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Peter Letmathe
Assistant Professor, Ruhr-Uni Bochum, Bochum, Germany
Roger K. Doost
Professor, School of Accountancy, Clemson University, Clemson,
South Carolina, USA
Figure 1
The concept of an environmental cost accounting system
[ 426 ]
Peter Letmathe and systematically. Besides the purchase cost, . Scientific literature gives further details
Roger K. Doost other costs may also be relevant. Examples about the productivity and specific risks
Environmental cost
accounting and auditing are costs for the treatment and logistical of a production technology. Such
handling of purchased goods or waste. information is extremely valuable if an
Managerial Auditing Journal
15/8 [2000] 424±430 5 Finally, the environmental costs have to organization wants to introduce a
be assigned correctly to their causing technologically new process.
objects like input, processes and products. . The environmental management gathers
This will be carried out according to the data about environmental impacts of the
bills of material and energy which were organization. Its experience and
mentioned in step 3. Internal prices are knowledge can contribute to the
the result of adding all cost components of estimation of material and energy flows
a single material and energy sources. and the process risks as well.
These internal prices can be used for
. Communication with the organization's
planning and control of inputs, processes, stakeholders can reduce conflict of
interests. Ideally, members of the
products and environmental impacts.
stakeholder groups have knowledge
Bills of environmental impacts which can lead to a more environmentally
All environmental impacts can be traced friendly and cost efficient production.
back to flows of material and energy. To As a result, bills of materials and energy can
assign them correctly to their perpetrators be generated. This information can then be
three different kinds of environmental used to plan environmental impacts in
impacts can be distinguished: advance and to control the level of impacts
1 Input-related environmental impacts are during the production phase. If there are
directly caused by the use of an input, like significant differences between the standard
the carbon dioxide emissions as the result and actual environmental impacts, then
of burning coal, oil or other fossil energy corrective action should be taken.
sources. Input-related environmental
impacts are independent of the process in Bill of environmental impacts of an input
which the input is inserted. The bill of environmental impacts of an input
2 Process-caused environmental impacts (see Figure 2) includes all environmental
cannot be assigned to a single input. They impacts which can be traced back to a single
are a consequence of carrying out a material or energy source. This means that
specific process. They are caused by a the amount of environmental impact does not
combination of inputs, like emission depend on the process in which the input is
which depends on the temperature of a used. In this step, all the input-related
process. environmental impacts have to be assigned
3 Product-caused environmental impacts to the input which caused them.
can be traced back to a product but not to
a single input or process. An example is
Bill of environmental impacts of a process
The bill of environmental impacts of a
the energy use during the consumption
process (see Figure 3) contains
phase or the waste after the product's use.
environmental impacts which are caused if a
To investigate the flows of materials and process is carried out. The total
energy, these information sources may be of environmental impacts of a process are the
interest: sum of both the direct process-related and the
. The manufacturer of the machine which input-related environmental impacts. The
is needed to carry out the production direct process-related environmental impacts
process knows the materials and energy cannot be assigned to a single input. The
sources which are required to run it. input-related environmental impacts can be
Additionally, he/she can give details calculated through the multiplication of
about technological efficiency and the input-coefficients of the process with the
spoilage rate. Customers, who already
work with this technology, can provide Figure 2
further information. Bill of environmental impacts of an input
. The quality manager knows about the
existing and potential sources of quality
problems. Statistical quality control
provides information about the optimum
specification of materials and other
process parameters to meet the quality
standards of the organization.
[ 427 ]
Peter Letmathe and input-related environmental impacts per unit environmental impacts are only measured in
Roger K. Doost of the considered input. The input-related quantities, there is no way to ensure legal
Environmental cost compliance and the accomplishment of
accounting and auditing environmental impacts are given by the bills
of environmental impacts of the inputs. business goals cost efficiently. Therefore, the
Managerial Auditing Journal
15/8 [2000] 424±430 calculation of internal prices of material and
Bill of environmental impacts of a product energy sources is the next logical step to
With the bill of environmental impacts of a create a decision-oriented information base.
product (see Figure 4) significant
environmental impacts can be assigned
correctly to a product. The environmental Internal pricing
impacts of a product contain the direct
The recorded quantities of material and
product-related environmental impacts and energy need to be evaluated with their
all input-and process-related impacts which realistic costs. In addition to the purchase
are caused through the processes and inputs costs, other cost components are often
to manufacture the product. relevant (see Figure 5):
The described bills of environmental . Treatment costs result from the
impacts give a company the opportunity to separation, refinement, and cleaning of
plan, control and supervise its used materials or undesired residuals like
environmental impacts much more waste, waste water, and emissions.
systematically. If the actual environmental . Logistic costs include the costs of storage
impacts, e.g. represented through the amount and transportation as well as costs for
of emissions or waste water, are higher than security measures to avoid accidents and
the standard impacts, these indicate uncontrolled environmental impacts.
inefficiencies in the business processes. Also . In Europe, many manufacturers have to
legal compliance can be achieved much take back their old products (see Epstein,
better with appropriate data. But because the 1996) after usage. An example is the new
European regulation which obliges all car
Figure 3 manufacturers to take back all old cars
Bill of environmental impacts of a process from the year 2005. The amount of cost
depends on the ability to dismantle and
recycle the products. Processes which
improve the reusability of the products
can reduce such costs.
