---

03-88226.qxd 04/11/2003 17:21 Page 1
PRODUCTIVITY, VIABILITY AND IMPROVED ENVIRONMENTAL PERFORMANCE
Introducing
Environmental Management Accounting (EMA)
At Enterprise Level
Methodology
And
Case Studies From Central and Eastern Europe
A contribution of the UNIDO project
"Transfer of Environmentally Sound Technology (TEST)
in the Danube River Basin"

---

03-88226.qxd 04/11/2003 17:21 Page 2
The designations employed and the presentation of material in this publication do not
imply the expression of any opinion whatsoever on the part of the Secretariat of the
United Nations Industrial Development Organization concerning the legal status of any
country, territory, city or area, or of its authorities, or concerning the delimitation of its
frontiers or boundaries. The opinions, figures and estimates set forth are the responsi-
bility of the authors and should not necessarily be considered as reflecting the views or
carrying the endorsement of UNIDO. The designations "developed" and "developing"
economies are intended for statistical convenience and do not necessarily express a judg-
ment about the stage reached by a particular country or area in the development process.
Mention of firm names or commercial products does not imply endorsement by UNIDO.
CONTACT DETAILS:
Roberta De Palma, email: rdepalma@unido.org
Maria Csutora, email: csutora@enviro.bke.hu

---

03-88226.qxd 04/11/2003 17:21 Page iii
FOREWORD
In the Millennium Declaration of 2000, the
United Nations General Assembly asserted that
current unsustainable patterns of production and
consumption had to be changed, and that no
effort should be spared to free all of humanity,
particularly future generations, from the threat of
living on a planet irredeemably spoilt by human
activities, and whose resources would no longer
be sufficient for their needs. They codified this in
the Seventh Millennium Development Goal of
Ensuring Environmental Sustainability.
In their Plan of Implementation, the delegates to the World Summit on
Sustainable Development of 2002 reaffirmed the necessity for sustainable
patterns of consumption and production, calling inter alia for an enhance-
ment of industrial productivity and competitiveness as well as an inten-
sification of efforts in cleaner production and the transfer of
environmentally sound technologies.
The UNIDO Corporate Strategy responds to these challenges, affirming
that for development to be sustainable environmental concerns must be
systematically incorporated into the paradigms of economic development.
This way the achievement of high levels of productivity in the use of nat-
ural resources becomes a central concern both in the developing coun-
tries as well as in the advanced industrial nations. As stated in the Strategy,
"in the process of industrialization there has to be a shift from end-of-
pipe pollution control to the use of new and advanced technologies which
are more efficient in the use of energy and materials and produce less pol-
lution and waste; and finally to the adoption of fundamental changes in
both production design and technology represented by the concept of
`natural capitalism' and the `cradle-to-cradle' approach."
iii

---

03-88226.qxd 04/11/2003 17:21 Page iv
Introducing Environmental Management Accounting at Enterprise Level
This Series on Productivity, Viability and Improved Environmental Performance
has been conceived as one of UNIDO's tools to promote the message that
increased levels of productivity by enterprises in their use of natural
resources enhances their environmental performance while assuring them
a greater viability when affronting the challenges of the future. In par-
ticular, this volume "Introducing Environmental Management Accounting
at Enterprise Level" presents the experience gained in the application of
environmental management accounting (EMA) as a valuable tool to assist
the corporate and organisational managers, accountants and engineers of
the developing and transitional countries, in understanding how
environmental issues influence accounting business practices.
Carlos Magarińos
Director-General
iv

---

03-88226.qxd 04/11/2003 17:21 Page v
NOTES ON THE AUTHORS
Roberta De Palma is an industrial engineer with a specialization in Cleaner
Technology. She has worked for UNIDO since 1998, and has been respon-
sible for the implementation of various technical cooperation programmes
in the field of industrial environmental management and transfer of envi-
ronmentally sound technologies. Since 2001, Ms. De Palma has been the
Programme Manager of the UNIDO TEST project in five countries of the
Danube River Basin, developing an innovative approach to integrate indus-
trial competitiveness with environmental responsibility--a methodology
that includes the introduction of Environmental Management Accounting
(EMA) as a management tool. She is the designer of the conceptual frame-
work of this publication and co-author of the introductory and method-
ology chapters, being also responsible for reviewing and assembling the
four EMA case studies presented in this document.
Maria Csutora is an associate professor at the Budapest University of
Economic Sciences and Public Administration. She was Vice-Director of
the Hungarian Cleaner Production Centre between 1997-2001 and taught
environmental accounting at the Rochester Institute of Technology
between 1998-1992. She is member of the United Nations Division for
Sustainable Development (UNDSD) expert working group on environ-
mental management accounting and Environmental Management
Accounting Network (EMAN). She has collaborated with UNIDO within
the framework of the TEST project, providing methodological inputs and
practical assistance to local teams during the implementation of EMA sys-
tems at enterprise level and the preparation of the case studies.
v

---

03-88226.qxd 04/11/2003 17:21 Page vi

---

03-88226.qxd 04/11/2003 17:21 Page vii
ACKNOWLEDGEMENTS
The authors would like to thank a large number of people and organiza-
tions that contributed to the success of this publication. First of all the
Global Environment Facility (GEF) as the main source of funding, the gov-
ernments of Hungary and the Czech Republic, and the United Nations
Industrial Development Organization (UNIDO) which provided valuable
co-financing, for the TEST project (Transfer of Environmentally Sound
Technology in the Danube River Basin) under which the EMA was intro-
duced in pilot companies.
We would especially like to thank Mr. Zoltan Csizer, Special Adviser
Programme Development and Technical Cooperation Division--UNIDO,
and Mr. Pablo Huidobro, Chief of the Water Management Unit--UNIDO
for their guidance and support to our work.
Special thanks are due to Mr. Andrea Merla of the GEF Secreteriat for his
support during the project formulation phase, and to Mr. Andrew Hudson,
of UNDP-GEF for his guidance during all phases of the project.
Many thanks to the GEF implementing agency, the United Nations
Development Programme (UNDP), and the TEST project national coun-
terparts that coordinated the efforts of local consultants and organized
the assistance provided to the participating companies within the EMA
project: the Hungarian Cleaner Production Centre for organizing all the
training seminars, namely Sandor Kerekes director and Gyula Zilahy exec-
utive director; Beáta Borsos who was responsible for all the logistics and
Krisztina Bársonyi; Maura Teodorescu, director of international department
and Lucian Constantin from the Institute for Industrial Ecology (ECOIND)
in Romania; Morana Belamaric, programme manager from the Croatian
Cleaner Production Centre and Viera Fecková, director, and Jana Balesova,
programme manager from the Slovak Cleaner Production Centre.
The project could not have succeeded without the conscientious work of
company representatives and national consultants: Katica Blaskovi´c,
vii

---

03-88226.qxd 04/11/2003 17:21 Page viii
Introducing Environmental Management Accounting at Enterprise Level
Andreja Feruh, Darko Kobal, Ivan Smol vci´c, Vlatko Zaimovi´c from HERBOS;
Boris Bjedov consultant; Adrian Timar chief accountant at SOMES¸, Maria
B vac varan SOME ¸S Technical Department; Mihai Svasta and Oana Tortolea
consultants; Madarászné Ágnes Kajdacsy, environmental manager, Bóta
Györgyi, chief controller and Horváth Zsuzsa, plant engineer from
Nitrokémia 2000; Helena Malisová, accountant Kappa Sturovo and Michael
Hrapko consultant.
We extend our gratitude to Mr. Huidobro and Mr. Edward Clarence-Smith,
Senior Technical Adviser of UNIDO, who provided useful technical and
editorial inputs on the early drafts of this publication.
Finally, we would like to thank the English editor, Ms. Kathy Pritchard.
Full responsibility for the content of this material, including any errors
stays nevertheless with the editors of this material.
viii

---

03-88226.qxd 04/11/2003 17:21 Page ix
CONTENTS
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iii
Notes on the authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
v
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
vii
Explanatory notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
INTRODUCTION
UNIDO TEST Programme in Central and Eastern European (CEE)
Countries and the TEST Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
PART I. ENVIRONMENTAL MANAGEMENT ACCOUNTING
ENVIRONMENTAL MANAGEMENT ACCOUNTING . . . . . . . . . . . . . .
7
A.
Definition: What is EMA? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
B.
Why should companies use environmental accounting? . . . .
7
C.
Integration of EMA with other environmental
management tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
D.
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
PART II. THE METHODOLOGY
THE METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
A.
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
B.
Implementing the EMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
PART III. CASE STUDIES
CASE STUDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
A.
Introducing EMA in CEE countries: the experience
of the TEST project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
B.
Use of EMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
C.
Further application of EMA in CEE: barriers
and challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
ix

---

03-88226.qxd 04/11/2003 17:21 Page x
CASE STUDY 1: NITROKÉMIA 2000, HUNGARY . . . . . . . . . . . . . . . . .
39
A.
Brief description of the company . . . . . . . . . . . . . . . . . . . . . . .
39
B.
Scoping EMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
C.
Calculation of environmental costs and allocation method .
47
D.
Findings and suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
E.
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
CASE STUDY 2: SOMES¸ S.A., ROMANIA . . . . . . . . . . . . . . . . . . . . . . .
57
A.
Brief Description of the company . . . . . . . . . . . . . . . . . . . . . . .
57
B.
Scoping EMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
C.
Calculation of environmental costs, allocation keys
and information system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
D.
Allocation of environmental costs to cost centre and
to products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67
E.
Total environmental costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
F.
Sensitivity analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
G.
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
CASE STUDY 3: HERBOS D.D. CROATIA . . . . . . . . . . . . . . . . . . . . . . .
77
A.
Brief description of the company . . . . . . . . . . . . . . . . . . . . . . .
77
B.
Scoping EMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79
C. Calculation and allocation of environmental
protection costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
D. Allocation process and Information system for EMA . . . . . . .
86
E.
Results and conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88
CASE STUDY 4: KAPPA STUROVO, SLOVAKIA . . . . . . . . . . . . . . . . . .
91
A.
Description of the company . . . . . . . . . . . . . . . . . . . . . . . . . . .
91
B.
Scoping EMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97
C.
Calculation of environmental costs and information system .
97
D
Results of the EMA project . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
E.
EMA and investment decision on EST . . . . . . . . . . . . . . . . . . . 105
F.
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
G.
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
x

---

03-88226.qxd 04/11/2003 17:21 Page xi
Figures
I. Comparative Short-Term Normative and Actual
Product-Based Environmental Costs . . . . . . . . . . . . . . . . . . . . . . .
25
II. Phthalimide, Fumaric Acid and Ferrous Fumarate Production at
Nitrokémia 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
III. Nitrokémia 2000 Product Environmental Costs--Before
EMA and after EMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
IV. Effects of Implemented CP Measures at SOMES¸: Reduction of
Chemicals and Water Specific Consumption . . . . . . . . . . . . . . .
59
V. SOMES¸ Production Cost Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
VI. SOMES¸ Product Cost Structure: Bleached Pulp . . . . . . . . . . . . . .
69
VII. SOMES¸ Non-Product Cost Structure: Bleached Pulp . . . . . . . . . .
70
VIII. Sensitivity Analysis: Wood versus Pulp and
Non-product Costs--SOMES¸ . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
IX. Breakdown of Atrazine Product Costs--HERBOS . . . . . . . . . . . . .
89
X. Production of Fluting Flowsheet--Kappa . . . . . . . . . . . . . . . . . . .
92
XI. Production of Cardboard Flowsheet--Kappa . . . . . . . . . . . . . . . .
93
XII. Kappa--Environmental Costs Chart--Beginning vs. End
of Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Tables
1. Environmental Cost Categories . . . . . . . . . . . . . . . . . . . . . . . . . .
9
2. Relationship between Non-Product Output Costs, Calculation
Methods and Cost Controllability . . . . . . . . . . . . . . . . . . . . . . . .
27
3. Impact of the UNIDO TEST EMA Project on Nitrokémia 2000
Accounting System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
4. Depreciation of Phthalimide, Fumaric Acid and Ferrous Fumarate
Production Equipment at Nitrokémia 2000 . . . . . . . . . . . . . . . . .
48
5. Raw Material Costs vs. Total Production Costs of Major
Products--Nitrokémia 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
6. Environmental Costs per tone of Fumaric Acid,
Ferrous Fumarate and Phthalimide at Nitrokémia 2000 . . . . . . .
51
7. Absorption Costing at SOMES¸ . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
8. Management Accounting System Allocations at SOMES¸ . . . . . .
62
9. SOMES¸ WWTP Cost Allocation Comparison--
Before vs. After EMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
10. SOMES¸ Cost Structure of the Bleaching Unit . . . . . . . . . . . . . . .
67
11. SOMES¸ Treatment Cost Structure--Bleaching Unit . . . . . . . . . . .
68
xi

---

03-88226.qxd 04/11/2003 17:21 Page xii
12.
SOMES¸ Product Cost Structure--Bleached Pulp . . . . . . . . . . . . . .
68
13.
SOMES¸ Breakdown of Treatment Costs for Bleached Pulp . . . . .
69
14.
SOMES¸ Environmental Profit/Loss--March 2003 . . . . . . . . . . . . .
71
15.
Non-Product Output Costs Compared to Environmental
Treatment Costs For Each Product--SOMES¸ . . . . . . . . . . . . . . . .
74
16.
Cost Centres with Environmental Costs/Revenues--HERBOS . .
79
17.
Breakdown of Industrial Water Costs in 2001--HERBOS . . . . . .
80
18.
Total Environmental Protection Costs in 2001--HERBOS . . . . .
82
19.
Raw Material Losses in Atrazine Production--HERBOS . . . . . . .
85
20.
EMA Information System--HERBOS . . . . . . . . . . . . . . . . . . . . . . .
87
21.
Atrazine Plant Environmental Costs--HERBOS . . . . . . . . . . . . . .
88
22.
Kappa--Accounting System For Environmental Costs . . . . . . . .
96
23.
Kappa--Environmental Equipment, Organization Section . . . . . 100
24
Kappa--Account Codes Where Expenditures for Environmental
Service Could Be Found . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
25.
Kappa 2001--Total Environmental Costs by Category . . . . . . . . 104
26.
Kappa 2001--Environmental Costs Structure . . . . . . . . . . . . . . . 104
27.
Kappa--NSSC Pulp Washing Project Assumptions and
Projected Annual Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
28.
Kappa--NSSC Pulp Washing Project Financial Indicators . . . . . 107
29.
Kappa--Green Liquor Project Assumptions and Projected
Annual Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
30.
Kappa--Green Liquor Project Financial Indicators . . . . . . . . . . . 108
xii

---

03-88226.qxd 04/11/2003 17:21 Page xiii
EXPLANATORY NOTES
ABC
Activity Based Costing
Al O
Aluminium Oxide
2
3
ASPEK
Association for Industrial Ecology
BAT
Best Available Technology
BDtpd
Bone-dry tons per day
BOD
Biological Oxygen Demand
CC
Cost Centres
CEE
Central and Eastern European countries
COD
Chemical Oxygen Demand
COMFAR
UNIDO Accounting Software
(http://www.unido.org/doc/3470)
CP
Cleaner Production
CPA
Cleaner Production Assessment
ECOIND
Institute for Industrial Ecology (Romania)
EM
Environmental Management
EMA
Environmental Management Accounting
EMAN
Environmental Management Accounting Network
EMS
Environmental Management System
End-of-Pipe
Pollution treatment or abatement technology
EPA
U.S. Environmental Protection Agency
EST
Environmentally Sound Technologies
EU
European Union
euro
European Union Currency
EUROSTAT
European Statistics Organization
GEF
Global Environment Facility
HERBOS
Chemical producer (mainly pest control products)
based in Croatia
HTS
Hygienic and Technical Safety
HUF
Hungarian Forint (1 HUF = 0.003881 euro)1
IAS
International Accounting Standards
1
Conversion as of 22 August, 2003. For current rates see www.oanda.com/convert/classic.
xiii

---

03-88226.qxd 04/11/2003 17:21 Page xiv
Introducing Environmental Management Accounting at Enterprise Level
ICPDR
International Commission for the Protection of the
Danube River (www.icpdr.org)
IDs
Identification numbers
ISO 14001
International Standards Organization--
Environmental Management System Standard
IRR
Internal Rate of Return
KAPPA STUROVO
Pulp and paper plant in Slovakia
HRK
Croatian Kunas Currency as of May 2001 (1 HRK
is approximately 0.139 euro)
MFG/PRO
Software for accounting purposes
NCPC
National Cleaner Production Centre
NITROKÉMIA 2000 Chemical producer in Hungary
NGO
Non-Governmental Organization
NPV
Net Present Value
NSSC
Neutral Sulphite Semi-Chemical
PBP
Pay Back Period
PR
Public Relations
PSA
Anhydrous phthalic acid
RAS
Romanian Accounting Standard
SSK
Slovak Crown (1 euro is approximately 41 SKK)1
SAP/R3
Business application software (www.sap.com)
SO
Sulphur Dioxide
2
SOMES¸
Romanian Plant, Member of the HOVIS Group pro-
ducing sulphate pulp (kraft) and wrapping paper
TEST
Transfer of Environmentally Sound Technology
UNCED
United Nations Conference on Environment and
Development
UNDS
Uniform National Discharge Standards
UNDSD
United Nations Division for Sustainable
Development
UNDP
United Nations Development Programme
(www.undp.org)
UNEP
United Nations Environment Programme
(www.unep.org)
UNIDO
United Nations Industrial Development
Organization (www.unido.org)
USD
United States Currency
(1 USD is approximately 0.893 euro)1
WWTP
Waste Water Treatment Plant
xiv

---

03-88226.qxd 04/11/2003 17:21 Page xv
INTRODUCTION

---

03-88226.qxd 04/11/2003 17:21 Page xvi

---

03-88226.qxd 04/11/2003 17:21 Page 3
UNIDO TEST PROGRAMME IN CENTRAL
AND EASTERN EUROPEAN (CEE)
COUNTRIES AND THE TEST APPROACH
The United Nations Industrial Development Organization (UNIDO) has
developed a programme designed to promote competitiveness and effec-
tive environmental performance in the industrial sector by supporting the
adoption and Transfer of Environmentally Sound Technology (TEST) and
incorporation of Environmental Management Accounting (EMA) in an
enterprise's decision-making process. With these programmes companies
will finally be able to review all the factors affecting competitiveness,
including the effect of environmental choices, and make better-informed
business decisions based on more accurate data. This new initiative, fund-
ed by the Global Environmental Facility (GEF) and developed within the
framework of the Danube River Basin Commission (ICPDR),2 was launched
in April 2001 in five Danubian countries (Bulgaria, Croatia, Hungary,
Romania and Slovakia).
Seventeen industrial hot spots of the Danube river basin, representing five
different industrial sectors (chemical, food, machinery, textile, pulp and
paper), were selected and pilot projects were set-up to implement the new
integrated TEST approach to industrial environmental management.
As a result of the TEST project's success, their national counterparts have
implemented the TEST approach and programme3 so that they can, in turn,
pass on the acquired expertise to other enterprises and institutions in their
own countries and throughout the Danube River Basin. These national
counterparts include the UNIDO-UNEP Cleaner Production Centres in
Hungary, Slovakia and Croatia, the Institute for Industrial Ecology
(ECOIND) in Romania and the Technical University of Sofia in Bulgaria.
2
www.icpdr.org.
3
R. De Palma and V. Dobes, Increasing Productivity and Environmental Performance:
An Integrated Approach--Know-How and Experience from the UNIDO TEST project
in the Danube River Basin, UNIDO.
3

