poor evirometal behaviour. May people overestimate the cost ad uderestimate the beefits of improvig evirometal practices. The primary aim of eviromet maagemet accoutig is to better iform ad otherwise support decisiomakig proceses that are iflueced by evirometal factors- which are primarily those of accoutig ad fiacial maagemet, evirometal maagemet ad operatioal maagemet (Bartolomeo, Beet, James, 1998). Some of the specific objectives that this creates ca be summarised as: Demostratig the impact o the icome statemet (profit ad loss accout) ad/or balace sheet of eviromet-related activities Idetifyig cost reductio ad other improvemet opportuities Prioritisig evirometal actios Guidig product pricig, mix ad developmet decisios Ehacig customer value Future proofig ivestemet ad other decisios with log term cosequeces Supportig the sustaiable busiess. Maagemet accoutig techiques ca distort ad misrepreset evirometal issues, leadig to maagers makig decisios that are bad for busiesses ad bad for the eviromet. Evirometal maagerial accoutig ca solve these issues. A literature review reveals various approaches to the defiitio of evirometal costs. I 1998, the US Evirometal Protectio Agecy argued that the defiitio of evirometal costs depeded o how a compay iteds to use the iformatio, for example i capital budgetig or product desig. They itroduced termiology that distiguishes betwee covetioal costs, potetially hidde costs, cotiget costs, ad image ad relatioship costs. Covetioal costs are those raw material ad eergy costs havig evirometal relevace. Potetially hidde costs are those which are captured by accoutig systems, but the lose their idetity i overheads. Cotiget costs may be icurred at a future date for example costs for cleaig up. They are also referred to as cotiget liabilities. Image ad relatioship costs are itagible i ature ad iclude, for example, the costs of producig evirometal reports. However, such costs pale ito isigificace whe compared with the costs associated with beig see to behave i a irresposible maer. UNDSD described total corporate evirometal costs as evirometal protectio costs (emissio treatmet ad pollutio prevetio) plus costs of wasted materials, plus costs of wasted capital ad labour. Waste i this cotext meas productio iefficiecy (purchase value of omaterial output). UNDSD stated that wasted materials accout for 40% to 90% of evirometal costs accordig to a survey. Oe should recogise that evirometal costs are ot a separate type of cost; rather they are part of moey flowig throughout a corporatio. The mai difficulty associated with evirometal costs is their idetificatio ad allocatio. Accordig to UNDSD, covetioal accoutig systems ted to attribute may of the evirometal costs to geeral overhead accouts with the result that they are hidde from maagemet. Thus, maagemet is ofte uaware of the extet of evirometal costs ad caot idetify opportuities for cost savigs. EMA attempts to make all relevat, sigificat costs visible so that they ca be cosidered whe makig busiess decisios. UNDSD (2003) idetified maagemet accoutig techiques which are useful for the idetificatio ad allocatio of evirometal costs as: iput/output aalysis, flow cost accoutig, activity-based costig (ABC), ad lifecycle cost. The iput/output aalysis is a techique that ca provide useful evirometal iformatio, sometimes referred to as mass balace (Evirowise, 2003). This techique records material flows with the idea that what comes i must go out or be stored. The purchased iput is regarded as 100% ad is balaced agaist the outputs which are the produced, sold ad stored goods ad the residual (regarded as waste). Materials are measured i physical uits ad iclude eergy ad water. At the ed of the process, the material flows ca be expressed i moetary uits. Process flow charts ca help to trace iputs ad outputs, i particular waste. They demostrate the details of the processes so that the relevat iformatio ca be allocated to mai activities. Process flow charts (Figure 1) brig together techical iformatio ad cost accoutig iformatio (UNDSD, 2003). Flow cost accoutig is a tool of a ew maagemet accoutig approach flow maagemet. It aims to...orgaise productio ed-to-ed i terms of flows of materials ad iformatio all structured i a efficiet, objective-orieted maer (UNDSD, 2003). It is more tha a simple assessmet of evirometal costs, because it is focused o assessmet of total costs of productio. 82
