Carbon Management Accounting - Assignment Example

Managerial Control Systems Take-Home Exam Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 26th October 2012 Introduction Carbon management accounting and related information is the main focus of this paper. The first reason for this focus is that there has been increased attention on information intended to maintain improved carbon management. The second reason is that carbon emissions are subjected to uniform measurements and are major environmental feature appearing in corporate external reports. The third reason is that carbon management has been gaining public attention. Therefore, it is important that corporations learn the economic impacts of carbon dioxide (CO2) emissions (Burritt, Shaltegger & Zvezdov 2011). Question 1 Carbon Management Accounting (CMA) is a section of sustainability accounting that enables managers to access information relating to carbon emission issues. Such information is necessary for companies facing short-term and long-term decisions regarding carbon emissions. This is especially important where company operations are strongly associated with the related ecological crisis. It can also be referred to as monitoring and removal of carbon emissions. The removal involves a process known as carbon sequestration among other practices. This practice involves carbon dioxide storage aimed at reducing the amount of carbon dioxide in the atmosphere. On the other hand, carbon monitoring is control and regulation of carbon emission levels. Companies can approach carbon management through four different ways (Burritt, Shaltegger & Zvezdov 2011): Some companies try to minimise the number of carbon emission certificates. This helps such companies to obtain direct savings. When the level of carbon emissions is reduced, it means that the level of emission trading certificates sold and purchased is minimalized. As result, such companies spend less money to acquire the same. Therefore, the resources that would have otherwise been used to purchase the certificates can be used in other investments or to cater for other departmental costs. Other companies try to manage carbon emissions by adopting energy saving strategies. Therefore, they save the invested energy. One of the energy saving strategies adopted is measurement of carbon emission levels in the commercial buildings. For example, Cisco’s Environmental Data Tool stores the cost and data related to energy use. The company also aims at tracking data related to electricity use. These measures enable the company to control and advice the staff on energy regulation measures. This is one among the many measures that companies should adopt in order to reduce the level of carbon within their premises and products. Other companies acquire market advantage by imprinting ‘carbon-neutral’ labels on their products. The modern consumer expects products to enable them to act responsibly. This means that the communication, marketing, supply chain and other departments need to be integrated in to carbon-related agendas. The aim of this strategy is to build a brand that has low-carbon within it. As a result, consumers can make viable decisions based on such information. Therefore, the company would bear less responsibility for consumers that suffer consequences as a result of neglect to such information or warning. Companies are required by the industry to provide information regarding carbon emission. Additionally, such companies are required to engage in carbon management because it is a means of environmental commitment. This means that carbon-related information is no longer a secret. It also means that companies are required to account for the costs and benefits obtained from reduced carbon emissions. As a result, companies with high levels of carbon emission can be publicly identified from the companies’ financial reports. The aim of such a strategy is to sensitize the public about their welfare and also to make companies to be more environmentally responsible. The methods of carbon management vary with companies. Therefore, what works well for a given company may be less useful to another company. Additionally, companies are open systems meaning that there exists no specific method for all companies to achieve certain targets (Carbon Management: A Connected Approach 2012). Question 2 Carbon Management Accounting framework reduces management information in to monetary and physical Carbon Accounting, past and future decision making time frames and in to short term and long term time frames. Such kind of time frames is useful in accounting for corporate carbon related information. Such CMA frameworks are useful to decision makers regarding how such characteristics help in carbon management. Contingency approaches see management in a radically different manner from formal schools of management (Guenther & Stechemesser 2011). (a) past oriented routinely generated short term and long term information Monetary Carbon Accounting It involves the requirement to account for costs and benefits of carbon emissions on a company’s financial performance. These are the requirements established by the GAAP or IFRS. According to the context of monetary accounting, past oriented routinely generated short-term information involves establishing the costs incurred and revenues realized from carbon emissions certificates. These are the sold and bought certificates that a given company places on sale on a weekly basis. In the long-term, past oriented routinely generated information refers to accounting for carbon expenditure. The processes involved in such a practice are collection of annual capital expenditure data. This is data that is related to carbon reduction technologies (The 5 Stages to Carbon Management Maturity 2012). Physical Carbon Accounting Under the past oriented context, carbon accounting in the short term refers to the flow of carbon accounting information. This means that a given company collects and records information relating to the daily flow of carbon emissions in the production sections. In the long-term, it refers to accounting for the carbon impact in a long time. For example, it can involve calculating a company’s level of carbon footprint reduction over a 10 year period (Stern 2006, p. 37). (b) future oriented routinely generated short term and long term information Monetary Carbon Accounting Under the future oriented routinely generated context, monetary carbon accounting in the short term refers to financial carbon operational budgeting. The future needs of such information may extend up to one or two years to come. This means approximating the level of monthly savings obtained from reduced carbon associated with electricity consumption. In the long-term it means financial planning. Therefore, companies set up long term forecasts for their financial gains. Such gains are from corporate plans to reduce the carbon