---

03-88226.qxd 04/11/2003 17:21 Page 4
Introducing Environmental Management Accounting at Enterprise Level
The TEST approach starts with a preventative philosophy of cleaner pro-
duction, (preventative actions based on pollution prevention techniques
within the production process) and moves into the transfer of additional
technologies for pollution control (end-of-pipe) only after other win-win
solutions have been exhausted. This leads to environmental and economic
optimisation of the transferred technologies.
TEST builds on company strategies of corporate sustainability. The imple-
mentation of these strategies is based on the introduction of different tools,
each of which will increase the enterprise's competitiveness. With better
management of existing processes and the integration of environmental
considerations into new investment decision-making, enterprises will
become more competitive. One of the core tools introduced within the
TEST approach is Environmental Management Accounting (EMA). EMA
will bring competitive advantages to the company in terms of better under-
standing and control of production costs, particularly environmental costs.
The TEST approach is a methodology designed to simultaneously com-
bine the introduction of management tools like EMA, Clean Production
Assessment (CPA) and EMS under one programme. The method demon-
strates how combining these tools within an integrated framework will
result in reaching positive synergies and better results.
The aim of this publication is to present the experience that was gained
during the implementation of the EMA tool at selected enterprises within
the framework of the UNIDO-TEST project in the Danube River Basin. It is
meant to assist the corporate and organizational managers, accountants
and engineers of the developing and transitional countries, in understand-
ing how environmental issues influence accounting business practices.
The publication is organized into three parts. In the first, it clearly and con-
cisely describes the principals behind EMA and the linkages between busi-
ness management and other environmental management tools. The second
part outlines the methodology used during the practical implementation of
EMA systems at the companies participating in the project. The third and
last part presents a detailed description of four case studies, which provide
practical advice on how to successfully integrate EMA systems into business
operations. The case studies are presented in this publication in chronolog-
ical order of completion within the framework of the TEST project.
4

---

03-88226.qxd 04/11/2003 17:21 Page 5
PART I
ENVIRONMENTAL MANAGEMENT
ACCOUNTING

---

03-88226.qxd 04/11/2003 17:21 Page 6

---

03-88226.qxd 04/11/2003 17:21 Page 7
ENVIRONMENTAL MANAGEMENT ACCOUNTING
A. Definition: What is EMA?
Monetary environmental management accounting is a sub-system of envi-
ronmental accounting that deals only with the financial impacts of envi-
ronmental performance. It allows management to better evaluate the
monetary aspects of products and projects when making business decisions.
"`EMA' serves business managers in making capital investment decisions,
costing determinations, process/product design decisions, performance
evaluation and a host of other forward-looking business decisions."4 Thus,
EMA has an internal company-level function and focus, as opposed to
being a tool used for reporting environmental costs to external stake-
holders. It is not bound by strict rules as is financial accounting and allows
space for taking into consideration the special conditions and needs of
the company concerned.
B. Why should companies use environmental accounting?
Companies and managers usually believe that environmental costs are not
significant to the operation of their businesses. However, often it does not
occur to them that some production costs have an environmental com-
ponent. For instance, the purchase price of raw materials: the unused por-
tion that is emitted in a waste is not usually considered an
environmentally related cost. These costs tend to be much higher than
initial estimates (when estimates are even performed) and should be con-
trolled and minimised by the introduction of effective cleaner production
initiatives whenever possible. By identifying and controlling environ-
mental costs, EMA systems can help environmental managers justify these
cleaner production projects, and identify new ways of saving money and
improving environmental performance at the same time.
4
UNDSD: Improving Government's Role in the Promotion of Environmental Managerial
Accounting, United Nations, New York, 2000, p. 39.
7

---

03-88226.qxd 04/11/2003 17:21 Page 8
Introducing Environmental Management Accounting at Enterprise Level
The systematic use of EMA principles will assist managers in identifying
environmental costs often hidden in a general accounting system. When
hidden, it is impossible to know what share of the costs is related to any
particular product or process or is actually environmental. Without the
ability to isolate and separate this portion of the overall cost from that
of production, product pricing will not reflect the true costs of its pro-
duction. Polluting products will appear more profitable than they actual-
ly are because some of their production costs are hidden, and they may
be sold under priced. Cleaner products that bear some of the environ-
mental costs of more polluting products (through the overhead), may have
their profitability underestimated and be over priced. Since product prices
influence demand, the perceived lower price of polluting products main-
tains their demand and encourages companies to continue their produc-
tion, perhaps even over that of a less polluting product.
Finally, implementing environmental accounting will multiply the bene-
fits gained from other environmental management tools. Besides the
cleaner production assessment, EMA is very useful for example in evalu-
ating the significance of environmental aspects and impacts and priori-
tising potential action plans during the implementation and operation an
environmental management system (EMS). EMA also relies significantly
on physical environmental information. It therefore requires a close co-
operation between the environmental manager and the management
accountant and results in an increased awareness of each other's concerns
and needs.
As a tool, EMA can be used for sound product, process or investment pro-
ject decision-making. Thus, an EMA information system will enable busi-
nesses to better evaluate the economic impacts of the environmental
performance of their businesses.
1. Product/process related decision-making
Correct costing of products is a pre-condition for making sound business
decisions. Accurate product pricing is needed for strategic decisions regard-
ing the volume and choices of products to be produced. EMA converts
many environmental overhead costs into direct costs and allocates them
to the products that are responsible for their incurrence.
8

---

03-88226.qxd 04/11/2003 17:21 Page 9
Part I Environmental Management Accounting
The results of improved costing by EMA may include:
Different pricing of products as a result of re-calculated costs;
Re-evaluation of the profit margins of products;
Phasing-out certain products when the change is dramatic;
Re-designing processes or products in order to reduce environmental
costs;
Improved housekeeping and monitoring of environmental perform-
ance.
Table 1 summarizes the main environmental cost categories5 found in
business.
Table 1. Environmental Cost Categories
Environmental Cost/Expenditure Categories
1
2
3
4
5
Waste and
Prevention and
Material Purchase Processing Costs
Emission
Environmental
Value of
of Non-Product
Environmental
Treatment
Management
Non-Product Output
Output
Revenues
1.1 Depreciation
2.1 External 3.1 Raw
materials 4.1 Labour
costs 5.1
Subsidies,
for related
services for
Awards
equipment
environmental
management
1.2 Maintenance
2.2 Personnel for 3.2 Packaging
4.2 Energy costs 5.2
Other
and operating
general
earnings
materials and
environmental
services
management
activities
1.3 Related
2.3 Research and 3.3 Auxiliary
Personnel
Development
materials
1.4 Fees, Taxes,
2.4 Extra
3.4 Operating
Charges
expenditure
materials
for cleaner
technologies
1.5 Fines and
2.5 Other
3.5 Energy
penalties
environmental
management
costs
1.6 Insurance for
3.6 Water
environmental
liabilities
1.7 Provisions for
clean-up costs,
remediation
5
UNDSD: "Environmental Management Accounting, Procedures and Principles", United
Nations, New York, 2001, p. 19.
9

---

03-88226.qxd 04/11/2003 17:21 Page 10
Introducing Environmental Management Accounting at Enterprise Level
The purchase value of materials and processing costs of non-product out-
puts play an important role in EMA. They include the cost for buying and
processing that portion of production inputs that goes into the waste or
is discarded as scrap such as raw materials, auxiliary materials or water,
energy and the labour cost of processing. These costs are often on an aver-
age ten to twelve times greater than the waste and emissions treatment
costs.6 Savings associated with this category of environmental costs into
project evaluations will make a larger number of cleaner production pro-
jects more profitable.
2. Investment projects and decision-making
Investment project decision-making requires the calculation of different
profitability indicators like net present value (NPV), payback periods (PBP)
and internal rates of return (IRR) or benefit-cost ratios. Recognizing and
quantifying environmental costs and benefits is both invaluable and nec-
essary for calculating the profitability of environment-related projects.
Without these calculations, management may arrive at a false and costly
conclusion.
Companies should take into account hidden, contingent and image costs
for project appraisals. The costs recorded in bookkeeping by convention-
al accounting systems are insufficient to provide an accurate projection
of the profitability and risks of an investment. Many cost items that may
arise from long-term operations or projects must be included in the pro-
ject appraisal. These environmental costs have been grouped into five cat-
egories7 as follows:
Raw materials, utilities, labour and capital costs are conventional costs
always considered in project appraisals and cost accounting, however
the environmental portion of these costs, e.g. non-product raw mate-
rial costs, are not isolated and recognized as environmental.
Administrative costs buried in the overhead costs and hidden.
Examples include monitoring, reporting or training costs.
6
Evaluation of cleaner production projects implemented in 46 enterprises in the Czech
Republic--Czech Cleaner Production Centre: Annual Report 1996, Czech Cleaner
Production Centre, Prague, 1997.
7
An introduction to Environmental Accounting As A Business Management Tool: Key
Concepts And Terms, EPA 742-R-95-001, June 1995, pp. 8-11.
10

---

03-88226.qxd 04/11/2003 17:21 Page 11
Part I Environmental Management Accounting
Contingency costs that may or may not be incurred in the future,
such as potential clean-up costs from an accident, compensations or
fines: the inherent difficulty in predicting their likelihood, magnitude
or timing often results in their omission from the costing process.
However, these costs very often represent a major business risk for the
company.
Image benefits and costs, often called intangible or "good-will" bene-
fits and costs, arise from the improved or impaired perception of stake-
holders (environmentalists, regulators, customers, etc.). Changes in
these intangible benefits are often not felt until they are impaired. For
example, a bad relationship with regulators may result in prolonged
licensing process or stricter monitoring.
External costs represent a cost to external stakeholders (communities,
customers, etc.) rather than to the company itself. Most accountants agree
that these costs should not be taken directly into account when making
project decisions. The company should be aware, however, that high
levels of external costs may eventually become internalized through
stricter environmental regulation, taxes or fees. A good example of this
type of cost would be costs of environmental degradation (through "acid
rain"), due to sulphur dioxide (SO ) pollution, which later standards
2
strictly regulating SO emissions would internalize, as the costs of
2
purchasing and operating a scrubbing and neutralizing system.
A profitability analysis should be done using appropriate time-lines and
indicators that do not discriminate against long-term savings and bene-
fits. Net present value and benefit cost ratios are suggested as better invest-
ment criteria than simple paybacks or internal rates of return to reflect
real costs and benefits. An accurate analysis of the investment's sensitiv-
ity to environmental costs should also be carried out, which takes into
consideration the impact of input price changes and future changes in
the regulatory regime (fees, fines and penalties). Different scenarios can
be examined, also evaluating contingency and external environmental costs
reflecting the joint impact of changing several variables at the same time.
Thus, EMA is an important tool for integration of environmental consid-
erations into financial appraisals and decision-making for new investments:
environmentally friendly investments will show increased profitability in
the long term if all these factors are included in the model.
11

---

03-88226.qxd 04/11/2003 17:21 Page 12
Introducing Environmental Management Accounting at Enterprise Level
C.
Integration of EMA with other environmental
management tools
Environmental accounting will produce the most benefits when it is inte-
grated with other environmental management tools. In particular, EMA
will increase the advantages that a company can gain through the imple-
mentation of EMS. Linking EMA with cleaner production and environ-
mental reporting show the financial gain which can be achieved by
applying these tools, since contingent liabilities represent major environ-
mental, business and financial risks for companies. EMA is a good sup-
plement for risk management programmes as well.
The TEST project has the major advantage of applying different tools with-
in an integrated framework. Below is a brief discussion on how the dif-
ferent tools support each other and can be integrated with EMA.
1. Environmental Management Systems (EMS) according
to the ISO standard
The ISO14001 standard requires the evaluation of environmental aspects
during the planning phase of the environmental management system. In
ISO 14001 environmental aspects are "elements of an organization's activ-
ities, products and services that can interact with the environment."8 The
company shall:
Identify the aspects which have an impact on the environment and
Assign a level of significance to each environmental aspect
"When establishing and reviewing its objectives, an organization shall
consider the legal and other requirements, its significant environmental
aspects, its technological options and its financial, operational and busi-
ness requirements, and the views of interested parties".9
8
ISO 14004: 1996 Environmental management systems--general guidelines on princi-
ples, systems and supporting techniques, normative references, p. 2.
9
ISO 14001: 1996 Environmental management systems specification with guidance for
use, section 4.3.3.
12

---

03-88226.qxd 04/11/2003 17:21 Page 13
Part I Environmental Management Accounting
Experience shows that financial implications play a very important role in
companies decisions about significant environmental aspects they choose
to tackle first. Measures that will bring higher savings will most likely be
implemented first. By clarifying the environmental cost structure of a
process or of a product, EMA will allow managers to have an accurate
understanding of where to focus to make processes more cost efficient.
When EMA is in place, environmental costs are calculated and traced back
to the source of their generation within the production process. In this
way, environmental costs can be associated to specific environmental
aspects, and can provide additional quantitative criteria for the setting of
priorities, targets and objectives within an EMS. Thus, having an EMA sys-
tem in place will help managers to effectively implement the EMS.
2. Cleaner production
When cleaner production is combined with an EMA system, significant
synergies can be reached. The optimum time to build up the EMA is just
after completing a cleaner-production detailed analysis, where the
input/output analysis and the material flows analysis can provide basic
information on the amount of production inputs physically lost. These
data are essential for assessing the non-product output costs.
A cleaner-production assessment (CPA) can be a major source of data dur-
ing the design of an EMA information system: especially in companies
that do not have a well-established management accounting system and
environmental controlling system to provide information on material
flows and the costs associated with them. This is especially true for small
and medium sized companies. If neither a CPA nor EMA exists, it is rec-
ommended a company perform the CPA before the EMA, especially if the
company does not have accurate data on the process.
Regardless of whether any of these systems have been implemented or
assessments performed, the adoption of an EMA would immediately result
in the adoption of tools like CPA to identify measures to reduce envi-
ronmental costs on a continual basis.
13

---

03-88226.qxd 04/11/2003 17:21 Page 14
Introducing Environmental Management Accounting at Enterprise Level
3. Environmental performance evaluation
and sustainability reporting
The calculation of the financial impacts of environmental performance
has recently been introduced within the environmental performance eval-
uation and reporting.
According to ISO 14031 financial costs and benefits are a sub-group of
management performance indicators. Examples for financial indicators in
the standard include: costs that are associated with environmental aspects
of a product or process, return on environmental investment, savings
achieved through reductions in resource usage, prevention of pollution or
waste recycling, etc. While most companies have an estimate of their envi-
ronmental costs, it is usually underestimated. Moreover, savings and prof-
itability of waste reduction programmes cannot be reliably estimated
without a proper EMA in place.
An EMA system can separate end-of-pipe costs from prevention costs. It
also helps in calculating the savings gained through the reduced use of
raw materials and energy. Without these data from environmental pro-
grammes, companies will continue to think of environmental manage-
ment as a strictly non-profit-generating part of business that always costs
money. Cleaner production can save money and thereby increase profits.
With an EMA these savings can be captured and reported.
EMA generated data improves the bargaining power of environmental
managers with a company's top managers and shareholders, to create or
obtain funding for environmental programmes, CP projects and EST
investments. It will also provide precise numbers on environmental costs,
when required by external stakeholders. While shareholders are con-
cerned about their liabilities, external stakeholders (authorities, civil soci-
eties, NGOs, etc.) are interested in seeing the company's efforts toward
environmental management supported by substantial environmental
expenditures. Data generated by an EMA will help demonstrate these
efforts.
14

---

03-88226.qxd 04/11/2003 17:21 Page 15
Part I Environmental Management Accounting
D. Conclusions
EMA is a relatively new tool in environmental management. Decades ago
environmental costs were very low, so it seemed wise to include them in
the overhead account for simplicity and convenience. Recently there has
been a steep rise in all environmental costs, including energy and water
prices as well as liabilities. In Europe the Pollution Prevention Pays pro-
gramme of 3M played a crucial role in the spread of the EMA concept,
while in the United States the high level of potential liabilities pushed
companies to better evaluate their environmental costs. Now, especially
transition economies are going through a fast change that will impose a
requirement for more accurate control of production inputs and outputs.
Environmental costs are no longer a minor cost item that can be pooled
together with other costs: the use of EMA saves money and improves
control.
Still, many companies need external help in creating or improving their
EMA, as those skills are not widespread and rarely available internally.
EMA has to be tailored to the special needs of the company rather than
be applied as a generic system. The costs and benefits of building such a
system has to be considered and the scope of the EMA properly selected.
Building the EMA incrementally is a common implementation strategy
among companies.
15

---

03-88226.qxd 04/11/2003 17:21 Page 16

---

03-88226.qxd 04/11/2003 17:21 Page 17
PART II
THE METHODOLOGY

---

03-88226.qxd 04/11/2003 17:21 Page 18

---

03-88226.qxd 04/11/2003 17:21 Page 19
THE METHODOLOGY
A. Background
Much work has been done over the past three years in the field of EMA.
The methodology used within the EMA TEST project uses the experience
from this work.10 This includes the use of environmental cost allocation.
The project appraisal portion relied on the total cost accounting concept
published by EPA and used in the UNIDO COMFAR and the P2 Finance
(developed by the Tellus Institute11) software tools. Cost categories were
defined following the existing workbook published by United Nations
Division for Sustainable Development (UNDSD).12
Within the TEST Project framework, a significant contribution to the prac-
tical use of EMA was made in the following areas:
Linking CPA and EMA: introducing different controlling methods for
non-product output costs. EMA was divided into three main categories
to reflect the different levels of controllability of costs for both short
and long term conditions. This will lead to a better understanding of
the amount a company can save, by just improving the operation of
its existing technology, or by making major technology change over
to environmentally sound technologies;
Developing outlines for scoping EMA: defining the steps of imple-
mentation and developing an information system for EMA;
Identifying both the barriers to EMA, and ways to overcome them,
when it is introduced under different circumstances.
10
Stefan Shaltegger and Roger Buritt: Contemporary Environmental Accounting, Issues,
Concepts and Practice, 2000.
11
www.tellus.org.
12
UNDSD: Environmental Management Accounting: Procedures and Principles, United
Nations, New York, 2001.
19

---

03-88226.qxd 04/11/2003 17:21 Page 20
Introducing Environmental Management Accounting at Enterprise Level
B. Implementing the EMA
In the following section, the steps of the EMA implementation process
used in the TEST project are described.
1. Scoping EMA
Once management is committed to introducing an EMA, the first step is
to define the scope of the EMA, which means to identify the area of the
company where the project should focus its implementation and the
depth of the analysis. Usually the processes and/or the products, which
are causing the most significant environmental aspects and impacts, are
selected as the initial focus of an EMA project.
Setting the goal of the project will lead to defining the depth of the analy-
sis within the selected focus area. An EMA project will start with calcu-
lating environmental costs, and depending on the goal which has been
initially set, will move to the next step of allocating those costs to cost
centres13 and to products.
For some industrial processes, where the same technological process pro-
duces several products, the environmental costs of one specific product
are linked to the costs of other products. Therefore, in several cases one
product may not be able to be evaluated without also evaluating others.
In this way the selection of the focus area and the depth of the analysis
are inter-related and decisions should take into account the type of indus-
trial production processes that are in place as well as the kind of prod-
ucts that are manufactured.
Generally, not all possible environmental cost items will be measured. The
main criteria for selection of which to measure is the magnitude of the
environmental cost item compared to the total production costs. The
trade-off between the efforts for data collection and the benefit of hav-
ing more accurate information will influence the selection of the envi-
ronmental costs items chosen. The selection of the project's priority
environmental cost items is made during the initial step of scoping an
EMA project.
13
Costs centres are the smallest units of activities of responsibilities for which accounts
are accumulated. A cost centre can be a process, a department, a programme, etc.
20

---

03-88226.qxd 04/11/2003 17:21 Page 21
Part II The Methodology
It is the joint responsibility of the environmental manager and the
accounting department to decide which costs are relevant and considered
for the EMA project. An EMA expert can assist in this decision-making
process. Although an initial estimation of environmental costs is needed
to properly scope an EMA, the actual environmental costs will only be
known at the end of the EMA project, when the values have been cor-
rectly calculated. The situation is complicated by the fact most companies
underestimate their environmental costs.
This problem can be overcome by setting a very conservative limit on the
magnitude of environmental costs that will be dealt with and by apply-
ing a systematic approach to the analysis. For example, the company
might initially decide to deal with environmental costs initially estimat-
ed to be less than 1 per cent of product costs. If the EMA calculation of
environmental costs reveals that this preliminary estimation is correct, the
company can continue to assign these costs into overhead. On the con-
trary, it might turn out that some costs, originally estimated to be under
this limit, are actually higher than initially estimated. For example, it may
be determined that 1 per cent of production costs was too low as criteria
and the level could be increased to 3 per cent or more before it needs to
be addressed. The limits must be set in a conservative manner to reduce
the risk of bad estimations, but can be revised as appropriate.
By the end of the scoping exercise, there will usually have been a defi-
nition of a preliminary set of environmental costs that are considered rel-
evant or of concern. They will be controlled on a periodic basis, but may
change at the end of the project when the final parameters are chosen,
based on their real value and impact on production costs. The EMA is an
iterative process and can be applied incrementally to processes and prod-
ucts. Therefore, additional environmental costs items, not selected in the
initial scope of the EMA, can still be considered within the frame of the
project. Moreover, the priority of some cost items, judged not significant
at the beginning, might become important due to changes in regulations,
input prices, etc.
2. Calculation of environmental costs
The next step is to choose a time period (quarterly for example) of which
the analysis will be conducted and collect all the necessary information
21

