Impact of Environmental Accounting in Management Accounting System Essay

CONTENTS INTRODUCTION What is Accounting Branches of Accounting Definition of Environmental Accounting Definition of Management Accounting Functions of Management Accounting LITERATURE REVIEW MANGEMENT ACCOUNTING SYSTEM Features of Useful Management Accounting AN INTRODUCTION TO ENVIRONMENTAL ACCOUNTING {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} BENEFITS OF ENVIRONMENTAL ACTIVITIESEconomic effects of Environmental activities IMPACT OF ENVIRONMENTAL ACCOUNTING IN MANAGEMENT ACCOUNTING SYSTEM. CONCLUSION INTRODUCTION An overview of accounting is needed to understand the impact of environmental accounting in management accounting system.

Environmental accounting can support national income accounting, Financial Accounting or internal business managerial accounting. Hence, some basic accounting terms are to be explained in other to have a better understanding of the primer under study.Accounting: **American Institute of Certified Public Accountant (1962) defined Accounting as “the act of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are part at least of a financial character and interpreting the result thereof”. American Accounting Association defines Accounting as “the process of identifying, measuring and communicating economic information to permit informed judgement and decision by users of the information”.Basically, Accounting can be defined as “the process of collection, recording, presenting, analysing and interpreting financial information for the users of financial statement”. BRACHES OF ACCOUNTING There are various branches of accounting. They are, Financial Accounting Cost and Management Accounting Government Accounting Oil and Gas Accounting Taxation Auditing and Investigation.

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Environmental Accounting: Encarta Dictionaries define Environmental Accounting as the inclusion of indirect cost i. e. the practice of including the indirect costs and benefits of a product or activity, e. .

its environmental effects on health and the economy, along with its direct costs when making business decisions. Environmental Accounting deals with two different, sometimes conflicting goals of important stakeholders which may be linked with two main groups of company-related environmental information: {text:list-item} It is thus not a surprise that many different perceptions of and examples relating to “environmental accounting” exist and that different tools have developed to deal with physical and monetary issues.Every environmental accounting system has been designed to provide specific information for different stakeholders.

*MANA*GEMENT ACCOUNTING SYSTEM Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non management groups such as shareholders, creditors, regulatory agencies and tax authorities. CIMA official terminology. ) The core activities of management accounting include; *FEATURES* OF USEFUL MANAGEMENT ACCOUNTING It should be relevant for its purpose. It should be complete for its purpose.

It should be sufficiently accurate for its purpose. It should be clear to the manager using it. The manager using it should have confidence in it. It should be communicated to the appropriate manager. Its volume should be manageable. It should be timely. It should be communicated through appropriate channel of communication.

It should be provided at a cost which is less than the value of the benefits it provides. As earlier stated, to solve the management accounting tasks, a company applies a self-made Management Accounting System – MACSYS. This automated system makes it easier to make management decisions, providing the top managers with necessary information in a convenient way.

The MACSYS system automates the business processes, helps control the executive discipline, and enables remote work with the information. Major tasks the system solves: Providing the efficient management toolsImproving the executive discipline control Improving the labour productivity due to reduced document circulation time Accumulating the information for further use as a knowledge base Optimising the business processes, automating the mechanism of their execution and control Formalizing document circulation processes MACSYS is an integrated system. The following major modules serve for automating the accounting and management of different company activity facets: Staff/Organizational Structure Management ModuleProduction Management Module Customer Relationship Module Revenues/Expenses Analysis Module Reporting Module Accounting Interfacing Module AN INTRODUCTION TO ENVIRONMENTAL ACCOUNTING Introduction The term environmental accounting has many meanings and uses. Environmental accounting can support national income accounting, Financial Accounting or internal business managerial accounting. This introduction focuses on the application of environmental accounting as a managerial accounting tool for nternal business decisions. Environmental accounting is regarded as an effective means for quantitatively evaluating the costs and benefits of environmental activities.

Environmental Management Accounting is broadly defined as the identification, collection, analysis, dissemination, and use of physical flow information (materials, energy and water flows), environmental cost information, and other monetary information for both conventional and environmental decision-making within an organisation.This definition of Environmental Management Accounting is similar to the definition of conventional management accounting, but has several key differences: Environmental Management Accounting places particular emphasis on identifying environmental costs, including the costs of producing waste; Environmental Management Accounting includes information on physical flows and use of materials, water, and energy, as well as cost information; Environmental Management Accounting information is particularly useful for activities and decisions with environmental impacts.Moreover, the term environmental cost has at least two major dimensions: It can refer solely to costs that directly impact a company’s bottom line (here termed “private costs”), or It also can encompass the costs to individuals, society, and the environment for which a company is not accountable (here termed “societal costs”). The discussion in this primer concentrates on private costs because that is where companies starting to implement environmental accounting typically begin.However, much of the material is applicable to societal costs as well. Main Features Environmental Accounting is an important function that provides firms with a means to incorporate information with business decision making and business operations. Perhaps the most compelling reason for practicing environmental accounting is the growing body of evidence indicating that environmental costs can make up a much larger proportion of costs than firms realize.Environmental accounting will also serve as a solid foundation for an Environmental Management System (EMS), or increase the effectiveness of an existing one.

