This Project represents the findings of a case study in how to apply Environmental Management Accounting (EMA) to achieve financial and Environmental benefits. STAR Engineering Works manufactures plastic bottles and caps for the food, health and cosmetic industries. The Project study focused on several key areas of the business:
The manufacturing business ;
2. Key manufacturing process; and
3. An individual product.
The economic and environmental impacts of the management decisions which flowed from
those changes were recorded during a trial.STAR Engg.Works relates costs to waste, energy and
packaging. And it tries to bring the same to business.
At the process level
An analysis was performed of two mutually exclusive methods of performing
a key manufacturing process. The analysis identified significant and
unexpected waste costs, and differences between the two processes in
economic and environmental performance. This demonstrated the application
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of EMA at the process level, improving decision-making and integrating
environmental performance considerations.
At the product level
The application of EMA at a product level showed that costs of waste are not
currently being accounted for in determining standard costs. Incorporating
the environmental costs at this level has implications for pricing, production
mix and volume decisions and has direct impacts on margins.
Based on extrapolation of results for the trial period, initiatives already
identified requiring a one-off investment of $37,000, will:
save the business $41,400 per year over 15 years
reduce their CO2 emissions by 90 tonnes per year over 15 years
Going forward, the data provided by the new framework will ensure
improved and more informed decision-making. Already a number of other
potential strategies have been identified for consideration, once the data is
available, to save costs and reduce CO2 and waste emissions further.
The case study concludes that:
organisations can tailor their own definition of what constitutes an
some environmental costs and benefits may be hard to identify. EMA
can help separate hidden environmental costs and benefits and
encourages consideration of those not captured by the accounting
EMA may be applied incrementally, in many cases using existing
systems of data collection and accounting
EMA can be employed at different levels, from the whole organisation
down to the individual product
each business will apply EMA differently according to their unique
requirements. However, the focus should remain on key environmental
This Project will help the business to Improve capital and operational decision making,
for both the business and the environment.
COGS is an acronym used for Cost of Goods Sold in this report.
Contingent costs are environmental costs that are not certain to occur - they
depend on future events.
Direct costs are costs that are clearly and exclusively associated with a
product or service and are treated as such in accounting systems.
Environmental aspect is the result of an activity, product or service that can
interact with the environment.
Environmental impact is any change to the environment, whether adverse
or beneficial, wholly or partially resulting from an organisation's activities,
product or services.
Environmental liabilities is an umbrella term for different types of
environmental costs, including costs for remediating existing contamination,
costs of complying with new regulations, future environmental costs of
Externalities or external costs are the costs of an organisation's impact on
the environment and society for which it is not currently financially
FG is an acronym used for finished goods in this report.
Full cost is the total cost of production, including direct and indirect costs.
Unlike some other definitions it does not include external costs to society and
Hidden environmental costs are the results of assigning environmental
costs to overhead pools or of overlooking future and contingent costs.
Hot runner and cold runner process refers to the mechanism in a plastic
injection moulding machine for injecting the liquid plastic into the mould. In
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a hot runner mechanism, the plastic is molten in the flow channels between
the moulds. In a cold runner mechanism, plastic freezes in the flow channels
each time a batch of (six) products is moulded. This 'runner' waste must be
separated, and in most cases can be reground and reused as raw material.
Moulding machines can be converted to one mechanism or the other but at
significant expense. Most of Cormack's products can be made using either a
hot runner or a cold runner mechanism.
MP is an abbreviation for the manufacturing business unit profit.
Confidential amounts in this report have been expressed as a % of this
Materials refers to raw materials of polypropylene, polystyrene and
Obsolete stock is stock of raw materials and finished goods that are reduced
in value. Obsolescence occurs where product lines are discontinued or where
demand is overstated and the stock expires before use or sale.
Recycled packaging is packaging sent for recycling after initial use. It is not
Recycled waste is waste from any source that is sold for recycling.
Re-grinding refers to the re-use of moulding waste in place of raw materials.
In most cases, waste from moulding machines can be ground up on site and
re-deposited in the machine in place of raw material. Special re-grinding
machines are employed next to all moulding machines.
Returnable packaging is packaging that is returned by the customer and reused
in its existing form.
