A5- Environmental Accounting

A5: Specialist Cost and Management Accounting Techniques | Environmental Accounting (ACCA F5)

Environmental accounting discusses the issues that businesses face in the management of environmental costs and describes the different methods a business may use to account for its environmental costs.

Environmental Accounting

Environmental accounting also known as environmental management accounting focuses on “the efficient use of resources and the disposal of waste and effluent.”

Businesses should be mindful of their environmental costs and identify and manage them. Failure to do this could result in:

  • Additional direct costs for resources
  • Damage to their reputation
  • Stiff fines and penalties
  • Increased cost of capital
  • Pressure from environmental groups

a) Discuss the issues business face in the management of environmental costs.

Some of the concerns with managing environmental costs are how to pinpoint and them and how to allocate them to a specific product or service. Some examples of environmental costs are:

  • Consumables and raw materials
  • Transport and travel
  • Waste
  • Waste and effluent disposal
  • Water consumption
  • Energy

Bennett and James, authors of Management Accounting (1998) have suggested the following ways to achieve business and environmental benefits:

  • Integrate the environment into capital expenditure decisions
  • Understand and manage environmental costs
  • Introduce waste minimization schemes
  • Understand and manage life cycle costs
  • Measure environmental performance
  • Involve management accountants in a strategic approach

b) Describe the different methods a business may use to account for its environmental costs.

The United Nations Division for Sustainable Development (UNDSD) identified several techniques which can be used to account for environmental costs:

  • Input/Output Analysis – What comes in must go out.
  • Flow Cost Accounting – An improvement on Input/Output Analysis where inputs and outputs are measured through each individual process of production
  • Environmental Activity-Based Accounting – Combines elements of environmental costing with activity-based costing
  • Environmental Life Cycle Costing – Environmental costs are considered at all stages of the life cycle

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