Macsweens Environmental Accounting Experience - Essay Example

MACSWEEN CASE STUDY 28th MARCH Introduction and Scope This thesis is a case study on Macsween’s financial implication on issues concerning the environment. This essay shows the viability of the business’s decision to be more environmentally friendly and thus make financial savings (Odum, 1996). It outlines the most appropriate decisions to be made based on the costs and financial benefits associated with each decision the management will make. The essay is divided into three sections. The first section will identify all the possible costs and revenues that can be sourced from the business Macsween carries. The second section will analyze the financial impact of Macsween’s decision to care for the environment. The third section will estimate the information that is unavailable for making of the decision. In determining the best decision, all the possible costs and revenues associated with each decision option will be accounted (Schaltegger and Burritt, 2000). The relevant information and data associated with each decision will be collected and recorded for consideration. The financial implication of each decision option available will be analyzed based on the information collected. Before the most appropriate decision is made, other vital information that is unavailable will be estimated by identifying the source of the information and possible surrogate data. A conclusion will be made at the end of the essay with a recommendation of the steps Macsween should take in order to reduce costs and increase revenues while caring for the environment. The conclusion will explain the viability of Macsween’s environmental experience. The applicability of Macsween’s experience in other organizations and sectors will also be explained in the conclusion section. Section 1: Full Costs and Revenues Identification This section recognizes all the possible costs and revenues that can be generated from Macsween’s involvement in environmental management. All the costs that will be affected are explained below, as well as how they will affect the general profitability of Macsween. A. Raw Material Production Cost These comprise all the costs which relate to the production of raw materials (Uno and Bartelmus, 1998). These costs include all rebates costs, which are paper, card board, plastic, cooking oil and waxed paper. B. Manufacturing Cost The cost of manufacture can be further sub-divided into factory and production costs. Various costs that are associated with the manufacture of haggis will either increase or decrease, when Macsween involves itself in environmental management. Some of the costs that were identified are named below. i. Factory Costs These consist of all the costs that were incurred in the operations of the factory. These costs include those that are related to capital expenditure (Volosin, 2008). These costs are; mill size waste baler, self-optimizing central heating boiler, SDC industries light master unites, SDC industries KVAR power correction unit, refrigeration heat recovery units and sava watt fan optimization units. ii. Production Costs These include all the costs which were incurred in the production process. They are costs associated with utilities. Cost of utilities includes; gas, electricity and water. C. Distribution These comprise of all the costs that are associated with supply of the products produced by Macsween. The costs incurred in distribution are; payments to suppliers and transportation costs. D. Disposal/ Recycling This includes all the costs that relate to waste management and disposal of waste. These costs consist of landfill, anaerobic digestion and effluent. Other costs that can be incurred include waste packing regulation payments, packaging return notes, climate change levy scheme, water testing and water hygiene audits (Freedman and Jaggi, 2006). E. Packaging This includes all the expenses connected to branding and packaging of products produced by Macsween. These expenses include cost of paper, card board, plastic cooking oil and waxed paper. F. Marketing These are expenses incurred by Macsween, and that are aimed at boosting sales of its products. Such expenses include cost of designing a web site and cost of advertisement. Section 2: Measurement of Available Data In this section, the available data will be analyzed in details. All the data of the costs and revenues which Macsween will gain are analyzed in this section of the case study. The available cost data is described below. Utilities These are the resources that the company usually consumes in order to produce its