Cost Accounting Sustainability - Term Paper Example

Task: Cost Accounting Sustainability The management of global businesses continues to present several challenges to managerswith the evident increase in competition coupled with concerns of ensuring sustainability. The electricity markets in Europe, for instance, are experiencing a sharp decline in demand for electricity, from power stations, because of the adoption of green energy initiatives. Such variations render the global business environment a complicated one. The high competition in the global business prompts the adoption of cost management techniques that are dynamic and capable of responding to emerging trends and challenges. Such strategies adopted should aid in increasing efficiency in financial reporting as well as internal management. Such is the advantage that a business management team gains from the use of cost accounting. Kinney and Raiborn define cost accounting presents a mechanism of analysis of past, apparent as well as future data to deduce relevant information on the cost of all objects that is important for accurate cost management (4). Cost accountancy entails the use of costing as well as the principles of cost accounting with a central objective to ascertain profitability of a company. Costing, as part of the system, involves ensuring that business ascertains costs of all objects. In the business, cost accounting differs from financial accounting. While financial accounting presents a mechanism of reporting the financial position of a company, cost accounting is a principle that serves as a system of internal reporting of the performance of the company. The key role of undertaking cost accounting is to provide succinct cost information that company management needs to engage in planning and as a guide for informed decision-making on company affairs. It is important to gain financial information before engaging in any business activity. All cost objects should have their cots stated as a means of informing decisions. With the development of several sustainability strategies, modern companies apply cost accounting in diverse ways. Sustainability initiatives in different parts of the world such as those aimed at introducing renewable energy in Europe directly affect the cost management of modern companies. Modern companies must acknowledge and accommodate the various sustainability initiatives that continue to shape the business environment and bring serious challenges to their continued existence and profitability. The relevance of applying cost accounting in sustainability emanates from the need to determine the cost of the different improvements, which any modern company launches to conform to sustainability requirements. The cost of the diverse forms of innovation adopted by companies to initiate sustainability should be under close consideration through cost accounting. Cost accounting in sustainability entails a succinct evaluation the company’s performance by considering the extent of cost savings that may accumulate from improvements that embrace sustainability, made by the company. Cost accounting, as an important aspect of sustainability accounting, should consider the profits and returns from activities that improve on the social and environmental aspects of a company’s operations. It involves full inclusion of sustainability costs in the financial operations of modern companies. Cost accounting, as way of promoting sustainability, allows companies to choose the best and most economical practice. The choice entails a through and detailed process of consideration of cost and benchmarking of the efficiency of different improvement strategies set. In every system of accounting information, cost management contributes a vital role of providing relevant information that is important in the decision-making process. Sustainability accounting is a relatively recent practice that most companies undertake, however, not as part of statutory provision. Sustainable development has three vital pillars, all of which every company’s management must consider in their operations. Cost accounting for sustainability is a practice undertaken by modern companies as opposed to companies that operated before the dominance of sustainability debate. In the past, most companies did not give reports on their performance regarding social and environmental aspects. There were other cost management approaches used by companies in accounting for sustainability, before the adoption of cost accounting. Standard costing approach entails the determination of the price of various materials and relating it to its standards. It was the most dominant approach compared to other approaches. The standards are determinants of cost. However, it has limitations given the limited extent of change that it can accommodate once the set standard of the project is determined. Target costing is a key cost management used by companies in the past, which aimed at achieving a cut in the cost of the product during its entire time of production. Its main objective was to come up with a profit margin that the management desires to have and have the required product quality. Activity-based costing is an approach that links the activity to the cost of the product. The just-in-time approach to cost management used the notion of contact when needed. These past approaches to cost management have limitations in responding to sustainability agenda. The rate of competition was not as high as experienced in the current global markets. The cost management techniques