---

03-88226.qxd 04/11/2003 17:21 Page 22
Introducing Environmental Management Accounting at Enterprise Level
for the calculation of the selected environmental cost items. The process
of collecting data is time and effort consuming: different sources should
be analysed to extract the relevant information.
If a cost accounting system is in place, a cost centre structure is already
defined which may be very useful to collect the relevant information.
These accounting systems frequently have some "environmental waste and
emission treatment costs" categories already allocated to cost centres.
However it is very rare that these environmental costs refer to independ-
ent account numbers within the company's bookkeeping system: gener-
ally, they are pulled in on the same account as non-environmental related
information. Besides the fact that this makes the environmental-related
portion of the specific cost items invisible to management, the existing
allocation of environmental costs is done utilizing the same allocation
keys used for non-environmental costs (like labour or machine hours) and
will not generally be correct for these types of costs. For example, income
statements usually combine the depreciation of environmental related
equipment and non-environmental equipment on the same account.
Thus, work needs to be done to extract the relevant information from
existing accounts. Once the environmental costs are extracted however,
they should be properly re-allocated to cost centres using environmental
keys.
Even though some categories of environmental costs might have their
independent account number and be allocated to cost centres, they may
not be allocated to the cost centre where they actually originate or the
allocation key used may not be appropriate. As an example, waste and
emission treatments costs might already be allocated to the environmen-
tal department or to a specific end-of-pipe equipment only on the basis
of total volume, without considering the toxicity or the pollution con-
centration-loads contribution of the individual costs centres. This aspect
has to be checked before using the values from the existing system.
Generally expenditures related to other environmental costs categories,
like prevention and environmental management costs, are not allocated
to cost centres even if a cost accounting system is in place. These costs
are usually hidden in various overheads and are included in the same
account number as other expenditures. In such cases, different accounts
and bills must be checked first to identify the environmentally related
22

---

03-88226.qxd 04/11/2003 17:21 Page 23
Part II The Methodology
information to be extracted. Depending on the nature and magnitude of
the environmental costs, a decision can then be made on whether to allo-
cate those costs to cost another centre, or leave them in the overheads
and eventually create an environmental overheads general account.
While waste and emissions treatment, prevention, and environmental
management costs can usually be found in existing accounts (more or less
easily), less conventional environmental costs have to be calculated. For
instance, the purchase values of product and non-product outputs are not
distinguished from one another and are recorded together as direct pro-
duction costs. There are different ways to calculate non-product output
costs (see part II section B-2.1), however it is necessary to first have a
detailed mass balance of each production step to identify where material
and energy losses originate within the process. A CPA assessment is good
tool to do this.
To assure consistency of the analysis, cross-checking of data should be
done using different sources of information such as balance sheets, prof-
it and loss accounts, inventories and material balances.
2.1. Calculation of non-product output costs
One of the goals of EMA is to highlight the contribution of environmental
costs to unit product costs. This is particularly true for non-product out-
put costs, which usually represent the most significant share of total envi-
ronmental costs, but often are forgotten or ignored. The establishment of
an EMA system will result in more control over environmental costs. This
information can assist in directing decisions towards the adoption of
cleaner production measures or new technologies to reduce these costs.
As can be found in literature14 the usual practice for calculating non-prod-
uct output costs is to take into consideration the entire value of inputs
that do not go into to the final product. However, this approach ignores
the fact that not all wastes and emissions can be eliminated even when
state of the art technology (BAT) is in use, and thus, companies usually
feel that this approach is too penalising. To better help managers plan
14
This definition is used by UNDSD and by Shaltegger.
23

---

03-88226.qxd 04/11/2003 17:21 Page 24
Introducing Environmental Management Accounting at Enterprise Level
cleaner production measures and/or investments in new cleaner tech-
nologies, it can be useful to create three different benchmarks against
which companies can compare their non-product output costs. The three
benchmarks reflect how companies can manage and eventually reduce
those costs both in the short-term as well as in the long-term.
The first, and normally least stringent benchmark, is what we can call
technological norms. These represent the most efficient level of input con-
sumption and emissions achievable by the technology that the company
has in place. Technological norms allow for the fact that some wastes,
emissions and scrap outputs cannot be avoided, even when the existing
technology is operated in the most efficient way. These values can be
found in engineering design specifications and operating parameters, man-
ufacturer's technical manuals and process flow sheets (which have been
modified to quantifiably reflect volumes where wastes are concerned).
These data could be consolidated into technological flow-charts. In this
case, the difference between the actual costs of the inputs and the costs
of the inputs if the technological norms were adhered to, demonstrates
how much companies can save in the short-term by operating their exist-
ing technology in the most efficient way.
The next, and usually more stringent benchmark, is the Best Available
Technology (BAT) levels. These will be technologies, that for particular
sectors and/or products, are considered the most efficient and/or protec-
tive of the environment currently available on the international market.
By using this benchmark to calculate non-product output costs, a com-
pany is signalling that it recognizes that it could switch to the best avail-
able technology (BAT), or at least implement technological changes to
come closer to BAT levels (by purchasing equipment with efficiencies clo-
ser to BAT) or significantly modify its current technology. The difference
between the actual costs of the inputs (or between the input costs for the
technological norms) and the costs of the inputs for BAT norms shows
how much companies could save by switching to BAT (or close to BAT).
The use of this benchmark, like the technological norms, recognizes that
some waste and pollution will always be generated (although lower in
quantities). This cost difference is the one that companies should defi-
nitely use when important decisions are made regarding the choice of new
technologies and is best addressed in an analysis over a medium-longer
time line.
24

---

03-88226.qxd 04/11/2003 17:21 Page 25
Part II The Methodology
The final benchmark is the theoretical norms. Theoretical norms assume
100 per cent efficiency and do not allow for any wastes or emissions. As
such, they can never be achieved, only approximated. As mentioned
above, this is implicitly or explicitly the benchmark used in most litera-
ture on the calculation of non-product output costs. In the chemical indus-
try this amount is determined by the reaction equation. In other industries
a thorough input-analysis could be required to show the portion of the
inputs that would directly become part of the product. Technological flow-
charts can also be used for this purpose in non-chemical based operations.
In the end, as technology develops, BAT can change and move closer to
the theoretical norm efficiency levels, so the gap between the last two
benchmarks will continue to narrow.
The relationship between the above-mentioned norms to calculate non-
product output costs are shown in figure I, where the technological norm
is higher than BAT and BAT is higher than the theoretical norm.
Figure I. Comparative Short-Term Normative and Actual Product-Based
Environmental Costs
Actual Value
Technological Norm
BAT Norm
Theoretical Norm
Production Input Costs (unit costs)
25

---

03-88226.qxd 04/11/2003 17:21 Page 26
Introducing Environmental Management Accounting at Enterprise Level
For operational purposes, companies are most likely to be interested in
the difference between the actual non-product output costs and the costs
for the technological norms. This information shows how much they devi-
ate from the cost they could achieve by using their existing technology
in accordance with its technological descriptions. In these cases, the non-
product output costs can be used to highlight those areas where a com-
pany can usually reduce its wastes and emissions by better housekeeping
e.g. better monitoring of raw material consumption, avoiding/reducing
scraps and wastes and reducing energy and water consumption.
Companies need this information on a monthly basis to be able to react
quickly.
The difference between the actual non-product output costs and the non-
product output costs for BAT could also be interesting for a company,
although on a less frequent basis as the difference cannot be reduced in
the short term. The difference shows the point up to which it is eco-
nomically feasible to perform technological improvements. This informa-
tion is very important when a company considers changing technology,
so it must be calculated every time such a decision is to be made, prob-
ably every 3-7 years depending on the technological life cycle of the equip-
ment. In cases where a company is reporting total environmental costs,
the latter is only correct when the non-product output costs related to
BAT are considered. A good practice would be to calculate these costs
annually, when the information can be used for internal reporting pur-
poses to facilitate stakeholders' decision-making for new investments.
Non-product output costs tend to be very high when they are calculated in
relation to theoretical norms, because first, 100 per cent efficiency is not
achievable, and second, many inputs are never meant to go into the prod-
uct (they are auxiliary inputs or "helpers" in the process) and so inevitably
become 100 per cent waste. For example, catalysts are needed in chemical
reactions, but 100 per cent of them become non-product output costs
because they do not go into the product and eventually become spent and
need to be replaced. Another example would be the energy that is required
to maintain temperatures in the company buildings at a certain level: that
energy never goes into the product and eventually is all wasted (with
respect to the product). This comparison can be discouraging for compa-
nies, because these costs are considered inevitable and non-controllable.
On the other hand, a calculation of very high values of non-product output
26

---

03-88226.qxd 04/11/2003 17:21 Page 27
Part II The Methodology
costs in relation to theoretical norms can represent a strong motivation for
better use of resources and innovative thinking. They can spur the adoption
of BAT and in the case of auxiliary inputs the levels of use can often be
reduced and sometimes completely eliminated.
Table 2 shows the calculation methods of material purchase value of non-
product costs and their relationship with cost controllability. It is impor-
tant that the company have access to all of these costs when EMA is
introduced for the first time. The final selection of which calculation
method to use for non-product output cost will depend on the specifics
of the company.
Table 2. Relationship between Non-Product Output Costs, Calculation
Methods and Cost Controllability
Material Purchase Value
of
Non-Product Outputs
Calculation Method
Ability to Control Costs
Material consumption
Exceeding the
Actual Value--
Controllable
Technological Norms
Technological Norms
in the shorter term
Material consumption
Exceeding the
Actual Value--
Controllable
BAT Norms
BAT Norms
in the medium to long run
Material consumption
Exceeding the
Actual Value--
Controllable
Theoretical Norms
Theoretical Norms
in the longer run
3. Allocation of environmental costs
To summarize, the calculation of environmental costs, as presented in the
previous section, can be divided into the following steps:
Analyse the existing costs data information system;
Organize costs data according to the technology flow;
Understand the major allocation keys in use;
Identify environmental cost items within overheads;
Extract environmental expenditures information from accounts;
Complete detailed mass-balances of the process;
Calculate environmental costs related to direct production costs (non-
product output costs).
27

---

03-88226.qxd 04/11/2003 17:21 Page 28
Introducing Environmental Management Accounting at Enterprise Level
Once all the relevant information on environmental costs has been col-
lected, the allocation process should start. Initially, environmental costs
will appear in the production cost structure of each cost centre, and then
be placed in the product cost structure.15 At this point, it will be possible
to decide which environmental costs are more important (compared to
total production costs) for the future operation of the company. Once
chosen, they should be monitored on a continual basis within the EMA
system.
Whenever possible, environment costs should be allocated directly to the
activity that generates the costs, again first to the respective cost centres
and then to the products. As a result, for example, the costs of treating
the toxic waste arising from a product should directly and exclusively end
up allocated to that product.16 Proper allocation keys must be developed
for this purpose.
The choice of an accurate allocation key is crucial for obtaining correct
information for cost accounting. It is important that the chosen alloca-
tion key be closely linked with actual, environment-related activities. In
practice, the following four allocation keys are often considered for envi-
ronmental issues:17
Volume of emissions or waste treated;
Toxicity of emissions or waste treated;
Environmental impact (volume is different to impact per unit of vol-
ume) of the emissions or waste;
Relative costs of treating different kinds of waste or emissions.
The choice of the allocation key must be adapted to the specific situa-
tion, and the costs, caused by the different kinds of wastes and emissions
treated, assessed directly. Sometimes a volume-related allocation key best
reflects the costs, while in other cases a key based on environmental
impact is appropriate. The appropriate allocation key varies depending on
the kind of waste treated or emissions prevented.
15
During the allocation of costs to products, overheads are also allocated.
16
Stefan Shaltegger and Roger Buritt, Contemporary Environmental Accounting, Issues,
concepts and practice, Greenleaf Publishing 2000, p. 131.
17
Ibid., p. 136.
28

---

03-88226.qxd 04/11/2003 17:21 Page 29
Part II The Methodology
The information needed for calculating and allocating environmental costs
can be acquired relatively easily if a cost managerial accounting system is
in place. There are different methodologies for managerial cost account-
ing,18 such as "activity based costing (ABC)",19 "full cost accounting",
"process costing" and "material flow costing".
4. Building the information system for EMA
The information flow of environmental costs should be organized and
structured to allow for regular monitoring. An effective information sys-
tem should reinforce existing communication links between the account-
ing, environmental and production departments of a company to enable
the systematic evaluation of environmental costs.
The EMA information system should build on existing information sys-
tems and should be harmonized with the overall cost management
accounting in terms of responsibility (e.g. environmental manager), con-
trolling frequency of environmental cost evaluation (e.g. quarterly or
monthly), format and calculation method. The existence of an EMS can
help to organize the necessary structure of the EMA information system
into a set of procedures and work instructions.
The existing cost centre structure is usually maintained, as it could be
complicated for the company to change it, however, implementing an
EMA project could highlight the necessity to reorganize the existing cost
centre structure. For example, end-of-pipe operations (wastewater treat-
ment plants (WWTP), incinerators, etc.), laboratories or environmental
departments could be organized as independent cost centres.
Environmental allocation keys will then be assigned to environment-
related expenditures and new accounts can be created for certain envi-
ronmental costs. If the EMA project reveals that some environmental costs
included in overheads are not significant compared to total production
18
UNDSD: Improving Government's Role in the Promotion of Environmental Managerial
Accounting, United Nations, New York 2000, p.14.
19
ABC represents a method of managerial cost accounting that allocates costs to the cost
centres and cost carriers based on the activities that caused the costs. The strength of
ABC is that it enhances the understanding of the business processes associated with
each product. It reveals where value is added and where value is destroyed.
29

---

03-88226.qxd 04/11/2003 17:21 Page 30
Introducing Environmental Management Accounting at Enterprise Level
costs, then these costs may remain in general overheads, depending also
on existing accounting regulation.19 Regardless, companies can choose to
make environmental overheads visible within the general overheads.
Existing information related to environmental costs can also be re-organized
into a parallel environmental cost sheet. In the case of allocation to a prod-
uct for example, a new category "environmental costs" could be created
within the product cost structure.
The information base needed for flow-cost accounting is gathered from
the material flow model and a defined database. The material flow model
maps the structure of the material flow system and is relevant for the cal-
culation of non-product output costs. The database contains data needed
to quantify the material flow model. It is used as the basis for calculat-
ing the quantities, values, and costs allocated to the material flow model.
5. Reviewing EMA
An EMA system is to be implemented using a step-by-step approach, and
reviewed and updated on a continual basis as new developments occur or
with the addition of new cost items not considered during previous allo-
cation phases. Changes in production, products or in the regulatory regime
can occur that make certain environmental cost items previously not con-
sidered significant, relevant for the business operation.
20
In some countries, there are cost accounting regulations that forbid the allocation of
fines and penalties to products. This has to be taken into account.
30

---

03-88226.qxd 04/11/2003 17:22 Page 31
PART III
CASE STUDIES

---

03-88226.qxd 04/11/2003 17:22 Page 32

---

03-88226.qxd 04/11/2003 17:22 Page 33
CASE STUDIES
A. Introducing EMA in CEE countries:
the experience of the TEST project
EMA systems were introduced in four companies located in the Danube
River Basin, namely HERBOS (herbicide producer--Croatia), Kappa (pulp
and paper sector--Slovakia), Nitrokémia 2000 (chemical sector--Hungary)
and SOMES¸ (pulp and paper sector--Romania).
EMA systems were introduced as part of the TEST integrated approach,
together with other management tools such as CPA and EMS. The TEST
project showed that the best time to introduce the EMA is after the CPA
has been completed and while the EMS is under development: significant
synergies were achieved in terms of data collection and setting up of the
information system.
The introduction of EMA at the four enterprises was conducted by teams
of national consultants and employees of the selected companies work-
ing under the supervision of an EMA expert. At the request of the par-
ticipating companies, environmental costs data reported in the case studies
have been modified slightly to protect confidentiality.
As part of the TEST project, capacity was already built into the overall
system for implementing EMA at the national counterparts and at the par-
ticipating enterprises. The national TEST counterparts found the EMA such
a significant business asset that they decided to include it within their
available technical services and disseminate it to other enterprises within
the countries. For instance, the Hungarian Cleaner Production Centre
hosted a national seminar on EMA that was attended by more than 80
participants, including 20 companies' representatives.
33

---

03-88226.qxd 04/11/2003 17:22 Page 34
Introducing Environmental Management Accounting at Enterprise Level
Two new projects to implement EMA were launched by UNIDO and are
in progress at the time of writing:
The first, within the framework of the TEST project, aims to incor-
porate EMA at both an institutional level and at selected Bulgarian
enterprises. Completed case studies are expected by December 2003.
The second, financed by the Hungarian Government and executed by
UNIDO, involves the Hungarian and Croatian Cleaner Production
Centres applying EMA at selected Croatian enterprises.
B. Use of EMA
EMA was used to achieve different goals, depending on the specific needs
of each enterprise. In two companies (HERBOS and Kappa), the goal was
to calculate the total environmental costs of the enterprise. At SOMES¸ and
Nitrokémia the goal was to allocate environmental costs to products for
product pricing and for comparing different products.
The scope of the EMA was customized at each of these companies to meet
their individual needs and circumstances. A comparison of the four case
studies shows that the factors that may influence the scope of the EMA
include:
The type of processes (industrial branch);
The commitment of the management;
The existing accounting practices;
The skills of the accounting department;
The communication between the environmental department and
accounting department;
The position and recognition of the environmental function by the
top management.
Nitrokémia 2000 decided to focus on three processes/products with high
environmental impacts for the company. Each of the three products con-
cerned is produced by a separate technology (although productions are
interlinked); therefore, the costs could be allocated directly to products.
34

---

03-88226.qxd 04/11/2003 17:22 Page 35
Part III Case Studies
In the case of SOMES¸, the scope of the EMA was initially restricted to one
production unit (bleaching process). Later, the company decided to allo-
cate environmental costs to the product (pulp), especially with respect to
non-product output. In order to do that, the scope of the EMA had to be
broadened to the whole company.
At Kappa, due to the wide range of products, all with similar charac-
teristics (different variations of cardboards), the trade-off between costs
and benefits of segregating these products under these circumstances
led to the decision not to allocate the environmental costs to each
product.
It is unlikely that a company would change its complete accounting
practice just to accommodate EMA. Thus, EMA has to adjust to the cur-
rent practice. Certain companies do not have a separate management
accounting function; instead, they use the financial accounting infor-
mation for internal control purposes. Data collection and calculation of
environmental costs would be much more time consuming and expen-
sive in such cases and the company might decide to set a less ambi-
tious goal for EMA to save time and effort. HERBOS is an example of
this situation: it was decided to calculate environmental costs at the
company level and specifically for the most problematic plant, the
atrazine plant. Even though the environmental costs were not allocated
to products and the EMA project required a significant effort from the
plant and consultants, it proved to be very beneficial for the company.
However, due to the lack of an internal cost accounting system, it was
not possible to allocate environmental costs to products and implement
the EMA system on a continuous basis.
The actual environmental costs (calculated after implementation of EMA
system in the four enterprises) were much higher than originally estimated
at the start of the project by a factor of 2 to 10 times. It should be men-
tioned that this estimate is still conservative, since not all environmental
costs categories were considered during the pilot introduction of EMA in
the four companies.
In general, the calculation of environmental costs studies focused on the
raw materials and auxiliary materials portion of the non-product costs (the
energy and labour portion related to non-product output costs were not
35

---

03-88226.qxd 04/11/2003 17:22 Page 36
Introducing Environmental Management Accounting at Enterprise Level
considered in any of the four case studies). The studies revealed that raw
material costs associated to non-product outputs are in average three times
higher than the waste and emission treatment costs.
Overall the environmental costs in the four companies were shown to be
significant if related to the total production costs, varying between 5 and
10 per cent of total variable production costs and this was a surprise for
the companies.
Looking back, some companies felt they would have preferred to devote
less energy to EMA implementation and have decided they will develop
it further only if it offers definite benefits. Support from top management
is a crucial issue in applying EMA. Without this support, EMA will prob-
ably be a one-time exercise rather than everyday practice. It should be
noted that in some companies, management is restricted by the internal
regulations set for the entire corporate group, so it cannot make a deci-
sion that would make its management accounting system depart from the
group standards. EMA is more easily introduced in companies without this
kind of obligation.
By the end of the project, three of the four companies had established an
information system and were controlling environmental costs on a con-
tinuous basis. The information system for the EMA differed from one com-
pany to the other, depending on existing cost accounting practices and
systems. The identification of cost centres for the allocation process was
done using existing cost centres classifications and in most cases the exist-
ing allocation keys. EMA became integral part of the existing systems.
Two of the four participating enterprises in the EMA-TEST project, given
the positive results achieved within the project, decided to extend the sys-
tem to other processes or to their entire plant utilizing their own inter-
nal resources.
C.
Further application of EMA in CEE: barriers and challenges
One of the main findings of the TEST project that was not expected when
it was started, is that EMA as a management tool is initially much easier
"to sell" to enterprise managers than for example CPA, although it requires
36

