Sustainable Practices in Environmental Management Accounting - Assignment Example

A report on sustainable practices I) Introduction The key aim of this report is to provide recommendations to Mr Hugo Tifador, the owner of Charlie Jo, on how to become more sustainable and profitable by implementing principles of environmental management accounting (EMA). Foremost, this report will focus on the use and benefits of material flow balance. It will illustrate the ways in which Charlie Jo can use material flow balance to increase the profitability and sustainability of its business. Secondly, this report will provide recommendations on the appropriate accounting techniques for the company’s environmental impacts. It will illustrate the benefits of activity based costing as an EMA approach that Charlie Jo can use. Thirdly, this report will highlight the benefits of sustainable supply chains in relation to the manufacturing of clothes and illustrate how Charlie Jo can develop sustainable supply chains. Moreover, it will illustrate how Charlie Jo can develop a strategy of evaluating their suppliers with regards to sustainability. Subsequently, this report will evaluate the proposed investment of the company that involves the use of solar energy source by putting into account environmental effects into the decision. Lastly, this report will employ performance indicators on the basis of the “Finished product” in the different categories of environmental data to compare and evaluate the environmental performance of two lines of clothes. 1. Material flow balance a) Benefits of material flow balance Material flow balance incorporates attempts of tracking and balancing a company’s physical inputs and outputs. The basis of improvements in environmental performance revolves around tracking material flows on the basis of input and output analysis. Due to the rising costs of environmental compliance, waste disposal and the increasing need to enhance material efficiency in today’s competitive market, tracking the material flow of a company is an essential tool for identifying potential areas of improvement in sustainable production and waste prevention. Although, this task can be quite challenging, it helps company managers to identify losses. Information on a company’s physical flow of materials provides a basis of analysing monetary aspects of the company’s performance. Moreover, information on material flow balance can help managers to recognise inefficient or uneconomical practices by using performance appraisal techniques such as environmental performance indicators. Information on material flow balance can also feed managers with information on supply chain issues (Jash 2009). b). Example of a material flow balance in use Cormack Manufacturing Pty Limited is a plastic injection company located in Western Sydney. The company is known for assembling and manufacturing a different range of polyethylene, polypropylene and polyethylene tops and plastic caps for sports, pharmaceutical and food industries. Over the years, Cormack has continuously implemented refinements and operational improvements. The company recycles all its waste materials and carries out effective maintenance. The manufacturing unit of the company carries outs two main processes namely injection moulding of plastics and plastic assembly. In the course of these processes, the company attempts to ensure that it tracks and balances its physical inputs and outputs. Waste products produced as a result of these processes are fairly homogenous, they comprise of various grades of polyethylene, polypropylene and polystyrene since no additives are used apart from dye. After every manufacturing process, the waste residues are collected, ground-up and re-used as raw material through re-grinding. During these processes there are no hazardous wastes regenerated or toxic chemicals used thus there are limited requirements on environmental compliance (Environment Protection Authority of Victoria, 2003). The figure below illustrates the material flow of Cormack Manufacturing business unit. . Energy Energy Imported constituents Raw material (Plastic) & Dye PPp Finished Products Wa Re-used as Raw material Re-usable Waste Waste plastic Landfill recycles Waste energy Waste energy Waste plastic Landfill recycle Material flow of Cormack Manufacturing business unit (Environment Protection Authority of Victoria 2003). c). Charlie Jo’s material flow balance Input Output 15,000kWh of electricity 90,000l of water 90kg chemical and dye 1,214kg raw material 70,000l waste water 500kg solid waste 15,000kg of carbon 2. Appropriate accounting techniques for Charlie Jo’s environmental impacts a) The benefits of activity based costing as an EMA tool Activity based costing as an EMA tool for use at Charlie Jo, can act as a powerful decision making tool for managers. It is a powerful tool for measuring or evaluating performance. It can be used to identify, describe, report and assign costs to the operations of the company. As compared to the traditional cost accounting, activity based costing is a more accurate management system. It can be used as a method of developing cost estimates by subdividing projects into discrete work unit or quantifiable activities. These systems can calculate costs of individual activities and