Environmental management accounting p5

Assumed knowledge


14 builds on your knowledge of environmental management accounting (EMA) from PM.


2      Introduction


Organisations are becoming increasingly aware of the environmental implications of their actions.


Test your understanding 1



Discuss the potential benefits to a company of reducing the negative environmental impact of its operations, products or services.


Illustration 1 – Environmental management at BP

BP, one of the world’s leading oil and gas companies, describe a number of activities aimed at reducing the environmental impact of the company’s operations in its annual review. These include:


  • improving the integrity of its equipment and pipelines to reduce the spillage of oil


  • reducing the emissions of greenhouse gases, which is measured and reported within the Annual Review


  • introducing environmental requirements for new projects


  • supporting the use of market mechanisms to bring about emission reductions across the industry


  • launching a new business providing energy from alternative sources


  • investing in research into biofuels


  • developing and marketing fuel which produces lower emissions compared with standard fuels.


3      Traditional management accounting and environmental costs


Managers need to be able to identify the environmental costs that exist in order to be able to measure existing performance and to monitor the effectiveness of any environmental-related activities undertaken. However, traditional accounting systems are unable to identify or to deal adequately with environmental costs.


As a result, managers are unaware of these costs and have no information with which to manage or reduce them.


There are four categories of environmental costs:

Environmental cost Description category


Conventional costs          Costs such as raw

material and energy costs


Contingent costs               Costs such as future

compliance costs or

remediation costs when a

site is decommissioned


Relationship costs            Image costs such as the

cost of producing

environmental information


for public reporting


Reputational costs           Costs associated with

failing to address

environmental issues,

e.g. lost sales





These are often ‘hidden’ within overheads making it difficult for managers to identify and control them


Often incurred towards the end of a project so are ignored by managers who focus on short-term performance


Ignored by managers who are unaware of their existence


Ignored by managers who are unaware of the risk of incurring them




Illustration 2 – Reputational costs




In 2010 a blast at the Deepwater Horizon rig in the Gulf of Mexico killed eleven people and caused one of the worst oil spills in history. The environmental impact of the oil spill is ongoing. For example, in 2016 traces of oil from the spill were found in the feathers of birds eaten by land animals. The US presidential commission concluded that the oil spill was an avoidable disaster caused by a series of failures and blunders made by BP, its partners and the government departments assigned to regulate them. It also warned that such a disaster was likely to recur because of complacency in the industry.


For BP, the company at the heart of the disaster, the effects have had a deep and widespread impact. The company has become synonymous with everything that is dangerous about oil exploration causing massive reputational damage.


BP is working to restore their reputation. For example, in 2016 they joined forces with two other oil and gas companies to create a $1 billion climate change fund focused on researching renewable energy, sharing techniques and reducing the leakage of methane (a big contributor towards global warming).


4      What is EMA?


EMA is concerned with the accounting information needs of managers in relation to the organisation’s activities that affect the environment as well as environment-related impacts of the organisation. It involves the production of financial and non-financial information to support the internal environmental management process.




  • identifies and estimates the costs of environment-related activities (covered in Section 3) and seeks to control these costs. For example:


– identifies and separately monitors the usage and cost of resources such as water, electricity and fuel and enables these costs to be reduced, for example through redesigning the product or the production process


– estimates future contingent costs ensuring they form part of any investment decision and giving scope upfront to reduce these costs through product or process redesign


  • assesses the likelihood and impact of environmental risks


  • includes environment-related indicators as part of routine performance monitoring


  • makes managers aware of reputational costs in order to focus their attention on managing the risk of them occurring


  • benchmarks activities against environmental best practice.


Importantly, the focus of EMA is not all on financial costs but it also considers the non-financial environmental cost or benefit of any decisions made.


5      EMA techniques


Three key techniques exist. The techniques can assist an organisation in achieving the aims of EMA covered in Section 4. They are not mutually exclusive.


5.1 Activity- based costing (ABC)


Environment-related costs can be analysed into:


  • Costs which can be attributed directly to a cost centre, for example a waste filtration plant. It should be relatively straightforward to identify and, to some extent, control these costs.


  • Environment-driven costs which are generally hidden in overheads. ABC will aim to separately identify and control these costs:


– The costs are removed from general overheads and traced to products or services.


– This means that cost drivers are determined for these costs and products are charged for the use of these environmental costs based on the amount of cost drivers that they contribute to the activity.