---

03-88226.qxd 04/11/2003 17:22 Page 37
Part III Case Studies
considerable resources for its practical implementation. It seemed that
managers immediately recognized the benefits of using an EMA.
Environmental managers found it very useful to have an EMA in place,
and consider it to be a very useful tool for justifying environmental pro-
jects within the company. The bargaining power of the environmental
managers increased significantly as they were able to show managers the
economic significance of environmental costs with respect to the total
production costs. By allocating environmental costs to the production
steps where they originate, it was possible to show which portion of the
environmental costs could be reduced by implementing a CP option and
which portion of environmental costs could be avoided if significant
investment in BAT's were undertaken.
EMA can be applied in any company, but the benefits that can be gained
can vary considerably depending on their particular conditions. This fact
was underlined by the experience of TEST project companies. The factors
that most influence the future adoption of EMA on a wide scale in CEE
countries are related to the price of input materials, regulatory regimes
and enforcement, and the stability of the business environment.
High input prices encourage the use of EMA since significant savings
opportunities can be revealed. On the other hand, in countries with low
input prices, savings in these materials (identified using input efficiency
programmes) are small and often insignificant. Experience from SOMES¸
showed that water represents a negligible input cost for industries in
Romania due to extremely low water prices. This situation would not
change even if a tenfold increase in prices occurred.
Strict environmental regulations and enforcement encourages the use of
EMA, where savings can be realized from reduced environmental fines,
fees and liabilities. Lax or frequently relaxed regulation and enforcement
discourages its use. Relaxed environmental regulations were a problem in
most of the TEST project countries.
In the near future all the countries involved in the TEST project in the
Danube River Basin are planning to accede to the European Union (EU).
This will have a significant impact on these countries' economies.
Enforcement of environmental regulations is likely to be taken seriously,
37

---

03-88226.qxd 04/11/2003 17:22 Page 38
Introducing Environmental Management Accounting at Enterprise Level
even in those countries where the lack of enforcement was mentioned as a
problem during the project, and environmental liabilities for not meeting
regulations are expected to rise. Subsidies will be cancelled in many areas
and the currently depressed prices for raw materials, energy and water may
rise, which would significantly increase environmental costs in all the CEE
countries. These developments will increase the importance of EMA: in a
business environment where input material costs and environmental fines
are high, enterprises will likely be interested in adopting management tools
such as EMA, which will enable them to control those costs.
Thus, the adoption of EMA, especially in CEE countries which are charac-
terized by economies in transition and under growing environmental pres-
sure, can support managers to be pro-active by enabling them to forecast
increases in production costs from environmental impacts and changes in
the regulatory regime, a fact confirmed in all the TEST countries.
38

---

03-88226.qxd 04/11/2003 17:22 Page 39
CASE STUDY 1:
NITROKÉMIA 2000, HUNGARY
Authors: Mária Csutora and Ágnes Kajdacsy
The EMA team in Nitrokémia 2000 consisted of the Environmental Manager,
the Plant Engineer and the Chief Controller from the company and the
national consultant from the Hungarian Cleaner Production Centre.
A. Brief description of the company
1. About the company
Nitrokémia 2000 Rt. was founded in 1997 as a 100 per cent subsidiary of
Nitrokémia, an old state-owned chemical company that started in 1928
and accumulated numerous environmental problems and liabilities dur-
ing its long life. Nitrokémia 2000 was established as an entirely new legal
body in 2000, thereby not inheriting any of the environmental liabilities
of its parent, but it was left operating most of its obsolete technologies.
The new company purchases wastewater treatment and hazardous waste
incineration services from the still existing state-owned Nitrokémia.
Nitrokémia 2000 sites, two in Balatonfüzfö and one site in Papkeszi, are loca-
ted in valuable surroundings close to Lake Balaton, both the most visited
recreational area in Hungary and near to prospective conservation areas.
These sites are ones listed by the International Commission for the
Protection of the Danube River (ICPDR) as industrial hot spots in the
Danube River Basin. The company is an important private enterprise in
the Hungarian chemical industry, operating 54 technologies in five dif-
ferent divisions.
The product structure and the volume of production changed significantly
due to major transformations in the economic system, ownership and
39

---

03-88226.qxd 04/11/2003 17:22 Page 40
Introducing Environmental Management Accounting at Enterprise Level
market demand after the company was formed. The volume of produc-
tion declined for most product types during the first two years of opera-
tion. Major economic indicators of the company for the year 2002 are as
follows:
Revenue:
11-12 billion HUF
(approximately 42 million euro)
Registered capital:
4.653 billion HUF
(approximately 19 million euro)
Export:
approximately 65 per cent of turnover
Number of employees:
700-800
Contact Person:
Ágnes Kajdacsy, environmental manager
Telephone:
(+36)-88-543-723
Email:
akajdacsy@nitrokemia.hu
Core business units:
Manufacture of organic and inorganic chemical base materials;
Manufacture of pesticides;
Manufacture of intermediates for the chemical industry;
Manufacture of fine chemical products;
Energy generation and supply;
Wholesale trade in chemical products.
Company sales revenues in 2001 showed a 4 per cent increase compared
with the previous year. This consists of a small decrease in domestic sales
and an increase of 9.6 per cent in export sales. The intermediate business
unit produces about half of the turnover of the company.
The main objectives for 2002 were to radically improve efficiency and
immediate improvement in productivity. A goal of efficiency emphasises
the importance of better-cost control within the company.
2. Environmental aspects of the company
and results of the CP programme
Nitrokémia 2000 is struggling with two major areas of environmental
problems:
40

---

03-88226.qxd 04/11/2003 17:22 Page 41
Part III Case Studies
Odour--The organization is located in the most visited recreational
area of Hungary (next to Balaton, Balatonfüzfö), so odour raises many
public concerns. The production processes causing the odour prob-
lems are shut down during the summer season when tourists arrive
to spend their holiday at the lake. By 2004 these processes will be
shut down permanently until new ones are developed that would pre-
vent the odour problem.
Wastewater--The wastewater contains mainly salts and compounds dif-
ficult to decompose. It is treated using biological wastewater treatment,
at the still existing state-owned Nitrokémia Inc. facility. There are 10
wastewater-emission points in the area of the factory.
The wastewater fines paid are significant due to the salts, high COD and
NH -N discharged in the water. A large amount of process water is used,
4
resulting in a large volume of wastewater discharge. Wastewater, after
treatment (neutralization and biological treatment) at Nitrokémia, flows
into spring Séd, then into the River Danube.
Various environmental problems were inherited from the former
Nitrokémia Corporation. These include past liabilities like polluted soil,
10-40 year-old technologies, outdated infrastructures for water, wastewater
and other networks and waste.
The cleaner production assessment provided input-output analysis for the
chosen processes: several cleaner production options were identified dur-
ing the TEST project.
All the material flows that appear in the input-output analysis also show
up as raw material or waste costs in the cost structure of the product. In
Nitrokémia 2000, the cost structure of products follows the structure of
the input-output analysis, as do other items like processing costs. The
input-output analysis also provides the basis for defining technological
standards within the company.
EMA information was used to assign a value to the material and waste
streams and evaluate the profitability of cleaner production measures. In
this way these tools were linked and multiplied the benefits of each
other.
41

---

03-88226.qxd 04/11/2003 17:22 Page 42
Introducing Environmental Management Accounting at Enterprise Level
3. Current accounting practice
Nitrokémia 2000 has a control department separate from the financial
accounting function and uses variable costing21 for cost accounting. The
company is improving its management accounting system by allocating
variable costs to products. The share of variable costs within the costs of
sales increased from 74.2-80.4 per cent in 2000. This was due in part to
increasing raw material prices and in part by broadening the scope of vari-
able cost.
The company applies the MFG/PRO software for accounting purposes. The
software has the advantage of capturing material flows both in monetary
and physical terms. This proved to be a very good starting point for EMA,
enabling tracking and pricing of material flows within the company.
There was an existing EMA system within Nitrokémia 2000, before the
TEST project started, focusing on the end-of-pipe costs of wastewater treat-
ment and hazardous waste disposal. These costs were treated as variable
costs and were allocated to products. Fines and penalties were recorded
as environmental overhead. For simple processes, allocation keys are based
on volume of discharge, contribution to the toxicity or acidity of dis-
charge and calculated using the material flow diagram. Processes that are
more complicated used material flow diagrams and technological norms
to compute allocations. As a result, allocation keys are closely connected
to the actual contributors of the wastewater problem. Costs for the man-
agement of non-hazardous waste, environmental personnel or environ-
mental fines were kept as overhead. Some environmental costs were
missing from this system and non-product outputs were not considered
as environmental costs.
In summary, the conditions were very good for developing EMA in
Nitrokémia. The environmental manager was committed and the chief
controller seemed interested and helpful.
21
Also called marginal costing or direct costing.
42

---

03-88226.qxd 04/11/2003 17:22 Page 43
Part III Case Studies
B. Scoping EMA
1. Objectives
The Papkeszi site was the Nitrokémia 2000 site chosen for the TEST EMA
project. There are six technologies representing six cost centres.22 Three
chemical products and related processes were selected. The scope was based
on the high environmental impact of the processes as well as the avail-
ability of the results from the cleaner production assessment.
The following products with high environmental impacts were selected:
fumaric acid, phthalimide and ferrous fumarate. The technology used was
developed within the company, so the detailed flowcharts for these
processes are confidential.
The production of the three products is interconnected (figure II): fuma-
ric acid is the raw material used for ferrous fumarate production. The prod-
ucts of the anhydrous phthalic acid (PSA) production are the raw materials
for the phthalimide production and produce the waste generated by the
technology. This wastewater is a maleinic acid-containing solution used
as a main input, and raw material, for fumaric acid production. All three
products are sold on the market.
There is a tendency for managers of Nitrokémia 2000 to think of raw
materials as necessary and inevitable costs. They are often not con-
sciously aware of the fact that some of the materials purchased will never
become part of any product. Yet, they might leave the company with
the wastewater or be wasted in some other way. These unused materi-
als burden the environment and represent an unnecessary loss to the
company. One of the goals of EMA at Nitrokémia 2000 was to enable
managers to better control material and processing costs by splitting
them into necessary and wasted designations. The aim of the project
was to isolate the cost of wasted raw material from the cost of raw mate-
rials in the product in order to encourage source reduction measures
within the company.
22
In the chemical industry, technologies are very closely related with the specific prod-
ucts. This is the reason why Nitrokémia use the technologies as cost centres.
43

---

03-88226.qxd 04/11/2003 17:22 Page 44
Introducing Environmental Management Accounting at Enterprise Level
Figure II. Phthalimide, Fumaric Acid and Ferrous Fumarate Production
at Nitrokémia 2000
Inputs
Outputs
Dust
Urea
Waste
Nitrogen
Phthalimide
CO2
Production
Water
Phthalimide
PSA
PSA
Production
Wastewater with
Product Loss
Maleinic Acid
Steam
Water
Charcoal
Wastewater
Sodium
Fumaric Acid
SO
Pirosulphate
Production
2
Auxiliary
Waste
Materials
Water
Fumaric Acid
Fumaric Acid
Wastewater
Sodium
Carbonate
Iron
Waste
Sulphate
Ferrous Fumarate
Auxiliary
Production
Materials
Ferrous
Fumarate
Steam
44

---

03-88226.qxd 04/11/2003 17:22 Page 45
Part III Case Studies
2. Environmental cost items selection
The company decided not to calculate and allocate environmental costs
initially estimated below 5 per cent of direct production costs. Treating
small cost items like auxiliary materials as overhead, is consistent with
common practice in management accounting.
Most end-of-pipe environmental costs were already measured and allo-
cated to products and were treated as variable costs within the system.
These included wastewater treatment costs and hazardous waste inciner-
ation costs. Wastewater costs were burdened on products using allocation
keys based on volume as well as on COD and the acidity of the waste-
water. Treatment of sludge, however, was hidden in overhead.
Table 3 shows the impact of the UNIDO TEST EMA project on the envi-
ronmental accounting of Nitrokémia 2000.
There are items that are easily identifiable as environmental costs but
cannot be allocated to products for practical reasons. Some annual costs
fall into this category. The premise of variable costing dictates however,
that all environmental variable costs should be allocated to products.
For instance in Hungary wastewater fines for 2002 activity are to be
charged in May 2003 and paid afterwards. For this reason they cannot be
allocated to products when they occur and will continue to be included
in overhead accounts. This cost item should be considered however in
project appraisal procedures and calculations as contingency costs and
future costs. Labour costs of environmental personnel were originally treat-
ed as indirect labour. The controller agreed to treat this cost item as an
environmental cost.
The focus of the EMA project at Nitrokémia 2000 was the calculation of
material purchase values of non-product costs and their allocation to the
three selected products. The processing costs of non-product outputs, like
labour, is an important issue for this company that has yet to be quan-
tified. It is planned to do this in the future.
45

---

03-88226.qxd 04/11/2003 17:22 Page 46
Introducing Environmental Management Accounting at Enterprise Level
Table 3. Impact of the UNIDO TEST EMA Project on Nitrokémia 2000
Accounting system
Costs
Costs
Considered
Considered
Costs To Be
Environmental Cost/
for the EMA
for the EMA
Considered in
Expenditure Categories
Project
Project
the Future
1. Waste and Emission Treatment
1.1. Depreciation for Related
Equipment
Xa
X
1.2. Maintenance and Operating
Materials and Services
Xa
X
1.3. Related Personnel
X
1.4. Fees, Taxes, Charges
1.5. Fines and Penalties
X
1.6. Insurance for Environmental
Liabilities
1.7. Provisions for Clean-up Costs,
Remediation
N.A.
2. Prevention and Environmental
Management
2.1. External Services for
Environmental Management
2.2. Personnel for General
Environmental Management
Activities
X
2.3. Research and Development
X
2.4. Extra Expenditure for Cleaner
Technologies
X
2.5. Other Environmental Management
Costs
3. Material Purchase Value of
Non-Product Output
3.1. Raw Materials
X
3.2. Packaging
X
3.3. Auxiliary Materials
X
3.4. Operating Materials
X
3.5. Energy
X
3.6. Water X
4. Processing Costs of Non-Product Output
X
5. Environmental Revenues
N.A.
Note: Some items, such as remediation, liabilities or environmental revenues, were not applicable for the company.
aDepreciation of environmental equipment was allocated to the products, but it was not recognized as an environ-
mental cost.
46

---

03-88226.qxd 04/11/2003 17:22 Page 47
Part III Case Studies
C.
Calculation of environmental costs and allocation method
In Nitrokémia, the chemical processes are defined as cost centres. It quite
often happens that one process will produce one or several products.
However, for the three technologies within the EMA project scope, each
technology defines one product.
The cost control department was the main source of data on direct costs
and allocated indirect costs. The plant engineer and the environmental
manager worked together on quantifying the environmental cost of non-
environmental personnel. The latter, with about 1 per cent of direct costs,
turned out to be too small for allocation purposes.
The chief controller and the environmental manager identified data for
the material purchase values of non-product outputs, defined as the top
priority area for improving the EMA. Actual data, as well as theoretical
and technological standards were needed to accomplish this. The job of
finding the information was crucial to the project.
1. Waste and emission treatment costs
The following costs were considered for allocation:
Emission treatment
While treatment costs of hazardous waste and wastewater were already
allocated to products using the correct allocation keys, management
costs of non-hazardous waste were not allocated to products, although
they are becoming increasingly more significant. Starting in 2003, the
treatment cost of sludge will be allocated to products.
Depreciation
Product related depreciation, including environmental equipment, is
allocated to products. Depreciation of the electrostatic precipitator,
ventilation, cyclone and research costs was treated as direct product costs
together with other product-related depreciation. Older equipment has
very low or zero depreciation. Depreciation of environmental equipment
vs. total depreciation for the three processes is indicated in table 4.
Depreciation was found to be a relatively small item, if related to unit
of production.
47

---

03-88226.qxd 04/11/2003 17:22 Page 48
Introducing Environmental Management Accounting at Enterprise Level
Table 4. Depreciation of Phthalimide, Fumaric Acid and Ferrous
Fumarate Production Equipment at Nitrokémia 2000
Depreciation of Environmental
Environmental Depreciation
Equipment
Share vs.
Product
(thousands of HUF)
Total Depreciation
Fumaric Acid
2,463
53%
Ferrous Fumarate
614
14%
Phthalimide
41
15%
Wastewater fines.
Wastewater fines are proportional to the extent the effluent concen-
trations exceed the regulatory limits and the volumes discharged.
These costs cannot be allocated to products within the regular month-
ly reporting system but have been calculated at product level for future
decisions.
2. Labour costs
The labour costs of environmental personnel used to be lumped toge-
ther with other indirect labour as part of the general overhead. As such,
environmental costs did not include the labour costs of environmental
personnel. Nitrokémia 2000 has two full-time people directly responsible
for environmental management, with other environmental duties and
responsibilities divided between various employees. It did not seem prac-
tical to allocate all these costs to products. However, after discussing this
issue with the controller and the environmental manager, this practice
was immediately changed and these items were moved to the environ-
mental overhead account.
3. Purchase value of non-product output
The purchase price of non-product output is a major issue for the com-
pany as input prices account for the majority of the production costs. The
share of material costs within the production costs of the three products
is shown in table 5.
48

---

03-88226.qxd 04/11/2003 17:22 Page 49
Part III Case Studies
Table 5. Raw Material Costs vs. Total Production Costs of Major
Products--Nitrokémia 2000
Product
Raw material costs as share of the total production costs
Fumaric Acid
39%
Ferrous Fumarate
74%
Phthalimide
88%
Material costs represent a relatively low percentage of the overall pro-
duction costs for fumaric acid because one of its main raw materials
(maleinic acid wastewater) is produced internally with the PSA production
process, rather than being purchased. As a result, this material is available
at a nominal price compared to other input costs. The contribution of
raw materials to overall costs for the other product is higher than would
normally be expected. It was due to the significant impact raw material
costs have on the production costs that EMA at this site was developed
to focus on quantifying non-product output. Two major steps were taken
in this regard:
Quantification of the total purchase price of non-product output;
Splitting these costs into categories based on their controllability.
The company was interested not only in quantifying the total amount
and value of non-product outputs, but also which of these costs can be
controlled in short or long term. To achieve this non-product output
value, costs were calculated in two different ways:23
In relation to the consumption of raw materials exceeding the tech-
nological norm;
In relation to the consumption of raw materials exceeding the theo-
retical norm.
Best Available Technologies (BATs) are available for several of Nitrokémia
2000's processes, but not for the three areas within the scope of EMA.
Therefore, this part of the cost analysis was not calculated.
The technological norms used for calculation of non-product-output costs
were based on information from the equipment designers and represent
the capacities and capabilities of the equipment under optimal operational
and maintenance practice conditions.
23
For detailed description of the methodology, please refer to section II.
49

---

03-88226.qxd 04/11/2003 17:22 Page 50
Introducing Environmental Management Accounting at Enterprise Level
Nitrokémia 2000 itself developed the vast majority of its technologies. The
company has technological standards in place, which define the raw mate-
rial consumption (per unit of product) under normal operation of the
technology. These standards are based on the technological flowcharts and
were defined by the plant engineer, the quality manager and the envi-
ronmental manager. The company is struggling with resource usage often
exceeding the technological norm. At first, they considered changing tech-
nological standards to better reflect actual raw material use. After dis-
cussing this issue in the framework of the TEST EMA project, however, it
was decided to use technological standards to identify possible sources of
inefficiencies in the system and calculate the material cost of waste.
4. Processing costs of non-product output
These costs were not added to the EMA system for two reasons:
They were very hard to calculate for a company operating in the chem-
ical industry;
Direct labour is a relatively small item within the cost structure of
products. If isolated and allocated as an environmental cost, their pro-
portion of non-product output would only increase the environmen-
tal costs by 4.72, 3.29 and 0.66 per cent for the three products
respectively (as compared to the theoretical norms for fumaric acid,
ferrous fumarate and phthalimide). These percentages are even smaller
when technological norms are used.
However, the company planned to calculate these costs items in the near
future and include them into the EMA system.
5. The results of allocation of environmental costs to products
Calculating environmental costs using technological versus theoretical
norms differs only in how non-product output is taken into account.
Table 6 provides a summary of the EMA project: environmental cost items
(per ton of product) calculated for each of the three products (first quar-
ter 2002). For fumaric acid, ferrous fumarate and phthalamide, the results
50

