AMP Company’s Environmental Management Accounting

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Table of Contents

Introduction
Definition of Environmental Management Accounting
Changes that AMP made to its Management Accounting System
Definition of Environmental Costs
Environmental impacts of Services@ AMP’s
Changes that can be made to AMP’s Accounting System
Relevant Costs for Selected Environmental Inputs and Outputs
Breakdown of AMP’s Costs
Benefits Resulting from the Separation of Costs
References

Introduction

The case study will focus on AMP Limited which is a financial services organization based in various countries around the world. The company has an employee base of about 14,500 employees in the AMP International organization of the company. The case study will focus on the service division of AMP which provides a variety of services to the company’s affiliate in Australia. These services include human resource services, administration services, procurement management, and maintenance of the company’s facilities. The use of the US EPA classification of environmental costs is useful for this case study because it helps to explain how and why different types of costs need to be considered for decision making within the management accounting system (KPMG 2002)

The use of the classification system was able to highlight the environmental costs that are utilized by the various divisions of Services AMP. The company’s environmental costs are mostly related to the energy and water consumption needs of the organization as well as waste disposal activities identified in the first question of this analysis. By classifying the various costs of the company based on the EPA classification system, the company will be able to develop a new environmental management system that takes into account a new structure of costs that can be managed properly under the new system.

Definition of Environmental Management Accounting

Environmental management accounting is defined as a process that deals with the identification, collection, and analysis of data that is related to an organization’s environmental costs as well as its environmental performance. This information is usually beneficial to the company’s managers when it comes to decision-making activities. Environmental costs according to this study are defined as the costs that are related to the environmental aspects of a business and they have to be paid directly so that goods and services are produced for customers.

These costs do not however cover waste management and disposal of the materials that have been used by the organization or business to produce goods and services. Environmental costs do not also cover the corporate responsibility activities within the surrounding environment where the organization operates (Langfield-Smith 2009).

AMP accounted for the environmental impacts of its offices by conducting a high-level analysis into the way the company used various resources to conduct its business operations. The analysis was able to reveal electricity, water, wastewater disposal, and management are activities that have the most impact on the company’s environment. The management accounting system used by the organization has accounted for costs by vendors, costs for building services paid for by Services @ AMP, and costs that arise from waste collection and disposal activities (KPMG 2002).

The reason why AMP took part in the case study was so that it could be able to change its environmental management accounting systems to reduce the impact of the company’s operations on its surrounding environment. It also took part in the case study to demonstrate its commitment to environmental management and adopt practices that will reduce the environmental impacts of its operations.

The company has an environmental policy that aims at improving the environmental performance of AMP as well as incorporating the efforts of its employees to improve the environmental performance of the company thereby enhancing business decisions and actions. The environmental management accounting case study will therefore act as a starting point for the organization in developing its environmental management activities to reduce its environmental costs (KPMG 2002).

Changes that AMP made to its Management Accounting System

A high-level analysis was conducted to determine the environmental costs that are incurred by AMP which were found to be categorized in the current management accounting system to include organizational spending on building services and wages as well as the costs incurred by AMP’s vendors. The environmental costs that are incurred for AMP’s building services are usually combined with those for every building office occupied by the company.

These charges are based on the number of offices that have been occupied instead of the amount of office space that has been utilized in general and they are usually charged back to the cost centers of the company in the form of single office service charges (SOSC). The single office service charge system includes rental payments, maintenance of the space, office cleaning, electricity, water, and wastewater management systems within the company (KPMG 2002).

The company also spends environmental costs for invoice payments, office stationery, materials (paper) that are used for marketing and public relations activities, office furniture and supply purchases, and also payment for leases on the rented out cost centers. Based on the high-level analysis of the company’s environmental costs, AMP’s managers discovered the key opportunities needed to improve or change the management accounting system used by the company were directed towards improving the availability of information in relation to environmental costs. The opportunities would allow AMP to identify any cost-saving exercises that would reduce the environmental degradation of the company’s environment (KPMG 2002).

The key changes that were therefore going to be made in the company’s management accounting system included placing additional fields in the accounting system that would cater for various types of goods and services as well as the quantities of these goods and services, identifying the environmental inputs and outputs of AMP which would be accounted from the rent incurred by the company within the accounting system, separating the environmental costs from the costs that arose from the single office service charge, the rationalization of vendors which would support the additional fields within the accounting system and the separation of electricity charges from the single office service charge (KPMG 2002).

Definition of Environmental Costs

Environmental costs are referred to as the direct costs that are utilized by corporate ventures and businesses to provide goods and services to customers while at the same time managing the environmental impacts of these goods and services. Environmental costs are important for an organization’s managers as they are able to offset any environmental costs by generating revenues from recycling wastage materials and selling waste.

