Management accounting
Implementing LCM in management accounting means identifying, assessing and reporting on a broader range of environmental impacts and costs. Management accountants can play a pivotal role in sharing this valuable data with internal decision makers to initiate change and identify improvements.
Profile
Management accounting involves preparing financial information to support financial management, decision making, and product pricing. Key accounting activities include: establishing management information and financial systems; identifying, collecting, interpreting and presenting financial information; and, developing and implementing better accounting and analytic tools and techniques. Working with other professionals in the organisation to identify 'hidden' costs is another important activity.
Current Practice
Obvious and immediate environmental costs are usually accounted for. However, costs such as compliance monitoring and reporting, legal support, resource use (i.e. energy, water) and waste management are often rolled in with general overheads. This conceals the costs from those who may be in the best position to control them (e.g. plant managers, production engineers). Formulae applied to allocate such costs rarely result in a realistic distribution.
Other important environmental costs are often overlooked because they are less direct, less tangible and/or longer term. Examples of commonly overlooked costs include increased future service costs on equipment due to emissions/deposits, long-term site monitoring costs, and future remediation costs. A company that ignores foreseeable environmental costs will continually under-cost its products, and reduce future corporate profitability.
Applying the LCM Framework to Management Accounting
THINK:
Reflect on potentially significant environmental costs, including upstream and downstream costs, associated with a product or proposed investment, for example, does your management accounting system appropriately allocate waste treatment and disposal costs across your different product lines (one may be disproportionately high), or have you considered the contingent liability that may be associated with future product take-back requirements for packaging materials?
ASK:
For potentially significant life cycle environmental costs, request input from staff involved in the development of investment options, and/or from company personnel responsible for environmental management. Collect ideas on possible LCM approaches to reducing environmental costs.
ASSESS:
For major product decisions with significant implications for the future of the company, consider initiating a more formal Life Cycle Assessment to identify inputs, outputs and impacts. This will provide a basis for more comprehensive costing of the various options.
ACT:
Include at least a qualitative description of possible life cycle environmental costs in reporting to decision makers. Where warranted, provide more detailed product costing and life cycle costing.
Moving Towards A Life Cycle Approach
Implementing LCM in management accounting means identifying, assessing and reporting on a broader range of environmental costs. This includes overlooked internal costs, and costs that are currently external but will likely begin to accrue to the company. LCM also requires increased effort to allocate costs to individual product lines. The level of effort, rigour and detail applied should relate to the importance of the decisions that will be affected by the information, and the significance of the environmental issues in question.
Related Strategies
Consideration of life cycle environmental costs in accounting is referred to as life cycle costing or full cost accounting. Key steps to these approaches include the following:
- Integrate life cycle environmental considerations in ongoing financial analysis and decision making. A data set on environmental costs can be built over time, based on the findings of individual cost accounting exercises. For recurring costs that are difficult to quantify, consider developing an internally defined set of environmental prices, to help shift decision making toward environmental objectives. As more experience is gained, methods can be formalised and standardised.
- Assess costs on a product specific basis, where possible. A life cycle inventory that identifies and quantifies life cycle inputs and outputs (i.e. energy, material and waste flows) is a basis for identifying a broader range of product-specific environmental costs. This in turn will support more comprehensive cost accounting of the material and energy inputs associated with a product.
- Look into methods that have been developed to support more comprehensive cost accounting. There are now numerous accounting methods (e.g. full cost accounting, total cost assessment) that provide a good base for bringing life cycle costs into accounting practice.