---

03-88226.qxd 04/11/2003 17:22 Page 51
Part III Case Studies
Table 6. Environmental Costs (in HUF) per ton of Fumaric Acid,
Ferrous Fumarate and Phthalimide at Nitrokémia 2000
Environmental Costs
Environmental Costs
Based on
Based on
Theoretical Costs
Technological Norms
Fumaric
Ferrous
Phthali-
Fumaric
Ferrous
Phthali-
Cost Items
Acid
Fumarate
mide
Acid
Fumarate
mide
Waste and Emission Treatment Costs
Emission Treatment Costs
29,054
15,858
7,430
29,054
15,858
7,430
Waste Disposal
3,450
3,450
Wastewater Fine
1,200
2,400
500
1,200
2,400
500
Energy Costs of Environmental
Equipment
240
240
0
240
240
0
Material Purchase Value of Non-Product Output
Purchase Cost of Non-Product
Output
15,133
21,337
3,433
83
457
-1,718
Environmental Part of Indirect
Material
310
2520
50
310
2520
50
Total Environmental
Costs
45,937
45,805
11,413
30,887
24,925
6,226
Actual Variable Production
Costs
98,766
227,080
150,409
98,766
227,080
150,409
Environmental Costs
share [%] of Variable Costs
47%
20%
8%
32%
11%
4%
from the non-product output costs calculations were much lower when
based on the technological norms versus those from the theoretical norms.
These results revealed that there were few cost reductions to be gained by
implementing better housekeeping measures. Large positive numbers
would indicate serious non-compliance with the technological prescrip-
tions, while very negative numbers would be a sign of technological norms
being out-dated. Small oscillations around the norm are normal due to
measuring error and other factors of incidence. Phthalimide had a rela-
tively small negative number showing that a decline was experienced
compared to the consumption norm and the ratio of raw material costs
within direct costs is very high (88 per cent). With such a high material
cost percentage, even small savings or small percentages of input wastage
would have high impact on costs. This approach can be used daily for
monitoring control to ensure wastes do not exceed the technological norm.
51

---

03-88226.qxd 04/11/2003 17:22 Page 52
Introducing Environmental Management Accounting at Enterprise Level
Total non-product output costs calculated using the theoretical norm-
based approach, indicate areas for longer-term possibilities involving major
technological change. These costs appear much higher than the techno-
logical norm based costs. With environmental costs at 47 per cent, 20 per
cent and 8 per cent of variable costs, respectively, the company could
consider major technological changes at least for fumaric acid and ferrous
fumarate production. The company has hired a consultant to assist them
in examining the technological possibilities of changing the inputs for
two processes.
Environmental costs are significant cost items for fumaric acid and fer-
rous fumarate. Comparatively, the total environmental costs for fumaric
acid production are almost five times those for the phthalimide, and there-
fore seems a less environmentally friendly product. This is mainly because
fumaric acid production absorbs the environmental costs of phthalic acid
production, the major raw material of phthalimide. Treatment of maleinic
acid water discharged from the PSA would be very costly if it was not
used in the production of fumaric acid, and would result in a significant
increase of environmental costs for production of phthalimide.
Figure III. Nitrokémia 2000 Product Environmental Costs--Before EMA
and after EMA (percentage)
350
Environmental costs based on
300
theoretical norms
Environmental costs based on
technological norms
250
Environmental costs estimated
before the EMA-TEST project
e
200
tag
150
P
e
r
cen
100
50
0
Fumaric Acid
Ferrous Fumarate
Phthalimide
52

---

03-88226.qxd 04/11/2003 17:22 Page 53
Part III Case Studies
This comparison leads to the conclusion that all three products should be
considered simultaneously when addressing environmental cost issues
because the products are so interdependent.
The definition of environmental costs of Nitrokémia was broadened dur-
ing the TEST EMA project. Figure III shows the changes at the product
level. The new definition will give cleaner production projects a better
chance as a wider range of non-product outputs is taken into account.
D. Findings and suggestions
Improving efficiency in the future is a major goal for Nitrokémia 2000.
The project demonstrated that EMA could promote this objective by
improving its cost controlling system and revealing savings options for
the company.
1. Integration of EMA with management accounting
As a result of the TEST-EMA project, the monthly reporting structure of
direct costs was changed to the following:
Non-product output costs are now calculated as direct environmental
costs on a monthly basis using the technological norms;
Waste disposal costs were identified as a significant cost item and will
be allocated to products on an on-going basis. (Note: before the project,
only hazardous waste costs were allocated);
The environmental portion of indirect material costs will be allocated
to products as direct costs.
Some cost items were either deemed too small for allocation to products,
or, were redirected to the direct product costs category due to the time
constraints of the project. These costs include environmental fines, envi-
ronmental labour and laboratory costs. These costs will remain in the envi-
ronmental overhead account. The EMA project resulted in a redefinition
of non-allocated environmental overhead to include certain cost items
that were not considered environmental costs in the past: the salaries of
environmental personnel that were formally hidden in indirect labour was
redefined as environmental cost.
53

---

03-88226.qxd 04/11/2003 17:22 Page 54
Introducing Environmental Management Accounting at Enterprise Level
2. Actions based on EMA
Since completing the TEST EMA project, the company has continued the
process and used the approach for re-calculating the environmental costs
of further products. One of those products was found to be so costly in
environmental terms that its production was stopped.
An expert has been hired by the company to investigate the possibility
of changing some of the raw materials used for two of the processes being
tracked by the TEST EMA. The company hopes to achieve a reduction of
both pollution and environmental costs.
3. Future oriented decisions
Certain environmental cost categories could not be incorporated in to the
production cost structure for practical reasons. Regardless, the costs items
can still be calculated or estimated and will be taken into account when
important, long-range decisions are made regarding the products or projects
within the company.
For long-range decisions where investment evaluations or product related
decisions are made, all environmental cost categories will be calculated and
reported in a structure "parallel" with the existing cost control system.
The information provided by EMA will support the:
Preparation of budgets.
Actions when production efficiency has dropped below acceptable lev-
els i.e. when the difference between planned and actual costs is too
large. Improved housekeeping and maintenance measures are usually
needed in these cases.
Modification of technological standards. Some technological standards
are outdated and require changes. Practices can change and new alter-
natives for saving inputs should be developed and reflected in the
technological norms. This modification is identified by consumption
staying below technological norms for an extended period of time.
54

---

03-88226.qxd 04/11/2003 17:22 Page 55
Part III Case Studies
Analysis of project alternatives. Process changes are currently under
consideration for the three products examined in the project and the
calculation of non-product output costs will give environmental pro-
jects a better chance for support.
Making strategic decisions on products and projects. These include
production decisions as well as costing and pricing decisions.
The company will continue to use the modified 2003 EMA system on a
regular basis. Based on the results of the project, the company decided to
extend the EMA to include further products without using external assis-
tance.
E. Conclusions
Environmental costs are rising all the time. For example, in 2000 there
was a 42 per cent increase in environmental costs for Nitrokémia 2000.
This was due to increasing service costs, wastewater treatment costs and
incineration, increasing volumes of production and a 41 million HUF one-
time cost for sludge disposal. This emphasises the need for more control
over them.
Waste disposal costs are rapidly increasing and sufficiently significant to
have been mentioned in the annual financial report as a problem area.
This fact underscores the importance of allocating these costs directly to
products.
The above-mentioned development is characteristic of Hungarian envi-
ronmental protection in general: environmental-service prices, as well as
fines are increasing at a rapid rate. The approaching EU accession and the
need to harmonize all environmental laws have accelerated this develop-
ment. This new situation underlines the importance of organizing envi-
ronmental management more efficiently and EMA is an excellent tool for
doing that.
Input prices are also increasing, as subsidies were removed subsequent to
their country signing international agreements. Higher water and energy
prices made the former practice of using technologies in a wasteful way
unacceptably expensive.
55

---

03-88226.qxd 04/11/2003 17:22 Page 56
Introducing Environmental Management Accounting at Enterprise Level
After the transition and restructuring of the economy that has been going
on, companies are much more subject to competition than they were 10
years ago. Strong competition encourages the search for efficiency, which
is a major short-term goal for many companies, not just Nitrokémia 2000.
Efficiency can be improved by improving the management and control
of material flows. This can result in a switch from the old absorption-
costing model to a variable costing or ABC costing model, which creates
a favourable climate for EMA.
56

---

03-88226.qxd 04/11/2003 17:22 Page 57
CASE STUDY 2: SOMES¸ S.A., ROMANIA
Authors: Adrian Timar, Maria B vac varan and Adela Olaru,
Mihai Svasta, Oana Tortolea, Maura Teodorescu and
Lucian Constantin
The EMA team consisted of Adrian Timar, chief accountant SOMES¸, Maria
B vac varan and Adela Olaru, SOMES¸ Technical Department, Mihai Svasta and
Oana Tortolea consultants, Maura Teodorescu and Lucian Constantin, CP
consultants ECOIND-Bucharest.
A. Brief Description of the company
1. About the company
SOMES¸ Dej is a Romanian integrated pulp and paper plant, producing:
Bleached/unbleached sulphate pulp (kraft), from softwood--60,000 t/yr
Bleached/unbleached wrapping paper--34,000 t/yr
Name:
SOMES¸ S.A. DEJ, Member of the HOVIS Group
Location:
Romania, Transylvania, Dej city
Established:
1963
Privatized:
2000
Shareholders:
MFC Commodities GmbH Austria
74.99 %
SIF Banat Cris¸ana 17.64
%
Others
7.37 %
Turnover (2001):
34,108,000 euro
Profit (2001):
496,000 euro
Export:
16,749,000 euro
Liquidity
(quick ratio):
0.69
No. of employees:
1,184
Contact Person:
Adrian Timar, chief accountant SOMES
Telephone:
0040 744-674-894
Email:
atimar@hotmail.com
57

---

03-88226.qxd 04/11/2003 17:22 Page 58
Introducing Environmental Management Accounting at Enterprise Level
2. Environmental aspects of the company and results of the CP
programme
In April 2001, the management of SOMES¸, recognized the importance of
being able to manage the current environmental aspects of the company,
and for the sake of future operations and competitiveness decided to join
the UNIDO-TEST project.
After the initial environmental review the bleaching unit was identified
as the area causing the most significant environmental impacts of the
whole plant, due to:
Hazardous pollution generated by the creation of chlorinated organic
compounds;
High water consumption compared to BAT;
High material losses (chemicals, product and resources: water, energy)
there were not very well quantified.
A number of investment projects were initiated during the TEST projects,
which were revealed to be an important catalyst in implementing tech-
nological solutions and spreading the environmental culture to employees.
The effects of implemented cleaner production measures resulted in:
A decrease of flow and effluent loading from the mill;
A decrease in specific consumption of chemical at the bleaching unit;
Product quality improvement;
A decrease in maintenance and repair expenditure;
A consumption reduction.
The material balances conducted at the bleaching unit, within the TEST
project, revealed significant losses of raw materials that should have been
regarded as environmental costs. Figure IV shows the impact of the
implemented CP measures on the consumption of chemicals and water
at the bleaching unit.
In early 2002, the company became ISO:9002 certified, according to the
SR EN ISO 9002/1995 standard24 and implemented an environmental man-
agement system in accordance with SR EN ISO 14001/1996 standards.
24
The system certification audit was conducted by the Germanischer Lloyd Company.
58

---

03-88226.qxd 04/11/2003 17:22 Page 59
Part III Case Studies
Figure IV. Effects of Implemented CP Measures at SOMES¸: Reduction of
Chemicals and Water Specific Consumption
[ May 2003 -- Bleaching unit : total production 42,000 tons per year ]
100
- 5%
95
- 10 %
- 14 %
90
- 11 %
85
80
e
75
tag
70
P
e
r
cen
65
60
55
50
Cl
ClO
NaOH
Water
2
2
Equivalent
Equivalent
Equivalent
Equivalent to
to 260
to 13
to 2.15
1.98 Mm3/yr
tons /yr
tons /yr
tons/yr
In 2000
After implementation of CP
As part of the TEST project, management decided to expand the EMA to
have a better and more comprehensive approach to management account-
ing, with a particular focus on costs related to wasted raw materials and
other environmental issues.
3. Management Accounting: current practices, cost centres
structure and existing allocation keys
Along with other large industrial companies from Romania, SOMES¸ has
changed its cost accounting system from one that was compatible with
the previous political structure in Eastern Europe (but is now obsolete),
to one that is more in line with international accounting standards that
provide management with better information.
59

---

03-88226.qxd 04/11/2003 17:22 Page 60
Introducing Environmental Management Accounting at Enterprise Level
The current method used for costing is generally known as Absorption
Costing (AC). The company is organized into five main cost centres, five
main auxiliary sections and five minor auxiliary sections as summarized
in table 7 and figure V. The method is conducted in several steps:
First, direct costs (direct materials, labour and energy consumption)
are allocated directly to the appropriate cost centres;
Second, the overheads (auxiliary sections) are allocated among them
through different allocation methods;
Third, the allocated overheads are absorbed into the cost centres,
through several absorption keys (proportion of production value,
labour, etc.) chosen by department managers.
Table 7. Absorption Costing at SOMES¸
Cost
Centre
Main Cost
Main Auxiliary
Other Auxiliary
Number
Centres
Sections
Sections
1
Chipping
Regeneration Finishing
2
Kamyr Digester (Boiling)
Bleaching Agents
Packaging
3
Bleaching Chemicals
Deposit
4
Pulp Machine
Water Treatment
Administration
5
Paper Machine
Wastewater Treatment
Management
The main advantage of the system used in SOMES¸ S.A. Dej was that at the
start of the project all the expenses and costs incurred during the produc-
tion process were traced and periodically reported in internal company
documents. The switch from the previous accounting system to absorption
costing at SOMES should therefore be considered as a real step forward.
However, in environmental management accounting literature, direct cost-
ing or activity based costing (variable costing) is considered preferable to
absorption costing.25
The only environmental cost category recognized in the management
accounting system at SOMES¸, before the EMA project started, was the
wastewater plant treatment costs. These costs were allocated to cost cen-
tres and to products as overheads. Non-product output environmental
costs were not recognized as environmental costs, but were included in
the direct material costs, while fines and penalties were part of the gen-
eral overheads. In table 8 the main environmental cost items and their
allocation method are reported as they were before the EMA project start.
25
For a more detailed explanation see Stefan Schaltegger and Roger Buritt: Contemporary
Environmental Accounting, Greenleaf Publishing 2000.
60

---

03-88226.qxd 04/11/2003 17:22 Page 61
Part III Case Studies
g
cals
emi
Ch
Finishin
aper
ed
ed
e
r
ed P
p
ed Pulp
Pulp
bleach
Pa
bleach
n
n
U
U
Bleach
Bleach
e
e
e
achin
achin
ort Fibr
Sh
P
a
per M
Pulp M
g
g
s
nt
c
e
Age
cal
ted
Bleachin
Bleachin
op/
a
n
ater
essed Air
rksh
ten
W
echani
o
alized
t
e
r
M
W
ain
e-Decan
M
er
Pr
Compr
Wa
ts
on
Demin
g/
on
ati
er
t
g
esti
cal
en
en
gy
ary plan
Boilin
g
t
e
r
er
Di
ater
Reg
on
t
ologi
W
Wa
En
uxili
en
Bi
Drinkin
T
r
eatm
A
sportati
Departm
T
r
an
t
al
Production Cost Flow
cal
en
g
t
e
r
¸
t
e
r
emi
ustri
Wa
d
Wa
Steam
Ch
T
r
eatm
In
SOMES
Chippin
Figure V.
61

---

03-88226.qxd 04/11/2003 17:22 Page 62
Introducing Environmental Management Accounting at Enterprise Level
Table 8. Management Accounting System Allocations (Before the EMA
Project) at SOMES¸
Cost Item
Allocation Method
Non-Product Raw Material
Direct Cost As Raw Material
Fines and Penalties
Non-allocated Overhead
Environment Related Labour
Non-allocated Overhead
Solid Waste Disposal Cost
Non-allocated Overhead
Waste Water Treatment Cost
Allocated Overhead (un-appropriate allocation key)
Contingency Cost/Provisions
Unavailable
Modification of the existing management cost accounting system at
SOMES¸, to accommodate any environmental costs category, had to take
into consideration the country's financial accounting regulations. The way
that production costs are calculated affects the financial performance of
the company (the profit) and in turn, the taxes the company has to pay
(profit tax). Therefore, there is close link between managerial accounting
and financial accounting.
The Romanian accounting legislation is in the process of adapting to the
International Accounting Standards (IAS). As a result, currently, both
Romanian Accounting Standard (RAS) and IAS are applied within SOMES¸.
According to the RAS and IAS, some categories of environmental costs,
such as fines and penalties or environment related overhead labour can-
not be considered production costs and are not allocated to products. In
addition, the regulations that permit the accrual of contingency costs are
still unclear.
B. Scoping EMA
1. Objectives
The following objectives were set at project start:
1.
To identify additional environmental costs, focusing on non-product out-
put costs.
This will result in the identification of hidden environmental costs,
within the Management Accounting System. The exact quantifi-
cation of total environmental costs will reinforce management
commitment to the implementation of Cleaner Production measures
and EST investments.
62

---

03-88226.qxd 04/11/2003 17:22 Page 63
Part III Case Studies
2.
To reorganize the accounting system to include "Environmental costs" in
the final cost structure (allocation of environmental costs to products).
The reorganization of the management accounting system will pro-
vide the management with the necessary information for creating a
better public image. By showing that the company is tracing its
environmental costs and is acting to reduce them it demonstrates
the company's commitment to environmental responsibility.
2. Environmental Costs items selection
The bleaching unit was initially selected as the focus for the implemen-
tation of the EMA project. However, it was necessary to extend the bound-
aries of the EMA project to the entire plant, in order to conduct a proper
allocation to products.
Considering the existing cost management practices and main environ-
mental aspects of the company, the following environmental costs items
for calculation were chosen:
Direct environmental costs:
Material Purchase Value of non-product output.
Allocated environmental overheads:
Wastewater Treatment costs;
Solid waste disposal costs.
Non-allocated environmental overheads:
Environmental studies and research;
Cost of personnel from the environmental department;
External services;
Fines and penalties;
Contribution to the environmental fund.
Once environmental costs items were selected, all cost centres, including
all process overhead generator centres, were analysed to collect informa-
tion on the environmental costs and the existing allocation keys.
63

---

03-88226.qxd 04/11/2003 17:22 Page 64
Introducing Environmental Management Accounting at Enterprise Level
The calculation of non-product output costs, as well as end-of-pipe costs,
was done using data provided by the material and energy balances from
the cleaner production assessment. It was also possible to define, for each
cost item, what kind of information would be necessary for the EMA sys-
tem and who would provide it.
The company accounting department discussed two calculation methods
for the correct allocation of raw materials and non-product output costs
that use either:
The entire value of the non-product output compared to the theo-
retical norms; or
The difference between the present consumption value and the con-
sumption value indicated in the technological norms of the existing
technology.
They chose to use both methods, choosing the most appropriate method
for each cost centre based on the type of process and on the practicality
of controlling those costs in a short to medium period. The first alterna-
tive was used for the wood chipping unit, while the second was used for
the bleaching section. The method for calculating the purchase value of
inputs exceeding consumption norms at the bleaching unit was selected
for operational control purposes.
C.
Calculation of environmental costs, allocation keys
and information system
Once mass balances were completed, the environmental costs were iden-
tified, allocated to the respective cost centres in the main production flow
and the cost information system was then modified to integrate the EMA.
The following is a brief description of the allocated cost items, by main
cost centres.
1. Chipping
The wood-waste produced has two destinations: the refuse boiler for burn-
ing wood-waste and producing steam, or the dumpsite. The following
environmental costs were identified and allocated:
64