products. Macsween’s involvement in environmental management will have the following effects on the identified utilities, as shown by the table below. Utilities Expected Cost Incurred Cost Cost savings Electricity 1051315.1 Euros 1005943.16 Euros 45371.99 Euros Gas 27858.63 Euros 30087.32 Euros (2228.69) Euros Water 5700 Euros 4200 Euros 750 Euros TOTAL 1084873.73 Euros 1040230.48 Euros 43893.3 Euros In the year 2009/10, Macsween produced 944 tones of haggis and had estimated to consume 2296.25 kWh/tone of electricity. Since it costs 0.485 Euros per kilowatt, the company expected to spend 1051315.1 Euros. The actual electricity consumed that year was 2197.15 thus the cost of 1005943.156 Euros. For gas, the target was 2500kw but the actual was 2700kw. The daily service charge is 3.053 pence, so the yearly charge is assumed to be 1114.345 pence, as the factory will operate for 365 days in a year. Pence where converted to Euros by dividing by 100. The firm managed to make 1500 Euros cost savings on water. These cost savings were divided on 50-50 basis by the consultant that helped the firm on this issue. Wastes Under this sub-heading, the costs of managing and disposing waste will be outlined in details. The factors affecting the cost of waste disposal are outlined in the table below. Waste Disposal cost Recycled/ saved cost Landfill 936 Euros 7164 Euros Anaerobic Digestion - 1854.25 Euros Effluent 4821.69 Euros - TOTAL 5757.69 Euros 9018.25 Euros Landfill is the cost associated with disposal of waste on a dump site (Lange, Hassan and Hamilton, 2003). The total waste produced by Macsween is 90 tones. 80.6 tones of the waste are recycled. Therefore, only 10.4 tones are disposed and since the cost of disposing is 90 Euros per ton, 936 Euros is the cost to be incurred. Assuming that the compost wastage of 17.7 tones was cow manure, 637.2 cubic meters of biogas were to be produced. Since one cubic meter of pure methane biogas produces 10 kilowatts of energy, and the gas contains 60 percent methane, 3823.2 kilowatts will be produced. This are valued at 1854.25 Euros. The total amount effluent discharged from Macsween was 3449 cubic meters. It cost 52,631 pence on biological treatment, 151307.63 pence on launderettes, 94226.68 pence on car washes, 79085.57 pence on dry cleaners, and 104918.58 pence on commercial swimming pools. The total cost of effluent is 482169.46, which is equal to 4821.69 Euros since 1 Euro is equal to 100 pence. Rebates This includes all the materials that were used in the production and packaging of haggis. These materials include; paper, card board, plastic, cooking oil and waxed paper. The costs associated with these materials are shown by the table below. Material Costs Paper (200* 0.0116666666) 2.33333332 Euros Card board (26.2* 90) 2358 Euros Plastic (16.5*20) 330 Euros Cooking oil(17.2* 1.10) 18.92 Euros Waxed paper (2*645.38) 1290.75 Euros TOTAL 4000 Euros The cost of paper used by Macsween was able to go down because the firm mainly used emails to send information. Card board and plastic were recycled so as to reduce the cost of purchasing new materials. The cost of cooking oil can be established to be 18.92 Euros (17.2* 1.10). The total expenses incurred for the year 2009/ 10 was 4000 Euros. This amount is expected to be lower than that of the previous year, since the cost of materials was generally reduced. Compliance These are costs which will be incurred in order to observe the law. Such costs will include; waste packing regulations, packaging return notes, climate change levy scheme, water testing and water hygiene audit. The table below shows these costs (Thames Water, nd). Compliances Costs Waste packing regulations (10.4* 500) 5200 Euros Packaging return notes 167 Euros Climate change levy scheme 16.17 Euros TOTAL 5383.17 Euros Since the firm disposes 10.4 tones of waste, the rate for this tonnage is 500 Euros. Packaging return notes is estimated to be 167 Euros. On climate change levy, 405 pence were consumed on gas (2700* 0.43), 944.77 pence on electricity (2197.15* 0.43), and 267.62 pence on LPG (3823.2* 0.07). The total amount spent on climate change levy is 16.17 Euros. Section 3: Estimation of Remaining Data Some information was not disclosed in Macsween’s financial reports. The undisclosed information will have to be estimated in order to facilitate decision making. Estimates of the undisclosed information are described below. Capital Expenses These include all the costs that are associated with capital (Gupta, 2005). The costs are shown on the table below. Cap-ex Cost Mill size waste baler 16800 Euros Self-optimizing