. Costs of environmental risks are
determined by financial risks which are
uncertain with regard to their occurrence
and their amount. Examples are liability
risks of high environmental impacts (see
Rubenstein, 1994). The costs of
environmental risks can be estimated
through the expected value minus or plus
a security charge.
. Supervision costs are incurred on the
documentation and control of harmful
Figure 4 substances and waste to achieve legal
Bill of environmental impacts of a product compliance. The costs for the EMS
documentation are also included in this
category.
. Additional control costs may be used to set
incentives to reduce the use of a material
which causes considerable environmental
impact. They help to control the use of
material and energy according to the
environmental objectives and targets in
the environmental program. It is also
conceivable to consider the externalities of
material and energy use.
The internal prices (Figure 5) change the
relative prices of inputs, processes and
products. The result indicates the
substitution of harmful material through
[ 428 ]
Peter Letmathe and other substances which are less harmful and review its improvements. To retain ISO 14001
Roger K. Doost result in lower costs. or ISO 9000 certification, external audits must
Environmental cost be repeated frequently (see Culley, 1998).
accounting and auditing
Especially the way the organization
Managerial Auditing Journal
15/8 [2000] 424±430 Auditing and environmental costs documents and supervises its improvements
may be viewed with much interest.
Environmental cost accounting provides Internal audits can be carried out to
information for planning, control and prepare for external audits for the mentioned
supervision. All areas which use cost data standards. They are also conducted to
automatically integrate the extended ascertain compliance with management's
information into their own planning system. goals. These audits can use the information
Besides, information from an environmental base of an environmental cost accounting
cost accounting system can be used for system in the same way as the external
investment decisions, for launching new audits. The more work is done through
products, etc. The bills of environmental continuous and systematic review of the
impacts can be integrated in production company's environmental measures by the
planning and control systems. internal auditors, the less time, effort, and
To examine how environmental cost money need to be spent by the external
accounting can deliver useful information for auditors in this area.
auditing, it makes sense to distinguish Another kind of audit is performance
between internal and external audits. auditing. Performance audits measure the
External audits or third-party audits are current performance of the organization and
carried out to review the management system try to identify potentials for improvement.
by an independent external auditor or Performance audits can also be a basis for
registrar. The most common external audits defining objectives, targets and measures
are the ISO 9000 and ISO 14001 audits which which should be attained in the future. To
review the quality management or achieve an adequate level of a performance
environmental management system. Both audit, companies need to review (Cushing,
audits are conducted to see if the management 1994) their:
system meets the requirements of the relevant . organizational arrangements to ascertain
standards. Although they are formal and not that proper division of responsibilities
result-oriented standards, appropriate data exist to achieve the organization's goals;
can support the work of the registrar. Data . system planning to make sure about the
about input and output flows of material and adequacy of system development projects
energy show if the business processes are to handle the complexities of the proposed
properly documented. The ISO 14001 (see cost system;
Clemens, 1996) standard is dedicated to . personnel policies to ascertain the
continual improvement as the overall goal of presence of proper standards for hiring,
environmental management systems. To training, and assigning of personnel to
accomplish this, the organization has to handle the tasks necessitated as a result of
define concrete objectives, targets, and new requirements;
measures to achieve them. Concrete measures . financial controls to make certain about
and targets can include the reduction of the adequacy of responsibility accounting
waste, waste water, and emissions. If these and reporting procedures for measuring
outputs are accounted for through the costs and variances attributed to various
environmental cost accounting system, it operations and cost flows; and
would be much easier to compare the current . computer operations to ascertain about
flow with the flow in the next period. This proper data processing capabilities in
gives the organization the opportunity to terms of equipment, software, and
personnel.
Figure 5
For these tasks to be accomplished,
Calculation of internal prices for material and energy flows
comprehensive information is needed which
is based on a cause-and-effect-analysis.
