APM topic Explainer: Environmental Management Accounting

Summary

This video discusses Environmental Management Accounting (EMA) in the context of Advanced Performance Management (APM). The script highlights the limitations of traditional management accounting systems in addressing environmental costs and emphasizes the need for businesses to incorporate EMA for greater transparency. Techniques such as input-output analysis, environmental activity-based costing, and life cycle costing are explored as tools to quantify and manage environmental costs. The video also covers how environmental information can aid in performance management, decision-making, and planning, especially in industries with significant environmental impact, like mining.

Takeaways

• 😀 Traditional management accounting systems often overlook environmental costs, which are typically hidden under overheads like waste treatment and pollution handling.
• 😀 Environmental Management Accounting (EMA) complements traditional systems by identifying, quantifying, and analyzing environmental costs to provide greater transparency.
• 😀 EMA techniques such as input-output analysis, environmental activity-based costing (ABC), and life cycle costing allow businesses to capture and allocate environmental costs more effectively.
• 😀 Input-output analysis helps identify the environmental costs of waste by linking input materials to the outputs of goods, scrap, and waste, thus revealing hidden environmental costs.
• 😀 Environmental ABC divides costs into environment-related and environment-driven costs, helping businesses understand and allocate environmental expenses.
• 😀 Life cycle costing captures environmental costs throughout the entire life cycle of a product, from creation to disposal, facilitating better long-term decision-making.
• 😀 The US Environmental Protection Agency (EPA) suggests categorizing environmental costs into four groups: conventional costs, hidden costs, contingent costs, and image/relationship costs.
• 😀 Quality cost analysis frameworks, which classify costs into prevention, appraisal, internal failure, and external failure categories, can be adapted to classify environmental costs in a similar way.
• 😀 EMA improves planning, decision-making, and performance management by integrating environmental costs into budgeting, pricing, investment appraisals, and KPI designs.
• 😀 The APM exam may require you to classify environmental costs into appropriate categories and explain how life cycle costing can help manage environmental impacts in business decisions.

Q & A

What is the main focus of the video on Environmental Management Accounting (EMA)?

The video focuses on explaining Environmental Management Accounting (EMA), how it complements traditional management accounting, and its application in identifying and managing environmental-related costs in modern businesses.

What is the primary problem with traditional management accounting systems in relation to environmental costs?

Traditional management accounting systems often hide environmental costs (such as wastewater treatment and pollution mitigation) within overheads. These costs are not clearly visible or tracked, leading to poor management of environmental impact and long-term consequences for both the firm and the environment.

How can businesses address the deficiencies of traditional management accounting systems?

Businesses can address these deficiencies by adopting Environmental Management Accounting (EMA) systems, which focus on increasing transparency and reporting environmental costs. This includes improving both external and internal reporting, as well as re-engineering accounting and reporting systems to integrate environmental factors.

What are the three main techniques of Environmental Management Accounting (EMA) discussed in the video?

The three main techniques discussed in the video are: 1) Input-output analysis, 2) Environmental Activity-Based Costing (E-ABC), and 3) Life-cycle costing (LCC). Each technique helps businesses identify, quantify, and report environmental costs.

What is the purpose of input-output analysis in EMA?

Input-output analysis in EMA helps businesses track the relationship between material inputs and various outputs (such as finished goods, scrap, and waste). It enables companies to allocate input costs to different outputs, thereby estimating the environmental cost associated with waste and inefficiencies.

How does Environmental Activity-Based Costing (E-ABC) differ from traditional ABC?

Environmental Activity-Based Costing (E-ABC) is an adaptation of traditional Activity-Based Costing (ABC). While traditional ABC allocates costs based on activities, E-ABC specifically focuses on identifying and allocating environmental-related costs. It categorizes costs into 'environment-related' (e.g., compliance team salaries) and 'environment-driven' (e.g., waste treatment, pollution mitigation) costs.

What is the significance of life-cycle costing (LCC) in environmental management?

Life-cycle costing (LCC) captures all costs associated with a product or project across its entire life cycle, from inception to disposal (cradle-to-grave). This includes environmental costs at each stage, which helps businesses make better long-term pricing, investment, and sustainability decisions by factoring in future liabilities and environmental impact.

How does the EPA’s classification of environmental costs support EMA?

The EPA's classification of environmental costs into four categories—conventional, hidden, contingent, and image/relationship costs—supports EMA by providing a structured way to classify and analyze environmental costs. This framework helps businesses clearly identify and report costs that were previously hidden in overheads, improving transparency and management.

What are some examples of costs that would be classified as 'external failure costs' in EMA?

Examples of 'external failure costs' in EMA include fines and penalties for breaching environmental regulations, and costs related to external damages caused by environmental harm (e.g., public relations issues or legal fees for environmental lawsuits). These costs are typically incurred after a business has failed to prevent environmental issues.

In an APM exam question, how should students approach classifying environmental costs and providing recommendations on performance management?

Students should first classify the environmental costs using appropriate frameworks (e.g., EPA’s four-category or quality-cost approach). Each classification should be justified with a brief explanation. For recommendations, students should connect environmental cost awareness to planning, decision-making, and performance management, discussing how this information can be used for budgeting, pricing decisions, KPIs, and long-term sustainability goals.