–    This should result in a more realistic product cost.


– It should also result in better control of environment-related costs by reducing the incidental cost drivers or eliminating certain activities.


Advantages and disadvantages of ABC
Advantages Disadvantages
• Better/fairer product costs. • Time consuming. Expensive to
• Improved pricing – so that implement.
the products which have • Determining accurate costs
the biggest environmental and appropriate cost drivers is
impact reflect this by difficult.
having higher selling • External costs, i.e. not
experienced by the company
• Better environmental (e.g. carbon footprint) may still
control. be ignored/unmeasured.
• Facilitates the • A company that integrates
quantification of cost external costs voluntarily may
savings from be at a competitive
‘environmentally-friendly’ disadvantage to rivals who do
measures. not do this.
• Should integrate • Some internal environmental
environmental costing into costs are intangible
the strategic management (e.g. impact on employee
process. health) and these are still




5.2 Lifecycle costing


Traditional costing techniques based around annual periods may give a misleading impression of the costs and profitability of a product. Lifecycle costing considers the costs and revenues of a product over its whole life rather than one accounting period. Therefore, the full cost of producing a product over its whole life will be taken into account. These costs include costs incurred prior to, during and after production and will therefore include the full environmental cost of producing a product over its whole life.


It is important that all of the environmental costs are identified and included in the initial project appraisal. For example:


  • Managers should design products carefully to reduce waste over the manufacturing life of the product.


  • Managers must pay attention to decommissioning costs that will be incurred after the end of the project and should plan for these costs.


For an organisation to be able to claim to be financially and environmentally responsible, it must have plans in place to cover these costs.





In order to reduce lifecycle costs an organisation may adopt a TQM approach. It is arguable that TQM and environmental management are inextricably linked insofar as good environmental management is increasingly recognised as an essential component of TQM. Such organisations pursue objectives that may include zero complaints, zero spills, zero pollution, zero waste and zero accidents. Information systems need to be able to support such environmental objectives via the provision of feedback – on the success or otherwise – of the organisational efforts in achieving such objectives.


Test your understanding 2


The following details relate to a new product that has finished development and is about to be launched.


Development  Launch  Growth  Maturity  Decline
Time period Finished 1 year 1 year 1 year 1 year
R & D costs 20
Marketing 5 4 3 0.9
costs ($m)
Production 1.00 0.90 0.80 0.50
cost per unit
($) (see note)
Production 1m 5m 10m 4m
Other costs 1m
($m) (see


Note: The production cost per unit includes environmental-related production costs. The ‘other costs’ relate to decommissioning costs that will be incurred at the end of the decline stage.


The launch price is proving a contentious issue between managers. The marketing manager is keen to start with a low price of around $8 to gain new buyers and achieve target market share. The accountant is concerned that this does not cover costs during the launch phase and has produced the following schedule to support this:


Launch phase: $ million
Amortised R&D costs (20 ÷ 4) 5.0
Marketing costs 5.0
Production costs (1 million × $1 per unit) 1.0
Total 11.0
Total production (units) 1 million
Cost per unit $11.00




Prepare a revised cost per unit schedule looking at the whole lifecycle and comment on the implications of this cost with regards to the pricing of the product during the launch phase.


5.3 Flow cost accounting


This technique looks at material flows and material losses incurred at various stages of production. It makes the flow of materials much more transparent and by doing so it aims to reduce the quantities of materials leading to increased ecological efficiency.


Illustration 3 – Cost reduction at McCain Foods


One example of energy saving is McCain Foods, which buys an eighth of the UK’s potatoes to make chips. It has cut its Peterborough plant’s CO2 footprint by two -thirds, says corporate affairs director Bill Bartlett. It invested £10m (approximately $15m) in three 3MW turbines to meet

60 per cent of its annual electricity demand. McCain spent another £4.5m (approximately $ 6.75m) on a lagoon to catch the methane from fermenting waste water and particulates, which generates another 10 per cent of the site’s electricity usage. It also wants to refine its used cooking oil, either for its own vehicles fleet or for selling on.


McCain want to become more competitive and more efficient.


Question practice


The question below is taken from a past exam. It is an excellent question on EMA. Make sure that you take the time to attempt the question and review/ learn from the answer.