---

03-88226.qxd 04/11/2003 17:22 Page 65
Part III Case Studies
Transport cost to the dump site;
The cost of dump site maintenance;
Transport and purchasing costs of the wood that becomes a waste;
Environmental earnings: the value of steam produced using wood-waste.
Data on the waste quantities were derived from the difference between
the quantities of wood entering the chipping section and of chips trans-
ferred to the Cooking Section. Wood-waste transports were monitored by
the Mechanical-Energy and Maintenance Service departments and repor-
ted to the Accounting Department. Purchasing transport costs were allo-
cated in accordance with the value of the raw materials.
2. Wastewater treatment
All these costs were considered environmental costs. Monitoring was the
basis for establishing the amount of wastewater discharged by each plant
section. Where monitoring was not possible, due to lack of monitoring
equipment, mass balances were used. Environmental costs for WWTP were
re-calculated and the allocation key changed. Before the EMA project these
costs were allocated based on the volume of water; after EMA the costs
were allocated to individual cost centres, based on both the concentra-
tion of pollutants and the quantity of wastewater. Table 9 shows the allo-
cation key of WWTP costs before and after the EMA project at each main
cost centre.
Table 9. SOMES¸ WWTP Cost Allocation Comparison--Before vs. After EMA
Chemical WWTP
Biological WWTP
Department
Before EMA
After EMA
Before EMA
After EMA
Bleaching
39%
15%
39%
50%
Recovery Boiler
14%
3%
14%
5%
Paper Machine
15%
70%
15%
0%
Pulp Machine
7%
2%
7%
5%
Boiling/Washing
25%
10%
25%
40%
Total
100%
100%
100%
100%
65

---

03-88226.qxd 04/11/2003 17:22 Page 66
Introducing Environmental Management Accounting at Enterprise Level
3. Bleaching and bleaching reagents
The following environmental costs were identified:
Purchase value of chlorine exceeding technological norms;
Purchase value of industrial water exceeding technological norms;
Purchase value of caustic liquor exceeding technological norms;
Transport and handling cost of non-product output;
Depreciation of storage tanks for hazardous substances;
Maintenance and repair cost for storage tanks for hazardous substances.
Additional information about environmental costs was obtained from con-
sumption sheets and warehouse's records.
4. Recovery boiler
The following costs were considered non-product output costs:
Purchase value of sodium sulphate exceeding technological norms;
Purchase value of soft water exceeding the technological norms;
Transportation costs for above-mentioned raw materials exceeding the
technological norms.
Information about environmental costs was obtained from consumption
sheets, warehouse's records and consumption norms.
5. Paper machine
The following costs were considered non-product output costs:
Purchase value of sizing reagents exceeding technological norms;
Purchase value of aluminium sulphate exceeding technological norms;
Purchase value of optical brightener exceeding technological norms;
Transportation costs for above-mentioned raw materials exceeding
technological norms.
Information about environmental costs was obtained from consumption
sheets, warehouse's records and consumption norms.
66

---

03-88226.qxd 04/11/2003 17:22 Page 67
Part III Case Studies
D. Allocation of environmental costs to cost centre and to products
As a result of EMA, several modifications occurred within the managerial
accounting registration system. New accounts were created for each envi-
ronmental costs item, both for direct costs (to make them visible within
the direct production costs) and for each type of environmental category
included in the overheads (in order to emphasis the "environmental over-
heads" within the total overheads).26 However fines and penalties, as well
as all the other non-allocated overheads, were revealed to be almost
insignificant and also cannot be allocated directly to products according
to the Romanian law.
Solid waste disposal costs were calculated and properly allocated to the
cost centres that generate them.
The environmental costs were first allocated at the cost centre level and
then at the product level. Tables 10 and 11 summarize the structure for
the bleaching cost centre (computed on a monthly basis):
The first column in table 10 represents the bleaching production costs by
each cost category, while the second and the third columns represent the
part of each cost item related to non-product costs. In particular, the second
column refers to production costs generated in the bleaching unit from
Table 10. SOMES¸ Cost Structure of the Bleaching Unit (thousands of ROL)
Bleaching Unit Production Cost Structure
Value of Non-Product Output
Exceeding
Final Product
Cost Item
Total
Consumption Norms
in Wastewater
Caustic Liquor
2,069,815
561,403
12,067
Chlorine
1,066,200
79,497
7,894
Industrial Water
773,701
71,262
5,620
Hydrogen peroxide (H O )
667,811
5,342
2
2
Chemicals
351,631
2,813
Wages
648,548
5,188
Electricity
1,236,320
9,891
Steam
3,485,994
27,888
Repair Works
197,856
1,583
Transport and Handling
420,257
3,362
Depreciation
140,181
4,572
1,085
Treatment Cost
1,078,016
8,624
Total
12,136,330
716,734
91,357
26
These costs were analysed as separate costs in overheads and not used to compute the pro-
duction cost (not allocated to cost centres). Later these costs were allocated to products
in order to compute the total cost and calculate the profitability of each of the product.
67

---

03-88226.qxd 04/11/2003 17:22 Page 68
Introducing Environmental Management Accounting at Enterprise Level
Table 11. SOMES¸ Treatment Cost Structure--Bleaching Unit (thousands of ROL)
Bleaching Unit Treatment Costs
Cost Item
Total
Chemicals
184,684
Depreciation
61,269
Wages
236,025
Electricity 279,235
Discharge Fees
211,249
Electricity
48,143
Repair Works
26,412
Transport and Handling
30,998
Total 1,078,016
exceeding technological norms, which represent costs that do not con-
tribute to the final product. The third column represents the fraction of
bleaching production costs that are associated with the consumption of
inputs to produce bleached pulp, which however gets lost in the wastewater.
A similar calculation was made for all main cost centres. Once the pro-
duction cost structures of all centres were finalized, it was possible to cal-
culate the product's cost structure. Tables 12 and 13 show the product
cost structure generated for bleached pulp.
Table 12. SOMES¸ Product Cost Structure--Bleached Pulp (thousands of ROL/ton)
Bleached Pulp: Product Cost Structure
Environmental Costs
Non-Product
Cost Item
Total
Output Costs
Treatment Costs
Wood
5,773
376
Chemicals
1,373
166
Wages
874
26
Steam
3,384
18
Air
116
2
Energy
1,319
9
Water
446
19
Maintenance
905
20
Other Indirect Costs
720
14
426
Other Material Costs
63
7
Total Cash Cost
14,973
657
426
Depreciation
176
1
-
Total Production Cost
15,149
658
426
Overheads
1.363
59
Total Cost
16,512
717
Note: Other indirect costs represents: costs of small inventory, tools, dispatch, etc.
68

---

03-88226.qxd 04/11/2003 17:22 Page 69
Part III Case Studies
Table 13. SOMES¸ Breakdown of Treatment Costs for Bleached Pulp
Breakdown of Treatment Costs: WWTP and Solid Waste Disposal Costs
(per ton of product)
Cost Item
Total (thousands of ROL)
Chemicals
73
Depreciation
24
Wages
93
Purchased Electricity
110
Discharge Fees
83
Electricity
19
Repair Works
10
Transport and Handling
12
Total
426
The total value in table 13 represents the cost of WWTP and solid waste
disposal cost per ton of product [thousands of ROL]. Before EMA, this por-
tion of costs from "Other indirect costs" was not visible. The overheads
cost category includes the financial cost, extraordinary costs like fines,
penalties and the costs for the administration of the company. The envi-
ronmentally related overhead costs that were mentioned previously are
analysed monthly (there is separate account for environmental overheads)
but do not appear in the final product cost structure (because their value
as percentage of total overheads is negligible). In figure VI the SOMES¸ pro-
duction cost structure for the bleached pulp is reported: it appears that
non-product costs are equal approximately to 4 per cent of product costs
while total environmental costs are 7 per cent of product costs.
Figure VI. SOMES¸ Product Cost Structure: Bleached Pulp
3%
4%
Non-product output costs
Other environmental costs
93%
[WWTP and waste disposal]
69

---

03-88226.qxd 04/11/2003 17:22 Page 70
Introducing Environmental Management Accounting at Enterprise Level
The breakdown of the non-product output reported in figure VII shows
that more than 70 per cent of the non-product cost is represented by the
purchase value of raw material (mostly wood).
Figure VII. SOMES¸ Non-Product Cost Structure: Bleached Pulp
2% 1%
3% 3%
1%
3%
4%
58%
25%
Wood
Wages
Chemicals
Energy
Steam
Maintenance and spare parts
Water
Other indirect material costs
Other indirect costs
E.
Total environmental costs
The EMA system was designed to compute environmental cost on a
monthly basis.
Table 14 shows the results from March 2003. From the table it is clear
that non-product output is a larger issue than treatment costs, demon-
strating the company should focus on decreasing these costs.
70

---

03-88226.qxd 04/11/2003 17:22 Page 71
Part III Case Studies
Table 14. SOMES¸ Environmental Profit/Loss--March 2003
Expenditure/Cost Roll-over
Value (thousands of ROL)
1. Waste and Emission treatment
1.1. Depreciation for Related Equipment
74,568
1.2. Maintenance and Operating Materials and Services
693,079
1.3. Related Personnel
287,256
1.4. Fees, Taxes, Charges
260,302
1.5. Fines and Penalties
1.6. Insurance for Environmental Liabilities
1.7. Provisions for Clean-up Costs, Remediation
TOTAL I
1,315,205
2. Prevention and Environmental Management
2.1.
External Services for Environmental Management
66,000
2.2.
Personnel for General Environmental Management Activities
60,750
2.3.
Research and Development
2.4.
Extra Expenditure for Cleaner Technologies
2.5.
Other Environmental Management Costs
TOTAL II
126,750
3. Material Purchase Value of Non-Product Output
3.1.
Raw Materials
1,864,055
3.2.
Packaging
-
3.3.
Auxiliary Materials
326,912
3.4.
Operating Materials
915,735
3.5.
Energy -
3.6.
Water 96,845
TOTAL III
3,203,547
4. Processing Costs of Non-Product Output
386,478
Environmental Expenditure (1+2+3+4)
5,031,980
5. Environmental Revenues
5.1.
Subsidies, Awards
5.2.
Other Earnings
5.2.1 Sales of Waste
205,955
5.2.2 Production of Steam from Wood Waste
1,602,756
5.2.3 Pulp Recovered from Wastewater and Sold
565,000
TOTAL IV
2,373,711
Environmental Result
- 2,658,269
71

---

03-88226.qxd 04/11/2003 17:22 Page 72
Introducing Environmental Management Accounting at Enterprise Level
F.
Sensitivity analysis
A sensitivity analysis was conducted to analyse the variation of the most
sensitive production inputs and their relative influence on the product
cost structure, in particular on the non-product costs. The input parame-
ters selected were based on both their significant (large) cost factors and
their wide range of maximum and minimum estimated values. The fol-
lowing parameters were considered:
Water costs; and
Wood costs.
The sensitivity analysis showed that the variation in pulp's cost is sensi-
tive to increase in water prices. Given that the current cost of water in
Romania is very low, it would not be unrealistic to see an increase of
200 per cent27 would not be unrealistic in the not too distant future. This
will have a significant impact on pulp cost.
Figure VIII shows the impact of the variation of wood cost on both pulp
cost as well as the impact on non-product costs. A 10 per cent increase
in wood price will generate an increase of 4 per cent of pulp cost and a
6 per cent increase of non-product costs. It seems then that non-product
costs are more sensitive to wood price variation than pulp cost.
G. Conclusions
SOMES¸ S.A., is a member of the HOVIS Group, a company with much
potential. The Organizational culture of the company and the level of the
existing human resources are an excellent basis for the company's future
development. A tool like the one EMA has successfully introduced to help
it attain that potential.
At its conclusion, the EMA project achieved the following:
EMA human skills were built within the company and the EMA pro-
ject was extended from the bleaching unit (initial focus area) to the
entire plant.
27
An increase of 200 per cent of the current water price in Romania would bring the
water fee to a value comparable with the EU countries.
72

---

03-88226.qxd 04/11/2003 17:22 Page 73
Part III Case Studies
10.0
0%
3.81
5.71
%
9.00
3.43
5.14
%
8.00
3.05
4.57
%
7.00
2.67
4.00
%
6.00
2.29
3.43
%
5.00
1.91
2.86
%
4.00
1.52
2.29
%
3.00
1.14
1.71
¸
%
2.00
0.76
1.14
SOMES
on
%
1.00
0.38
0.57
a
ti
%
0%
0%
0.00
-
%
1.00
cost vari
-
0.38
-
0.57
-
ood
%
2.00
-0.76
-1.14
W
-
%
3.00
-
1.14
-
1.71
-
%
4.00
-1.52
-2.29
-
%
5.00
-
1.91
-
2.86
-
%
6.00
-2.29
-3.43
-
%
7.00
-
2.67
-
4.00
-
%
8.00
-3.05
-4.57
-
%
9.00
-
3.43
-
5.14
-
10.0
0%
-3.81
-5.71
n
o
00%
00%
00%
00%
00%
00%
00%
00%
00%
ati
8.
6.
4.
2.
0.
-2.
-4.
-6.
-8.
n
o
ati
p cost vari
pul
non-product cost vari
Figure VIII. Sensitivity Analysis: Wood versus Pulp and Non-product Costs--
73

---

03-88226.qxd 04/11/2003 17:22 Page 74
Introducing Environmental Management Accounting at Enterprise Level
Management Accounting and Data Collection System were re-organized
and Procedures were prepared to highlight the environmental costs.
Continuous application of CPA for reduction of the environmental
costs was adopted.
CPA was extended to the entire plant to support environmental cost
controlling information system (EMA).
Integration of environmental criteria in EST investments analysis (both
present and contingency costs/benefits).
The reorganization of the management accounting system was done in
the following steps:
Existing cost allocation methods and allocation keys were revised to
take into account environmental criteria.
Total environmental costs were calculated and allocated to the appro-
priate cost centre and to the products.
The existing accounting information system was modified by the cre-
ation of environmental accounts.
The information from the newly created environmental accounts will
result in the presence of two categories within the product cost structures:
one for "environmental cost" (end-of-pipe related costs) and another one
for "non-product output". Table 15 shows the relative importance of non-
product output compared to environmental treatment costs (end-of-pipe)
for each product. It appears that non-product material costs are more
important for the company. However, a reduction of total environmental
costs by 50 per cent will generate an average increase in profitability of
approximately 3 per cent. For a turnover of 31,600,000 euro, the amount
of savings will be 948,000 euro.
Table 15. Non-Product Output Costs Compared to Environmental
Treatment Costs (end-of-pipe) For Each Product--SOMES¸
Total Production
Non-Product
Environmental Costs
Cost
Output
(End-of-pipe)
Products
Value: ROL/kg
Value
%
Value
%
Natural Pulp
8,779
440
5.01
233
2.65
Bleached Pulp
15,149
658
4.34
426
2.81
Unbleached Paper
15,295
633
4.14
233
1.52
Bleached Paper
18,126
617
3.40
318
1.75
74

---

03-88226.qxd 04/11/2003 17:22 Page 75
Part III Case Studies
Additionally, the management recognized the following benefits from
implementing EMA:
The increase of efficiency in the use of the raw materials became the
most important objective at the cost centre level for product prof-
itability (reduction of non-product material costs);
Increased commitment for the development of new environmentally
friendly products, technologies and work procedures;
Increase in the quality and consistency of the information offered to
management;
Fostering of communication between company plants and cost cen-
tres including the involvement of top management in structuring and
controlling the material flow within the company;
Environmental reasons became critical for investment decisions (three
large environmental investments are in progress: a chlorine-free
bleaching unit-EST component of the TEST project, Wastewater
Treatment Plant, Solid Waste Incineration plant).
Based on the results of the project, the following actions are planned:
Material balances for the other auxiliary cost centres will be prepared.
Determination and tracing of the non-product raw material costs for
the other auxiliary cost-centres will be carried out.
Study the possibility of taking into account other environment related
overheads.
75

---

03-88226.qxd 04/11/2003 17:22 Page 76

---

03-88226.qxd 04/11/2003 17:22 Page 77
CASE STUDY 3: HERBOS D.D. CROATIA
Authors: Katica Blaskovi ´c, Andreja Feruh, Darko Kobal,
Ivan Smol vci ´c, Vlatko Zaimovi ´c, Morana Belamaric and
Boris Bjedov
The EMA team consisted of Katica Blaskovic, Andreja Feruh, Darko Kobal,
Ivan Smol vci´c, Vlatko Zaimovi´c from HERBOS, Morana Belamaric from the
Croatian Cleaner Production Centre and Boris Bjedov consultant.
A. Brief description of the company
1. About the company
HERBOS d.d. is a joint stock company (i.e. both privately and publicly
owned), for the production of chemicals, mainly pest control products.
The company was founded in 1946. At that time, it was a manufacturer
of tartaric acid and oxygen. Over the past 50 years, the company changed
its name to "HERBOS d.d." and has grown into a major manufacturer of
pest control products, construction materials, paints and coatings and
reagents for clinical diagnostics
The company statistics include:
Employees:
Presently 340 employees
Annual Revenue:
Approximately 150 million HRK.
Ownership:
Approximately 70 per cent owned by small share-
holders
Contact Person:
Mr. Ivan Smolčić
Telephone:
+385 (0) 44 543 333
Email:
ivan.smolcic1@sk.tel.hr
HERBOS d.d. operates as one unit, regardless of its various production pro-
grammes.
77

---

03-88226.qxd 04/11/2003 17:22 Page 78
Introducing Environmental Management Accounting at Enterprise Level
2. Environmental aspects of the company
The main environmental problem at HERBOS is wastewater discharge that
originates from atrazine synthesis. At full operational capacity (approx.
450 m3/day), atrazine concentration in discharged wastewaters is 93.3
mg/l, which exceeds the permitted concentration level (10 mg/l) by almost
ten times. In addition, regulations are to change by 2005, which will have
an atrazine level of 0.05 mg/l, 200 times stricter than the current limit.
Different, cleaner production measures are planned to solve this problem.
Air pollution limits are covered by the law on Limit Values of Pollutant
Emission from Stationary Sources into the Air.
Hazardous wastes generated in the processes include:
Tin drums, which are collected and kept separate until returned, or
pressed and sold as secondary raw materials;
Glass packaging (from laboratories), which is kept in separate con-
tainers and returned as a secondary raw material;
Other hazardous wastes removed from the point of generation and
sent for destruction at the company's incineration plant;
Ash from the incineration plant, which is sent to a class IV site for
off-site disposal after physical and chemical analysis, classifies it as a
process waste.
3. Current management accounting practice
There is a financial accounting department within HERBOS, supported by
an automatic data processing system. The majority of existing environ-
mental costs are allocated to cost centres, or to products, according to
pre-determined keys, usually through the management or supporting serv-
ices overhead. Allocation keys are not always clearly defined and there is
no mechanism to regularly check them. Until now, there had not been
an instance where environmental protection costs had been separated
from other overheads in order to determine their real value and to enable
correct allocation to cost centres and cost carriers.
The company as a whole is organized into six sectors, and each sector has
several organizational units. Out of 66 total cost centres, 19 can be rec-
ognized as having environmental costs/revenues. Table 16 shows these
cost centres:
78

---

03-88226.qxd 04/11/2003 17:22 Page 79
Part III Case Studies
Table 16. Cost Centres with Environmental Costs/Revenues--HERBOS
Code
Cost Centres
10
Sector of Executive Director
11
Services Sector
1110
General Services Dept. with General Manager Office (Ecological Laboratory included)
1111
Safety Department
1112
Fire Safety Department
1120
Department of Mechanical Maintenance
1130
Electrical Department and maintenance
1140
Department of Energy (Incineration plant)
1150
Department of Safety at Work
1160
Department of Transport
1170
Restaurant
12
Sector of Finance
2
Pest Control Programme
21
Pest control preparation and purchasing sector
2220
Atrazine Synthesis Plant
2230
Dusting-powder Plant
23
Sector of Pest Control Production
3
Construction Materials Production Programme (CM)
30
Office of Director (CM)
31
Commercial Sector
32
Controlling Sector (CM)
33
Production Sector (CM)
B. Scoping EMA
1. Objectives
This project focused on the chemical synthesis of atrazine, a key product
of HERBOS, whose concentration in discharge water significantly exceeds
the permitted limits. In certain areas, however, broadening the project
scope to include the whole company was inevitable to provide a high
quality analysis of all atrazine related environmental protection costs: this
broadening refers to items documented at the company level.
The project scope was finally defined as follows:
Calculating environmental costs at a company level to include all
emission treatment and prevention costs categories, but not includ-
ing non-product outputs. Non-product outputs could have been cal-
culated only after analysing all processes within the company. This
was not possible within the framework of the project, since a cleaner
production assessment and input/output analysis was only available
for the atrazine synthesis plant.
79