allocate costs to cost objects like services and products based on activities carried out to produce products. The system accurately identifies the sources attributed to any losses or profits made by the company. Moreover, it can be used to identify opportunities of improving the efficiency and effectiveness the company’s business process by determining the “actual” costs of products. Other benefits that can be associated with activity based costing as an EMA tool include; it is easier to understand and implement and it also supports and facilitates performance management (Schaltegger & Wagner 2005). b). Cost centres and cost drivers applicable to Charlie Jo The cost centres applicable to Charlie Jo is its accounting department and the manufacturing unit of the company. The accounting department uses a traditional accounting system which does not capture material flows or the environmental impacts. Although the company’s accounting department has the necessary information, it does not allocate costs to some of its cost centres. Effective environmental management accounting requires that both monetary and physical information is tracked so as to provide a good basis for decision making, minimize costs and increase profitability. (Schaltegger, Bennett & Burrit 2008). On the other hand, the cost drivers applicable to Charlie Jo include activity costs drivers such as its production processes and developments relating to the adaptation of the solar panels. Its resource cost drivers include the raw materials that the company uses, electricity used in the course of the manufacturing process, environmental resources such as water and the energy used up. During its manufacturing process, the company uses 1,214kg of raw materials, 90kg chemical and dye and 15,000kWh of electricity. Other cost drivers applicable to Charlie Jo include the pollution caused as a result of its manufacturing process. For instance, during the manufacturing process, 15,000kg of carbon equivalents are emitted, 500kg solid waste and 70,000l waste water are produced. By focusing on its costs centres and some of the underlying processes involved, Charlie Jo can be able to effect considerable costs savings while optimising on its business processes (Schaltegger, Bennett & Burrit 2008). c) Application of activity based costing for Charlie Jo Charlie Jo can apply activity based costing to calculate and allocate costs to its cost centres and determine costs resulting from material flows and environmental impact. The activity based costing system can be used to identify the company’s cost objects such as its products. Foremost, the system will calculate the costs manufacturing both its heavy linen range and swimwear line. After identifying the cost objects, the activities carried out in the company will be identified depending on the various subdivides of the company’s activities. Subsequently, the system will identify the direct costs of the products. The direct costs of products constitute of the direct cost of materials, labour and other direct expenses. After the system identifies the company’s activities, the different items of overhead will be then related to the primary and support activities that caused them (UNDSD 2001).Cost buckets and cost pools will be created as a result of the items related to the overhead activities. Afterwards the system will determine the activity cost drivers for each activity carried out by the company. In the case the company’s resource cost drivers such as the raw materials that the company uses, electricity used in the course of the manufacturing process, environmental resources such as water and the energy used up will be determined. 3. Sustainable supply chains in relation to clothes manufacturing a). Benefits of sustainable supply chains Enforcing sustainable supply chain is one of the ways that can be used to address the environmental issues that have adversely affected the state of the environment. Sustainable supply chains are the solution to minimizing and averting the adverse effects of environmental issues. The implementation of sustainable supply chain to clothes manufacturing can contribute to the use of natural resources in the environment within the sustainable limit. Moreover, a sustainable supply chain can help the company increase its profitability, by proactively implementing sustainability concepts in its supply chain the company can increase value to its operations and minimize costs. Sustainable supply chains in clothes manufacturing can help to facilitate continuous improvements, it can help managers to think beyond the short-term financial considerations and build strong supply relationships that can deliver long-term value in the entire supply chain of the company. This may involve incorporating sustainability issues in the purchasing and sourcing practices of the company (Linton, Klassen & Jayaraman 2007). b). How Charlie Jo might implement a sustainable supply chains In order to for the company to implement a sustainable supply chain, it is essential its management to not only be transfixed on short-term results but also long-term results. The management of the company should be relentless about developing a culture of conserving resources, using products and processes that are environmentally friendly and