In addition, having and environmental accounting system in place allows firms to: Better manage environmental costs Better formulate business strategies More accurately cost products and processesDiscover new opportunities to offset or minimize environmental costs through environmental thinking Include potential environmental costs in appraisal processes and investment analyses By implementing environmental accounting, organizations will benefit from: Better discern opportunities to minimize compliance costs and reduce operating costs Reduced costs through energy and resource conservation Strategic decision making regarding continuing or abandoning a particular product or process Competitive advantage by minimizing environmental impacts through improved design of products, packages, and processes Compliance and due diligence requirements Environmental activity costs Investment and expenses in environmental activity costs are defined as follows: Investments: expenditures for the fiscal year for items capitalized as assets such as investment in plant and equipment, and other financing for the purpose of environmental conservation Expenses: expenditure for the purpose of environmental conservation, e. g. depreciation expenses, lease expenses, repair expenses, maintenance and management expenses, commissioning expenses and personnel expenses N. B.Depreciation expenses are applicable for items equivalent to environmental activity facilities, and are calculated and added according to the service life and depreciation method of the financial and accounting practices.

The full costs and differences in cost are used in the cost calculation as a principle; however, proportional costs are used where the differences in cost are difficult to identify. {draw:frame} Why Environmental Accounting? Environmental costs are one of the many different types of costs businesses incur as they provide goods and services to their customers. Environmental performance is one of the many important measures of business success.Environmental costs and performance deserve management attention for the following reasons: Many environmental costs can be significantly reduced or eliminated as a result of business decisions, ranging from operational and housekeeping changes, to investment in “greener” process technology, to redesign of processes/products.

Many environmental costs (e. g. , wasted raw materials) may provide no added value to a process, system, or product. Environmental costs (and, thus, potential cost savings) may be obscured in overhead accounts or otherwise overlooked. Many companies have discovered that environmental costs can be offset by generating revenues through sale of waste by-products or transferable pollution allowances, or licensing of clean technologies, for example.

Better management of environmental costs can result in improved environmental performance and significant benefits to human health as well as business success. Understanding the environmental costs and performance of processes and products can promote more accurate costing and pricing of products and can aid companies in the design of more environmentally preferable processes, products, and services for the future. Competitive advantage with customers can result from processes, products, and services that can be demonstrated to be environmentally preferable. Accounting for environmental costs and performance can support a company’s development and operation of an overall environmental management system.

Such a system will soon be a necessity for companies engaged in international trade due to pending international consensus standard ISO 14001, developed by the International Organization for Standardization. EPA’s work with key stakeholders leads it to believe that as businesses more fully account for environmental costs and benefits, they will clearly see the financial advantages of pollution prevention (P2) practices. Environmental costs often can be reduced or avoided through P2 practices such as product design changes, input materials substitution, process re-design, and improved operation and maintenance (O&M) practices. For example, increased environmental costs may result from use of chemical A (e. g. , a chlorinated solvent), but not from chemical B (e. g. an aqueous-based solvent).

This is true even though chemical A and chemical B can be substitutable. Another example: some environmental compliance costs are required only when use of a substance or generation of a waste exceeds a defined threshold. A company that can reduce chemical use below such thresholds or employ substitutes for regulated chemicals can realize substantial cost savings from design, engineering, and operational decisions. In two of the most thorough reports on the subject of pollution prevention in the industrial community, the not-for-profit group INFORM3 studied 29 companies in the organic chemical industry in 1985 and again in 1992.This research found that chemical “plants with some type of environmental cost accounting program” had “an average of three times as many” P2 projects “as plants with no cost accounting system. “4 The study also showed that the average annual savings per P2 project in production facilities, where data were available, were just over $351,000, which equalled an average savings of $3. 49 for every over $351,000, which equalled an average savings of $3.

49 for every dollar spent. Not only were substantial savings and returns on pounds of waste were reduced for each project. Results like these have highlighted the potential benefits of environmental accounting to the business community.

