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0 Introduction

1.1 What is EMA?

According to International Federation of Accountants (IFAC), Environmental

Management Accounting (EMA) is generally defined as the identification, collection,
analysis and use of two types of information (physical information and monetary
information) for internal decision-making within an organization.

Physical information consists of data on the uses, flows and fates of energy, water,
materials and wastes. EMA places considerable emphasis on material-related costs based on
two reasons. First, materials purchase costs are a major cost driver in many organizations.
Second, consumption of energy, water and materials as well as generation of waste and
emissions are directly linked to the impacts of organizations to their respective environments.
(IFAC, 2005).

Monetary information includes data on environment-related costs, earnings and

savings. Organizations define environment-related costs differently. It depends on an
organization’s purpose of using the cost information, interpretation on environmental as well
as its economic and environmental goals. However, some of the common environment-
related costs under EMA include Environmental Protection Expenditures (EPEs) such as
costs to prevent generation of waste or emissions, costs to dispose waste and costs to remedy
polluted sites. Besides, other important monetary information such as cost of purchasing
materials that eventually becomes waste or emissions and cost of purchasing all natural
resources such as energy and water can be considered as environment-related cost. (IFAC,
2005).

2.0 Challenges of EMA

2.1 Poor Communication between Accounting and Other Departments

In most organizations, communication and interaction between accounting department

and other departments are not well-built. Besides, different departments also have different
objectives and perspectives concerning EMA activities. Furthermore, different departments
use different information systems that lead to inconsistency of information. Therefore, it is
difficult to integrate accounting information and environment-related cost information.

For example, environmental personnel possess in depth information and knowledge

regarding environmental issues and concerns while technical personnel have strong
understanding and know-how regarding the flow of energy, water and other materials
throughout an organization. However, both personnel have little knowledge of how those
issues are reflected in the accounting records. In contrast, accounting personnel are proficient
and competent in interpreting accounting information. However, they have little information
and knowledge in terms of environmental issues and flow of physical resources. Hence,
accounting personnel often unable to provide accounting information that meets the
requirements of environmental and technical personnel.

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2.2 Environment-related Costs are Hidden in Overhead Accounts

Generally, environment-related costs are often hidden in the accounting records.

Environment-related costs can be hidden by assigning them to overhead accounts instead of
allocating them directly to the processes or products that created the costs. This practice tends
to create difficulty for managers as they unable to search the cost information when it is
needed. In additional to that, managers will not be aware of the magnitude of the
environment-related costs when they are hidden in overhead accounts. Subsequently, they do
not have the incentive to reduce the environment-related costs.

Moreover, the inclusion environment-related costs in overhead accounts also create

problems in recognizing fixed costs and variable costs. This is because managers fail to
identify fixed costs that are difficult to reduce and variable costs that could be reduced by
preventive environmental management.

Furthermore, the use of overhead accounts for environment-related costs can be

difficult when overhead costs are allocated back to cost centres for product pricing.
Normally, overhead costs are allocated back to cost centres based on a number of allocation
bases such as production volume, machine hours and personnel hours. However, this is an
inaccurate method to assign some typical environment-related costs.

2.3 Problematic in Identification of Material-related Costs

Material-related costs information includes uses and flows of materials as well as

materials purchase costs. In most of the organizations, it is difficult to trace and identify the
material-related costs.

In some organizations, the posting of materials purchase information prohibits clear

identification of the amount and value of different categories of purchased materials.
Subsequently, all materials purchase information is posted into one account in the accounting
systems while detailed material numbers and amounts are documented in the stock
management systems. Therefore, it is problematic to identify and extract the material-related
costs information from the accounting systems as well as the stock management systems.

Besides, material-related costs are difficult to identify as organizations aggregate

materials purchase costs and materials processing costs into a single cost item. This means
that the material-related costs information is recorded in the accounting records as a single
payment without detail on the separation between materials purchase costs and other
processing costs. As a result, managers find it difficult and time consuming to disaggregate
these costs for decision making.

3.0 Opportunities of EMA

3.1 Compliance Efficiency

EMA reveals the opportunity for environmental protection via cost-efficient

compliance with environmental regulation and self-imposed environmental policies. (IFAC,
2005).

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 EMA helps organizations in prioritizing and supporting environmental activities.
Thus, EMA provides incentive for organizations to engage in environmental activities such as
purchasing of biodegradable materials, recycling of raw materials as well as incurring costs
for pollution and control equipment, pollution monitoring and emission fees. Therefore, EMA
drives organizations to establish effective and cost-saving methods to manage and alleviate
environmental impacts.

Consequently, organizations enable to use EMA information to prove compliance

with environmental regulations and legislations. Besides, EMA also helps organizations to
respond more quickly and cost-effectively to an ever-changing environmental regulatory
framework. Therefore, organizations are able to strengthen the relationships with government
and regulatory bodies as well as avoid lawsuits and prosecutions. Hence, with EMA data and
information, organizations can achieve compliance efficiency.

3.2 Ecological Efficiency

In addition, EMA provides the opportunity to simultaneously reduce the costs and
environmental impacts via more efficient use of energy, water and materials in internal
operations and final products. (IFAC, 2005).

EMA assists managers in clarifying the environmental cost structure of a process or

product as well as identifying and controlling environmental costs. Subsequently, managers
will have an accurate understanding to redesign procedures and processes to be more cost
efficient. Therefore, managers are able to be more effectively enhancing the efficiency of
using energy, water and other materials.

As a result, organizations enable to reduce resource use, waste and emissions.