central heating boiler 6800 Euros SDC Industrial light master unites 3400 Euros SDC Industrial KVAR power correction unit 8560 Euros Refrigeration heat recovery unites 3907 Euros Sava watt fan optimization units 6452 Euros TOTAL 45919 Euros Running Costs These are costs which are associated with operation of the firm (Hecht, 2005). The running costs can further be sub-divided into consumable and maintenance costs. The table below shows cost estimates of both consumable and maintenance costs. Consumable Costs Consumables Cost Estimates Water testing (3323* 1) 3323 Euros Water hygiene audits 1661.5 Euros TOTAL 4984.5 Euros Since the firm utilized 3323 cubic meters of water in the year 2009/ 10, it is assumed that water testing cost 1 Euro per cubic meter while water hygiene audit cost 0.5 Euro per cubic meter. Maintenance Costs Maintenance Cost Estimates Suppliers 4000 Euros Consultants 750 Euros TOTAL 4750 Euros The remuneration paid to the consultants was expected to be cost savings on water divided by two, since they were to share with the firm on 50-50 basis. The cost of suppliers was expected to be low since most of the materials used by the firm are recycled and reused (Macsween, nd). Viability of Macsween’s Environmental Accounting Process From the financial figures presented in sections 2 and 3 above, it can be stated that Macsween’s environmental management program is viable. The program will not only benefit the environment, but will lead to cost reductions in the operations of the firm (Aronsson, 2010). When considering expenses associated with utilities, the firm’s involvement in environmental management has resulted to a total cost saving of 43893.3 Euros. This decrease in cost can be attributed to reduction in electricity expenses and revenues generated from water cost savings. Macsween’s effort to care for the environment has also resulted to production of biogas which generates revenue of 1854.25 Euros to the firm. Recycling of products has also resulted to cost savings, which sum up to 9018.25 Euros. Though there are some costs associated with recycling, its benefits outweigh the expenses. Macsween’s environmental management program has enabled the firm to reduce the cost of paper, since it only used 200 pieces of paper for letters while the rest were sent through emails. Although the capital expenses are high, there are long run benefits from the investment since the cost of investment is more likely to repay itself. Recommendations Macsween should focus more of its effort on the reduction of gas emissions. This will lead to higher cost savings, since the climatic change levy will be minimized. The firm should also seek to increase the tonnage of recycled materials, since it recycled a total of 79.9 tonnes of waste materials in the year 2009/ 10, a figure which is 17.9 tonnes less that of the previous year. Conclusion Macsween’s environment management project is viable since it helps the firm to cut down on its operational and manufacturing costs. The viability of the program is also boosted by the revenues generated and the firm’s social responsibility. Due to the environmental involvement of the firm, it has been able to save on costs of electricity and water. Climatic change levy is likely to reduce, if the firm sticks to this program, a move which will further reduce operational costs. The expenses paid on landfill are low, since some waste products are recycled within the firm and therefore reducing tonnage of wastes dumped. On the other hand, anaerobic digestion has also facilitated recycling and boosted revenues for the firm. It is recommendable for all firms to participate in environmental management since all businesses have corporate responsibility. The involvement of all firms in such practices will not only result to cost savings, but will also reduce carbon in the atmosphere as well as lower the global warming effect. References Aronsson, T., 2010. Handbook of Environmental Accounting. Cheltenham: Edward Elgar Publishing Limited. Cole, M. W., 1908. Accounts: their Construction and Interpretation for Business Men. Cheltenham: Edward Elgar Publishing Limited. Eisen, P., 2000. Accounting. San Diego: Elsevier Ltd. Freedman, M. and Jaggi, B., 2006. Environmental Accounting: Commitment or Propaganda. San Diego: Elsevier Ltd. Gupta, D. N., 2005. Environmental Accounting. Washing DC: Resources for the Future. Hecht, E. J., 2005. National Environmental Accounting: Bridging the Gap between Ecology and Economy. Washing DC: Resources for the Future. Haber, R. J., 2004. Accounting Demystified. 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