PPT Ch17 Management Accounting 5e

Chapter 17

Sustainability and management accounting

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Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith

Outline• Sustainability for businesses• Environmental management accounting• Economic, environmental and social impacts• Environmental costs• Improving supply chain management through measuring environmental

and social impacts• Sustainability and performance measurement• Strategic performance measurement systems (SPMS) and sustainability• Environmental outcomes: capital expenditure analysis• Climate change and management accounting

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Sustainability for businesses• Sustainable investments focus on achieving a

sustainable economy, a sustainable environment and sustainable society

• Corporate social responsibility (CSR) involves organisations taking into account the social and environmental impact of corporate activity when making decisions– May increase profitability– Determines long-term survival– Demanded by stakeholders: customers, employees,

investors

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Environmental management accounting (EMA)• Consists of environmentally-related management

accounting systems and practices• Life cycle costing, environmental cost accounting,

environmental performance measures, assessment of environmental benefits, strategic planning for environmental management

• EMA techniques– Financially-oriented EMA– Physically-oriented EMA

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Financially-oriented EMA• Environmental costs

– Costs incurred to prevent, monitor and report environmental impacts and the cost of failing to comply with environmental regulations

– Cost of waste management systems, environmental training, legal activities and fines, record keeping and reporting, cost of remediation of environmental impacts

• Environmental product costing– Involves tracing direct and indirect environmental costs to products – The cost of waste management, permits and fees, recycling

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(cont.)Copyright 2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith

Financially-oriented EMA (cont.)• Environmental performance indicators

– Used to set targets, and monitor environmental performance

• Environmentally-induced capital expenditure– Driven by the desire to improve the organisation's environmental

impact, or to comply with environmental regulations

• Environmentally-induced revenues– Arise from positive environmental actions

– Increased revenue from the sale of recycled materials, from higher selling prices for greener products, increased customer satisfaction, improved employee morale

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Physically-oriented EMA

• Techniques that focus on supplying information to management that accounts for the organisation’s impact on the natural environment– Kilograms of noxious waste emissions, kilowatt hours of

electricity used, decibels of noise – Used for tactical decisions and capital expenditure

decisions

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Environmental management systems (EMS) and EMA

• EMS—systems that organisations put in place to manage their environmental performance– May include recycling systems, systems to monitor and

control levels of liquids, material and atmospheric discharge and waste

• ISO 14001 is an international standard for EMA and its audit

• EMS and adoption of ISO 14001 requires that environmental performance be measured against policies, objectives and targets

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Economic, environmental and social impacts• Economic and social impacts are difficult to identify and

measure, but may be substantial• Future ecological and social impacts are not yet known

– Current work practices may have future environmental and social consequences which we cannot predict

• Many costs and benefits are external to the organisation– Difficult to detect and assess

• Many costs and benefits are difficult to measure in financial terms

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Environmental costs

• The costs that an organisation incurs to prevent, monitor and report environmental impacts– May extend into the future

• US EPA defines 5 tiers of environmental costs• Private costs (tiers 1 to 4) and societal costs

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(cont.)

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Environmental costs (cont.)

• Environmental costs can be analysed using the same framework as used to analyse quality costs

• Prevention activities– Solve environmental problems before they occur, or turn

problems into opportunities– Costs of these activities are ‘investments’, as they reduce

the future outlays and provide long-term benefits

• Appraisal activities– Monitor the levels of environmental impact– Measures damage, inspects processes and products,

audits supplier performance

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(cont.)

Environmental costs

• Internal failure activities– To correct breakdowns discovered in appraisal activities– Cost of cleaning the plant after spillage, cost of

occupational health and safety claims by employees

• External failure activities– Occur when resolution and remediation efforts fall outside

of the organisation’s management– Cost of cleaning up polluted sites, fines for environmental

damage, lost profits associated with damage to reputation

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Improving supply chain management through measuring environmental and social impacts

• Suppliers– An organisation may be willing to pay more where suppliers

have reduced environmental and social impacts– Organisations may work with suppliers to adopt more

responsible environmental and societal practices; this can lead to cost reductions

– Formal supplier evaluation can include assessment of a range of environmental and social factors, as well as financial factors

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(cont.)