For example, responses to a questionnaire administered by George Nagle of the Bristol-Myers Squibb Company at the Spring 1994 Global.Environmental Management Initiative (GEMI) Conference showed that corporate professionals are placing a high priority on environmental accounting. 5 Of the 25 respondents to the informal survey; half stated that their company had some form of a tracking system for environmental costs. All but two reported that they believed environmental accounting issues would be more important to their companies in the near future. In addition, the Business Roundtable expects to turn its attention to environmental accounting issues in 1995, and companies of all sizes in the U. S. are beginning to consider implementing environmental accounting in their facilities What Is Environmental Accounting?Different uses of the umbrella term environmental accounting arise from three distinct contexts: National income accounting is a macro-economic measure. Gross Domestic Product (GDP) is an example.

The GDP is a measure of the flow of goods and services through the economy. It is often cited as a key measure of our society’s economic well-being. The term environmental accounting may refer to this national economic context. For example, environmental accounting can use physical or monetary units to refer to the consumption of the nation’s natural resources, both renewable and Non renewable.

In this context, environmental accounting has been termed “natural resources accounting. ” Financial accou**nting enables companies to prepare financial reports for use by investors, lenders, and others.Publicly held corporations report information on their financial condition and performance through quarterly and annual reports, governed by rules set by the U.

S. Securities and Exchange Commission (SEC) with input from industry’s self-regulatory body, the Financial Accounting Standards Board (FASB). Generally Accepted Accounting Principles (GAAP) are the basis for this reporting. Environmental accounting in this context refers to the estimation and public reporting of environmental liabilities and financially material environmental costs. Management accounting is the process of identifying, collecting, and analyzing information principally for internal purposes.

Because a key purpose of management accounting is to support a business’s forward-looking management decisions, it is the focus of the remainder of this primer. Management accounting can involve data on costs, production levels, inventory and backlog, and other vital aspects of a business. The information collected under a business’s management accounting system is used to plan, evaluate, and control in a variety of ways: (1) Planning and directing management attention, (2) Informing decisions such as purchasing (e. g.

, make vs. buy), capital investments, product costing and pricing, risk management, process/product design, and compliance strategies, and (3) Controlling and motivating behaviour to improve business results.Unlike financial accounting, which is governed by Generally Accepted Accounting Principles (GAAP), management accounting practices and systems differ according to the needs of the businesses they serve. Some businesses have simple systems, others have elaborate ones. Just as management accounting refers to the use of a broad set of cost and performance data by a company’s managers in making a myriad of business decisions, environmental accounting refers to the use of data about environmental costs and performance in business decisions and operations. Exhibit 1 lists many types of internal management decisions that can benefit from the consideration of environmental costs and benefits. This primer later summarizes how environmental accounting can be integrated into cost allocation, capital budgeting, and process/product design. EXHIBIT 1Types of Management Decisions Benefitting from Environmental Cost Information {draw:frame} IS THERE A PROPER SCALE AND SCOPE FOR ENVIRONMENTAL ACCOUNTING? Environmental accounting is a flexible tool that can be applied at different scales of use and different scopes of coverage.

This section describes some of the options for applying environmental accounting. Depending on corporate needs, interests, goals, and resources, environmental accounting can be applied at different scales, which include the following: {draw:frame} Specific environmental accounting issues or challenges may vary depending on the scale of its application. Whatever the scale, there also is an issue of scope.An initial scope question is whether environmental accounting extends beyond conventional costs to include potentially hidden, future, contingent, and image/relationship costs. Another scope issue is whether companies intend to consider only those costs that directly affect their bottom line financial profit or loss (e. g.

, see examples of costs listed in Exhibit 2 above), or whether companies also want to recognize the environmental costs that result from their activities but for which they are not accountable, referred to as societal or external costs. Thus, the scope of environmental accounting refers to the types of costs included. As the scope becomes more expansive, firms may find it more difficult to assess and measure certain environmental costs. Who Can Use Environmental Accounting?Environmental accounting can be employed by firms large and small, in almost every industry in both the manufacturing and services sectors. It can be applied on a large scale or a small scale, systematically or on an as needed basis. The form it takes can reflect the goals and needs of the company using it. However, in any business, top management support and cross-functional teams are likely to be essential for the successful implementation of environmental accounting because: Environmental accounting may entail a new way of looking at a company’s environmental costs, performance, and decisions. Top management commitment can set a positive tone and articulate incentives for the organization to adopt environmental accounting.

Companies will likely want to assemble cross-functional teams to implement environmental accounting, bringing together designers, chemists, engineers, production managers, operators, financial staff, environmental managers, purchasing personnel, and accountants who may not have worked together before. Because environmental accounting is not solely an accounting issue, and the information needed is split up among all of these groups, these people need to talk with each other to develop a common vision and language and make that vision a reality. AT&T is one example of a company that has combined senior management support and use of a cross-functional team for its environmental accounting initiative.