Figure 1: Flow cost accoutig accordig to UNDSD (2003) Flow maagemet ivolves ot oly material flows, but also the orgaisatioal structure. Classic material flows are recorded as well as material losses icurred at various stages of productio. Flow cost accoutig makes material flows trasparet by usig various data, which are quatities (physical data), costs (moetary data) ad values (quatities x costs). The material flows are divided ito three categories, material, system, ad delivery ad disposal. The material values ad costs apply to the materials which are ivolved i the various processes. The system values ad costs are the i-house hadlig costs, which are icurred iside the compay for the purpose of maitaiig ad supportig material throughput, e.g. persoel costs or depreciatio. The delivery ad disposal values ad costs refer to the costs of flows leavig the compay, for example trasport costs or cost of disposig waste. EMA ca beefit from flow cost accoutig because it aims to reduce the quatities of materials, which leads to icreased ecological efficiecy (UNDSD, 2003). The above-metioed accoutig techiques are useful for EMA to idetify ad allocate evirometal costs. I additio, there are alterative techiques to estimate evirometal costs such as the evirometal cost decisio tree as described by Rimer (2000). The most sigificat problem of EMA lies i the absece of a clear defiitio of evirometal costs. This meas it is likely that orgaisatios are ot moitorig ad reportig such costs. The icrease i evirometal costs is likely to cotiue, which will result i the icreased iformatio eeds of maagers ad provide the stimulus for the agreemet of a clear defiitio. If a geerally applicable meaig of evirometal costs is established, the use of EMA will probably icrease with positive effects for both orgaisatios ad the eviromet i which they operate. I the future it will ot oly be large compaies which ca afford to implemet EMA but also small ad medium-sized eterprises which have fewer available fiacial resources. The mai purpose of the proposed research is to defie the geeral framework ad the coditios to implemet Evirometal Maagerial Accoutig i Romaia orgaizatios. Corroboratig with the actual kowledge i the researchig area, we propose to achieve the followig objectives: 1. Idetifyig the useful iformatio to help achieve certai objectives such as miimizig the costs (especially the evirometal oes) ad the egative impact o the eviromet. The decisio makers ca use the iformatio regardig the physical use ad cost of resources to take the most appropriate fiacial ad evirometal decisios. It is importat to ote that, while EMA supports iteral decisio-makig, the implemetatio of EMA does ot guaratee ay particular level of evirometal or fiacial performace. However, for orgaizatios ad programs that have the goals of miimizig costs, especially evirometal costs, ad miimizig evirometal impacts, EMA provides a essetial set of iformatio for meetig those goals. EMA data are particularly valuable for maagemet iitiatives with a specific evirometal focus. EMA provides ot oly the cost data ecessary for assessig the fiacial impact of these maagemet activities, but also the physical flow iformatio (e.g., raw materials use ad waste geeratio rates) that help characterize evirometal impacts. Examples of actios which could beefit from the support offered by evirometal maagerial accoutig may iclude: pollutio prevetio, desig for eviromet, evirometal life cycle assessmet/costig/desig, evirometal supply chai maagemet, evirometally preferable purchasig, exteded producer/product resposibility, evirometal maagemet systems, evirometal performace evaluatio & bechmarkig, evirometal performace reportig. 2. Buildig a set of priciples ad methods to provide the meas to obtai the quatificatio of the correlatio betwee the evirometal protectio activity beefits ad the costs of used resources (materials ad eergy), idispesable for the success of ay iitiative of this kid, so that the evirometal maagerial accoutig become i the future more tha just a istrumet for evirometal maagemet. Icreasigly, the rage of decisios affected by evirometal costs of oe type or aother is geerally o the rise. Thus, EMA is becomig icreasigly importat ot oly for evirometal maagemet decisios, but for all types of routie maagemet activities, such as: product & process desig, cost cotrol & allocatio, capital bud- Evirometal Maagemet Accoutig (EMA): Reflectio of Evirometal Factors i the Accoutig Processes through the Idetificatio of the Evirometal Costs Attached to Products, Processes ad Services 83
Ecoomie teoreticã ºi aplicatã getig, purchasig, supply chai maagemet, product pricig, performace evaluatio. 3. Implemetig ABC for evirometal costs i Romaia. Activity-based costig (ABC) represets a method of maagerial cost accoutig that allocates all iteral costs to the cost ceters ad cost drivers o the basis of the activities that caused the costs. ABC applied to evirometal costs distiguishes betwee eviromet-related costs ad eviromet-drive costs. The former are attributed to joit evirometal cost ceters, for example icierators or sewage plats. The latter are hidde i the geeral overheads ad do ot relate directly to a joit evirometal cost cetre, e.g. icreased depreciatio or higher cost of staff. Nevertheless they vary with the amout of throughput. The choice of a adequate allocatio key is crucial for obtaiig correct iformatio. The four mai allocatio keys are: volume of emissios or waste, toxicity of emissio ad waste treated, evirometal impact added (volume x iput per uit of volume), volume of the emissios treated ad the relative costs of treatig differet kids of emissios. 