Test your understanding 3


FGH Telecom (FGH) is one of the largest providers of mobile and fixed line telecommunications in Ostland. The company has recently been reviewing its corporate objectives in the light of its changed business environment. The major new addition to the strategic objectives is under the heading: ‘Building a more environmentally friendly business for the future’. It has been recognised that the company needs to make a contribution to ensuring sustainable development in Ostland and reducing its environmental footprint. Consequently, it adopted a goal that, by year 17, it would have reduced its environmental impact by 60% compared to year 1. It is currently year 11.


The reasons for the board’s concern are that the telecommunications sector is competitive and the economic environment is increasingly harsh with the markets for debt and equities being particularly poor. On environmental issues, the government and public are calling for change from the business community. It appears that increased regulation and legislation will appear to encourage business towards better performance. The board have recognised that there are threats and opportunities from these trends. It wants to ensure that it is monitoring these factors and so it has asked for an analysis of the business environment with suggestions for performance measurement.


Additionally, the company has a large number of employees working across its network. Therefore, there are large demands for business travel. FGH runs a large fleet of commercial vehicles in order to service its network along with a company car scheme for its managers. The manager in charge of the company’s travel budget is reviewing data on carbon dioxide emissions to assess FGH’s recent performance.


Recent initiatives within the company to reduce emissions have included:


  • the introduction in year 10 of a homeworking scheme for employees in order to reduce the amount of commuting to and from their offices and


  • a drive to increase the use of teleconferencing facilities by employees.


Data on FGH Telecom:
Carbon Dioxide emissions
Measured in millions of kgs Year 1 Year 9 Year 10
Base year
Commercial Fleet Diesel 105.4 77.7 70.1
Commercial Fleet Petrol 11.6 0.4 0.0
Company Car Diesel 15.1 14.5 12.0
Company Car Petrol 10.3 3.8 2.2
Other Road Travel (Diesel) 0.5 1.6 1.1
Other Road Travel (Petrol) 3.1 0.5 0.3
Rail Travel 9.2 9.6 3.4
Air Travel (short haul) 5.0 4.4 3.1
Air Travel (long haul) 5.1 7.1 5.4
Hire Cars (Diesel) 0.6 1.8 2.9
Hire Cars (Petrol) 6.7 6.1 6.1
——— ——— ———
Total 172.6 127.5 106.6
——— ——— ———





  • Perform an analysis of FGH’s business environment to identify factors which will affect its environmental strategy. For each of these factors, suggest performance indicators which will allow FGH to monitor its progress.


(8 marks)


  • Evaluate the data given on carbon dioxide emissions using suitable indicators. Identify trends from within the data and comment on whether the company’s behaviour is consistent with meeting its targets.


(9 marks)


  • Suggest further data that the company could collect in order to improve its analysis and explain how this data could be used to measure the effectiveness of the reduction initiatives mentioned.


(3 marks)


(Total: 20 marks)


Student accountant article: visit the ACCA website, www.accaglobal.com, to review the article on ‘environmental management accounting’.


6      Exam focus


Exam sitting Area examined Question Number of
number marks
Sept/Dec 2016 EMA and lifecycle 3(b)(c) 17
December 2014 EMA 3 25
June 2011 EMA 5 20
December 2010 Environmental performance 4 20

Test your understanding 1


The benefits are as follows:


  • This approach ensures the organisation meets with legal and regulatory requirements relating to environmental management.


  • Increased sales as a result of meeting with customers’ needs and concerns relating environmental management.


  • Helps to maintain a positive public image.


  • Manages risk, for example of an environmental disaster.


  • Can reduce costs, for example through improved use of fuel and water.


  • Should contribute to sustainable development, i.e. the meeting of current needs without compromising the ability of future generations to meet their own needs.



Test your understanding 2


Lifecycle costs $ million
Total R&D costs 20.0
Total Marketing costs (5+4+3+0.9) 12.9
Total Production costs (1×1+5×0.9+10×0.8+4 17.1
× 0.9)
Decommissioning cost 1.0
Total production (units) (1+5+10+4) 20 million
Cost per unit (51 ÷ 20) $2.55




•         The cost was calculated at $11 per unit during the launch phase. Based on this cost, the accountant was right to be concerned about the launch price being set at $8 per unit.


•         However, looking at the whole life-cycle the marketing manager’s proposal seems more reasonable.


•         The average cost per unit over the entire life of the product is only $2.55 per unit. Therefore, a starting price of $8 per unit would seem reasonable and would result in a profit of $5.45 per unit.