footprint. Monetary short term and long term plans enable the various departments to account for their expenses at the end of every year. Physical Carbon Accounting In the future oriented routinely oriented context, physical carbon accounting in the short term refers to physical budgeting for expected carbon reduction. For example, it can involve a plan to reduce the level of carbon emitted by a commercial building. Such a technique can be established by introducing green awareness methodologies. On the other hand, physical carbon accounting in the long term entails physical means of carbon planning. For example, projects made by the research and development section have forecasted on the level of carbon dioxide emissions. The physical form of data collected enable the companies used in the research to monetarise data in to financial reports at the end of the year or after several years. Question 3 EMA (Environmental Management Accounting) is a structure that identifies, collects and analyses physical and monetary information in order to make internal organizational decisions. The main factors that determine the volume and type of information that an EMA system can provide are the type and the number of managers that look for decision making information. Therefore, managers and their need for information can be connected with the structure of a given organization. Such structures include functional (production or accounting structures) or decentralized structures (divisions). The first type of development in carbon related organizational structures is development of new functional departments. This should be an additional to the already existing systems. The second type should be establishment of new and integrated management information systems. These should be able to function within the already established functional departments. The last type of organizational development should be establishment of decentralized carbon accounting systems that can best fit the organizational structure. With these types of organizational developments it would mean that there would be different types of managers for the different departments and sections. The volume and type of these managers means that different volumes and type of information would be provided by the EMA (Environmetal Management Accounting 2005). Question 4 For the purpose of this study 33 interviews were conducted upon 10 leading listed German Companies. The interviews were carried out in 2009 and others in 2010. The four factors used to determine the selection of the companies for this study were: Strong commitment to active carbon dioxide sustainability and management: This meant that the companies had to have recently obtained good sustainability report recognition by a well-established institution. Such an institution would be the Institute of Ecological Economy Research in Germany. Alternatively, the companies should have received positive reporting from non-government organisations. The companies must have belonged to a variety of industry sectors. For example, finance, retail and telecommunication sectors. This type of distribution was aimed at increasing heterogeneity and to facilitate structural variations which are necessary in CMA. The companies must have had a complex organization and a system of accounting that deals with non-financial company affairs. The companies must have had a willingness to distribute resources in order to enable active participation in the research. This is as opposed to mere provision of published reports of previous financial years. Question 5 First, information necessary for this study was collected using interviews. The interviews were conducted with the sustainability managers. Additionally, senior accountants, internal users and providers of information relating to carbon accounting were interviewed. The interviews were conducted face to face while others were done over the phone. The second method used in collecting information was through semi-structured questionnaires. The main section covered in the questionnaires was on the general sustainability-related management practices. There were also more detailed questions enquiring about the perception that people had on the companies’ practices. Other information was collected through the use of field notes. Such notes were used as records of ideas and views assembled during the interviews. The notes were consulted during the interviews in order to recognize important issues that could have been forgotten during the first stages of the study. Question 6 Management accounting entails collection and distribution of both physical and monetary information to decision –makers. Reduction in carbon emission has become a compliant necessity for many companies involved in carbon management. For the purpose of this study, German companies were required to collect physical and monetary information. These companies assembled information in physical form. The physical information was later on converted into monetary units. While in monetary form, it can be used in planning and resource allocation. The accounting departments in the German Companies used in this study had physical information relating to energy, water, material and waste usage. From the use of these materials and carbon emission cost are incurred. Waste products are obtained in form of by-products. Companies purchase these materials in order to support their activities. The final products are sold to consumers. Additionally, the companies provided information regarding non-manufacturing operations. This is information related to agriculture, service, public and extraction sectors. This is because these operations consume energy, water and other resources in their operations. Physical carbon emitting assets are also a source of physical information. For example, physical counts of depreciating motor vehicle or machinery can determine whether a company has low or high levels of carbon emissions. For example, a company with motor vehicle or machineries aged 10 years or older may have higher sources of carbon emissions as opposed to a company with assets that are 5 years old or younger. The physical information enables companies to calculate costs and future costs related to carbon flows. The monetary information is obtained from the physical information. For example, the physical information obtained from the 10 German Companies used in this study was converted in to costs, earnings and savings. For example, the companies provided information regarding purchase costs related to all the natural resources. The purchase costs were related to all the natural resources such as energy and water. Although most companies consider these costs in their management decisions, they do not view them as environment related. For companies to view them as environmentally related, they must analyse the environmental management aspect related to both physical products