eliminating waste materials. Secondly, for the effective implementation of sustainable supply chains, it is essential for the management of the company to educate its workforce on sustainability. It is essential to educate employees on the benefits of sustainability and what it can do to the environment and their company. The third step towards the implementation of sustainable supply chains, involves conducting a sustainability audit on the company’s supply chain. The sustainability audit will enable the management of the company to create a baseline measure for where the company stands when it comes to sustainability in its supply chains and where it needs to go. The sustainability audit should be focused on areas such as environmental costs, water usage, materials recovery, reverse logistics, hazardous materials, products and processes (Penfield, 2009). Following the completion of the audit, the company will be able to identify deficiencies in its supply chains and find ways of improving processes in its supply chains. The results of the audit will also enable the company to set objectives and goals for a sustainable supply chain. When setting its goals and objectives for the supply chain, the company should ensure that these goals and objectives are focused on sustainability and that the goals are specific, measurable, attainable, relevant and timely. Moreover, the goals that the company should set should be geared towards, its use of renewable resources, recycled materials, reduction of energy consumption, the reduction of the company’s carbon footprint and the elimination of waste. These goals and objectives should be incorporated in the company’s corporate strategy or the overall strategic goals of the company. Once the company’s sustainability goals and objectives are in place, the company should continuously take measures aimed at achieving these goals and objectives. Furthermore, measures should be continuously and regularly carried out to measure the company’s sustainability progress in its supply chains (Penfield, 2009). c) Procedures of evaluating suppliers in terms of sustainability The company should demand transparency from its suppliers so as to know where all its supplies are generated and the conditions under which its supplies are produced. One of the ways in which the company can evaluate its suppliers in terms of sustainability is by developing a set of criteria which provide guidance for evaluating the level of supplier commitment towards environmental sustainability (QGCPO 2009). Some of the areas that should be evaluated as part of the supplier criteria are; The environmental performance of the supplier: has the supplier carried out their carbon footprint measurement or have they identified their main environmental impacts? The social impacts of the supplier: Through its sourcing of manufacturing components or raw materials, what impacts does the supplier have on the local community or the developing countries? Has the supplier identified the social impacts or have they created a social impact plan? The suppliers sustainability capacity in the entire supply chain- has the supplier developed any initiatives to address the environmental sustainability impacts within the supply chain? (QGCPO ,2009). Systems for environmental management: does the supplier use systems and processes that enable their company to minimize environmental impact and realise continual improvements on environmental performance? Legal environmental requirements: does the supplier adhere to the set legal environmental requirements for environmental performance? (QGCPO, 2009). d).Considerations to lifecycle analysis Life cycle analysis is often used to examine the financial and environmental impacts of services or goods from its production to its disposal. In the case of Charlie Jo, in the course of lifecycle analysis, the company should consider environmental impacts and cots that are associated with the following factors; The solid waste and waste pollution generated during the manufacturing process The energy used during the manufacturing process The waste absorbed by the environment as a result of the manufactured goods. The costs of resources and raw materials. 4). Assessment of the proposed investment on solar energy source incorporating environmental impacts into the decision a). Advice to Charlie Jo based on the payback period method of investment appraisal Based on the payback period method of investments purchasing the solar panels in a bid to reduce the amount of energy purchased is a good investment. This is mainly because the length of time that it will take to recover this investment and reimburse into the cash flow is convenient and plausible to a small-scale business like Charlie Jo. Currently, the solar panel cost $25,000 however following the government rebate of $ 3000 the amount of money that the company will pay for these solar panels is $22, 000. The purchase of these panels will ensure that the company minimises on its electricity needs by 75%. Given the fact that the company uses 15,000kWh of electricity in the course of its manufacturing process and the current rate for electricity is 20cents per kWh, in total the current amount of money spent by the company on electricity is $ 3000. Therefore, if the company purchases