This report attempts to investigate, discuss, analyse, and assess the impact of epistemic change, from modern to primal, on management accounting.
With the change in episteme possibly being the most important phenomenon of contemporary times, its study has begun in earnest in progressive western universities and colleges. Whilst epistemic change is essentially broad in nature and impacts diverse aspects of life and society, this structured report deals with its significance and implications for contemporary management accounting.
The report is sequentially structured and discusses issues like the consequences of epistemic change for management accounting, the development of new management accounting tools and techniques that can be applied to different areas of human enterprise, the benefits of these tools, and the reasons why their development should be perceived to be proof of epistemic change. The concluding section provides reasoning and justification for the contribution of epistemic change and the chosen management accounting tools towards Intrinsic Sustainable Development in global society.
2. Key Consequences of Epistemic Change for Management Accounting
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Much of contemporary society is awash with issues like globalisation, economic liberalisation, the near magical growth of the online world, and the opportunities and challenges these forces provide for contemporary civilisation. The occurrence of a muted but far reaching change in episteme, from the modern to the primal, appears to nevertheless have the potential of bringing about far more fundamental and far reaching change in the ways in which humans think, act and work (Birkin & Polesie, 2011).ÂÂ
There is little doubt of the complete domination of the modern episteme in contemporary society. The modern episteme, which replaced the classical episteme in the 1800s, rejects metaphysics and the importance of god and religion in human society (Birkin & Polesie, 2011). It drills down into the base of knowledge provided by the renaissance and classical episteme, disproves numerous beliefs, assumptions and superstitions, and makes the point that man controls society, and social and business activity, through the application of rational, scientific and objective actions that aim to achieve economic and social prosperity. The modern episteme has, in turn, spawned numerous constructs like economic theory, modern day capitalism and neoliberalism, among others, all of which appear to be working towards the furtherance of an unsustainable and increasingly fragile global order. Whilst the modern episteme has been found to be lacking in true substance, by Foucault and others, possibly because of the absence of a metaphysical orientation, contemporary thinkers are emphasising upon the relevance of nature for human society and plant and animal life, in order to develop the primal episteme (Rizvi, 2004). Numerous scientific discoveries, the emergence of the chaos and complexity theories, and astonishing advancements in areas of molecular biology and genetics point to the predominance of nature in the lives of men and the necessity to move from unsustainable actions, a consequence of the modern episteme, to sustainable development, in line with the primal episteme (FrankISD, 2012).
The larger idea of sustainable development is far more potent that the sugar coated market oriented CSR statements of modern day corporations. It is slowly gaining ground and affecting the ways in which people plan and manage their businesses (Jasch & Stasiskiene, 2005). Some companies are accordingly changing from being bulldozers that are independent and deterministic, push their way forward, and pay little heed to the destruction that is caused in their wake, to boat companies that sense their way forward in accordance and in harmony with nature, sensitive to the weather, the waves and the currents (Jasch & Stasiskiene, 2005).
Management accounting, an important contemporary business tool, is used by managers to analyse their costs, improve their apparent organisational productivity, and to improve the figures of their profit and cost oriented financial statements. The change in episteme, from the modern to the primal, is however dramatically changing this management discipline (Van Heeren, 1998). These epistemic changes first resulted in the introduction of concepts like the Balanced Scorecard and ABC costing, and thereafter led to the development of Environmental Management Accounting and Sustainable Management Accounting, which aim to provide comprehensive data, not just on conventional economic and financial aspects, but also on various social and environmental dimensions of business activity (Van Heeren, 1998).
Environmental and Sustainable management accounting asks for the integrated reflection of diverse financial, social and environmental aspects. It is a tool that assists firms to become more sustainable by highlighting diverse financial and non-financial benefits, costs, and risks. It extends traditional management accounting to account for sustainability at the organisational level (Wahyuni, 2010). Based on a broad stakeholder approach, it considers the external impact of the organisation and its products, and extends the focus of the range of monetised information, (covering economic, environmental, and social impact) for making of decisions. Numerous management accounting tools are being developed in line with the primal episteme to assist entrepreneurs and managers to operate sustainable businesses (Wahyuni, 2010).
3. Six Management Accounting Tools and Techniques in the new Episteme
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Agriculture has been chosen as the focus business area for this report on account of its criticality for human life, as well as to draw attention to the diverse unsustainable practices that are routinely being adopted by agriculturists, both in the organised and the unorganised sector, across the world.
