Management of Environmental Costs in an Organization

This report discusses the meaning of environmental costs, techniques used in managing environmental costs, and the importance of management of environmental costs in an organization. It explores the identification and recording of environmental costs, controlling environmental costs, and accounting of environmental costs. Additionally, it highlights the importance of management accounting in decision-making and the relevance of budget control and key performance indicators (KPIs) in improving financial performance.

Financial Performance
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Meaning of environmental costs.................................................................................................3
Using costs and benefits in environmental management accounting .........................................4
Techniques used in managing environmental costs....................................................................4
Importance of Management of environmental costs in an organisation.....................................5
Identification and recording Environmental costs......................................................................5
Controlling environmental costs.................................................................................................6
Accounting of environmental costs.............................................................................................6
Management accounting is important for decision-making........................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Environmental cost is cost occurs due to production of the goods and services with actual and
potential damage to natural resources due to economic activities by the organizations (Lee, Hu,
2018). This report is based on the environmental management accounting cost and the affect of
the environment by the organization. This shows the techniques which identify and manage the
environmental cost with identify and record and how to control this environmental cost which
less affect the environment. Also, importance of the decision-making process and how
management accountant gain the right information with the planning tools to solve the financial
problem faced by the organization and also shows the relevance of the budget control by the
organization, the importance of KPI to improve the financial performance of the organization
and how financial suitability can be gained by the organization.
MAIN BODY
Meaning of environmental costs
Environmental costing can be defined as the costs associated with the harming and hurting nature
in the accomplishment of the business activities. In other words it refers to the various waste
produced by the company in the form of energy consumption, carbon emissions, pollution like
waste product comes out of the production process. It must be identified, measured, analysed and
reported by the management accountant in order to minimise the negative impact on the
environmental factors. The environmental costs can be classified into two types:
Internal costs: Costs associated with disposal of waste, installing systems which can minimise
the penalties, taking back used product from customers for recycling the same, fines and charges
imposed by regulatory authority and costs of obtaining permission before project initialised
(Latan and et. al., 2018). These costs have the direct impact on the income of the company.
External costs: Costs which is being borne by the society due to the generation of these costs by
the company in the course of carrying out its economic activities. Cost of carbon emission's
impact on the society, excessive use of natural resource like energy and water, harming forests
and wildlife and cost of harmful impact on society's health are all external or indirect
environmental costs.

Using costs and benefits in environmental management accounting
Cost for the company in environmental management includes the cost of implementing policies
and regulations imposed on the company by the society and environmental regulatory authority,
earning loss to the company after implementing regulation, price rise of products and services,
and rising tax rates due to regulation's impact (Burritt and et. al., 2019 ). The benefits from
environmental management include protection to wildlife and various species, quality
improvement of water, carbon storage to avoid its emission in the atmosphere, reduction in
mortality of living beings and building reputation and image of the company in the society. The
management accountant is responsible for appropriately analysing the costs and benefits of the
new policies and regulations. For this the management accountant has to identify, measure and
compare costs and benefits.
Techniques used in managing environmental costs
In modern time it has become the basic duty of management accountant to manage costs
associated with the environmental aspects. This is because of the reason of modern society
becoming more aware about environmental aspects, introduction of new regulations and policies
and if it is not complied with then the company has to pay high penalties and fines (Burritt and
et. al., 2019 ). There are many techniques used by the management accountant in managing
environmental costs such as :
Input and outflow analysis: This technique is concerned with the appropriately managing how
much input has been bought and how much output has been produced. Like if 1000 kg raw
material is used and the output is 950 kg then the difference between the two must be considered
both in terms of quantitative and monetary. The difference of 50 kg may be complete waste or
some of it has been sold as scrap.
Flow cost accounting: Under this technique along with materials, organisational structure has
also been taken into account. It creates transparency in the physical quantities used, it's and costs
and value as well (Christine and et. al., 2019). The purpose of this technique is to ensure long run
positive impact on the business' total cost along with the positive impact on environment. For
example, wastes of restaurant may be regarded as an organic waste.
Activity based costing: This costing technique used to allocate the total cost of the business to
the individual activities carried out in the course of business. Here in environment management
accounting, it highlights the hidden environmental costs in overheads by grouping it under