and waste. The companies also acquired monetary information related to revenues obtained from reduced carbon emissions. Such revenues are measured from reduced operational or production costs, increased sales or increased revenue. Such financial information is available from the annual or quarterly company reports. Additionally, companies collected monetary information related to the company’s expenditure on carbon emission certificates. Reduced costs of purchasing the certificates showed that the companies were experiencing reduced carbon emissions and vice versa. Monetary information can also be available in form of previous years’ carbon emission records. Future oriented information collection had to rely on carbon emission information and records stored from previous years. Therefore, financial reports and budgetary expenditures for year 2011 had to rely on budgetary allocations formulated in 2010 or years prior to that. Other monetary information that is available in such budgets is the emission costs of the depreciating equipment and machinery in addition to revenues from sale of the depreciating assets. The revenues are itemized in order to include the carbon emission costs saved from selling such items. Such monetary information is relevant in keeping track of carbon-related costs and benefits of any given company. Collection of monetary information is necessary for decision making Question 7 Short term information ranges from one to two years in age. On the other hand, information is long-term if it covers a long period of time such as 5 to 10 years. Past-oriented information focuses on information from the present period towards the years prior to that. On the contrary, future-oriented carbon-related information focuses on the future years. It is aimed at making forecasts about a certain occurrence. The information that is collected by the German companies is both short term and long term. This is because among the companies used in the study, nine of them focused on short-term information relating to carbon emission while four of them focused on long-term information. Some of the short term information collected by the German companies involved establishing the revenues and costs incurred from carbon emission on a weekly basis. Additionally, the companies made monthly assessments of the monthly effects of energy saving measures as well as physical carbon budgeting. Some of the long term information collected by the German companies involved long term carbon financial planning and investment planning. The companies also made physical assessments of carbon investment appraisals as well as the impact of the capital effect of carbon accounting (Environmental Management Accounting 2005). Additionally, the information obtained by the companies under study is both past and future oriented. For example, eight companies focused on future oriented information while seven companies focused on future oriented information. Some of the past oriented information collected entailed establishing the costs, revenues and annual expenditure information over the current or past years. The aim of the past oriented information is to function as the basis for the future oriented information. The future oriented information involved forecast for operational budgeting, carbon costing, financial planning and investment appraisal and budgeting. The aim of future oriented information is to keep the company on tracks and focused on its main purpose. Therefore, the four dimensions are of relevance and they are fairly represented. This means that the study on the 50 companies could provide the four types of carbon-related information. This helped to reduce information gaps and to cover the major areas of carbon accounting management. Question 8 The ‘information age’ enables businesses to collect sufficient information necessary for decision making. However, collection of such information is challenging to the existing information systems. This is because it takes a lot of time for the companies’ information management systems to organize this information. Additionally, such information limits the ability of such companies to establish integrated management systems. Such integration would involve the incorporation of climate-related accounting. Additionally, there would be difficulty in integrating the capabilities of the information systems and their flexibility. Consequently, due to inadequate and viable technical solutions, greater amounts of impromptu data are collected. This is in addition to disadvantages associated with poor data assurance and inefficiency in processing the same. It is also challenging for the respondents to answer to questions relating to climate information. For example, inputting the information and creating a universal user interface that takes in to consideration the information needs of users. Design and implementation of such a structure is also difficult since the computing power can be too costly to achieve the expected output. This means that there is a restriction on the resources on a given department which makes carbon related information to be strategically of less importance in a given company. It becomes difficult to integrate environmental and social accounting within core existing business practices. Additionally, sustainability and conventional accounting are parallel to one another. This may lead to inefficient management of information. Collection of information relating to carbon emission also poses a challenge to existing information systems. This is because the data and ideas assembled are in isolated manner. Additionally, there is little cooperation between among the actors involved in information collection. This means that there is no existence of a smooth flow of ideas between professionals and organisation sections. Therefore, the actors should aim at facilitating information management. Collection of information in unsystematic way means that there are diverse functions of the contributors of the said information. This behaviour is realized because managers are more interested in information that is directly linked to their departments and they only collect such information when it is requested. The procedure of combining financial information with carbon management is also challenging to the already established information management systems. This means that it is important to have updated or redesigned systems in order to be able to combine the two processes. For example, the production, legal and the planning relations departments may obtain the same piece of information during the course of their duties. However, the individual departments neglect the information because it is thought to be negligible. This means that a departmental manager is not made aware of the issue. The challenges that collection of carbon related information pose to the information systems limit the quantity and quality of information