Intensive farming in fragile environments, across the world, is adversely affecting natural resources and sustainable development. Perennial forests and mangroves are being destroyed to make way for agricultural land. Farmers routinely burn their land after harvesting to get rid of weeds, a practice that contributes to the loss of forests, inhibits regeneration of tree seedlings and destroys organic matter in the soil. The excessive use of chemical fertilisers and pesticides for temporary short term benefits degrades soil quality and destroys beneficial organisms and insects. Indiscriminate use of chemical fertilisers for enhancement of yield leads to the soil becoming acidic and not conducive for plant growth. Over grazing is another problem across the world, which results in baron and unsustainable land.
Commercial exploitation by large companies pursuing profits leads to displacement of rural populations, development of rural inequalities, and the development of resource imbalances (United States ..., 2000). Inefficient use of water is increasing the risks of salinisation, even as deforestation for agriculture is threatening the lives of a billion people who are supported by humid and semi humid forests. Sustainable development in agriculture calls for a holistic, multi-dimensional and multi-organisational approach. Diverse management accounting tools and techniques, like the six detailed below, can help improve sustainability in agricultural operations (United States ..., 2000).
Life Cycle Assessment
The LCA represents a systematic process for the evaluation of the life cycle costs for products or services through the identification on environmental consequences and the assignment of monetary value to such consequences. The LCA should contain the complete cost analysis of the product life cycle, including the operation as well as the system of the life cycle, i.e. from research to disposal and from cradle to grave (Bennet & James, 1997).
Activity Based Costing
Activity based costing is a useful tool for calculation of comprehensive costs. It enables firms to allocate all costs, including all environmental costs, to specific costs centres and cost drivers on the basis of specific activity. ABC can furthermore be linked to the LCA, described above because it improves cost calculation through the allocation of costs that are found in overhead accounts to polluting activities and to products determined by the quantitative lfe cycle assessment processes (Collins, et al, 2011).
Flow Cost Accounting
This technique concerns the analysis of material and energy flows. It defines the various material and energy flows that move through value creating systems, like businesses over specific periods. Incorporation EMA perspectives, flow cost accounting includes the assessment of cleaner product potential at the plant level, estimation of waste generation costs, quantification of diverse emissions and waste and energy streams and a better understanding of the reasons for such emissions and waste and energy streams (Collins, et al, 2011).
Total Cost Assessment
TCA techniques are used for investment appraisals, and like LCAââ‚¬â„¢s, assist organisations to reduce and prevent pollution by incorporating environmental costs into capital budgeting exercises. The tool helps in identifying economic costs and areas of cost savings from prevention of pollution in traditional costing analysis. TCA represents a long term and comprehensive financial analysis of the complete range of savings and costs of an investment that will be experienced by organisations making such investments (Burritt, 2004).
The use of the Balanced Scorecard can provide managers with comprehensive perspectives of the business, including the impact of operational and environmental measures on diverse company perspectives like customer satisfaction, internal improvement, financials and research and training (FM Essentials, 2011).
Social Performance Costs
Social performance costs represent the financial impact of diverse social indicators, like labour practices and decent work, human rights, society and product responsibility. Each of these areas represents specific aspects of the social impact of organisations (FM Essentials, 2011).
These six management accounting tools and techniques are broad, comprehensive and are beyond the modern episteme. Whilst their introduction and implementation will need care and skill, they will be able to offer absolutely new perspectives to the environmental and social impact of organisations.
4. Benefits of Six Management Accounting Tools in Improving Sustainability in Agricultural Operations
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The six management accounting tools elaborated in the previous section can help agricultural sustainability in diverse ways. Some of the benefits that can be obtained from their application for agricultural operations are described hereunder:
Life Cycle Assessment
It is clear that diverse adverse environmental impacts can occur at different stages of commercial agricultural production, commencing from the acquisition of the land, (possibility of deforestation) and thereafter at various stages of the agricultural process, including clearing and burning of land, use of harmful pesticides, contamination of groundwater resources, depletion of groundwater, wastage during harvesting, payment of labour, packaging and emissions from processing plants and during transportation (Jayawardena, et al, 2005).
The LCA will identify and quantify both the use of energy and material and the release of waste to the environment, evaluate their environmental impact, and suggest improvement opportunities. The LCA will produce data on environmental emissions and their effect, which in turn will enable firms to identify opportunities for pollution prevention (Jayawardena, et al, 2005).
Activity Based Costing
Activity based costing can help agricultural operators to allocate costs for five important factors, namely (a) volume of emission, contamination or waste, (b) toxicity of treated emission and waste, (c) added environmental impact, (volume multiplied by input per unit of volume), (d) volume of treated emissions, and relative costs for the treatment of different types of emissions (Schaltegger & Burritt, 2000). ABC can also uncover a significant part of costs that are associated with the environment, like energy, water, and waste disposal that are commonly treated as undistinguished overheads. These costs are furthermore likely to be concealed from managerial evaluation, and more so for cost reduction strategies. The use of the ABC will result in more accurate cost information, not just for product pricing, but also for lowering entire costs and supporting diverse pollution prevention activities (Schaltegger & Burritt, 2000).