Environmental costs are beneficial to an organization because they improve the environmental performance of the organization increasing the company’s competitive advantage. According to the US EPA Pollution Prevention Benefits Manual of 1989, environmental costs are classified into five tiers which include Tier 0, Tier 1, Tier 2, Tier 3, and Tier 4. Tier 0 classifies environmental costs to be the direct costs that are associated with the capital expenditures, raw materials, and operating costs of a company (KPMG 2002).

Tier 1 describes environmental costs to include the hidden regulatory costs that arise from activities that fall under compliance and quality assurance such as monitoring, reporting, and controlling of organizational resources. Tier 2 deals with environmental costs that are related to the contingent liabilities that arise from poorly disposed of chemicals, contaminated environmental sites, and fines and penalties that arise as a result of not conforming to the standards and guidelines of the company’s license.

Tier 3 environmental costs are the less tangible costs incurred by a company such as an employee and community relations costs, customer perception costs, and risk management, and avoidance. Tier 4 environmental costs are those that are related to the external environment of an organization. They include costs that are incurred from the depletion of natural resources by the company and the release of wasted materials into the surrounding environment (KPMG 2002).

Four benefits that companies in the service sector can derive from the identification of environmental costs include the increased transparency of these costs which leads to a reduction in the number of funds used to deal with environmental problems. Another benefit of identifying environmental costs is that they can be able to offset environmental costs by generating revenues through the proper disposal of waste materials.

Identifying environmental costs also leads to improved environmental performance because these costs can be properly managed by the company and it also leads to the promotion of accurate pricing of products and services. The identification of environmental costs also allows a company to develop an environmental policy to manage the use of resources within its environment of operation (KPMG 2002).

Environmental impacts of Services@ AMP’s

The environmental impacts that are brought about by Services@ AMP’s activities include electrical costs, water consumption, and the costs that are incurred from other resources that are used to provide financial services to the company’s clientele. The generation of solid waste (waste paper, kitchen waste, and general waste), wastewater and gas emissions also have a significant impact on the environmental costs of AMP. Electricity, water, food, office stationery, furniture, and equipment are identified as the main inputs used by the company to create commodities or products in the form of financial services while waste paper, kitchen waste, wastewater, gas emissions, and general waste are identified as the outputs that arise from the process of developing the products (KPMG 2002).

These impacts are dealt with by the company’s management accounting system which conducts a high-level analysis of the system to relate the activities undertaken by the company with the environmental costs incurred by the company to manage these environmental impacts. One technique the company uses to manage these impacts is by categorizing the type of spending in the general ledger which might include building maintenance costs, wages, and electrical costs.

The accounting system used by Services @ AMP is able to provide information on the various types of vendor costs as well as the costs for many of the building services paid by the company. The company is also able to pay for office stationery, furniture, equipment, and publication material by charging back the costs of these products to AMP’s cost centers.

Services @ AMP manages the environmental costs of purchasing electricity and water purchases but in some cases, the building manager conducts the procurement of the company’s purchases. The building manager also manages the cleaning contract for Services @ AMP where the contracting company offers services for waste collection and disposal as well as payment of wastewater bills. The company has been able to reduce the number of vendors that it uses for the supply of electrical and water services which is part of the activities it incorporates for managing the environmental impacts of its inputs and outputs.

Changes that can be made to AMP’s Accounting System

Any changes to the environmental management accounting system will mostly be directed towards improving the information that deals with the costs and quantities of goods and services that arise from AMP’s environmental impacts. One change to the management accounting system will involve placing an additional field to the management accounting system so that it can be able to provide more details to the products offered by AMP’s suppliers.

The company was able to conduct a trial of this change by identifying potential vendors within the accounting system who would be able to provide electricity, water, office equipment, stationery (paper), paper recycling, and shredding services. The costs related to these goods and services were consolidated, an exercise that demonstrated office equipment and stationery to account for 71 percent of AMP’s total costs. Creating an additional field would therefore allow the company to identify cost reduction opportunities (KPMG 2002).

Another change to AMP’s accounting system will involve separating the costs charged for waste collection and disposal with those for building and office rent. This will ensure that the system is able to properly track the quantities and costs that are used by these services. These separate charges will ensure that AMP is able to effectively manage waste reduction within the company and also efficiently monitor the recycling activities of the company.

The company was able to conduct an audit into whether these changes would manage waste disposal activities within the company effectively. The results of the audit revealed that the volume of general waste could possibly be reduced to 80 percent if a paper recycling system was implemented within the company. The audit revealed that separating waste collection and disposal costs from the rent incurred by AM would have a direct impact on the environmental costs incurred by the company for these activities (KPMG 2002).

Another change that could be implemented by the company for its accounting system includes separating environmentally-related costs from the single office service charges (SOSC). The ideal situation would be one where cost centers are charged based on the actual environmental costs that arise from electricity, water, and waste environmental impacts on AMP’s environment. However, once the company introduced the SOSC system to minimize administration costs, this option became financially impossible. This change in the current context would however highlight the costs that are incurred by AMP listing them as a separate item in the SOSC charged to the company’s cost centers (KPMG 2002).

