7. Social and Environmental Cost Management

Question 1

What is CSR?

Answer 1

Corporate social responsibility & reporting.
CSR involves organisations taking into account the social and environmental impact of corporate activity when making decision. It has become more common for organisations to provide their environmental and social performance in their external reports to stakeholders. These reports may be a part of the annual report or a separate stand-alone report.

Question 2

What is TBL?

Answer 2

Triple bottom line (TBL) reporting is one type of external reporting practice which focus on three aspects: financial (or economic), social and environmental performance.

Question 3

What is social performance?

Answer 3

Social performance pertains to the impact of an organisation’s behaviour on society including the broader community, employees, customers and suppliers.

Question 4

What is environmental performance?

Answer 4

Environmental performance refers to the impact of an firm’s performance on the environment including the natural systems such as land, air and water as well as on people and living organisms.

Question 5

What 7 types of sustainability and performance measurements are there?

Answer 5

Sustainability reporting
Inside-out approach
Outside-in approach
Global reporting initiative
Dow Jones sustainability index
Australian SAM sustainability index
ISO 14031 environmental performance indictors

Question 6

What is sustainability reporting?

Answer 6

Formal reporting of information about corporate sustainability that describes the economic, environmental and social impact of the organisation’s activities. Also called TBL, social reports, social audits, and environmental reports

Question 7

What is the inside-out approach?

Answer 7

Measures developed within the business and then fed through to sustainability reports

Question 8

What is the outside-in approach?

Answer 8

Reported measures of sustainability performance driven by external regulations or guidelines

Question 9

What is the GRI?

Answer 9

Global reporting initiative guidelines are regarded as the global standard for sustainability reporting.

• 48 sets of core indicators + 31 additional indicators
• Includes unique indicators for certain industries

Question 10

What is the DJSI?

Answer 10

Dow Jones sustainability index (DJSI) compares the sustainability performance of the world’s largest companies

Question 11

What is the AuSSI?

Answer 11

Australian SAM Sustainability Index (AuSSI) assess the sustainability performance of Australian companies

Question 12

What is the ISO 14031?

Answer 12

Environmental performance indicators

• Operational performance indicators include measures of waste levels and energy consumption relative to sales or some other activity
• Management performance indicators measure the efforts of management to improve the environmental performance of their organisation
• Environmental condition indicators measure the actual condition of the environment at a local, national or global level
• May be reported as absolute measures or as a percentage relative to a baseline

Question 13

What is EMS or EMA?

Answer 13

Environmental management systems/accounting.

Question 14

Why do organisations use EMS/A?

Answer 14

They are systems that organisations put in place to manage their environmental performance
 For example: Life cycle costing, environmental cost accounting, environmental performance measures, assessment of environmental benefits, strategic planning for environmental management
 Recycling systems, systems to monitor and control levels of liquids, material and atmospheric discharge and waste
 ISO 14001 is an international standard for EMA and its audit
 EMS and adoption of ISO 14001 requires that environmental performance be measured against policies, objectives & targets

Question 15

What would be the management accountants role with the cost of emissions?

Answer 15

The management accountant’s role could include collecting and estimating the cost of emissions produced by products or customers and identifying carbon non-value added activities. This could help determine the company’s ‘carbon footprint’.

Question 16

What are the two reasons to measure environmental costs?

Answer 16

1. Many countries have increased their regulations. Enormous fines or penalties have become part of these new regulations.
2. Successful treatment of environmental concerns is becoming a significant competitive issue. Ecoefficiency is an important concept dealing with the second reason.

Question 17

What is ecoefficiency?

Answer 17

Ecoefficiency is the environmental management view that organizations can produce more useful goods and services while simultaneously reducing negative environmental impacts, resource consumption, and costs.

Question 18

Why are environmental costs measured?

Answer 18

Measuring environmental costs has become an important issue for many companies. There are two reasons that stand out pertaining to this increased interest in this issue.

Question 19

What are environmental costs?

Answer 19

Environmental costs are costs incurred because poor environmental quality exists or because poor environmental quality may exist.

Question 20

What are the 4 categories of environmental costs?

Answer 20

Environmental prevention costs
Environmental detection costs
Environmental internal failure costs
Environmental external failure costs

Question 21

What are environmental prevention costs?

Answer 21

Costs incurred to prevent damage to the environment, such as the production of contaminants. Examples include designing processes and products to reduce contaminants.

Question 22

What are environmental detection costs?

Answer 22

Environmental detection costs —costs incurred to detect if the firm is in compliance with environmental standards. Three types of environmental standards and procedures are:
Governmental regulatory laws
Voluntary standards (ISO 14001) developed by the International Standards Organization
Environmental policies developed by management
An example of detection activities includes measuring contamination levels.

Question 23

What are environmental internal failure costs?

Answer 23

Costs incurred after contaminants are produced but before they are introduced into the environment. Examples of internal failure costs include treating and disposing of toxic materials and recycling scrap.

Question 24

What are environmental external failure costs?

Answer 24

Costs incurred after contaminants are introduced into the environment. Realized external failure costs are external costs the firm has to pay. Unrealized external failure costs (or societal costs) are external costs caused by the firm but paid for by society.

Question 25

What is an environmental cost report?

Answer 25

An environmental cost report lists the environmental costs by category (prevention, detection, internal failure, and external failure) and as a percentage of operating costs.

Question 26

What are the two main ways to assign environmental costs?

Answer 26

1. full private costing —the assignment of only private environmental costs to products.
2. full environmental costing — the assignment of all environmental costs, both private and societal, to products.

Question 27

What are the two additional ways to assign environmental costs?

Answer 27

1. functional-based environmental cost assignment — environmental costs are assigned to individual products using unit-level drivers such as direct labor hours and machine hours. Functional-based cost assignment can produce distortions if there is product diversity.
2. activity-based environmental cost assignment — costs are assigned to environmental activities, activity rates are calculated, and then the rates are used to assign environmental costs to products.

Question 28

What is life cycle assessment?

Answer 28

It is the means for improving product stewardship, the practice of designing, manufacturing, maintaining, and recycling products to minimize adverse environmental impacts.

Question 29

What is life-cycle assessment?

Answer 29

Life-cycle cost assessment assigns costs and benefits to the environmental consequences and improvements.

Question 30

What are the three stages of life-cycle assessment?

Answer 30

1. inventory analysis — specifies the types and quantities of materials and energy inputs needed and the resulting environmental releases in the form of solid, liquid, and gaseous residues.
2. impact analysis —compares and evaluates the environmental impacts of different product or process designs.
3. improvement analysis —efforts to reduce the environmental impacts revealed by the inventory and impact steps.

Question 31

What are the two ways ABC is used in environmental cost management?

Answer 31

1. identify environmental costs and what products or processes are causing them
2. classify environmental activities as value-added and non value-added costs. Non value-added activities are activities that would not be necessary if the firm operated in an optimal environmentally efficient state.

Question 32

Can an environmental cost be added to the balanced scorecard? (BSC)

Answer 32

Yes, it is the fifth perspective, (the environmental perspective)

Question 33

What are the 5 ore objectives of the environmental perspective on the BSC?

Answer 33

1. Minimise the use of raw or virgin materials.
2. Minimise the use of hazardous materials.
3. Minimise energy requirements for production and use of the product.
4. Minimise the release of solid, liquid, and gaseous residues
5. Maximise opportunities to recycle.