collected. This is because poor coordination at the departmental level reduces the amount of monetary information that is integrated with the available information systems at a given time. Additionally, the quality of information obtained from the integration is also affected. This is due to the reduced level of coordination during the period of data collection (Zsofia 2010). Question 9 Given the level of professionals/sections that take part in assembling information in the companies researched, two settings can be differentiated. The first setting is that the departments concerned with carbon management request for information from every department (Lee 2012). This information is intended to produce a report that is given to the higher management. The size of the carbon related department is irrelevant in this case. This means that the number of people that collect the carbon-related information is dependent on the department size. This limits the resources that are available to collect such information. Additionally, it also results in limited understanding of carbon related issues faced by every department. As a result, such departments experience omission/neglect of important information. The large departments can experience inconvenience from uncoordinated or unbudgeted information collection expenses. This is common to companies that collect carbon-related information solely for compliance purposes. Departments belonging to such companies only monetarise the information at request (Ratnatunga 2008). Therefore, they would feel strained to provide such information for research purposes. The second setting is that delegating the process of collecting carbon-related information to every department results in involvement of very many people. This means that the carbon related department spends little amount of effort in collecting similar amount of data. This is unlike the previous setting. When the role of the carbon-related section is reduced it means that the entire model benefits. This is because carbon related information can be incorporated in to the system without having to involve additional functions. Additionally, the decentralized model means that relevant issues can be given greater attention. This is because the team is not focused on data collection. Therefore, it can use most of its time making strategic analyses of the collected data. With this second setting in place, it also means that carbon-related departments can be used to make and manage linkages between the data that is provided by the various departments. Question 10 The number of sections and professionals that conduct carbon accounting activities can obtain varied amounts of transaction costs. This is because when many departments engage in carbon accounting the costs are distributed. This means that the total transaction costs are divided roughly equally among the departments. As a result, the costs associated with each department are minimalized. On the contrary, when the number of departments involved in collecting carbon-related information is small, the transaction costs per department remain high. This means that the costs associated with collecting, analysing and reporting carbon related information are shared among few departments (Carbon Management: A practical guide for suppliers 2009). As a result, the small departments with minimal resources may incur higher transaction costs at the expense of the large departments. Additionally, when there many professionals involved in collecting carbon-related information it means that entire transaction costs are minimalized. This is because less time and resources are spent looking for similar information. On the other hand, when there are few professionals involved in the same process, more time and transaction costs are incurred when collecting carbon-related information. Conclusion Carbon management accounting (CMA) is a section of sustainability accounting that enables managers to access information relating to carbon emission issues. The paper has analyzed carbon related information about 10 German Companies. The first question identifies and explains the different methods that companies use to achieve carbon management. The second question discusses the characteristics of monetary and physical carbon accounting. The fourth question analyses the information that is provided by an Environment Management Accounting (EMA) system. The fifth question explains how the information about the 10 German Companies was collected. The sixth question explains the physical and monetary aspects of the information about the 10 German Companies. The seventh question analysis the nature of this information while the eighth question explains the challenge of integrating carbon related information with the existing information systems. The ninth question discusses the two settings involved in collection practices of the companies researched. The tenth and last question explains the number of sections and professionals that take part in carbon accounting operations. This is in relation to transaction costs incurred by the companies under research. The various dimensions used in this study show that carbon emission is a major concern for many companies. Although it is a legal and financial requirement, some companies are ill prepared for the process of carbon management. Therefore, it is recommended that companies should establish and maintain more carbon management procedures. These should entail to collecting, recording and publishing of short term, long term, past oriented, future oriented, monetary and physical information. References Burritt, R, Shaltegger, S & Zvezdov, D 2011, ‘Carbon Management Accounting: Explaining Practice in Leading German Companies’, Australian Accounting Review, vol. 21 no. 56, pp. 80-98. Carbon Management: A Connected Approach 2012, viewed 27 October 2012, . Carbon Management: A practical guide for suppliers 2009, viewed 27 October 2012, . Environmental Management Accounting 2005, viewed 27 October 2012, . Guenther, E & Stechemesser, K 2011, Accounting for Climate Change: What and How to Measure, viewed 26 October 2012, < http://tu-dresden.de/die_tu_dresden/fakultaeten/fakultaet_wirtschaftswissenschaften/bwl/bu/forschung/download/dateien/Gnther%20%20Stechemesser%20%282011%29%20Carbon%20Accounting.pdf>. Lee, K 2012, ‘Carbon accounting for supply chain management in the automobile industry’, Journal of Cleaner Production, vol. 1 no. 36, pp. 83-93. Ratnatunga, J 2008, ‘Carbonomics: Strategic Management Accounting Issues’, Journal of Applied Management Accounting Research, vol. 6 no. 1, pp. 1–10. Stern, N 2006, The Economics of Climate Change, Cambridge University Press, Cambridge. The 5 Stages to Carbon Management Maturity 2012, viewed 27 October 2012, . Zsofia, V 2010, ‘Accounting for Climate Change: What and how to Measure’, International Relations Quarterly, vol. 1 no. 4, pp. 1-2. Read More