Cost Management Measuring, Monitoring, and Motivating Performance

1. Cost Management Measuring, Monitoring, and Motivating Performance Chapter 17 Sustainability Accounting Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

2. Chapter 17: Sustainability Accounting Learning objectives • Q1: What are sustainability and sustainable management? • Q2: What are sustainability accounting, sustainability management accounting, and sustainability reporting? • Q3: What are the motivations and frameworks for external sustainability reporting? • Q4: What management accounting tools are useful for sustainability management and reporting? Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

3. Q1:Sustainability and Sustainable Management • Sustainability is defined as “activities and approaches that maintain or increase added value without creating long-term threats to economic environment or social systems.” • Sustainable management is “the ability to direct an organization in ways that restore and enhance all forms of capital to generate shareholder value and contribute to the well-being of current and future generations.” Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

4. Organizational Vision Organizational Strategies Operating Plans Actual Operations Core Competencies Q1: Overview of Strategic Management Process Measure, Monitor, and Motivate Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

5. Organizational Vision Organizational Strategies Operating Plans Actual Operations Core Competencies Q1: Overview of Strategic Management Process Sustainable Management involves addressing sustainability issues in each aspect of the strategic management process. Triple bottom line: Economic, Environmental, and Social Measure, Monitor, and Motivate Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

6. Q1: Sustainability and Levers of Control Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

7. Q2:Sustainability Accounting • Sustainability accounting is the systematic recording, reporting, and analysis of quantitative and qualitative information about sustainable management practices and performance. • Sustainability management accounting involves activities to assist in the sustainable management process including: • designing business processes • budgeting and forecasting • implementing and monitoring internal controls Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

8. Q2: Sustainability Reporting Internal Reporting External Reporting Distributed outside the company to various stakeholder groups Reports may be required Compliance reports for laws such as minimum wage or pollution levels May be voluntary and unregulated • Provides information for sustainability management decisions to support the strategic management process • Some issued regularly (monthly worker injuries or volumes of waste) • Others issued for one time use Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 1e

9. Q2: Sustainability Reporting Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 1e

10. Q3: External Reporting Motivations Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

11. Q3: Greenwashing? • Greenwashing is when companies appear to spend significant resources on publicity about being environmentally friendly without making substantive changes in their environmental impact. • Watch for: • Misleading words, visuals, and graphics • Vague and unproven green claims • Overstated or exaggerated environmental claims • Omitted or masked information to divert attention from environmentally damaging aspects Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

12. Q3: Frameworks and Guidelines for Reporting • Global Reporting Initiative (GRI) • Framework for disclosure on economic, environmental, and social performance • 77% of FIRMS in KPMG 2008 study uses GRI reporting guidelines • ISO 26000 – Guidance for Social Responsibility • Will be released in 2010 • Provides principles for sustainability reporting, guidance for several major reporting areas, and recommendations for implementation Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

13. Q4: Sustainability Management Accounting Tools • When fully integrated into an organization, sustainable management affects everything the organization does. • Examples include: • Qualitative and quantitative information used in decision making must also include environmental and social considerations • Must recognize and measure the social and environmental costs in the accounting system • More stakeholder groups need to be considered • Sustainability is incorporated into all control systems Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

14. Q4: Relevant Costs for Decision Making • Sustainability costs are often overlooked by traditional management accounting systems • Timing of environmental and social responsibility costs often lag the related decision • Five levels of sustainability costs • Conventional Costs • Hidden Costs • Contingent Costs • Image and Relationship Costs • Externalities Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

15. Q4: Material Flow Accounting • Material Flow Accounting (input output analysis) is the process of analyzing the movement of all physical materials through an organization’s operations • Inputs include: • Direct and indirect manufacturing materials • All forms of energy • Outputs include: • Products • Waste • Emissions Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

16. Q4: Material Flow Cost Accounting • Material Flow Cost Accounting is the process of analyzing and tracking the physical units and costs of materials and energies through a manufacturing process • Similar to process costing (Chpt 6) • Costs are assigned separately to waste and emissions (similar to abnormal spoilage) • Practice avoids burying the costs of waste • All wasted materials are treated as negative product Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

17. Q4: Sustainability Life Cycle Costing • Life cycle costing involves summing the costs of these activities throughout both internal and external value chains Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 2e

18. Q4: Sustainability and Capital Budgeting • Incremental Operating Cash flows are often impacted by sustainable management initiatives • These cash flows must be included in capital budgeting decisions • Waste and Emission Treatment • Prevention and Environmental Management • Non-Product Output • Material Purchase • Processing Costs • Environmental Revenues • Image Benefits and Costs Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 1e

19. Q4: Sustainability Balanced Scorecard • Assuming sustainable management is integrated into the strategic management process, then sustainability should be implemented into the balanced scorecard • Three possible ways to integrate sustainability: • Integrate into the traditional four perspectives • Add a sustainability perspective to the scorecard • Create a separate sustainability balanced scorecard Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 1e

20. Future of Sustainability Reporting • Integration with Annual Reports • Stakeholder Dialogue • Linked to Strategy, with Targets/Goals • Process and Product Innovation • Less Focus on Business Case • Larger Audience • Global Standards with Assurance Susan K. Wolcott, wolcott@WolcottLynch.com, AAA CPE Workshop, August 1, 2010 Chapter 17: Sustainability Accounting Eldenburg & Wolcott’s Cost Management, 1e