the solar panels, it electricity needs will be reduced by 75% thus after the purchase of the solar panels the company will use 3750kwh of electricity and spend only $750. The use of the solar panel will free up $ 2250 thus the enabling the company to reimburse the $22,000 spent on the solar panel to its cash flow in the shortest time possible. Based on the payback period method of investments purchasing the solar panels is a good investment. Current price of the solar panel = $ 25,000 – $3000(government rebate) = $ 22,000 Amount of money spent by Charlie on electricity= 15,000kwh x 20 cents = $ 3000 100 Amount of money spent on electricity after = 25 x15,000kwh x 20 cents = $ 750 purchase of solar panels 100 100 Money freed up after the purchase of solar panel = $3000- $750 = $ 2250 Length of time used to pay $ 22,000= 22000÷ 2250= Approximately 10 months b). Advice to Charlie Jo based on the net present value investment method of investment appraisal Based on the net present value investment (NPV) method of investment appraisal, the purchase of the solar energy panels is a good investment based on the present value of the cash flow associated with the investment. The higher the NPV the better the investment. In this case, the investment of the solar panels will cost a total of $ 22,000, if this investment generates annual cash flow of $ 2250 each month and the discount rate is 5% then this is a good investment. Amount of money spent on electricity after = 25 x15,000kwh x 20 cents = $ 750 purchase of solar panels 100 100 Money freed up after the purchase of solar panel = $3000- $750 = $ 2250 c.) Limitations of the two methods of investment appraisal The use of the payback period method of investment appraisal ignores the cash flows when the investment has been repaid. It also fails to consider the time-value of the money. On the other hand, the use of the net present value investment method of investment appraisal (NPV) is complicated when it comes to assessing potential investment. Choosing the appropriate discount rate to calculate NPV is challenging since the discount rate should be based on the risk of the investment and the cost of investment (Gotze, Northott & Schuster 2007). d) The value of the solar panel investment The solar panels will facilitate the use of solar power which is a renewable resource. This means that the company is not in danger of deplete any of its energy reserves. Secondly, the use of solar power does not cause pollution, unlike other energy source which emit green house gases which harm the environment the use of solar power will not pose any risk to the environment. This investment requires little maintenance and can last a life time. Basically, the investment of solar panels will facilitate the use of solar power which is a harmonious energy resource. 5. Use performance indicators based on Finished product’ for each category of environmental data to assess and compare the environmental performance of the two lines of clothes. a).Complete the performance indicators (16 marks) Heavy linen Swimwear Raw materials- 60% 39% Electricity - 60% 40% Chemical and dye- 44% 55% Water input- 78% 22% Solid Waste- 60% 40% Carbon equivalents- 60% 40% Finished- 60% 40% b).Briefly comment on the benefit of using the indicators in light of your results. Generally, using this performance indicator can help managers to make decisions with regards to their environmental performance. These indicators are decision making tools can offer managers with information concerning past results and provide important information on future decision making concerning the company’s environmental performance. These indicators can also be useful in benchmarking (Schaltegger & Burritt 2000). Bibliography Environment Protection Authority of Victoria, 2003, Environmental Management Accounting: an introduction and case studies for Australia, Institute of Chartered Accountants in Australia, Retrieved on September 9, 2011 from Gotze, U., Northott, D. & Schuster, P., 2007, Investment Appraisal: Methods and Models, Springer, UK. Jasch, C., 2008, Environmental and material flow cost accounting, Springer, Netherlands. Linton, D., Klassen, R. & Jayaraman, V., 2007, Sustainable supply chains: An introduction, Journal of Operations Management 25 (2007) 1075–1082. Penfield, P. (2009). Seven Steps to Implementing a Sustainable Supply Chain. Retrieved on September 12, 2011 from Schaltegger, S. & Wagner, M. 2005, ‘Current trend in environmental costs accounting – an it interaction with eco-efficiency performance measurement and indicators’, in Rikhhardson, P., Bennett, M., Bouma, J. & Schaltegger, S. (ed.), Implementing environmental management accounting: status and challenge, Springer, The Netherlands. Schaltegger, S., Bennett, M. & Burrit, R., 2008, Environmental management accounting for cleaner production, Springer, Netherlands. Schaltegger, S. & Burritt, R., 2000, Contemporary Environmental Accounting, Greenleaf Publishing, Sheffield. Queensland Government Chief Procurement Office (QGCPO), 2009, Integrating sustainability into the procurement process, Retrieved on September 12, 2011 from United Nations Division for Sustainable Development (UNDSD), 2001, Environmental management accounting: procedures and principles, United Nations, New York. Read More