Very often, a high volume of waste, waste
water and emissions is the result of
inefficiencies. Inefficiencies can also be
pointed out by high variations of the amount
of undesired byproducts. Hence, performance
audits should prioritize areas/cost centers
which are responsible for most of the
environmental impacts. For example, a high
amount of wasted heat can indicate the need
for investment in a heat recovery system. A
[ 429 ]
Peter Letmathe and high volume of fresh and waste water usage not only helps the company in terms of
Roger K. Doost can be reduced by a closed-loop cycle. performance improvements, but it provides a
Environmental cost Spoilage can be avoided through technical
accounting and auditing very important road map for internal and
and organizational measures or substitution external auditors in their endeavors to
Managerial Auditing Journal
15/8 [2000] 424±430 of materials. Waste can be separated and at determine the entity's compliance with
least a part of it recycled. Another way is to company policies as well as environmentally-
reduce the costs for waste disposal through related laws. Improvements achieved as a
more efficient processes. This leads also to result of creation and monitoring of an
lower purchase costs for raw material. effective environmental cost accounting
Because management is focusing on overall
system can help the company achieve its
costs and not only on purchase cost, it can
goals, comply with environmental laws, and
make more informed decisions.
contribute to the health of the ecology for our
A self-audit and inspection by the internal
generation as well as generations to come.
audit department is often a necessity to satisfy
Environmental Protection Agency (EPA)
requirements and reduce potential additional References
Ansari, S., Bell, J., Klammer, T. and Lawrence, C.
external costs. The Environmental Protection
(1997), Measuring and Managing
Agency (EPA, 1998) has published a self-audit
Environmental Costs, Irwin, Chicago, IL.
preparation guide for organic coating
Bundesverband der Deutschen Industrie (1979),
facilities which covers the following areas: Anleitung zur Bestimmung der Betriebskosten
. air emissions; fuÈr den Umweltschutz in der Industrie, KoÈln.
. wastewater management; Clemens, R.B. (1996), Complete Guide to ISO 14001,
. hazardous materials/waste management; Prentice-Hall, Englewood Cliffs, NJ.
. solid waste management; Cushing, R. (1994), Accounting Information
. community right-to-know; Systems, Addison-Wesley, New York, NY.
. pollution prevention. Culley, W.C. (1998), Environmental and Quality
Systems Integration, Lewis, Boca Raton, LA.
The first three areas are audited with the Environmental Protection Agency (EPA) (1998),
help of several checklists which includes the Self-audit and Inspection Guide for Facilities
inspection of the following areas: Conduction Cleaning, Preparation, and
. records to review; Organic Coating of Metal Parts, EPA,
. physical features to inspect; Washington, DC.
. responsibilities of supervisors and Epstein, M.J. (1996), ``Accounting for product take
managers; back'', Management Accounting, August,
. supervisor's and manager's management pp. 29-33.
of the considered area and resource Gege, M. (1997), Kosten senken durch
recovery; Umweltmanagement, Vahlen, MuÈnchen.
Hansen, D.R. and Mowen, M.M. (1999),
. organic finishing facilities.
Management Accounting, 5th ed., South-
The reviewed records include data about the Western, Cincinetti, OH.
amount of emissions, wastewater, and waste. Klassen, R.D. and McLaughin, C.P. (1996), ``The
These flows can be reviewed much easier if impact of environmental management on
an environmental cost accounting system firm performance'', Management Science,
provides the appropriate data. If the Vol. 42, pp. 1199-214.
inspectors see that these data are in Letmathe, P. (1998), Umweltbezogene
compliance with the inspected physical Kostenrechnung, Vahlen, MuÈnchen.
Rubenstein, D.B. (1994), Envrionmental
features, the whole inspection can be
Accounting for the Sustainable Coperation,
accelerated. Where continuous supervision
Quorum, Westport, CT and London.
of significant environmental impact is
Verein Deutscher Ingenieure (1979), VDI-
present, the EPA finds few, if any, violations. Richtlinie 3800 ± Kostenermittlung fuÈr Anlagen
The recording of material and energy flows und Maûnahmen zur Emissionsminderung,
documents the responsible handling of DuÈsseldorf.
environmental issues and is therefore a good
basis for demonstrating the organization's Further reading
environmental compliance. Epstein, M.J. and Birchard, B. Counting What
Counts: Turning Corporate Accountability to
Competitive Advantage?
Conclusion Federal Environmental Agency (Germany) (1997),
Sustainable Germany, Berlin.
An environmental cost accounting system Gallhofer, S. and Haslam, J. (1995), ``Worrying
that is based on a cause-and-effect about environmental auditing'', in
relationship is necessary. It is needed for Lehman, G. and Owen, D. (Eds), Social and
better identification and proper charging of Environmental Accounting, Special Edition of
environmental related costs. Such a system Accounting Forum, Vol. 19, pp. 205-18.
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