environmental related and driven costs. For example, cost of cleaning activities after production
process.
Life cycle costing: This technique takes into account the cost and benefits associated with the
whole life of the product instead of considering only one period of accounting (Phan, Baird and
Su, 2017). So in the context of environmental costing, the total environmental cost is taken for
producing product.
Importance of Management of environmental costs in an organisation
The management accountant along with its growth and profit making goals must considers the
environmental aspects in its decision making activities for the welfare of the society. Its
importance for the organisation are as follows:
 The environmental consideration helps an organisation to achieve sustainability and
success for long run.
 The organisation can improve its image and reputation through environmental concern
and measures adopted in production process which improves its profitability and reduces
its overall costs of the business.
 It helps in identification and measurement of environment driven costs and accordingly
helps in minimising the same(Căpușneanu and et. al., 2020).
 It helps in controlling usage of various natural resources like water and energy
consumption by separately identifying the same.
 It allows an organisation to adopt environmental friendly techniques in production
process to reduce environmental risks for the benefit of the society in which it operates.
Identification and recording Environmental costs
A lot of cost associated with the environmental aspects remains hidden in the general overheads
of the business and these are not accounted for separately by the management. In organisation of
large size such identification become complex procedure. This may be related to materials used
in the process, disposal of waste and its monetary value obtained by selling it as a scrap. Such
identification is actually difficult but the management is responsible in modern times to remain
concerned about the same because of increasing regulations and scarcity of natural resources
(Saeidi and et. al.,2018). So the steps to record and control these costs must be adopted. After
identification it must be assigned to the product or process cost from which it has actually been

arises. Only by doing so the management accountant be able to make informed decision about
environmental impact of production.
Controlling environmental costs
After being able to identify and appropriately allocate the environmental costs to the products
and processes then only the task of controlling it can be initiated. This can be done in many
ways:
 The cost of paying penalties and disposal of raw materials remain unused during
production and this can be saved through adopting “mass balance” technique whereby
the output is compared with the actual input bought which is helpful in minimising costs.
 Water also accounts as costs the organisation so if the consumption is decreased to some
extent then it will reduce costs of both environmental and monetary aspects(da Rosa,
Lunkes and Mendes, 2020).
 Vehicles for transporting goods used by the companies must be fuel efficient which
would definitely reduce environmental costs and monetary costs both.
 If the practice of creating waste and inefficient activities are minimised then the cost
savings can easily be done.
Accounting of environmental costs
There are different methods used for accounting the environmental costs which includes
preparing internal report for environmental costs and using management techniques for assigning
the environmental costs to different products and processes of the company by appropriately
identifying them. Internal reporting include the identification of physical quantity of wastes and
its inclusion in the financial accounts (Amir, Rehman and Khan, 2020). This shows that how
many costs has incurred in protecting environment and if not even protected then also it costs to
the company in terms of penalties and fines, social harm and natural resource's depletion.
Management accounting is important for decision-making.
Relevant cost analysis: To conduct a relevant cost analysis is the most important part for
an accountant to know the existing cost and the future activities of the firm. Before taking any
decision company explore all the possibilities and came with the most successful tactic to earn
maximum of the profits. Management accounting analysis all the channel to sale in, product and

service and the marketing strategies to know the best profitable channel for the firm. After, the
analysis of the relevant cost better evidence based costing decision can be made.
Audience targeting: marketing team must be forced on their customer specially, they are
the anchor of the business and each business have to make the buyer persona which include the
age and gender of the customer targeting, location of the audience, income level in the market,
lifestyle of the customer and the values they are carrying. Management accountant should
analysis the values of group to know the best customer by engaging more time and cost and
resources to earn the good profits from the market (Lepistö, hantola ,2018).
Make or buy evaluation: production of the product is the most expensive process of the
business so the businesses should make the two solutions, first make the product on your own or
but it from the market and sell it. Management accountant help in to make the decision on the
product either for manufacturing or trading by evaluating the real cost of the product.
Define budget: Budget related decision should be come ply with the past sales and
marketing database. Management accounting analyse the present activities and define the
future investment decision by creating financial plan, projects, new product or any other process
by the company in the future.
Controlling and planning: Controlling and planning is the other part of management
accounting. They evaluate and detect the financial performance of the company to predict the
future patter of the company (Rachapaettayakom, and et.al, 2020).
Planning tool that help the business to face the financial problems.
Benchmarking is the process of comparing their own practise to their competitor
company, mainly a leading company. To know the strategic to the leading company for their
success and the different tactics they used and improve own policy and producer to get success.
The company known their weakness and can change to be made by the company benchmarking
process help the company to measure the sales volume and expenses of the company. This
process include selecting benchmarking, types of benchmarking and making decision.
Variance analysis is difference between planned and actual numbers. They show the
over-performance and under- performance of the company for a particular financial year.
Companies compare the actual cost and the standard cost of the production.
Relevance of budget control:

