9.6 Understanding environmental management accounting and traditional management accounting
As you have learned, management accounting is the process of providing relevant and timely information to managers and other internal stakeholders to support planning, decision-making and control activities within an organisation. However, traditional management accounting systems often fail to capture and report the environmental costs and impacts of business operations, which may lead to poor decisions and environmental performance. In this section, you will learn about both the drawbacks of traditional management accounting, and why it is still useful.
Activity 11 Understanding and applying environmental management accounting
Read Section 2.1 (p. 19) of the IFAC report on Environmental Management Accounting [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] (EMA). Having read the definition, if you were asked to come up with an alternate definition of EMA, what would it be? Write your own definition with an explanation of why you think your definition is more valid.
Feedback
Burritt et al. (2001) stated there is still no precision in the terminology associated with EMA. However, it is widely accepted that EMA is a process of collecting, analysing and communicating environmental information to support organisational decision making. The definition of EMA is still evolving and has been expanded upon by multiple international organisations, including the IFAC. Nevertheless, the essence of EMA remains the same: it is a tool for organisations to make informed decisions by considering the environmental impact of their operations and activities.
The quality of your answer depends on its coherence and your ability to support and justify your view. The aim of this activity is to encourage critical thinking, independent thought, reflect on your own learning and to apply the knowledge gained in this section.
In contrast to environmental management accounting, traditional management accounting may not adequately address the environmental costs and benefits of organisational activities. This can result in a lack of information and awareness for managers to make decisions that are aligned with environmental goals. Let’s look at some of the drawbacks of tradition management accounting.
Activity 12 Drawbacks of traditional management accounting
a.
Inadequate consideration of environmental costs
b.
Raw material and energy costs are grouped with overheads
c.
Failure to account for future costs
d.
Reputational costs
e.
Externalities
The correct answers are a, b, c, d and e.
a.
Traditional management accounting does not take into account the environmental costs associated with production and operations. This leads to a lack of information for managers to make decisions about reducing these costs and managing them effectively.
b.
Traditional management accounting tends to group raw material and energy costs together with other overheads, making it difficult for managers to track and monitor these costs. This can result in a lack of visibility into the true cost of production and operations, making it challenging to make informed decisions.
c.
Traditional management accounting does not consider future costs, such as decommissioning and compliance costs, until the end of a project. This leads to a lack of visibility into the total cost of a project and can result in unexpected costs and budget overruns.
d.
Traditional management accounting fails to consider the impact that environmental issues can have on a company’s reputation. This includes the cost of negative publicity and reduced investor confidence. A lack of information about reputational costs can result in a failure to fully understand the financial impact of environmental issues on a company.
e.
Costs imposed on the environment that do not involve a direct monetary outlay by the organisation concerned. These costs can arise from various factors such as pollution and other similar impacts on the environment. Traditional management accounting (and EMA to some extent) fails to capture these costs.
Feedback
All of the above are relevant drawbacks of traditional management accounting. This list is not exhaustive. Can you think of more?
Note down a few reasons why traditional management accounting is still useful, then listen to the audio in the feedback.
Feedback
The following audio discusses why traditional management accounting is still useful.
Transcript: Audio 1 Why traditional management accounting is still useful
If you are interested in learning more about environmental management accounting, you can access the Journal of Cleaner Production or Management Accounting Research journal or search for the term ‘environmental management accounting’ to take a look at a few articles published within this area.