Re-used waste is waste that is re-used in the business in some form.
SEDA acronym for Sustainable Energy Development Authority, a NSW
The Packaging Covenant is a voluntary initiative designed to encourage
organisations to identify strategies to reduce packaging waste. To join,
organisations must develop and submit a plan for approval on how packaging
will be reduced. Organisations who are not signatories to the Packaging
Covenant will be subject to forthcoming regulations.
Waste from the moulding process is fairly homogenous, being different
grades of polystyrene, polyethylene or polypropylene. It is either surplus raw
material or rejected finished goods. All references to waste in the report refer
to moulding waste unless otherwise stated.
STAR Engineering Works
Making changes to the management accounts
The trial and outcomes
The benefits of EMA
About the case study
This project was conducted to explore the available techniques for
Environmental Management Accounting (EMA) and develop a simple,
repeatable methodology. The aim of EMA is to provide business managers
with the information they require to facilitate operational and capital
decisions which save costs,
Identify potential revenue opportunities and
Improve environmental performance.
Focus of the case study
The study was undertaken for the manufacturing business unit. This business
unit was selected because:
management believed this was where the majority of environmental
costs were being incurred and therefore where the greatest benefit
would be achieved; and
within the existing management accounting structure, the cost data was
already available and being presented.
Other parts of the business were not considered in the study.
Limitations of the case study
Because of the size and nature of its operations, Cormack was able to make
only limited resources available for the trial. As a result, the amount of
testing we could undertake was limited. For the same reason, it was not
possible to run a duplicate management accounting system to compare
results. Individual results were therefore estimated and extrapolated.
To keep the analysis of the data simple, we did not consider tax implications
or discount cashflows in our financial models.
WHAT ARE ENVIRONMENTAL COSTS?
Environmental costs comprise both internal and external costs and relate to all costs
occurred in relation to environmental damage and protection. Environmental protection
costs include costs for prevention, disposal, planning, control, shifting actions and damage
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repair that can occur at companies and affect governments or people . This book
only deals with corporate environmental costs. External costs which result from corporate
activities but are not internalized via regulations and prices are not considered. It is the role of governments to apply political instruments such as eco-taxes and emission control regulations in order to enforce the "polluter-pays" principle and thus to integrate external costs into
Environmental protection costs
(Emission treatment and pollution prevention)
+ Costs of wasted material
+ Costs of wasted capital and labour
= Total corporate environmental costs
1 to 10 per cent of total environmental costs, while the purchase costs of the wasted materials represent 40 to 90 per cent of environmental costs depending on the business sector examined.
Conventional environmental cost assessment did not consider material flows but mainly
waste treatment and disposal costs as well as investments in end-of-pipe technologies. Later, corporate material flow balances were determined, but without systematically integrating the two information systems and without assessing the costs of material flows.
Residual waste accounting, in a subsequent phase, not only measures the costs of waste by their disposal costs, but also adds the material purchase values and pro rata production costs. The system boundary is the corporation and identical to financial reporting. This approach is also at the core of the method described in the present report which aims to provide a comprehensive statement of annual environmental costs.
Activity-based costing improves internal company cost calculation by allocating costs typically found in overhead costs to the polluting activities and products. Significant material flows are traced throughout the company and their costs are allocated back to the polluting cost centres. Flow cost accounting aims not merely to separate the costs of environmental protection but to
detect all material flows via the company's cost centres and to reassess production costs and
percentage amounts added in the various phases of production, like estimated scrap
percentages, waste rates, etc. Technical process flow charts support this approach. While the
method in detail assesses the aggregated amounts and costs of material flows, which results in
a better calculation of production costs, it avoids the need to separate the environment-related
share and to obtain a complete list of other environmental costs. The system boundaries are the
several production processes and cost centres in a company.
Tier 0 Direct costs associated with capital expenditures, raw materials,
other operating and maintenance costs, etc
Tier 1 Hidden regulatory costs from activities such as monitoring and
Tier 2 Contingent liabilities arising from remediation of contaminated
sites, fines and penalties for non-compliance, etc
Tier 3 Less tangible costs and benefits from consumer perceptions,
employee and community relations, risk avoidance, etc
Tier 4 External costs to the environment, eg depletion of natural resources,
reduced air quality
We have used this classification system in this report as it helps explain how
and why different types of costs need to be considered in different ways in a
management accounting framework.