4. Developig a evirometal maagemet system (EMS). It ca oly be achieved if evirometal audit is a cocomitat feature of such a system. I this respect the orgaizatio becomes self-regulatig ad the udertakig of evirometal audits o a regular basis provides the platform for orgaizatios to adopt a self-critical ad aalytical posture as part of their routie orgaizatioal maagemet processes. Orgaizatios should be strivig to achieve a itegrated evirometal strategy uderpied by the same type of culture that is required for the successful operatio of a programme of total quality maagemet (TQM). This approach to evirometal quality maagemet requires the developmet of evirometal performace measures ad idicators that will eable a comprehesive review of evirometal performace to be udertake. May if ot all total quality maagemet accoutig techiques ca be modified ad effectively adopted to help maage evirometal issues. 5. Desig ad developmet of itegrated software to maage ad aalyze the evirometal costs. The system would aggregate two subsystems, oe for maagig the costs (built o a cliet server database specific architecture, ad oe for data aalysis (also usig cliet server architecture ad data warehouses-multidimesioal aalysis specific techology). Compaies ad maagers usually believe that evirometal costs are ot sigificat to the operatio of their busiesses. However, ofte it does ot occur to them that some productio costs have a evirometal compoet. For istace, the purchase price of raw materials: the uused portio that is emitted i a waste is ot usually cosidered a evirometally related cost. These costs ted to be much higher tha iitial estimates (whe estimates are eve performed) ad should be cotrolled ad miimized by the itroductio of effective cleaer productio iitiatives wheever possible. By idetifyig ad cotrollig evirometal costs, EMA systems ca help evirometal maagers justify these cleaer productio projects, ad idetify ew ways of savig moey ad improvig evirometal performace at the same time. The systematic use of EMA priciples will assist maagers i idetifyig evirometal costs ofte hidde i a geeral accoutig system. Whe hidde, it is impossible to kow what share of the costs is related to ay particular product or process or is actually evirometal. Without the ability to isolate ad separate this portio of the overall cost from that of productio, product pricig will ot reflect the true costs of its productio. Pollutig products will appear more profitable tha they actually are because some of their productio costs are hidde, ad they may be sold uder priced. Cleaer products that bear some of the evirometal costs of more pollutig products (through the overhead) may have their profitability uderestimated ad be overpriced. Sice product prices ifluece demad, the perceived lower price of pollutig products maitais their demad ad ecourages compaies to cotiue their productio, perhaps eve over that of a less pollutig product. Fially, implemetig evirometal accoutig will multiply the beefits gaied from other evirometal maagemet tools. Besides the cleaer productio assessmet, EMA is very useful for example i evaluatig the sigificace of evirometal aspects ad impacts ad prioritizig potetial actio plas durig the implemetatio ad operatio a evirometal maagemet system (EMS). EMA also relies sigificatly o physical evirometal iformatio. It therefore requires a close cooperatio betwee the evirometal maager ad the maagemet accoutat ad results i a icreased awareess of each other s cocers ad eeds. As a tool, we hope that the proposed method (ABC) to calculate evirometal costs at EMA level will be used to support decisio-makig at product ad process/ivestmet level. A evirometal accoutig iformatio system would allow orgaizatios to better evaluate the ecoomical impact of evirometal performaces. Product/process related decisio-makig. Correct cost evaluatio of products is a pre-coditio for makig soud busiess decisios. Accurate product pricig is eeded for strategic decisios regardig the volume ad choices of products to be produced. EMA coverts may evirometal overhead costs ito direct costs ad allocates them 84
