Using Environmental Cost Management Accounting

Posted by: Patricia Barlow Post Date: 14th October 2016

Environmental cost management accounting is something that more and more organisations need to consider as part of their overall strategy. Let’s take a look at why this is, and how it can be implemented.

Corporate social responsibility and the environment

Environmental cost management accounting

Sustainability plays a large part in the decisions companies make, and the strategies they implement to achieve their goals.

Environmental impact is a hot topic for companies, the government and the public, and people are now much more conscious of the way organisations affect the world we live in. As such, there is pressure on large organisations to have a corporate social responsibility strategy to ensure they are working sustainably, and to report this back to shareholders.

What is environmental cost management?

In response to the ways organisations need to think about their responsibility to the outside world, a new form of accounting has been developed, known as environmental cost management.

Environmental cost management looks to control the costs that are associated with the environmental impact the organisation has through its operations. This impact could be caused by factors like manufacturing emissions and waste disposal.

There are two central reasons for using environmental cost management. One is that controlling these costs will have a positive impact on the environment, by indirectly limiting damaging activities. Another reason is that it has the potential to increase profitability by reducing spend in certain areas, and even by helping to develop a positive brand image.

In some cases, the cost of environmental problems can force a company into liquidation if the cost of recovery is too high. For example, the cost of an oil leak into the ocean can be huge due to clean up costs, compensation, and having to close the oil base. There are also costs to others such as local fish mongers and restaurants.

Starting to use environmental cost management

To begin with, you need to carefully investigate the environmental impact of the organisation. When specific factors have been identified, you can generate ideas for addressing them.

The next stage is forming these ideas into a strategy that can be implemented. The whole organisation should be involved in this process, as it will affect actions at every level, from board decisions to the way specific tasks are carried out. If, for example, the strategy relates to altering the way a product is made, then tiny differences at the production stage could have a huge accumulative effect.

With environmental costing, an activity based costing approach works best. This involves identifying a cost driver. For example, if your strategy involves reducing the cost of washing the handtowels at a restaurant, the cost driver will be washing, and the environmental cost will be the energy used to power the washing machine.

In this case, the restaurant could stipulate one towel per customer, or they may look at using throw-away towels. These cost reductions could even generate new business from customers who seek to limit their environmental impact.

This topic is covered in depth on accounting qualifications such as ACCA.

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