They are based on well define plan to the amount that are expected to earn and spend by
the company. Budgetary is an effective way to control the cost eliminate the waste which
promote economy and efficiency of the company. Budget make the management to work in
limits and compare the actual and standard budget performance. It also promotes the
coordination between different departments. It centralized the diverse operations and delegate the
authority which is fixed to be used by the authority. Budget help company to earn good profit by
minimizes the cost and expenditure of the firm. They also help the company to forecast the
future need of money in the company.
KPI relevant in improving the financial performance.
KPI shows the quantifiable measures that are evaluated the success of the company target
or goal to accomplish the set target. There are different type of KPI are used by the companies to
measures and evaluated the performance of the company in different areas. KPI for financial
performance is measure to avoid the problem occurring in the future that ere rely on the KPI for
the effective decision making.
KPI can improve the financial performance by measuring it from the following ratios:
Inventory turnover: This shows that how many times inventory turn over or sold during
the financial year which denote from cost of good sold divided by inventory. Thus help the
company to move out those item which are slow moving items and maintain the inventory of fast
moving items (Rousseau, 2018).
Debt to equity: This shows the relation between the debt and the equity of the company
or shows the debt capacity of the firm. This denotes from debt dived by shareholders' equity. The
ideal ratio of debt equity is 2:1 for the companies.
Accounts receivable day: This shows the average time to collect the account receivable of
the company ion the market. This denotes from accounts receivable multiple by 265 divided by
annual sales. The market standard is about the to get the accounts receivable.
Accounts payable day: This shows the average time taken to pay the accounts payable to
the suppliers. This denotes from accounts payable multiplied by 365 divided by cost of good
sold.
Business gain financial sustainability:

Financial sustainability is the ability of the business to start, grow and sustain themselves
into the dynamic market with short term and long term financial stability. The min three
dimension are environmental, social and economical. The business can gain the financial
sustainability when it is done at the right time to put the efforts and time to gain the advantage of
financial sustainability by increasing more efforts to real work by doing more of what set out to
be because it helps the businesses to focus more on mission to complete it instates of day to day
survival. Business should become more and more competitive in the market to earn more of the
profit and to expand the business by increasing the employees to obtain the company's mission.
Whereas, making the plan by the organizational to get the success when current funding are full
enough to reach the mission. Companies should follow the guideline and make the backup plan if
any unfortunate situation arise (Smith,Van and Der Heijden, 2017). Financial sustainability of
the business is done when there is proper strategic planning for their product by using latest and
ozone-friendly products that are not harmed to anyone and follows the trend in the current
environment. Quality of the product should not be comprised and improvement evidence based
sustainable by setting benchmarking, proper progress of the company and ensure greater
accountability for the product.
CONCLUSION
From this report it has been concluded that the financial performance of the company is
not solely the result of its sales but also their adherence to the environmental norms and its
protection for the social and environmental benefits. The application of environmental
management accounting ensures this concern about environmental aspects. In the second part of
this report the factors helpful in financial performance improvement are discussed which can be
applied in the normal course of business for solving financial problems, establishing good
control systems and gain sustainability for long run through obtaining right information and
decision making.

REFERENCES
Books and Journals
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accounting and control system between top management commitment and
environmental performance: A legitimacy theory. Journal of Management and
Research. 7(1). pp.132-160.
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production: Evidence from some case studies. Journal of Cleaner Production. 224.
pp.479-491.
Căpușneanu, S., and et. al., 2020. Environmental Management Accounting: A Business
Perspective on the Policies, Analyses, and Benefits of Its Implementation.
In Management Accounting Standards for Sustainable Business Practices (pp. 27-51).
IGI Global.
Christine, D., and et. al., 2019. The relationship of environmental management accounting,
environmental strategy and managerial commitment with environmental performance
and economic performance. International Journal of Energy Economics and
Policy. 9(5). p.458.
da Rosa, F. S., Lunkes, R. J. and Mendes, A. C., 2020. Environmental management accounting
and innovation in water and energy reduction. Environmental Monitoring and
Assessment. 192(10). pp.1-15.
Latan, H., and et. al., 2018. Effects of environmental strategy, environmental uncertainty and top
management's commitment on corporate environmental performance: The role of
environmental management accounting. Journal of Cleaner Production. 180. pp.297-
306.
Lee, Y. M. and Hu, J. L., 2018. Integrated approaches for business sustainability: The
perspective of corporate social responsibility. Sustainability. 10(7). p.2318.
Lepistö, L. and Ihantola, E. M., 2018. Understanding the recruitment and selection processes of
management accountants. Qualitative Research in Accounting & Management.
Phan, T. N., Baird, K. and Su, S., 2017. The use and effectiveness of environmental management
accounting. Australasian Journal of Environmental Management. 24(4). pp.355-374.

Rachapaettayakom, P., and et.al., 2020. The need for financial knowledge acquisition tools and
technology by small business entrepreneurs. Journal of Innovation and
Entrepreneurship. 9(1). pp.1-28.
Rousseau, D. M., 2018. Making evidence-based organizational decisions in an uncertain
world. Organizational Dynamics. 47(3). pp.1-12.
Saeidi, S. P., and et. al.,2018. The moderating role of environmental management accounting
between environmental innovation and firm financial performance. International
Journal of Business Performance Management. 19(3). pp.326-348.
Smith, S. and Van Der Heijden, H., 2017. Analysts’ evaluation of KPI usefulness,
standardisation and assurance. Journal of Applied Accounting Research.
Online
Environmental cost. 2019. [Online] Available through
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