2. STAR Engineering Works
STAR Engg.Works is a plastic injection moulding business
based at VIRAR. They manufacture and assemble a range of polypropylene, polystyrene and polyethylene plastic caps and tops for the cosmetic, food, sports and pharmaceutical industries.
The business has a turnover of approaching 4crore and employees 9
They can recycle waste and operate effective housekeeping the workplace.
The business undertakes two main processes: plastic
injection moulding and assembly.
The materials flow for the manufacturing business unit is shown in figure 1. The waste produced by these two processes is fairly homogenous, consisting of different grades of
polypropylene, polystyrene and polyethylene (as there are little or no additives other than dye). Most of this is collected and ground up and can be re-used as raw material (re-grinding). There are no toxic chemicals used, no hazardous wastes generated.
Figure 1: Materials flow in the manufacturing business unit
Warehouse Plastic raw material Moulding Assembly Warehouse
waste Add Chart
Incentives to use EMA
For the long-term growth of the business.
Savings which could be generated by reducing/re-using waste
3. Implementing EMA
Implementation of environmental management accounting will ultimately
result in changes to the existing management accounts to better show cost
information. This may consist of a few simple changes within the existing
framework or involve a full restructuring of cost centres and account codes.
Making changes to management accounting procedures will incur costs in:
implementing the system changes, educating staff and initial
ollecting additional data and integrating it in the revised management
These costs must be weighed against the anticipated benefits which would be
yielded by more informed decision-making. The benefits may be economic,
improved environmental performance, or both.
Before any changes were made to Cormack's management accounts, it was
necessary to understand:
the existing management accounting systems and procedures for the
selected aspect of the business;
the 'significant' environmental aspects of the business; and
the increased revenue and/or reduced cost opportunities that are not
captured by the existing accounting system.
Only then was it possible to assess the estimated costs and benefit of any
changes, and to understand the environmental costs of the business (as
defined) and how they are currently treated within the accounting system.
Management accounting in the manufacturing business unit
An understanding of the management accounting system and procedures was
achieved by interviews with finance staff and analysis of the management
The management accounting system is segregated into:
Manufacturing Business Unit (MBU)
Sales and Administration Business Unit (SAU).
Both business units are then combined in the consolidated accounts (CA).
For recording and reporting purposes the MBU (on which this case study is
based) is a cost centre only. The costs in the MBU are absorbed into the CA
COGS account on a standard cost per machine hour basis every month.
Table 1 presents a brief description of the costs recorded in the MBU.
Comparison of the costs of using the hot and cold runner moulding process for a given product, based on machine production for one month
Materials (in FG)
Energy (in FG)
Materials (in waste)
Labour (in waste)
Energy (in waste)
The different mechanisms of the two processes resulted in varying costs. The additional waste generated by the cold runner process during production resulted in a higher labour waste cost for sorting and processing the waste. For the hot runner, the large amount of unrecyclable waste generated during colour changes and purges, not necessary for a cold runner mechanism, resulted in a higher materials waste costs.
This analysis showed that:
the environmental costs of waste are far higher and more significant, at 13.6% and 15.3%, than management expected the hot runner method is slightly cheaper than the cold runner method,
and has lower environmental costs. However quantification of the environmental impact of each method for the same period shows that other considerations may need to be taken into account in making any decision.
Comparison of the environmental impacts of using the hot and cold runner moulding process for a given product, based on machine production for one month
Waste sent to landfill
CO2 emissions from production
A decision to use exclusively hot runners or cold runners has not yet been taken. The financial costs are comparable, but there are differences in the associated environmental impacts. STAR Engg. Works is currently considering several ways to minimise the waste generation of each process.
Product costing and incorporating environmental costs
Product costing and margin analysis drives product pricing, production mix and volume decision-making. However, a review of the current management accounting identified that there is limited product cost information for decision-making. Standard costs have been determined, but are based on management estimations.
