Monetary Carbon Accounting and Physical Carbon Accounting - Assignment Example

Victoria UNIversity MANAGERIAL CONTROL SYSTEMS Take Home Exam Written By: Zeyad Alkhoneen (3742337) Due Date : 5 Nov 2012 1-Define carbon management accounting and identify and explain four different ways within which companies can approach carbon management? Carbon management accounting is one of the fundamental parts of sustainability accounting that provides managers, especially those in carbon intensive companies, with information regarding carbon emission issues. It has profound effects upon short-term and long-term company decisions. Many companies have resorted to introducing carbon management accounting following persistent pressure from the ongoing ecological crisis (Bebbington and Larrinaga-Gonz´alez 2008). There are four main approaches to carbon management used by companies across the globe: I. Measuring carbon emissions: In the contemporary society, customers are increasingly concerned about the amount of carbon emitted by the companies of their choice. According to Stern (2006), measuring carbon emissions means identifying sources of emissions, collecting activity data for each source and converting it to emission levels. II. The second approach commonly used by companies is the reduction of carbon emissions. In a nut shell, this means cutting down on the emissions of one or more of the six main greenhouse gases. To achieve a reduction of emissions, a company needs to set reduction targets, establish action plans for specific reduction initiatives, identify company hotpots and consider carbon offsets as part of its overall carbon management strategy. III. Management systems: As part of carbon management, companies establish procedures, frameworks and policies that are aimed at ensuring credible and effective carbon management. Management systems include allocation of resources and responsibilities, developing procedures and systems to ensure data quality, monitoring progress in carbon emission, verification and public disclosure and reporting. IV. Extending carbon management down the supply chain: This basically means working closely with suppliers and even sub-contractors to manage their carbon emissions. In this regard, it is imperative that they engage with the right suppliers, communicate with them effectively and follow then up using incentives, ongoing support and providing feedback to enhance performance (BCG 2009). 2-Identify and explain the following characteristics of both Monetary Carbon Accounting and Physical Carbon Accounting: (a) past oriented routinely generated short term and long term information; and (b) future oriented routinely generated short term and long term information? Past oriented routinely generated short-term information: This involves carbon cost accounting. For instance, determining the costs and revenue from carbon emission certificates purchased and sold weekly in the market. Past oriented routinely generated long-term information: This involves carbon capital expenditure. An example is the capital expenditure used to install and maintain carbon reduction technology within a company. Future oriented routinely generated short-term information: It is basically monetary carbon operational budgeting, for example, expected monetary savings accrued from carbon reduction initiatives. Future oriented routinely generated long-term information: It is essentially carbon-long-term financial planning. This could be forecasting benefits that can be obtained from permanent reduction of carbon footprint within the company (Unerman et al 2007). Physical carbon accounting Past oriented routinely generated short-term information: This is termed as the carbon flow accounting. It involves the collection of daily information regarding the emission of carbon in the production process. Past oriented routinely generated long-term information: This is basically carbon capital impact accounting which can be exemplified by calculations of carbon footprints following carbon reduction initiatives over a given period of time. Future oriented routinely generated short-term information: This means physical carbon budgeting. For example, determining the amount of carbon emitted from a commercial building as staffs undergo training on green techniques. Future oriented routinely generated long-term information: This basically entails long-term physical carbon planning. Example is the expected reduction in emission as a result of projects generated from the R & D department (Schaltegger et al 2008). 3- Explain the factors that will determine the volume and type of information that will be provided by an EMA system? The factors that will affect the volume and type of information obtained from an EMS include i. Number of professionals involved in the information collection: When the task is assigned to the carbon-related department only, the information obtained will be limited as their understanding of the carbon-related issues will also be limited. Delegation of responsibilities to other departments, on the other hand, would result in the involvement of a large number of people and ultimately enhance the quality of information (Lohmann 2009). ii. Interactive chains of information management: Bennett et al (2003) observes that most companies separate their environmental and carbon-related department. Although close cooperation between the two departments exists, flow of information is unidirectional and often ends up being reported to the environmental department. As such, it is recommendable to merge the two departments to enhance easy flow of information as well have a wealth of information. 4- Identify and explain four factors that determined the selection of companies for the purpose of the exploratory study involving 10 German companies? Factors that were considered in the selection of the 10 German companies for the explanatory study were: a) Companies that demonstrated a strong commitment to active sustainability programmes and sustainability management. Companies that had recently won sustainability prizes by recognized institutions or had positive shadow reporting by non-governmental organizations were given priority. An example of such a company was Ecological Economic Research. b) Companies with distribution patterns designed to facilitate analysis and increase heterogeneity of how changes in structures play a role in carbon management accounting. c) Companies that showed interest in complex accounting systems that can deal with non-monetary issues. d) Companies that demonstrated exceptional willingness to invest substantially and participate actively in research projects (Burritt et al 2011). 5- How was information collected for the purpose of the exploratory study involving 10 German companies? To gain insight and knowledge about carbon-related issues specific to each company, initial interviews were conducted with sustainability managers of the selected companies. Subsequently, senior accountants, providers of carbon information and internal users were interviewed. To enhance effectiveness, most of the interviews were conducted at the respective companies although a few were carried out on the telephone. To provide guidance for research as well as provide a more profound comparison, semi-structured questionnaires were used during the interviews. In addition, interviewees took field notes which basically gave reflection of the thoughts and behavior noted during the interviews (Burritt et al 2011). 