Another change that could be adopted by the company is reducing the number of vendors who provide the services that are related to the environmental impacts of the organization. The reduction would ensure that there is some form of transparency within AMP’s accounting system allowing for the addition of fields within the system. AMP was able to conduct a vendor analysis in 2001 that would allow Services @ AMP to select the most suitable vendors for its goods and services. The results of the analysis demonstrated that vendor reduction or rationalization activities presented a significant opportunity for the company to attain operational efficiency and cost reduction in its activities (KPMG 2002).

Relevant Costs for Selected Environmental Inputs and Outputs

The five relevant costs for environmental inputs and outputs for AMP include electricity costs, water costs, newspaper purchase costs, paper recycling, and shredding costs, and office stationery and paper costs. These costs were identified as relevant because they accounted for a large percentage of AMP’s environmental costs. The cost breakdown of each of these items in terms of percentage focuses on the kind of environmental impact.

The items that had the highest costs included office stationery and paper which had a cost breakdown percentage of 71 percent followed by electricity costs which had a percentage of 21 percent. Newspapers, paper recycling, and shredding services used by the company had a breakdown percentage cost of 4 percent and 3 percent respectively. Water had the smallest percentage of AMP’s total costs which amounted to 1 percent (KPMG 2002).

Office stationery and paper had a high breakdown cost percentage because it covered various purchases which included office equipment, food, and catering services, publication materials that will be used to produce journals and brochures to support the marketing activities of AMP, and also furniture purchases. The evaluation of relevant costs revealed that the cost of outputs such as solid waste and wastewater disposals was relatively low when compared to other costs because it accounted for less than 2 percent of the company’s operating expenses (KPMG 2002).

Breakdown of AMP’s Costs

The breakdown of costs for the top fifty items ordered by AMP’s cost centers for a six-month period revealed that compendium and satchel sets accounted for 33 percent of the budget while office paper and stationery accounted for 27 percent of the company’s budget. Staff gifts and incentives which were other items ordered by the company accounted for 20 percent of the expenditure while one-off purchase items accounted for 7 percent. Folders, dividers, and files accounted for 6 percent of the budget while stickers took up 4 percent of the cost. Funds that were set aside for other purchasers accounted for three percent of AMP’s cost budget (KPMG 2002).

Stationery costs were relatively high because of the irregular purchases made because of staff incentives and one-off item purchases. The costs per item also varied significantly between two or more items which meant that quantitative information was needed to determine the potential environmental savings of the company. To reduce the relative costs and environmental impacts associated with stationery items, AMP could establish a baseline that would determine the use of resources and waste management for the organization.

The baseline would enable AMP to monitor any deviations between resource utilization and waste generation minimizing any costs. AMP could also include environmental performance indicators within its management report allowing the company to determine the quantity and prices of products ordered.

Another opportunity that the company can use to reduce costs is to apply the relevant environmental criteria in the compilation of a preferred items list which will be used by the company to determine products that have the highest relative cost. Also using vendor monthly reports will allow management to compare the cost of stationery ordered by the various cost centers of the company so as to identify areas for cost reduction and also a reduction in consumption (KPMG 2002).

Benefits Resulting from the Separation of Costs

A waste audit conducted by the company was able to reveal various benefits that could be accrued by the company if it decided to separate its costs. The audit which was conducted on several floors of the Services @ AMP building revealed several potential benefits that would be useful for the company. The potential benefits that accrue from the separation of costs for AMP’s environmental inputs and outputs are the reduction of general waste which will go down by 80 percent in volume if the company adopts a recycling program and a reduction in kitchen waste by up to 65 percent in volume if a recycling program is introduced in AMP.

In the case of office stationery, the company will be able to accrue some benefits by recycling waste paper into office paper and also placing recycling bins in all AMP offices. The company will also be able to experience a 48 percent reduction in other recyclables and wastewater incurred by the company during the course of its operations. Recycling of waste paper will also enable the company to experience a 5 percent reduction in the number of costs that would be used to purchase office paper.

The waste audit also revealed that AMP had a reduction potential of 33 percent for its general waste meaning that the company could save thousands of dollars on waste management activities. The audit also revealed that copying double-sided papers and also reusing single-sided papers would save the company approximately $177,800 in expenses on a yearly basis compared to when single-sided papers were used and disposed of (KPMG 2002).

References

KPMG (2002) Environmental management accounting: a case study for AMP. Victoria, Australia: Institute of Chartered Accountants in Australia.

Langfield-Smith, K. (2009) Management Accounting: Information for Managing and Creating Value, 5th Edition. New Jersey: McGraw Hill.

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