A specific product was selected during the trial to help understand: how environmental costs, particularly waste costs, are treated at a product level .The appropriateness of the current standard cost of the product. The product selected was unique at STAR Engg.Works in that it was a simple, one component product produced by one specific machine. This made collation and analysis of the data simple. The machine was also known to generate substantial waste.
Standard direct costs and revised standard direct costs of production for a given product
Current standard cost
Revised standard cost
Materials (in FG)
Labour (in FG)
Moulding energy (in FG)
Materials (in waste)
Labour (in waste)
Moulding Energy (in waste)
Profit margin (including an allocation
of other overheads)
The analysis showed that:
existing standard costing for this product is imprecise the revised margin was 1.3% higher than the standard used in decisionmaking. Environmental costs account for 0.5% of the profit margin on this product this year alone the waste associated with the manufacture of this
product cost the business $16,100, before disposal costs. The inclusion of environmental costs impacts the profit margin being earned on products and the margin used for decision-making may be inaccurate. Failure to account for environmental costs at the product level raises issues
of cross-subsidisation. For example, the materials waste costs are currently being hidden in the tock variance account (see section 4.5). Stock variance costs are included in the standard cost of products as an element of an overhead allocation (not shown in this analysis). The stock variance element of the standard cost allocated to this product is unlikely to equal $10,200 - it
will probably be less as this product's production is known to generate significant waste. In other words, another product is being allocated a portion of this product's material waste costs.
Cross-subsidisation means that products with few environmental costs subsidise those with poor environmental performance and high environmental costs. The end result is that management may unknowingly.
Cost versus benefit of the re-grinding process
The re-grinding process was identified as worthy of further investigation during the environmental review process (Appendix A). Almost all production waste is re-ground at source for re-use as raw material. No cost information is known about the re-grinding process, but it is assumed to be the most cost-effective means of waste disposal and materials use. From the cost and revenue data generated during the trial it was possible to analyse this "environmental" process to verify the economic and environmental credentials.
Costs and benefits per year
Recycling revenue foregone
Raw materials saved
Net benefit per year:
In this case, the economic and environmental benefits of re-grinding moulding waste were obvious to management, although unproven. However, this example is a useful demonstration of how to consider the merits of other Environmental processes.
Energy savings for the air compressor
The energy consumed by air compressors was suspected to be a significant part of the total energy cost of moulding. At the time of the trial, management was in the process of purchasing a new air compressor to cope with increased capacity, but little information was available on energy consumption. An energy-efficient alternative had not been seriously considered as it was perceived to be too costly. Simple analysis of information generated during the trial showed that
investment in the new style energy-efficient air compressors would repay the additional cost over conventional air compressors (the preferred choice) within 5 years. Over the estimated life of 15 years, this would result in an energy saving of $50,000 equivalent to 773 tonnes of CO2.
Improving the efficiency of lighting
Identification of the lighting cost has provided management with the
information they need to assess a number of energy-saving strategies:
Painting the interior factory walls white
Two of the factories currently have dark red brick interior walls. The third, a
newer factory, has white. All are of similar size and shape. Comparison of
the respective lighting costs during the trial showed how painting the factory
would pay for itself within 9 years, as follows:
Investment in energy-efficient lighting
A lighting consultant is to be engaged to investigate the economic feasibility
of investing in energy-efficient lighting, now that cost data for the existing
lighting is known
Managing the energy overhead
The original energy overhead cost has now been substantially allocated to lighting and moulding. The remainder relates to assembly operations, ancillary machinery and equipment usage around the offices and factory.This will be managed as follows:
â€¢ Cormack has signalled its intention to apply the EMA techniques learnt to the assembly operations. This will identify the energy costs of this process, which may then also be separately accounted for, and subsequently managed for efficiency. Cormack is considering a full co-generation feasibility assessment for the factories to see if waste heat from the moulding process can be recycled to power ancillary machinery, reducing the overhead energy cost. Cormack elieve there may be a case for investment having now identified the heating costs (fuel, aintenance) and the energy costs of the moulding machines â€¢ For more general office and surrounds energy overheads, Cormack has initiated a process of ongoing review to identify general energy efficiency measures. They intend to approach SEDA to discuss the possibility of joining its business energy-smart program.