featured no model for sustainability compared to the apparent necessity to ensure sustainability. They did not present accurate cost reduction strategies. Changes in markets in which modern companies operate render it productive to adopt cost accounting for sustainability in cost management. Being among the biggest stores in Britain, efforts by the management of Tesco stores to advocate for environmental sustainability through control of plastic usage in retail sector received grand approval. The stores calculate the carbon cost of every product that they sell. They have programs with core objectives to cut down the use of plastic bags. Customers, who carry their bags to the stores, therefore reducing plastic use, get loyalty points for reducing the environmental effects of pollution from plastic bags disposal. The store has a strategic goal to achieve by 2050. It aims at ensuring a set limit of zero emission level of carbon. The management of the store aims at employing various cost accounting principles to achieve its goal of zero emission of carbon. The management, in collaboration with customers and suppliers, embarks on diverse programs to boost its energy efficiency. The company would embrace diverse environmental protection concepts and sustainable technologies to ensure a zero emission rate of carbon. In promoting sustainability, Tesco stores resolved to introduce oxo biodegradable bags as substitute to plastic bags. This was a strategy started by the management of the store, in 2009, to reduce the level of carbon emissions from its activities. The newly introduced bags are made of plastics that degrade within one and half a years when exposed to sunlight. The plastics used to make the bags are non-renewable. However, the company stopped the use of oxo biodegradable bags citing its ineffectiveness to promote sustainability. Tesco stores transformed its decision to use the non-biodegradable bags and replaced them with other packaging materials made of recycled materials. Cost accounting helps avoid any possibility of uncertainty that may occur with the introduction of the oxo biodegradable bags. Tesco stores calculate the carbon cost of every product it sells. This is a prime application of cost accounting for sustainability. Cost accounting helps in determining the profitability of any item sold at the store. Calculation of the carbon cost of every item informs decision making of Tesco stores management on the value of waste minimization. Cost accounting for the possible loss from customer dissatisfaction with the decision is part of decision-making and cost management. The management of Tesco stores compensated for the possibility any reduction in the customer turnout and profitability by issuing loyalty points. This helps restore customer loyalty and act as a cost management. The various strategies used by Tesco stores are important in cost accounting sustainability. Eon represents a principal example of modern companies applying cost accounting sustainability in its operations. In January 2013, Eon considered the low profitability of one its power stations powered by gas, constructed three years ago and decided to close it. Eon contributes to a plausible percentage of revenue, from utility, in Germany. The power station in Bavaria is among the modern stations powered by gas in Europe. The reduction in the electricity market in Europe, according to Eon, was a substantial cause of the low profitability of the gas-powered station. There is an increase in the adoption of renewable energy in Europe, a reason that explains the reduced market for electricity. Cost accounting sustainability involves the determination of costs to make informed decisions on sustainability related issues that affect a company’s cost management. According to Eon, the profitability of the power station reduced, by an estimated third, of the previous financial year, in 2013. Operating the power station therefore is highly uneconomical for the company. From the company’s cost accountancy, it would be uneconomical to continue to operate the power station. According to the chief executive of Eon, Joannes Teyssen, the company decided to end its operations of the power station citing high unprofitability incurred in operating the station (Wiesmann 1). The chief executive also highlighted possibilities of stopping the operations of other plants. There German government intends to improve renewable energy sources and replace nuclear power by 2022. The different strategies by the government have direct effects on the companies that operate power stations since there is a remarkably low performance of the electricity markets. Investments in green energy by the German government have reduced the profitability of fossil fuel plants. Gas powered-stations continue to record low profitability because of the high cost of inputs and low returns. The decision by Eon to discontinue the operations of the power station emanates from a comprehensive evaluation of the possibility of incurring a high cost. Cost accounting aims at defining the cost of every product. Since Eon incurred high investment cost in the power plant, it would be uneconomical if the electricity markets were unfavorable. Works Cited Kinney, Michael and Raiborn, Cecily. Cost Accounting: Foundations and Evolutions. Mason, OH: Cengage Learning, 2012. Print. Wiesmann, Gerrit. Energy: Eon eyes closure of gas-fired power plant. Financial Times, January 30, 2013. Web. April 27, 2013. http://www.ft.com/cms/s/0/edf37798-6aec-11e2-9871-00144feab49a.html#axzz2ReC07CLk Read More