6- Identify and explain the information that was collected by the German companies for the purposes of carbon accounting in terms of physical and monetary information? The study of the 10 Germany companies revealed that accounting practices in modern businesses focus on monetary information for decision making. Even so, information that is physical in measurement and orientation, which is reflected by, for example, carbon emission reduction targets expressed in relative, and absolute terms, company carbon footprint and eco-balances also provide sufficient information that can be used for decision making. The study found that companies that were carbon-intensive and thus required by law to provide comprehensive carbon reports collected information in physical units. These physical units are then converted into monetary units to aid management decisions related to resource allocation, planning and costing. For instance, accounting departments in all the selected companies had collected data concerning energy units, which was then used to produce the running costs account. This account is submitted to facility managers on a regular basis to facilitate decision making. Therefore, carbon accounting is dependent on both physical and monetary information (Langfield-Smith 2009). In addition to that, the study also revealed the importance of companies to have a clear understanding of CMA , and that both monetary and physical information are relevant to decision making. From a contingency point of view, physical information can be regarded as inevitable as it serves as the basis for managing processes and products such that economic implications are made more explicit. Contrary to this, monetary information is considered a requisite for decision making , but cannot be applied in the process of carbon management (Bartolomeo et al 2000). 7- Explain whether or not the carbon-related information that is collected by the German companies is short term or long term focused and whether or not the information is past or future oriented? The majority of the sample companies focused on short-term carbon-related information. In terms of past and future orientation, most of the sample companies demonstrated an equal representation. Short-term carbon-related information essentially means that these companies would prefer to have information regarding their carbon emissions reduction on a daily basis to facilitate accountability and hence decision making. This can be past oriented, that is information that is based on the daily progress of carbon flow. It can also be future oriented, meaning that the company makes budgets for potential benefits or costs from carbon reduction or lack of it. About four of the companies stated that they collected information related to carbon emissions for the purposes of compliance with external regulation and not internal decisions. The majority of the companies, however, posited that their core reason for gathering carbon-related information was to enhance their own performance and not just to satisfy external legislative forces. Although most of the sample companies agree that future oriented information is equally fundamental for CMA, the idea of compliance and mandatory reporting rather than focusing on an uncertain topic looks rather promising as costs are considerably minimized. It is however apparent that most accounting systems still use past oriented carbon-related information as ex post accounting impairs the information obtained from carbon-related issues for planning (Burritt et al 2011). 8- Explain why the collection of carbon related information presents a “serious challenge” to existing information systems? There are a number of reasons why the collection of carbon related information poses as a serious danger to other information systems within a company. First, the process is resource intensive. This is to mean that it attracts a considerably high amount finances to achieve the desired results. Besides that, as earlier noted, the collection of carbon-related information, especially when involving many department/professions, requires high transaction costs. The result is that the cost of maintaining the existing information systems will also increase as the number of people who are using carbon related information has increased. Wear and tear of the information systems is also an inherent factor with the collection of carbon related information. This is because this information is collected on a regular, daily basis (Schaltegger et al 2001). Additionally, other systems within the company that rely upon the information system might be overlooked and neglected as a priority is given to the collection of carbon related information. Due to the heavy workloads associated with the collection of carbon related information, the information systems department might neglect their core duty of facilitating information flows within the organization. Being a newly introduced aspect of information systems, the collection of carbon related information might not adhere to the stipulated company policies and procedures regarding information systems. For instance, most companies have security policies concerning information systems to ensure that information is not accessed or violated by ill-minded people. Security of information contained in the systems might be compromised during the collection of carbon related information as this involves a large number of people within and sometimes external to the company (Moura-Costa and Wilson 2000). 9- Identify and explain the two settings that can be differentiated in terms of the number of professionals / departments that are involved in the information collection practices in the companies researched? The two settings that can be differentiated based on the number of professionals/ departments involved in the information collection practice are: Few professionals/departments involved in collecting information: In this case, the carbon-related department requests information from other related departments combines it and submits it to higher management. Even with a large department, the number of people involved in the collection of data is limited which undoubtedly limits the resources available to collect a sufficient amount of information. Additionally, the carbon-related department might fail to understand all the issues affecting each department , and this is likely to lead to the neglect or omission of crucial information (Simons 2000). Many departments being involved in the collection of information: The carbon-related department delegates the information collection task to other departments in the company. Consequently, there is an increase in the number of people collecting the information. What this means is a substantial reduction in the workload of the carbon-related department and therefore, the department can focus on other vital issues. Rather than spending time collecting data, the delegation model allows the carbon-related department to strategically extract information collected by others. Furthermore, the resources used for collecting data in the carbon-related department can be now be directed towards managing and making strategic linkages between information obtained from other departments (Burritt et al 2011). 10- Explain the impact of the number of departments and professionals involved in carbon accounting practices upon the associated transaction costs? Although the involvement of a large number of people in the data collection process might look like the better option, it has the disadvantage of increasing transaction costs. This is because of the additional time required to gather information. Besides that, the company incurs extra costs in catering for the resources required for the collection of data by a large number of people. Nevertheless, Hopwood (2009) maintains that with proper coordination, transaction costs can be reduced significantly since it prevents the multiple use of similar information as well as the double collection of data. In this case, therefore, it is recommended that the carbon-related department make use of a few departments so as to reduce transaction costs, increase coordination and increase the quality of information. References Bartolomeo, M, Bennett,M, Bouma, J, Heydkamp, P, James, P, and Wolters, T, 2000, Environmental Management in Europe: Current Practice and Further Potential, The European Accounting Review, Vol. 9(1), p. 31–52. BCG (The Boston Consulting Group, Inc.)2009, The Business of Sustainability. 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