Improving supply chain management through measuring environmental and social impacts (cont.)• Customers

– An organisation can work with customers to reduce the adverse environmental and social impact of products

Recycling and disposal programs Substitution of materials Cost savings

– Sometimes customers may be willing to pay more for a more environmentally-friendly product

– Marketing and strategic considerations need to be considered in such pricing decisions

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Sustainability and performance measurement

• Sustainability reporting–formal reporting of information about corporate sustainability that describes the economic, environmental and social impact of the organisation’s activities– May also be called triple bottom line reporting, social reports, social

audits, environmental reports

• Inside-out approach–measures developed within the business and then fed through to sustainability reports

• Outside-in approach–reported measures of sustainability performance driven by external regulations or guidelines

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(cont.)

Sustainability and performance measurement (cont.)

• Global Reporting Initiative (GRI) Guidelines are regarded as the global standard for sustainability reporting– 48 sets of core indicators + 31 additional indicators

– Includes unique indicators for certain industries

• Dow Jones sustainability index (DJSI) compares the sustainability performance of the world’s largest companies

• Australian SAM Sustainability Index (AuSSI) assess the sustainability performance of Australian companies

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(cont.)

Sustainability and performance measurement (cont.)

• ISO 14031 environmental performance indicators– Operational performance indicators include measures of waste

levels and energy consumption relative to sales or some other activity

– Management performance indicators measure the efforts of management to improve the environmental performance of their organisation

– Environmental condition indicators measure the actual condition of the environment at a local, national or global level

– May be reported as absolute measures or as a percentage relative to a baseline

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Strategic performance measurement systems (SPMS) and sustainability

• Adding sustainability to the balanced scorecard – Sustainability measures may be included within the four

perspectives– An environmental or social perspective may be added to

the BSC – A separate sustainable scorecard may be developed

• Strategy maps may be developed to identify cause and effect relationships between objectives, strategies and to guide the selection of performance measures

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Environmental outcomes: capital expenditure analysis

• Inclusion of environmental costs and benefits may make financially non-viable projects more attractive or financially viable projects less attractive

• Weighting given to environmental factors depends on the organisation's values and preferences

• Some capital expenditure analysis may be driven by the need to be environmentally responsible

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Climate change and management accounting

• Climate change is the increase in temperature and changes in other climate characteristics which has been observed since the mid-1980s

• A result of the build up of gases (particularly carbon dioxide) which are trapped in the Earth’s atmosphere (the “greenhouse effect”)

• Actions to reduce greenhouse gas emissions are called “mitigation”, and actions to respond to climate change are called “adaptation”

• An emissions trading scheme (ETS) mitigates climate change and reduces the cost of emissions control

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(cont.)

Climate change and management accounting (cont.)

• Implications for business– Many managers are yet to respond to climate change through

adopting sustainability approaches

– The ETS will increase awareness

– Organisations that respond to climate change may not adopt broader sustainability agenda

• Implications for management accounting– The five tier cost framework of the US EPA, may provide a

useful way to identify, classify and measure costs associated with climate change

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(cont.)

Climate change and management accounting (cont.)

• Organisations that participate in the ETS and wish to promote themselves as carbon neutral need to measure their greenhouse gas emissions – They will also need to understand their “carbon footprint”, the quantity of

greenhouse gas emissions they produce

• International protocol (WRI/WBCSD) outlines three levels of measurement– Scope 1 – direct emissions controlled by the business– Scope 2 – indirect emissions from purchased electricity consumed by the business– Scope 3 – other indirect emissions caused by business activities, from sources

outside of the business

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(cont.)

Climate change and management accounting (cont.)• Management accountants can play a role by

– Collecting and analysing non-financial information– Gathering information from across the value chain– Managing information systems and large data bases

• For example– Estimate the cost of emissions produced by products, department and

customers – Identify carbon non-value-added activities– Understand carbon drivers– Supplier evaluation may include supplier emissions– Quantity of emissions produced and causes of emissions may be measured

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Summary

• Sustainability involves considering the economic, environmental and social impacts of an organisation's activities

• Environmental management accounting (EMA) consists of environmental-related management accounting systems and practices

• Environmental and social impacts can be difficult to recognise and to measure

• Environmental costs can be classified and managed using a five-tier framework

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(cont.)

Summary (cont.)

• Environmental and social costs can be input into management decision making, including capital expenditure analysis

• Performance measurement systems, including SPMS, can be adapted to include environmental and social measures– External frameworks include ISO 14000 series and the GRI

guidelines

• Management accountants are well equipped to produce a range of information that will help businesses respond to climate change

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Documents

PPT Ch17 Management Accounting 5e