Companies with formal environmental management systems may want to institutionalize environmental accounting because it is a logical decision support tool for these systems. Similarly, many companies have begun or are exploring new business approaches in which environmental accounting can play a part: Activity-Based Costing/Activity-Based Management Total Quality Management/Total Quality Environmental Management Business Process Re-Engineering/Cost Reduction Cost of Quality Model/Cost of Environmental Quality Model Design for Environment/Life-Cycle Design Life-Cycle Assessment/Life-Cycle Costing All of these approaches are compatible with environmental accounting and can provide platforms for integrating environmental information into business decisions.Companies using or evaluating these approaches may want to consider explicitly adopting environmental accounting as part of these efforts. Small businesses that may not have formal environmental management systems, or are not using any of the above approaches, have also successfully applied environmental accounting. As with larger firms, management commitment and cross-functional involvement are necessary.

BENEFITS OF ENVIRONMENTAL ACTIVITIES Benefits from environmental activities are calculated based on the amount of substances, and are defined according to the types of activities as follows: Activities that directly reduce the environmental load Amount of environmental load reduction from the baseline* (the onditions which would have occurred had there been no environmental targets) *Baselines are set for their respective environmental activities. For example, the baseline for CO2 reduction calculations is a situation where the electricity generated by all power generation methods was produced only by oil and coal-fired thermal generation; and that for SOx reduction calculation is a situation where no desulfurization facility is installed. However, for items of which calculation of the environmental load reduction is difficult, the amount of influence on the environmental load reduction is posted. Activities for the removal, mitigation or reparation of the impact of the environmental load.Amount of environmental load to which impact removal and other activities are implemented. Activities that support and promote environmental load reduction (two items above) Amount of activities that are required for support and promotion. Economic effects of environmental activities Items in the economic effects include the cost reductions, savings and sales of unneeded supplies (i.

e. real effects only) attendant on the reduction of environmental load that incurs costs whenever used or treated. However, estimated effects such as costs avoided from the reparation of environmental damages are not included. {draw:frame} {draw:frame}IMPACT OF ENVIRONMENTAL ACCOUNTING IN MANAGEMENT ACCOUNTING SYSTEM From the above, we can now derive the impacts of environmental accounting in Management Accounting System. Environmental Accounting is an effective means for quantitatively evaluating the costs and benefits of environmental activities. Management accounting includes the preparation of financial reports. Management Accounting comprises of the environmental costs a firm incurs in the process of producing its commodities.

The impact of Environmental Accounting here is that it is an effective means for evaluating the costs and benefits of environmental activities which the firm gets involved in.Environmental Accounting includes information on physical flows and use of materials, water and energy, as well as cost information. Management Accounting requires cost information to compute its reports. Therefore it can be concluded that Environmental Accounting impacts Management Accounting System in the provision of costs information especially Environmental Costs. Environmental Accounting is useful for activities and decisions with environmental impacts. One of the basic functions of Management Accounting is to enhance the decisions made by the management.

Another impact of Environmental Accounting is to enhance the decision made by the management relating to environmental issues.Environmental Accounting allows firm to better manage environmental costs. Environmental Accounting helps the Management to better formulating business strategies. CONCLUSION A successful environmental management system should have a method for accounting for full environmental costs and should integrate private environmental costs into capital budgeting, cost allocation, process/product design and other forward-looking decisions. Companies can make progress in environmental accounting incrementally, beginning with limited scale, scope, and applications. Companies can start with those costs that they know the most about and work toward the more difficult to estimate costs and revenues.Where private costs or revenues are difficult to estimate, and there is little management support for integrating them, then it may be best to handle them qualitatively.

In many instances, it may be unnecessary to quantify the more difficult to estimate costs and benefits of capital investment choices because the more easily measured costs (and benefits) are sufficient to justify an investment in cleaner technologies. The same is true for process/product design, if one design direction is clearly superior to the alternatives. Ultimately, businesses will benefit from including probabilistic and difficult to estimate costs in cost allocation, capital investment, process/product design, and other decisions.The best approach is to go as far as you can in integrating environmental costs, including hidden, future, and contingent costs, into management decisions. Efforts to integrate societal costs into business decisions will continue and expand. Most corporate information and decision systems do not currently support such proactive and prospective decision making. The capital markets do not yet have adequate ways to evaluate the financial performance of progressive companies who do so.

Although some companies are at the leading edge of efforts to address societal costs, it will likely be some time before societal impacts and costs can be integrated into cost allocation, capital budgeting, process/product design, and general business decisions.However, there is a growing body of information documenting a variety of businesses engaged in advancing the state of the art to bring societal costs into their decision-making. EPA is committed to helping businesses understand their environmental costs and integrate those costs into decision-making. The EPA’s Environmental Accounting Project performs education, research, guidance, and outreach on this issue. REFERENCES www. google.

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