to the products that are resposible for their icurrece. The results of improved costig by EMA may iclude: Differet pricig of products as a result of re-calculated costs; Re-evaluatio of the profit margis of products; Phasig-out certai products whe the chage is dramatic; Re-desigig processes or products i order to reduce evirometal costs; Improved housekeepig ad moitorig of evirometal performace. The purchase value of materials ad processig costs of o-product outputs play a importat role i EMA. They iclude the cost for buyig ad processig that portio of productio iputs that goes ito the waste or is discarded as scrap such as raw materials, auxiliary materials or water, eergy ad the labour cost of processig. These costs are ofte o a average te to twelve times greater tha the waste ad emissios treatmet costs. Savigs associated with this category of evirometal costs ito project evaluatios will make a larger umber of cleaer productio projects more profitable. 2. Ivestmet projects ad decisio-makig. Ivestmet project decisio-makig requires the calculatio of differet profitability idicators like et preset value (NPV), payback periods (PBP) ad iteral rates of retur (IRR) or beefit-cost ratios. Recogizig ad quatifyig evirometal costs ad beefits is both ivaluable ad ecessary for calculatig the profitability of eviromet-related projects. Without these calculatios, maagemet may arrive at a false ad costly coclusio. Compaies should take ito accout hidde, cotiget ad image costs for project appraisals. The costs recorded i bookkeepig by covetioal accoutig systems are isufficiet to provide a accurate projectio of the profitability ad risks of a ivestmet. May cost items that may arise from log-term operatios or projects must be icluded i the project appraisal. These evirometal costs have bee grouped ito five categories as follows: Raw materials, utilities, labour ad capital costs are covetioal costs always cosidered i project appraisals ad cost accoutig, however the evirometal portio of these costs, e.g. o-product raw material costs, are ot isolated ad recogized as evirometal. Admiistrative costs buried i the overhead costs ad hidde. Examples iclude moitorig, reportig or traiig costs. Cotigecy costs that may or may ot be icurred i the future, such as potetial clea-up costs from a accidet, compesatios or fies: the iheret difficulty i predictig their likelihood, magitude or timig ofte results i their omissio from the cost evaluatio process. However, these costs very ofte represet a major busiess risk for the compay. Image beefits ad costs, ofte called itagible or good-will beefits ad costs, arise from the improved or impaired perceptio of stakeholders (evirometalists, regulators, customers, etc.). Chages i these itagible beefits are ofte ot felt util they are impaired. For example, a bad relatioship with regulators may result i prologed licesig process or stricter moitorig. Exteral costs represet a cost to exteral stakeholders (commuities, customers, etc.) rather tha to the compay itself. Most accoutats agree that these costs should ot be take directly ito accout whe makig project decisios. The compay should be aware, however, that high levels of exteral costs may evetually become iteralized through stricter evirometal regulatio, taxes or fees. A good example of this type of cost would be costs of evirometal degradatio (through acid rai ), due to sulphur dioxide (SO2) pollutio, which later stadards strictly regulatig SO2 emissios would iteralize, as the costs of purchasig ad operatig a scrubbig ad eutralizig system. A profitability aalysis should be doe usig appropriate time-lies ad idicators that do ot discrimiate agaist log-term savigs ad beefits. Net preset value ad beefit cost ratios are suggested as better ivestmet criteria tha simple paybacks or iteral rates of retur to reflect real costs ad beefits. A accurate aalysis of the ivestmet s sesitivity to evirometal costs should also be carried out, which takes ito cosideratio the impact of iput price chages ad future chages i the regulatory regime (fees, fies ad pealties). Differet scearios ca be examied, also evaluatig cotigecy ad exteral evirometal costs reflectig the joit impact of chagig several variables at the same time. Thus, EMA is a importat tool for itegratio of evirometal cosideratios ito fiacial appraisals ad decisio-makig for ew ivestmets: evirometally friedly ivestmets will show icreased profitability i the log term if all these factors are icluded i the model. Evirometal Maagemet Accoutig (EMA): Reflectio of Evirometal Factors i the Accoutig Processes through the Idetificatio of the Evirometal Costs Attached to Products, Processes ad Services 85
Ecoomie teoreticã ºi aplicatã Bibliografie Bartolomeo, M., Beet M., James P. (1998). Eco-Maagemet Accoutig: A Framework for Aalysis ad Actio, (Wolverhampto, UK: Wolverhampto Busiess School Evirometal Maagemet Accoutig Group Beet, M., James P. (1998a): Eviromet-Related Performace Measuremet, Lodo: Associatio of Chartered Certified Accoutats Uited States Office of Pollutio EPA 742-R-95-001 Evirometal Protectio Prevetio ad Toxics Agecy (MC 7409) Washigto, D.C. 20460 (Jue 1995): A Itroductio to Evirometal Accoutig as a Busiess Maagemet Tool:Key Cocepts ad Terms UNSD (2003): Hadbook of Natioal Accoutig: Itegrated Evirometal ad Ecoomic Accoutig - A Operatioal Maual Iteratioal Coferece Ecoomic ad Social Research Istitute (ESRI) March 24, Faculty of Evirometal Studies, Nagasaki Uiversity (2005): New System of Itegrated Evirometal ad Ecoomic Accoutig (Trial Calculatio o Hybrid Accoutig System Itegratig Evirometal Pressures ad Ecoomic Activities) 86