One area of management cost accounting that is developing rap- idly is known by a couple of names. You will find it called either environmental accounting (EA) or full cost accounting (FCA).
The reason for this growing interest is clear. Environmental compliance costs have reached stunning levels. The cleanup costs in the U.S. alone now approach $1 trillion. These costs are spread across large areas of the economy: from huge petro- chemical companies to the corner gas station, from chemical runoff in manufacturing computer chips to disposal costs for used computers, from coal mining to junkyard tires, the costs are everywhere. These costs have been long ignored, but as new regulations, increased stockholder scrutiny, and public awareness converge, they are increasingly harder to ignore. I will refer to the accounting system and procedures that capture these costs as FCA, since recognizing the “full cost” of a busi- ness operation strikes me as clearer in intent.
The scale and scope of FCA will depend on a wide sweep of factors. It can be applied to the level of an individual process, a system, a product, a facility, or an entire company. Coverage may include specific costs, avoidable costs, future costs, and/or social external costs. Ideally, an FCA system is layered on a sophisticated cost accounting system that uses many of the fea- tures of activity-based costing, TQM, and balanced scorecard.
The first set of decisions must address this scale and scope.
How deeply will the need to account for environmental costs penetrate the organization? Will it apply to just a process or will the entire facility/company be affected? Obviously, the greater the scale, the more resources will be required. Other considera-
tions include the nature of the costs. Are these discrete, hidden, contingent, or image costs?
Once the nature of the costs are understood, some environ- mental costs can be significantly reduced or eliminated as a result of business decisions. Environmental costs, say disposing of waste raw material, may bring added costs but provide no added value to a process, a system, or a product.
Environmental costs may also be obscured in gen-
Volatile
Remediation costs are typically included in nonmanufac- turing overhead. Some of these costs are capital; other
costs involve permits, monitoring, regulatory, and maintenance activi- ties. Remediation costs are distinguished from manufacturing costs in accounting methodology.Yet, remediation activities directly compete for financial and human resources with production as well as proactive environmental programs, such as pollution prevention. Remediation is consequently related to production decisions through the budgeting process.Thus, inefficient remediation decisions can translate into ineffi- cient production and business decisions. Remediation costs must be properly accounted for and integrated with other costing systems.
Once environmental risks have been identified, the auditor must check for compliance with accounting standards. Several rules govern- ing environmental disclosures have been developed in recent years.
The Environmental Protection Agency has identified thousands of contaminated sites in the U.S. Laws now require responsible parties to pay to clean up their past contamination, which is often expensive. In response to consumer interests and regulatory enforcement, some cor- porations have had to change their ways of doing things. Some firms have had to learn to recycle, limit waste output (air pollution, water pol- lution, soil pollution), and, most importantly, follow their hazardous products from creation to final disposal. Consequently, for many organi- zations, significant risks surround environmental issues.As penalties have increased for poor environmental choices, many companies are paying closer attention to regulations, often going beyond what is required.
In addition, guidance on accounting for several of these items is shift- ing as regulatory bodies clarify their thinking on these issues. If you run into a situation requiring the application of environmental cost data, check for the latest information on how to handle the situation.
eral overhead accounts and overlooked during the decision- making process. At least that has been the general experience to date. Understanding these costs can lead to more accurate costing and pricing of products. In addition, a competitive advantage with customers may be possible when you have environmentally preferable processes and products.
The major challenge in using FCA as a management tool is identifying relevant costs. The types of environmental costs may be described as conventional, potentially hidden, contin- gent, and image.
Conventionalcosts would cover things like material, sup- plies, structures, and capital costs. These areas need to be examined for environmental impact on decisions.
The potentially hiddencosts can be some of the trickiest to tease out. Regulatory costs, the fees, licenses, reporting, and mandated training are usually straightforward. The major risk here is that some of the growing regulatory requirements will be overlooked. The major unknown is how high-remediation clean- up costs might go. With experience, the up-front and back-end costs for things like site prep, engineering, installation, closure, and disposal will become easier to estimate. Similarly, voluntary costs related to training, audits, monitoring, and reporting will become clearer.
The contingentcosts of penalties/fines have generally pub- lished ranges. However, there are some potentially crushing fines that would sink any company were the full weight of the law applied. The value and liability of any property would have to be assessed in light of environmental impact. Legal fees to defend or protect against claims have a tendency to be somewhat open- ended. Additionally, contingency factors may require adjustment using the probabilities of environmental incidents, such as spills.
Imagecosts would apply to developing and explaining your environmental positions with employees, customers, suppliers, regulators, and shareholders. These would be somewhat like advertising and market costs, since it is largely a communica- tions process.
An important consideration about an FCA system is that it must be a flexible tool that will be providing relevant cost data not ordinarily captured in traditional systems. Successful imple- mentation requires up-front understanding of the scale and the scope of application. Once identified, environmental cost infor- mation needs to get in front of decision makers and they must consider the data as a component of management’s decision- making criteria. FCA systems typically fall into one of three cat- egories—reactive, proactive, and leadership.
ReactiveFCA systems will generally spread costs, both cap- ital and expense, across various overhead categories.
Environmental costs are typically not assigned to a specific pro- duction process or activity. The reactive system usually fails either to indicate that such costs exist or to quantify them with data that’s more than sketchy. As a result, it fails to identify cost drivers and minimizes the opportunity to develop tactics to reduce these costs.
Sony Corporation
Sony has a global environmental accounting system to pro- mote effective and efficient use of its resources in protect- ing the environment. It can monitor environmental preservation expenses throughout a product’s life cycle and the extent to which those expenses decrease the environmental impact. (Sony uses a set of environmental indices that measure not only the direct impact of its business activities, but also the impact of its products in use.)
Sony uses FCA to determine the cost of environmental conserva- tion measures implemented during the year and compare the reduc- tion in environmental impact from year to year. Sony has formulated a coefficient to convert the factors involved into monetary values for use as reference. It uses the following categories for its environmental conservation expenses:
• product design and recycling
• manufacturing and service-related activities
• management activities
• research and development activities
• social activities
• environmental remediation
In a proactiveFCA system, costs are categorized and assigned to specific processes and activities. The costs incurred can be identified, classified, and quantified but are limited to discrete costs. Decisions typically focus on incremental activi- ties, such as minimizing hazardous waste.
A leadershipFCA system includes both financial and nonfi- nancial issues in the relevant data used in the business decision process. Systems are designed to include value chain perspec- tives. Both the process and the product are evaluated for the relationship between inputs and overall value in order to mini- mize total costs. The data coming from such an FCA tool can satisfy a variety of decision classes, including cost allocation, capital budgeting, and product design and pricing.