Flow Cost Accounting
The use of flow cost accounting can be particularly suitable for agricultural businesses because it basically perceives a firm to be a material flow system that is segregated into various production phases and cost centres. This will include classical agricultural material flows along the value added chain, from seeds to processed and packed finished products. It will also comprise of all material losses through the logistic chains, like rejected and spoiled products, as well as solid waste and effluents that thereafter leave the firm as economically and environmentally undesirable value (Hart & Milstein, 1999).
Total Cost Assessment
The calculation of the TCA for every new agricultural project will enable organisational managements to undertake a complete and long term financial analysis of the comprehensive range of costs and savings that can be expected to arise for the organisation making the investment. The conduct of a TCA, from initiation to project completion, will help managements to gauge the total environmental impact of the project, from land procurement to project completion, and the various steps needed for sustainability. The conduct of such an analysis is essential for enhancement of sustainability, right from the beginning of project activity (Jasch & Stasiskiene, 2005).
The original BCS, advanced by Kaplan and Norton, has been modified for environmental integration and the EBS intends to ensure that measures for the four indicators, and particularly financial performance measures, reflect diverse environmental considerations. Agricultural firms can ensure that various environmental costs, like those of groundwater and soil contamination are identified and thereafter allocated to budgets (Hart & Milstein, 1999). This will increase organisational awareness of such costs and bring about greater focus on their reduction and control. The setting of appropriate KPIs on various environment associated issues, like emission levels from transportation or the running of diesel pumps, and quantity of effluents released, (both treated and untreated), will enable managers to work in line with pre-set targets (Jasch & Stasiskiene, 2005).
Social Performance Costs
The computation of social performance indicators can be done for diverse areas like labour practices, human rights, and social and product responsibility. A number of western agricultural corporations have been found to be engaging in blatantly unfair labour practices in South American plantations (Schaltegger & Burritt, 2000). The setting of priorities and indicators in such an area can help significantly in (a) reducing child labour, a common phenomenon across farming activities in the developing countries, (b) improvement of diversity and (c) elimination of discriminatory practices. Indicators can also be set for issues like political contributions, bribery and corruption and customer health and safety, all of which will help managements to improve intrinsic sustainability (Schaltegger & Burritt, 2000).
5. Evidence of Epistemic Change
The change from the modern to the primal episteme is likely to be a long drawn out process, with both epistemes functioning side by side in the years to come. The change to the primal episteme calls for the recognition of the importance of nature for the survival of the human race and other forms of life. With modern day businesses being the foremost cause for unsustainable actions across the developing and developed world, the epistemic change will help in bringing about much greater sustainability in the actions of business firms.
All the six management accounting tools discussed in this report help business firms to increase their knowledge about the environmental impact of their actions in financial and non-financial terms. They furthermore empower these organisations to set objectives for bringing about greater sustainability in their business, decide upon appropriate indicators, both for the planning of investment and for measurement of performance, and provide methods and processes for assessment of environmental impact and costs. Whilst measures like LCA and TCA enable organisations to access the total environmental implications of projects and operations, the BSC framework helps them in deciding on important KPIs for diverse business operations, in terms of their environmental impact and sustainability. The ABC process on the other hand allows a wide basket of costs to be allocated to different functions and enables organisations to assess costs in entirety. The combined use of these six methods undoubtedly allows organisations to move towards intrinsic sustainable development.
It is also evident that these various tools and processes have been developed on account of the inadequacy of existing management accounting tools and techniques to capture all relevant costs of business organisations in dynamic and rapidly changing business environments. The Balanced Scorecard was developed to create greater awareness about overall business activities, beyond costs, operations and finances. The ABC method came about in response to the inadequacy of traditional product and standard costing methods to capture all costs in a logical and understandable manner. Both these tools have since been modified and developed to incorporate the environmental impact of organisations. The development of social cost indicators similarly pertains to issues that are beyond the modern episteme and essentially concern sustainability at the organisational and larger level. It is thus clear that the emergence of these tools, their development, and their evolution are indicators of epistemic change.
6. Justifications and Conclusions
The investigation and analysis conducted for this report leaves little doubt about the need for organisations to discard the modern episteme and move constructively and carefully towards the primal episteme. The modern episteme has over the last two centuries generated a huge range of unsustainable processes that are threatening to disturb nature and with it the existence of the human race. It is the responsibility of every responsible company to adopt the primal episteme and move towards intrinsic sustainable development.
Every organisational action should be assessed in terms of its sustainability and environmental implications before it is acted upon. The six management accounting techniques are supportive of intrinsic sustainable development and will undoubtedly help managements to plan and implement organisational sustainability at the micro and macro level.