Environmental Costing Flashcards
What is environmental costing?
Where an entity reports on the impact of its operations on the environment and the costs associated with activities that cause environmental harm.
What is the aim of environmental costing?
The aim is to reduce environmental impact while simultaneously improving performance and profitability.
This environmental awareness and management can be important for long-term survival and ensuring that the company maintains a strong marketplace position.
What are the benefits of environmental costing?
- Improved public image
- Can help avoid breaching regulations
- Potential cost savings
- Potential increased revenue
How does environmental costing improve public image?
It is important to meet stakeholders expectations and concerns relating to the environment.
The public are increasingly interested and concerned by their impact on the environment and what companies are doing to minimise negative effects. Producing a report and taking environmental damage seriously will be seen favourably by environmentally consious consumers.
How does environmental costing help avoid breaching regulations?
Many organisations are regulated on their environmental impact. By using environmental management they can ensure they are aware of any breaches of these regulations and avoid any penalties and fines.
How does environmental costing result in cost savings?
There are cost savings in the reduction of the consumption of resources. This reduced cost will result in increased revenue. The increased cost understanding will also improve cost control.
How does environmental costing result in increased revenue?
Some customers may be willing to pay more for products from organisations that promote concern for the environment. This would result in an increase in margins and ultimately profits. It may be also that product pricing is improved purely by having a better understanding of product costs.
How is environmental costing linked to ABC?
Environmental costing often works alongside ABC as traditional accounting systems do not offer enough detail or separate out environmental related overheads.
By using ABC principles we can remove environmental costs from general cost categories and trace them back to particular process or activities or products and services.
Environmental overheads will be given their own cost pool and cost drivers and charged to products in a similar way to all other activity based costs.
This ensures that the product costs fully reflect the true cost of production including the impact on the environment. So products with greatest impact on the environment will have the greatest cost allocated to it.
What are the 4 types of environmental cost?
- Prevention
- Appraisal
- Internal Failure
- External Failure
What are environmental prevention costs?
Costs incurred to prevent adverse environmental impact.
For example training staff to utilize equipment more efficiently, creating environmental policies and designing products that have less of an environmental impact
What are environmental appraisal costs?
Costs incurred to determine whether activities and products are compliant with environmental standards or policies
For example inspection and monitoring costs (including supplier monitoring)
What are environmental internal failure costs?
Costs incurred to eliminate environmental impacts created by the firm
For example recycling, site decontamination and waste disposal costs.
What are environmental external failure costs?
Costs related to environmental damaged caused outside the organisation, where the company has not controlled their environmental impact.
For example carbon emissions, lost good will, medical costs for employees and local communities.