Test your understanding 3


  • Government regulations relevant to FGH’s environmental strategy include requirements to recycle materials, limits on pollution and waste levels along with new taxes such as carbon levies to add additional costs. Performance indicators would be additional costs resulting from failure to recycle waste, fines paid for breaches and the level of environmental tax burdens.


The general economic climate is relevant to the strategy including factors such as interest, inflation and exchange rates. For FGH, the general economic environment is not good and cost savings from reductions in energy use would help to offset falling profits. Also, the difficulties indicated in raising capital could be monitored through the firm’s cost of capital. This would be especially relevant if the environmental initiatives lead to significant capital expenditure for FGH.


Trends and fashions among the general public appear to be relevant for FGH as the public will be end-users of its services and environmental action could improve the brand image of FGH. Suitable performance indicator would be based around a score in a customer attitude survey.


Technological changes in the capabilities available to FGH and its competitors will affect its environmental strategy. New environmentally efficient technologies such as hybrid cars and solar recharging cells would be relevant to the cost and product sides of FGH. Performance indicators would involve measuring the impact of the use of new technology on existing emission data.


  • The company has a target of cutting emissions by 60% of their year 1 values by the year 17. Overall, it has cut emissions by 38% in the first nine years of the 16-year programme. There was a reduction of 16% in the last year of measurement. If this rate of improvement is maintained then the company will reduce its emissions by 82% (62% × (84% ^ 7)) by year 17. However, it should be noted that it is unlikely that there will be a constant rate of reduction as it normally becomes more difficult to improve as the easy actions are taken in the early years of the programme.


The initial data are rather complex and so to summarise, three categories for the three types of transport were considered (Road, Rail and Air). The largest cut has been in rail related emissions (63%) while the contribution from road transport has only fallen by 38%. The road emissions are the dominant category overall and they are still falling within the programmed timetable to reach the target. However, it is clear that air travel is not falling at the same pace but this may be driven by factors such as increasing globalisation of the telecommunication industry which necessitates travel by managers abroad to visit multinational clients and suppliers.


One unusual feature noted is that the mix of transport methods appears to be changing. Rail travel appears to be declining. This is surprising as rail is widely believed to be the lowest emitting method from these forms of travel. However, caution must be exercised on this conclusion which may be due to a change in the emissions technology relating to each category of travel rather than the distance travelled using each method.


The major change that is apparent from the basic data is the move from petrol to diesel-powered motor vehicles which in the commercial fleet appears nearly complete. It will be more difficult to move company and private cars to diesel-power as there will be an element of choice on the part of the car user in the type of car driven.


Measured in millions of Year 1 Year 9 Year 10 Change on
kgs base year
Commercial Fleet 105.4 77.7 70.1 –33%
Commercial Fleet 11.6 0.4 0.0 –100%
Company Car Diesel 15.1 14.5 12.0 –21%
Company Car Petrol 10.3 3.8 2.2 –79%
Other Road Travel 0.5 1.6 1.1 120%
Other Road Travel 3.1 0.5 0.3 –90%
Rail Travel 9.2 9.6 3.4 –63%
Air Travel (short haul) 5.0 4.4 3.1 –38%
Air Travel (long haul) 5.1 7.1 5.4 6%
Hire Cars (Diesel) 0.6 1.8 2.9 383%
Hire Cars (Petrol) 6.7 6.1 6.1 –9%
Total 172.6 127.5 106.6
Index 100% 74% 62%
YoY change –16%



Simplifying categories
Road travel 153.3 106.4 94.7 –38%
Air travel 10.1 11.5 8.5 –16%
Rail travel 9.2 9.6 3.4 –63%
Total 172.6 127.5 106.6 –38%
Mix of travel method in
each year
Road travel 89% 83% 89%
Air travel 6% 9% 8%
Rail travel 5% 8% 3%


  • The analysis could be improved by collecting data on the total distances travelled so that employee behaviour can be tracked. This would allow measurement of the effect of switching away from physical meetings and using teleconferencing facilities. This may be particularly effective in cutting air travel which has been noted as a problem area.


It would also allow assessment of the homeworking scheme which should reduce total distance travelled. Although, the full environmental benefit will not be apparent as much of the travel would have been a regular commute to work which an employee will not be able to claim and so is unlikely to record.


Finally, the collection of distance travelled data will allow a measure of the effect of changing modes of transport by calculating an average emission per km travelled.


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