Eventually, organizations can achieve significant monetary savings as costs of materials
purchase and waste treatment decrease accordingly. Hence, EMA brings ecological efficiency
improvement in manufacturing process, new product development and reduction of long term
environmental liability.

3.3 Strategic Position

EMA also offers the opportunity to reinforce the evaluation and implementation of
cost effective and environmentally sensitive programs for ensuring the organization’s long-
term strategic position. (IFAC, 2005).

With improved environmental performance, organizations enable to achieve several

strategic benefits. One of the strategic benefits is organizations are able to design and develop
environmental friendly products and services for “green” business and consumer markets.
Furthermore, organizations can enhance corporate image and reputation by illustrating strong
environmental commitment to public at large.

In addition, EMA can be used as a supporting tool for external reporting to

stakeholders interested in organizational level environmental performance. External
stakeholders are such as finance providers, local communities and non-government
organizations (NGOs). By using EMA data and information, organizations are able to
demonstrate their respective contributions toward environmental management supported by

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substantial environmental expenditures. Therefore, organizations also can gain strategic
benefits by strengthening the relationships with key stakeholders.

4.0 Solutions to Overcome EMA Challenges

4.1 Development of Multi-Disciplinary Team

Since EMA relies significantly on physical information such as the uses and flows of
energy, water and materials, it is necessary to enhance the communication and integration
between accounting department and other departments. Therefore, organizations have to
develop a multi-disciplinary team in order to improve communication between accounting
personnel and other professionals involved in environmental management. This multi-
disciplinary team should involve accounting personnel, environmental personnel such as
biologists and geologists as well as technical personnel such as engineers and machine
operators.

By emphasizing on multi-disciplinary team, accounting personnel have the

opportunity to learn the expertise and knowledge of environmental and technical personnel.
At the same time, environmental and technical personnel can have a clearer and better
understanding of accounting information. Thus, accounting personnel can improve
collaboration and cooperation with environmental and technical personnel as well as increase
awareness of each other’s concerns and needs. Consequently, organizations are able to
achieve two-way communication of knowledge and integration of information between
accounting departments and other departments.

4.2 Implementation of Activity-Based Costing (ABC)

Organizations are able to resolve the issue of hidden environment-related costs by

implementing and practicing Activity-Based Costing (ABC). ABC is a method of managerial
cost accounting that extensively use cause-and-effect cost allocations. This means that ABC
is able to assign all internal costs to the cost centres and cost drivers based on the activities
that caused the costs.

By using ABC, ABC is able to differentiate between environment-related costs and

environment-driven costs. Thus, ABC establishes separate cost centres for the more obvious
and discrete environmental management activities. Therefore, cost centres can be more
clearly labelled as environment related while the less obvious costs will still appear in other
accounts.

As a result of practicing ABC, ABC can prevent environment-related costs being

hidden in overhead accounts by setting up separate cost centres for EMA activities. In
addition, ABC enables managers to easily and accurately calculate, trace and identify the
environment-related costs for decision making. Hence, the application of ABC to calculate
environmental costs at EMA level can support decision making at product and process or
investment level.

4.3 Integration between EMA System and Accounting System

In order to avoid troublesome identifying and recognizing environment-related costs,

organizations should establish a data system to collect, analyze and report information on

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material-related costs and other environmental matters. However, organizations do not
necessary have to develop a separate system to accomplish the mission. In fact, organizations
should integrate the EMA system with the current accounting system to manage and analyze
the environmental costs. By adapting to the current accounting system, environment-related
costs information can be easily captured and recorded.

Through the integration between EMA system and accounting system, managers are
able to trace, extract and identify material-related costs and other environment-related costs
on a timely manner. Besides, managers also can easily aggregate and disaggregate the
environmental costs for decision making. Furthermore, an integrated system is able to
provide the needed information for on-going materials flow management and environmental
management. Hence, organizations can effectively capture, measure and report on
environmental performance.

5.0 Conclusion

Since last few decades, environmental issues have been increasingly influencing the
economic performance of organizations. The growing concern and interest of internal and
external stakeholders in the environmental performance of individual organizations have
imposed intensive pressure on organizations. Besides, there has been a drastic growth in
environmental regulations and legislations as well as environmental costs including energy
and water prices and liabilities. Therefore, the increasing environmental and social concerns
have pushed organizations to utilize EMA for better evaluating environmental costs,
redesigning managerial processes and internal decision making processes as well as reducing
environmental impacts.

EMA contributes significant advantages toward environmental performance of

organizations. First, organizations are able to achieve compliance efficiency through
environmental management systems, environmentally preferable purchasing and
environmental compliance. Second, organizations can achieve ecological efficiency as EMA
supports cleaner production projects, waste minimization and energy efficiency. In addition,
EMA information is used for “green” product design and development and external reporting
which enable organizations to achieve strategic position. Thus, EMA is a broad set of
principles and approaches that provides importance data for wide range of environmental
management activities.

In order to successfully implement EMA, organizations have to take into account the
costs and benefits of building EMA and the scope of EMA. Besides, it is important that
personnel from various department to work as a team in dealing with environmental issues.
Furthermore, organizations should also practices ABC to overcome the issue of
environmental costs being hidden. Moreover, EMA has to be tailored to the special
requirements of individual organizations rather than be applied as a generic system. Thus,
organizations need to integrate EMA system into accounting system for accurately collecting
and analyzing environmental costs. Since EMA is still considered as a relatively new tool in
environmental management, therefore, external help is needed to assist organizations to
incrementally develop EMA as well as constantly improve their EMA.