---

03-88226.qxd 04/11/2003 17:22 Page 80
Introducing Environmental Management Accounting at Enterprise Level
Calculating environmental costs for the atrazine plant, including emis-
sion treatment and prevention costs, as well as the purchase value
and processing costs of non-product outputs. This job relied heavily
on the results of the cleaner production assessment previously per-
formed within the TEST project.
2. Cleaner Production Assessment
The Cleaner Production Module of the TEST project was based only on
one product-atrazine. The calculation of losses is based on the raw mate-
rial consumptions that exceed the technological norms. The latter are
derived from the technological flowchart. Raw material consumption and
final product quantity is determined through measurements wherever pos-
sible. Estimates were used where no monitoring of flows is performed. It
was estimated that 46,260 m3/year of process water is lost in the atrazine
production process.
Direct data are not recorded in the books for the volume of water used
in the atrazine production. These costs appear in different positions.
Table 17 shows the breakdown of industrial water costs in 2001.
Table 17. Breakdown of Industrial Water Costs in 2001 (in HRK)--HERBOS
Unit
Price
Cost Category
Amount/m3
HRK
HRK/m3
Calculation Method
Electric Energy
0.4 kWh
0.40
0.16
On the basis of technical
characteristic of pumps
Hypochlorite
0.05 l
2.20
0.11
Consumption norm
Amortisation
0.50
Estimation
Salaries
0.11
Estimation
Other Overhead Costs
0.20
Estimation
Net Price of Water
1.08
Part of the costs of Department
of Energy
Sewage Fee
1.39
For the whole plant
Water Consumption Fee
0.72
For the whole plant
Wastewater Discharge Fee
1.70
For the whole plant
Concession Fee
0.08
For the whole plant
River Basin Water Fee
0.41
For the whole plant
Municipal Fee
0.26
For the whole plant
Fees Total:
4.46
Total:
5.64
80

---

03-88226.qxd 04/11/2003 17:22 Page 81
Part III Case Studies
Only two of these cost items are directly allocated to the herbicide syn-
thesis facility (the surface run-off and the water consumption fees). All
other fees are recorded as overheads and are allocated through uniform
keys not related to environmental protection.
C.
Calculation and allocation of environmental
protection costs
Calculation of environmental costs required a significant effort, and sev-
eral recommendations were provided to the company for improvement
and for building up the EMA information system. The total environmen-
tal protection costs for HERBOS in 2001 were calculated as shown in
table 18.
Some examples of calculations and suggestions made are reported in sec-
tions 1-4 in this chapter.
1. Waste and emission treatment
1.1 Solid non-toxic waste
Existing way of calculation: There is a separate account for this cost and
it is allocated to the organizational unit that disposes the waste in its own
container.
Suggestion/Idea: No suggestions were made.
1.2 Sewage water fee (industrial and sanitary)
Existing way of calculation: Both costs are recorded on the same account
as overheads. Estimation was done in breaking down these costs.
Suggestion/Idea: The discharge of industrial and sanitary water used at the
site should be measured separately and separate accounts set up to record
these costs. It is estimated that significant water savings is possible (today
420 l/day per employee are used).
81

---

03-88226.qxd 04/11/2003 17:22 Page 82
Introducing Environmental Management Accounting at Enterprise Level
Table 18. Total Environmental Protection Costs in 2001
(thousands of HRK)--HERBOS
Cost Items
Value (thousands of HRK)
Waste and Emission Treatment
Solid Non-toxic Waste
78
Sewage System
200
Pre-treatment Costs (scrubbers, filters etc.)
Pre-treatment Costs Related Personnel
Incineration Plant
200
Fines
0
Insurance
92
Surface run-off Fee
311
Water Consumption Fee
-
Concession Fee
-
Wastewater Discharge Fee
153.3
River Basin Water Fee
8
Municipal Fee
2,800
Prevention and Environmental Management
External Services
234
Education and R&D
44
Environmental Laboratory (personnel included)
300
Cleaner Production Planning Costs
100
Decoration of the Area
97
Premises Cleaning
497
Safety
253
Maintenance
112
Material Purchase Value of Non-Product Output
Water
Main raw materials
Auxiliary materials
Other materials
Packaging
Processing costs of non product output
Total
5,471.3
Total costs of production
150,000
Of which environmental costs
3.65%
1.3. Wastewater discharge fee, water consumption fee and river
basin water fee
Existing way of calculation: All these fees are recorded in the same over-
head account. Water consumption is a fee that exists as a kind of con-
cession for the use of a natural resource and the water supply systems.
82

---

03-88226.qxd 04/11/2003 17:22 Page 83
Part III Case Studies
River basin fees are used for the continual maintenance and improvement
of the river basin water systems.
Suggestion/Idea: Separate individual fees by setting up new accounts. Fees
for water protection and water consumption should correlate with the
amount of water consumed and the sewage water fee, and should be relat-
ed and allocated to their respective cost centres based on industrial usage.
1.4. Incineration plant
Existing Way of calculation: The incineration plant operates as part of the
Department for General Services. There is an initiative to build a new
incineration plant that would comply with legal emission limit values.
The new plant is proposed to operate as a separate firm.
Suggestion/Idea: If the initiative for a new firm were refused, the incin-
eration plant should be organized as an individual cost centre in the
future. All costs should be identified and quantified, since this plant offers
services to the public as well.
1.5. Insurance
Existing Way of calculation: These costs are on the overhead account.
Suggestion/Idea: Processes within HERBOS have different inherent risks.
For that reason, a risk evaluation would be interesting for the different
processes.
2. Prevention and environmental management
2.1. External control services
Existing Way of calculation: Costs include emissions monitoring, are on
an overhead account and are allocated using pre-determined keys to dif-
ferent products.
83

---

03-88226.qxd 04/11/2003 17:22 Page 84
Introducing Environmental Management Accounting at Enterprise Level
Suggestion/Idea: Identify which activity belongs to which specific cost cen-
tres. For example, operating and monitoring costs of the incineration plant
should be allocated to the plant. These costs influence the price of the
services provided by the incineration plant.
2.2 Environmental laboratory
Existing Way of calculation: Presently all laboratory costs are pooled
together with other overhead costs.
Suggestion/Idea: A separate cost centre should be set up. This would be
especially important as certain services of the laboratory are provided to
external partners.
2.3 Hygienic and technical safety (HTS)
Existing Way of calculation: These costs are currently hidden in the over-
heads.
Suggestion/Idea: Separate accounts for personal protective equipment and
other means of HTS should be set up.
3. Material purchase value of non-product output
This focus is exclusively on atrazine synthesis plant data. This was the
only plant where a cleaner production assessment provided a detailed
material flow analysis, which could be used for estimating the value of
non-product output.
3.1 Packaging waste
Existing Way of calculation: Packaging waste costs are currently a part of
the direct costs of the production.
Suggestion/Idea: Packaging waste costs should be represented separately as
environmental cost.
84

---

03-88226.qxd 04/11/2003 17:22 Page 85
Part III Case Studies
3.2 Auxiliary raw materials and other materials losses
Existing Way of calculation: These costs are either on overhead accounts,
or part of the direct costs, but not recognized as environmental.
Suggestion/Idea: All costs from this category should be in a separate account.
3.3 Purchase value of water going to the wastewater
Existing Way of calculation: These are direct costs of production, but not
recognized as environmental costs.
Suggestion/Idea: In preparing environmental reports these costs should be
taken into account.
3.4 Raw material losses in atrazine production
Cleaner production assessment of material losses (table 19):
Table 19. Raw Material Losses in Atrazine Production--HERBOS
Total Financial
Material Losses Within the Process
Losses
Raw Material
kg/year
(%)
(thousands of HRK)
Cyanuric Chloride
73,554
5.3%
876,300
Isopropyl amine
56,884
11.9%
450,400
Monoethyl amine
13,082
2.8%
89,000
TOTAL:
143,520
1,415,700
Losses were calculated as consumption exceeding the technological norms.
The company can achieve significant cost savings in the short term by
making a better job of maintaining operations within the technological
norms.
85

---

03-88226.qxd 04/11/2003 17:22 Page 86
Introducing Environmental Management Accounting at Enterprise Level
4. Revenues
4.1 Income from the environmental laboratory
It is a secondary activity in HERBOS today, but it could become more
significant.
4.2 Income from the incineration plant
The incineration plant is used mostly by HERBOS. With a new incineration
plant, additional income could be gained by offering incineration services
to the public. For this purpose, a separate company might be set up.
D. Allocation process and Information system for EMA
Since costs were being hidden in overheads or recorded as part of direct
costs they were not recognized properly. This situation can be changed by:
Setting up separate analytical accounts;
Adding a special indicator for environmental expenditures while reg-
istering the business events in the accounting department;
Thoroughly registering the value of internal services by recording the
quantities and unit prices.
In this way the total environmental protection costs, at the company level,
can be obtained. It is far more complex and difficult to obtain this infor-
mation at cost centre or product levels.
From the problems and suggestions described, the following factors were
important when deciding on allocation of environmental costs:
Measurability of the parameters for cost allocation;
Consistent recording of costs in the cost centre where they appear;
Compatibility with existing methods and techniques of billing;
Implementation only in cases where it is economically justifiable.
The information system for EMA was set up as described in table 20.
86

---

03-88226.qxd 04/11/2003 17:22 Page 87
Part III Case Studies
Table 20. EMA Information System--HERBOS
Cost Item
Account
Method
When
How
1.1.
Solid Non-toxic Waste
Exists
Counting number
Monthly
Analysis and
of containers
allocation to CCa
1.2.
Drainage Water Fee
New
On the basis of m3 of Monthly
Analysis and
total amount of water
allocation to CC
1.3.
Wastewater Discharge
New
On the basis of m3 of Monthly
Analysis and
Fee, Water
total amount of water
allocation to CC
Consumption Fee
1.4.
River Basin Water Fee
New
On the basis of m2
of area
1.5.
Costs of Sewage System New
Estimation on the
Quarterly Analysis and
basis of m3 of water
allocation to CC
1.6.
Pre-treatment Costs
New
Estimation
Quarterly Analysis
1.7.
Incineration Plant
Estimation
Quarterly Analysis and
Costs
allocation to CC
1.8.
Costs of Environmental
Estimation
Quarterly Analysis and
Personnel
allocation to CC
1.9.
Insurance
New
Cost centre
Quarterly Analysis and
allocation to CC
1.10. Municipal Fee
Exists
On the basis of m2
Quarterly Analysis and
of area
allocation to CC
2.1.
External Services
New
Cost centre
Quarterly Analysis and
allocation to CC
2.2.
Education and R&D
Special
Cost centre
Quarterly Analysis and
indicator
allocation to CC
2.3.
Environmental Estimation
Quarterly Analysis
and
Laboratory
allocation to CC
2.5
Decoration of the Area
New
Cost centre
Quarterly Analysis and
allocation to CC
2.6
Premises Cleaning
Estimation
Quarterly Analysis and
allocation to CC
2.7
Safety
Exists
Cost centre
Monthly
Insight to
business books
2.8
Maintenance of
Quarterly Analysis and
Working Outfit
allocation to CC
3.1
Water
Estimation
Quarterly Evaluation
3.2
Raw Materials
Estimation
Quarterly Analysis
3.3
Auxiliary Raw Materials
Estimation
Quarterly Analysis
3.4
Other Materials
Estimation
Quarterly Analysis
3.5
Packaging
Estimation
Quarterly Analysis
4.1
Environmental New
Cost
centre
Quarterly Analysis
Laboratory
4.2
Incineration Plant
New
Cost centre
Quarterly Analysis
aCost Centre.
87

---

03-88226.qxd 04/11/2003 17:22 Page 88
Introducing Environmental Management Accounting at Enterprise Level
E.
Results and conclusion
1. Environmental costs in the Atrazine Synthesis Plant
Since technical grade atrazine is the focus of the project, estimation of
environmental costs were prepared for this plant, and non-product costs
were calculated as consumptions exceeding the technological norms (see
table 21).
This was the first attempt ever made to identify environmental costs for
technical atrazine. The largest percentage (approximately 2/3rds) of envi-
Table 21. Atrazine Plant Environmental Costs
(thousands of HRK)--HERBOS
Cost Item
Value
Remarks
Solid Non-toxic Waste
0
Not significant
Sewage System
20
Estimation
Pre-treatment Costs (scrubbers, filters etc.)
63
Estimation including: depreciation,
maintenance, energy
Pre-treatment Costs Related Personnel
96
Estimation
Incineration Plant
160
Estimation
Fines
0
Drainage Water Fee
114
Estimation based on physical
amounts
Water Consumption Fee
15
Estimation
Wastewater Discharge Fee
31
Estimation based on measured
pollution loads
River Basin Water Fee
8
Municipal Fee
External Services
122
Environmental Laboratory
(personnel included)
300
Cleaner Production Planning Costs
64
Estimation
Decoration of the Area
13
Estimation
Safety
35
Requisition slips
Water
257.5
Estimation (CP project)
Main Raw Materials
1,415.7
Estimation (CP project)
Auxiliary Materials
60.5
Estimation (CP project)
Other Materials
21.9
Estimation
Packaging
165.0
Estimation
Processing Costs of Non-product Output
322.1
Estimation based on production
costs of technical atrazine
Total
3,283.7
Total Costs of Production
44,854
% Environmental Costs
7.32%
88

---

03-88226.qxd 04/11/2003 17:22 Page 89
Part III Case Studies
ronmental costs stem from the material purchase value costs of non-
product outputs. These costs are expected to be reduced by implementing
cleaner production measures. Environmental costs for technical atrazine
make up 7.32 per cent of total production costs.
Figure IX provides a breakdown of atrazine product costs, highlighting
environmental costs.
Figure IX. Breakdown of Atrazine Product Costs (percentage)--HERBOS
4.4%
3.0%
51.0%
11.5%
22.8%
1.6%
4.3%
Raw materials, packaging
0.7%
0.4%
0.4%
Energy, water
Direct labour costs in production
General overhead
Other production costs
Non-product processing costs: lost raw materials
Non-product costs: raw material, packaging and energy loss
Pre-treatment environmental costs
Direct environmental costs
Environmental overhead
2. Future development of EMA
The loss of raw material refers to raw materials, packaging and water that
are not included in the final product. Considering the fact that the com-
bined costs of materials, packaging, energy and water is almost 60 per
cent of total costs, the 7.32 per cent of this which represents environ-
mental costs is a relevant number.
Most environmental costs were estimated or calculated. Only 5 per cent
of their actual amount (170,000 HRK) could be found as explicit items in
the books of HERBOS.
89

---

03-88226.qxd 04/11/2003 17:22 Page 90
Introducing Environmental Management Accounting at Enterprise Level
The analysis has shown that the environmental protection costs of atrazine
synthesis are equal approximately to 7 per cent of production value, which
is an relevant percentage considering that direct costs give 63 per cent of
total costs. This amount is actually even higher, as some items were left
out of the analysis. These values demonstrate that costs can be signifi-
cantly reduced by better housekeeping measures and by complying with
the technological norms.
Financial expenses for environmental protection are increasing as a gen-
eral trend. The new legislation on an Environmental Protection Fund,
which anticipates new fees, was passed by the Parliament and will come
into force in 2004. The new law requires that everybody who directly or
indirectly pollutes the environment pay fees. HERBOS therefore will be
incurring new environmental costs.
The need to know environmental protection costs and revenues calcula-
tion is recognized within HERBOS as an important tool for business deci-
sion-making. It also has relevance for public relations, since the public
closely follows the environmental protection measures in this factory.
90

---

03-88226.qxd 04/11/2003 17:22 Page 91
CASE STUDY 4:
KAPPA STUROVO, SLOVAKIA
Authors: Viera Feckova, Helena Malisová, Zdenka Kozempelova
and Michal Hrapko
The EMA team consisted of Helena Malisová, accountant, Zdenka
Kozempelova, head of department of management systems from Kappa
and Viera Feckova and Michal Hrapko, external consultants from the
Slovak Cleaner Production Centre. Several employees in the Kappa
accounting department have participated actively in the discussions, data
collection and data processing.
A. Description of the company
1. About the company
Name:
Kappa Stúrovo a. s.
Address:
Továrenská 1, 943 03 Stúrovo, Slovak Republic
Sector:
pulp and paper
Contact Person:
Zdenka Kozempelová (Head of Department of
Management Systems)
Telephone:
+421-36 756 1111
Fax:
+421-36 752 4886
E-mail:
zdenka.kozempelova@kappapackaging.sk
The company started in 1960 as a state owned company. After privatiza-
tion in 1992, the company was converted to a Joint Stock Company and
a new strategic investor (Swedish corporation AssiDomäin Aktiebolag)
made the company a member of one of the most important multinational
corporations in the field of wood and cardboard production.
91

---

03-88226.qxd 04/11/2003 17:22 Page 92
Introducing Environmental Management Accounting at Enterprise Level
Company data:
In 2001 AssiDomäin sold all its pulp and paper
sites to the Netherlands based multinational and
focused on fluting and cardboard production
Production:
166,104 tons of fluting
35,592 tons of plain and pasted cardboard
Export:
74 per cent of fluting production
56 per cent of cardboard production
Turnover:
72,355 million euro
Profit:
11,144 million euro
Employees:
825
Certificates:
ISO 9001, ISO 14001
Kappa is the largest recycled paper processing company in Slovakia. Its
main activity is cellulose and cardboard production (see figures X and XI).
Main products are:
Fluting;28
Cardboard.
Figure X. Production of Fluting Flowsheet--Kappa
Cellulose Division
Other Inputs
NSSC Pulping Process
Regeneration
Unit
52%
Wood
Paper Mass
Paper Machine
Preparation
PM3
Sulphur
Digester House
47%
Collected Paper
Processing of
Collected Paper
28
Undulate layer of cardboard.
92

---

03-88226.qxd 04/11/2003 17:22 Page 93
Part III Case Studies
Figure XI. Production of Cardboard Flowsheet--Kappa
Multi-Level Cardboard
Collected Paper
Processing of
PM1 & PM2
One Level
Collected Paper
Paper Machine
Cardboard
Conglomeration
Al O , etc.
2 3
Fluting is used primarily in the food processing and consumer industry
and is produced in three types: Sturovo Flute SC, Sturovo Flute EX and
Semi-Fluting SE.
Sturovo Flute SC and Sturovo Flute EX are produced with the primary
(virgin) fibres and with recycled paper, almost in equal percentages.
2. Environmental aspects of the company and results
of the CP programme
Since 1997, Kappa a.s. has both a certified quality management system
(ISO 9001) and a certified environmental management system, (ISO
14001). The management of the company is generally skilled and very
well acquainted with existing environmental aspects: many joint projects
with the state administration and broad activities in ASPEK (Association
for Industrial Ecology) have been implemented over the past years.
However, Kappa is also the largest Danube river water consumer and pol-
luter in Slovakia.
Most of technology dates from the late 1960s and the 1970s. The pulp-
ing section is responsible for the main environmental problems from
hydrogen sulphide (H S), sulphur emissions from the recovery boilers and
2
the status of the alkali tanks.
Other environmental problems include chemical pollution of wastewater
i.e. no sludge reported from production, an over-sized energy production
department, flue ash generation, etc.
93

---

03-88226.qxd 04/11/2003 17:22 Page 94
Introducing Environmental Management Accounting at Enterprise Level
The company produces an Annual Report, which contains environmental
and health and safety performance related data.
In May 2001 the company decided to join the TEST project and started
the implementation of the CPA with a focus on water as follows:
In terms of consumed and discharged volumes at the cardboard pro-
duction line;
In terms of pollution load, especially chemicals (sulphur consump-
tion) in the pulping unit.
More than 25 feasible cleaner production measures were identified and pro-
posed to the management. Water consumption in the cardboard produc-
tion line decreased from 120 m3/ton (May 2001) to 76 m3/ton (April 2002).
The CPA assessment revealed the following two factors as main causes of
environmental problems:
The non-existence of a process water-settling tank and open water loops
results in a large water consumption without water re-use capacity.
Frequent variations of product mix at the cardboard line. This reduced
the utilization capacity of the cardboard line by 50 per cent, caused
higher environmental problems and reduced the quality of the final
product. This resulted in lower return on sales.
The costs associated with the first cause of pollution are not treated as
environmental costs, but are hidden within direct production costs.
Likewise, the costs due to breaks in production at the cardboard line are
hidden in the general overheads of the company, and not seen as in envi-
ronmental cost.
As a follow-up to the CPA the company realised that causes of environ-
mental inefficiencies generates significant economic losses and that a
sound tracking of environmental costs would be of great benefit for the
company. Therefore, they decided to start the EMA project. CPA provided
data in several physical units related to water and chemical issues, nec-
essary for EMA. Although identified, many other factors were out of the
scope of CPA project, such as raw material (wood and recycled paper)
consumption.
94

---

03-88226.qxd 04/11/2003 17:22 Page 95
Part III Case Studies
3. Current accounting practices and information system
The company's overall information system is supported by SAP/R3 soft-
ware. The process based control and internal accounting system is linked
to a formal double book system as prescribed by Slovak law (the national
system is not fully compatible with international standards). Additionally,
the company follows international standards. Most of the company
departments have individual cost centres.
All transactions among cost centres are based on internal pricing, e.g. each
cost centre "purchases" and "sells" its service and products to other centres.
Only a few of costs centres are traditional overhead cost on company level.
Product costing is based on consumption norms, direct costs of relevant
production cost centres and proportion of costs allocated to overheads.
Even during initial discussions with the chief accountant, it appeared that
environmental costs were not reflected in the existing system. The only
environmental costs that were allocated to the respective costs centres
were waste treatment costs (fees and operational costs of WWTP)
Most other environmental related cost items such as depreciation of envi-
ronmental related equipment or external services for environmental man-
agement are currently allocated to cost centres but they were not
highlighted and regarded as environmental costs.
There were two issues regarding environmental costs-those costs hidden
(buried) in other costs where the company never realised how large the
environmental costs could be since this information was not available
from their existing system. The allocation to the costs centres, in most
cases, was appropriate regarding the material and equipment but not cor-
rect regarding services. Costs of management system departments are con-
sidered as general costs. Maintenance costs were partly allocated to cost
centres and partly included in overheads: the environmentally related
value was not available from the information system. Table 22 summa-
rizes the accounting practices of environmental costs at Kappa before the
EMA project started.
95

---

03-88226.qxd 04/11/2003 17:22 Page 96
Introducing Environmental Management Accounting at Enterprise Level
Table 22. Kappa--Accounting System For Environmental Costs
Environmental Cost/Expenditure Categories
Accounting Practice Before EMA Project
1. Waste and Emission Treatment
1.1. Depreciation for Related Equipment
Currently allocated to relevant cost centres--
Not regarded as environmental costs
1.2. Maintenance and Operating Materials Allocated to cost centres--Not regarded as
environmental costs
1.3. Related Personnel
Currently allocated to cost centre WWTPa--
Not regarded as environmental costs
1.4. Fees, Taxes, Charges
Currently allocated to cost centre MSb
1.5. Fines and Penalties
Overheads
1.6. Insurance for Environmental Liabilities Overheads
1.7. Provisions for Clean-up Costs,
Remediation
Overheads
2. Prevention and environmental management
2.1. External Services for Environmental
Allocated directly to MS--Not regarded as
Management
environmental costs
2.2. Personnel for General Environmental
Personnel of the MS department
Management Activities
directly allocated to cost centre MS,
other personnel costs related to time spent
on environmental issues allocated
to respective costs centres--Not regarded as
environmental cost
2.3. Research and Development
NA
2.4. Extra Expenditure for Cleaner
Technologies
NA
2.5. Other Environmental Management Costs
3. Material Purchase Value of non-product output
3.1. Raw Materials
Included in Direct Costs, not regarded as
environmental cost
3.2. Packaging
Included in Direct Costs, not regarded as
environmental cost
3.3. Auxiliary Materials
Included in Direct Costs, not regarded as
environmental cost
3.4. Operating Materials
Included in Direct Costs, not regarded as
environmental cost
3.5. Energy
Included in Direct Costs, not regarded as
environmental cost
3.6. Water
Included in Direct Costs, not regarded as
environmental cost
4. Processing Costs of Non-Product Output
Included in Direct Costs, not regarded as
environmental cost
5. Environmental Revenues
5.1. Subsidies, Awards
5.2. Other Earnings
Allocated to respective cost centres
(WWTP and MS) providing service also
to external companies
aWWTP--Wastewater Treatment Plant.
bMS--Management System department.
96

---

03-88226.qxd 04/11/2003 17:22 Page 97
Part III Case Studies
B. Scoping EMA
The system boundary was confined to the company site, with the inten-
tion of further analysing the other production sites where the CP project
was implemented. Pulping, as a part of fluting production (which repre-
sents 90 per cent of the total company turnover), was the primary focus
of study. Cardboard production was originally also targeted as a second
production line.
The objective of the EMA was to calculate total environmental costs and
highlight them by categories, within the already existing cost centre allo-
cation structure. Allocation to product was not conducted within the first
application of EMA at Kappa. The company in fact produces a range of
products, which are very similar.
To calculate the overall environmental costs of company, it was decided
to take into account the following cost items:
Depreciation of environmental related equipment;
Maintenance and operating material costs;
Costs of WWTP (since this was directly available);
Fees, charges and taxes;
Fines and penalties;
External services for environmental management;
Costs of the Management system department (this was also directly
available); and
Non-product output costs: water and energy above the BAT levels.
Raw material purchase values of non-product outputs were not considered
within the first EMA project at Kappa. These costs were estimated to be
of a higher amount and must be calculated within further application of
the system.
C. Calculation of environmental costs and information system
The following steps were necessary to identify relevant costs items with-
in the existing information system.
97

---

03-88226.qxd 04/11/2003 17:22 Page 98
Introducing Environmental Management Accounting at Enterprise Level
Depreciation and maintenance were identified as important issues, so spe-
cial attention was paid to them. Depreciation and maintenance costs of waste
and emission related equipment had not been tracked independently in
the company information system, but it was, at least partially, possible to
identify and calculate them using the physical fixed assets numbers. In order
to calculate depreciation of environmental equipment and maintenance
costs, it was necessary first to define what was environmental equipment
and to list all the existing environmental equipment. For definition, the
recommendation of Eurostat (June 2001) was used.29
The maintenance and depreciation of environmental equipment could be
precisely traced only if the pieces and technological units have their own
property identification numbers (IDs). If this is the case, an additional
separate analytical account reflecting only environmental property could
be created and would provide an exact picture of costs linked to envi-
ronmental equipment.
In reality, environmental equipment is either:
Hidden under the ID of a larger technological unit (in case when the
investment was procured as a unit); or
Has a unique ID in the system (if the whole technology itself is end-
of-pipe, for example WWTP); or
Could have more than one ID, if reconstruction, renovation or mod-
ernisation occurred more than once, such that it impacts depreciation
models according to the law.
Backtracking to calculate environmental costs is only applicable in the lat-
ter two cases i.e. large end-of-pipe plants.
In this case study, many smaller end-of-pipe units (like flue gas treatment,
stripper, etc.) were identified as part of production technology in the com-
pany. However, the evaluation of depreciation would require extensive
detective work in the records, utilizing original project documents and
invoices. Maintenance costs cannot be backtracked. Data presented reflects
28
Environmental equipment is equipment used for pollution treatment due to legal pres-
sures and where the company could technically produce the product without this
equipment, i.e. we considered only end-of pipe as environmental equipment.
98

---

03-88226.qxd 04/11/2003 17:22 Page 99
Part III Case Studies
the last two cases. It is expected that in reality, the environmental equip-
ment maintenance costs and depreciation is significantly higher than
reported here.
In parallel to the identification of depreciation costs, the external servi-
ces for environmental costs had to be calculated. Environmental services
had to be identified and listed. Respective accounts numbers where the
costs had been allocated were then identified for each environmental serv-
ice related expenditure. One of the main problems was that neither the
account number nor the IDs referred to purely environmental records, e.g.
in most cases their identification does not mean direct identification of a
financial item, the information should have read: "part of this financial
item if environmental".
The total amount of water discharged by the process was considered as
an environmental cost.
Despite of the existence of a well-developed information system, it was
necessary to search data and information from different departments, espe-
cially within the accounting department. Sources of data were (ranked
according to priority):
1.
Information System SAP/R3,
2.
Records of individual departments and
3.
Collection of single data.
1. Depreciation and maintenance environmental costs
Fifteen different pieces of equipment were defined with their correspon-
ding economic cost centres and ID numbers. Table 23 describes all devices
and units used at the company to treat the pollution and thus generat-
ing environmental costs.
There are two different independent cost centres devoted purely to envi-
ronmental costs: the wastewater treatment plant and the Department of
Management systems. All other equipment related environmental costs
are part of generic costs centres, either in production or energy depart-
ments. The equipment is installed in the pulping unit, energy department
or warehouse of combustible chemicals storage areas.
99

---

03-88226.qxd 04/11/2003 17:22 Page 100
Introducing Environmental Management Accounting at Enterprise Level
Table 23. Kappa--Environmental Equipment/Organization Section
Categories of Environmental
Cost
Equipment
Centre
Remark
1.
WWTP
WWTP
Individual CC
2.
Electrostatic Precipitator in the Energy Department
Energy
3.
Electrostatic Precipitator at the Pulping
Pulping
4.
Separator (Duster)
Energy
5.
Gas Scrubber--Water
Pulping
6.
Gas Scrubber--Alkaline
Pulping
7.
Management Systems Department
Administrative
Building
Individual CC
8.
Ash Sludge Including the Laboratories
Energy
9.
Green Liquor Centrifuge
Pulping
10.
Chemicals Overflows--roof, tank, pump
Pulping
11.
Continual Measurement of Emission
Pulping
12.
Emergency Tank--Chemicals Warehouse at Regeneration
Pulping
13.
Underground Water Monitoring System
Pulping
14.
Waste Warehouse
Combustibles
Warehouse
15.
Electrostatic Precipitators Fly-ash Tanks
Energy
In a second stage, company properties were analysed. A list was genera-
ted of all material and non-material property with a description of the
material, ID numbers, year and purchase value and economic cost centres
(all issued from the SAP information system). At the beginning, all listed
properties were reviewed to determine which equipment would be con-
sidered as environmental, and those were they copied into a separate table:
their cost centres, ID numbers, years and purchase cost were also identi-
fied, and the list sorted by ID numbers. The related depreciation and value
of maintenance for each piece of equipment was then determined.
Looking at the calculation, the total value of all properties represents
839,868,000 SKK.30
Fifteen per cent of this amount is an expert's estimate of the envi-
ronmental equipment value (app. 126 million SKK).
The value of the pulping cost centre is equal to 25.6 million, of which
environmental equipment represents app. 40 per cent (10.4 million SKK).
The independent WWTP cost centre is an end-of-pipe technology and
its purchase value was 90.7 million SKK. Similarly, the duster was 25
million SKK.
30
Calculations are in Slovak currency (Slovak Crowns). See explanatory notes for conversion.
100

---

03-88226.qxd 04/11/2003 17:22 Page 101
Part III Case Studies
The purchase costs are reflected differently depending on the age of the
equipment and type of depreciation classification prescribed by law.
Most of the equipment had been purchased in the 1970s or the 1980s,
thus the entire value had already been depreciated. Internal depreciation
policy indicates that investment should be depreciated within 10 account-
ing years.
2. Environmental services
Among environmental activities, a number of external and internal train-
ings, various courses, seminars and meetings are available to increase the
capital of staff and the workforce of the company. They are also active in
a variety of environmental activities such as maintaining the grass and
gardens surrounding plants, issuing of environmental reports, publications
and documents, translation of ecological documents, etc.
It was discovered that several different services are recorded under the
same account. For instance, contractual penalties and fines were assigned
to the same accounts as other fines and penalties.
Table 24. Kappa--Account Codes Where Expenditures
for Environmental Service Could Be Found
Environmental Services Categories
Account
1.
External Measuring of Emission
518197
2.
External Measuring of the Underground Waters Quality
518197
3.
External Measuring of Overflow
518170
4.
Appraisals in the Division of Environment
518197
5.
Gardening Service
518180
6.
External Audits and Certification (together with Quality Management Services)
518197
7.
Attendance at the Environmental and Management Systems Seminars, Courses,
Trainings and Conferences
518160
8.
Environmental Documents Translation
518190
9.
Waste Disposal
518180
10.
Environmental Administration, Certification, Documents and Publications
518197
11.
Submissions--ASPEK Membership Dues
518172
12.
Charges, Funds Contribution
538112
13.
Contract Fines and Penalties
544101
14.
Other Fines and Penalties
545101
101

---

03-88226.qxd 04/11/2003 17:22 Page 102
Introducing Environmental Management Accounting at Enterprise Level
The interesting part is, that waste disposal costs are recorded on the same
account number as the lawn and garden services. The proposal is to split
end-of-pipe, pollution fees and other costs into analytical accounts to
achieve better understanding and management of costs, as well as proper
allocation.
In this way, the company will be able to deal with these environmental
costs and reduce them through higher effectiveness.
3. Non-product outputs
Material purchase value of non-product outputs is tracked for each cost
centre, within the scope of technical economic norms.
The largest cost items that have arisen from these problems are:
High water consumption without internal recycling; and
High sulphur consumption and its losses into the water and air.
Both materials are used as auxiliary items, e.g. they are used during the
process but theoretically could be fully recycled. This means that the total
amount appears in non-product output. Other material streams were not
considered.
All products have few modifications, thus it is not necessary to allocate
environmental costs to products.
D. Results of the EMA project
In figure XII, the results after the first data collection and analysis cycle
are shown as the amount of environmental costs occurring by the whole
company in the year 2001.
Within the initial steps of the EMA project, a second rough estimate of
environmental costs was prepared. This time it included only the most
important and easiest to assess data for the wastewater treatment plant
and management system department (direct environmentally related costs,
already in information system). Already at this intermediate stage of the
project environmental costs appeared to be 2.5 times higher than the
company's initial estimate. By the project's end, the total environmental
costs were still five times higher the initial estimates, but lower than real
costs, since much of them cannot be retrieved from system.
102

---

03-88226.qxd 04/11/2003 17:22 Page 103
Part III Case Studies
Figure XII. Kappa--Environmental Costs Chart--Beginning vs. End of Project
600
528
500
400
300
243
Percentage
200
100
100
0
1
2
3
Environmental costs estimated by the company at project start
First estimate of environmental costs [WWTP and MS department,fees and purchased services]
Environmental costs calculated by the end of the EMA project
Environmental costs reported by company before the EMA project con-
sisted mainly of waste treatment costs purchased as services and are reflec-
ted in figure XII and table 25.
Further analysis showed that the depreciation of environmental equip-
ment, allocated to two independent costs centres (WWTP and EM), rep-
resented only 0.67 per cent of total depreciation. Depreciation of
environmental equipment traceable directly to production adds 1.58 per
cent (representing a factor of 136.8 per cent times more than that of the
WWTP and EM combined).
Maintenance and operating materials of environmental equipment allo-
cated to environmental costs centres created 38.3 per cent of waste and
emission treatment costs. However, it is expected that maintenance of
environmental equipment costs create a higher proportion, which could
not be easily identified from the existing records.
This is not unexpected given the age of the technology and by the fact
that number of calculated environmental costs is still relatively low and
much of costs were not possible to be traced back.
The structure of costs is provided in Table 26.
What this means is that real, properly evaluated and monitored environ-
mental costs especially if including all categories of non-product output
costs that were excluded from the first calculation, could mount to as
high as 10 per cent or even more of total costs.
103

---

03-88226.qxd 04/11/2003 17:22 Page 104
Introducing Environmental Management Accounting at Enterprise Level
Table 25. Kappa 2001--Total Environmental Costs by Category
(thousands of SKK)
Environmental Cost/Expenditure Categories
Cost
1. Waste and Emission treatment
57,773
1.1. Depreciation for Related Equipment
3,708
1.2. Maintenance and Operating Materials and Services
22,414
1.3. Related Personnel
3,285
1.4. Fees, Taxes, Charges
28,366
1.5. Fines and Penalties
0
1.6. Insurance for Environmental Liabilities
0
1.7. Provisions for Clean-up Costs, Remediation
0
2. Prevention and environmental management
7,519
2.1. External Services for Environmental Management
3,442
2.2. Personnel for General Environmental Management Activities
4,077
2.3. Research and Development
0
2.4. Extra Expenditure for Cleaner Technologies
0
2.5. Other Environmental Management Costs
0
3. Material Purchase Value of Non-Product Output
33,020
3.1. Raw Materials
3,659
3.2. Packaging
0
3.3. Auxiliary Materials
0
3.4. Operating Materials
3,183
3.5. Energy
0
3.6. Water
29,361
4. Processing Costs of Non-Product Output
21,674
Subtotal 1
119,986
5. Environmental Revenues
498
5.1. Subsidies, Awards
0
5.2. Other Earnings
498
TOTAL
119,488
Table 26. Kappa 2001--Environmental Costs Structure (thousands of SKK)
Percentage of
Percentage of
Production
Production
Summary of Results
thousands of SKK
Profit
Costs
1. Waste and Emission Treatment
57,773
1.80
2.21
2. Prevention and Environmental
Management
7,519
0.23
0.29
3. Material Purchase Value of
Non-Product Output (water)
33,020
1.03
1.26
4. Processing Costs of Non-Product
Output
21,674
0.67
0.83
Total Calculated Environmental Costs
119,986
3.73
4.58
104

---

03-88226.qxd 04/11/2003 17:22 Page 105
Part III Case Studies
E.
EMA and investment decision on EST
Future company strategy focused on expansion, thus proposed major
investment projects target on increased profitability, increased produc-
tion output, improved environmental performance and compliance with
EU regulations.
The identified priority areas for investments are aimed at three areas:
1.
Change the main process in the pulp mill: simplify and increase effi-
ciency of chemical recovery plant by switching to non-sulphur pulping;
2.
Increase the capacity of paper mill and degree of utilization of recycled
paper as one of the main raw materials;
3.
Expand the WWTP by including the biological treatment;
Within the frame of the EST module of the TEST project, the NCPC remade
the company's vision of its future operations and helped to integrate envi-
ronmental issues in investment considerations: utilizing the principles and
the results of the EMA project.
Two investment activities were also assessed using the COMFAR tool38:
1.
Neutral Sulphite Semi-Chemical (NSSC) Pulp washing (Investment size
1.960 million euro),
2.
Green liquor sludge disposal (Investment size 239,300 euro).
These investments will improve the company's environmental performance
and increase its productivity. During the preparation of the pre-feasibility
study, a sensitivity analysis was performed taking into consideration contin-
gency environmental costs like future liabilities, expected future increases
of pollution fees, future fines and expected increases in the costs of raw
materials. The sensitivity analysis revealed relevant changes in the financial
indicators of the proposed project. Fees and fines were estimated/deter-
mined based on information provided by the Ministry of Environment
and documents of Slovak Environmental Inspection.
Here is a brief description of the two projects.
38
www.unido.org/doc/3470
105

---

03-88226.qxd 04/11/2003 17:22 Page 106
Introducing Environmental Management Accounting at Enterprise Level
1. NSSC pulp washing
The current pulp washer has a very low washing efficiency. The main
problem is that a large volume of wash substances are carried over from
the inflow of the NSSC production line, thus a large amount of contam-
inated white water leaves the system to the Effluent Treatment Plant. The
main purpose of the investment in the NSSC pulp washing is to reduce
the COD and BOD discharge to the River Danube.
The objectives of the project are:
De-bottleneck the washing line i.e. increase the washing line capacity,
measured in bone dry tons per day (BDtpd) from current 300 BDtpd
(peak 330 BDtpd) to 350 BDtpd (peak 370 BDtpd) levels;
Improve the quality of the product by better washing;
Enhance the efficiency of the cellulose production by closing the loop
of chemicals;
Improve environmental performance by reducing COD and BOD loads
in effluent discharge.
The ability of the investment to reduce the pollution in the wastewater
and reduce wastewater discharge fees is considerable (Kappa pays charges
of over 11.8 million SKK annually for BOD ). The proposed investment
5
will have a significant influence on reducing BOD .
5
Operation is scheduled to start in the first half of 2004. The assumed life
span is eight years. Table 27 summarizes the basic assumptions and sav-
ings related to environmental costs.
The financial benefits of this project strongly depend on an increase in
production. In financial terms, the production has to increase from 25,000
euro to 41,000 euro to obtain zero NPV. Moreover, Table 28 shows that
by considering contingency environmental costs, the proposed EST
investment is more profitable.
Table 27. Kappa--NSSC Pulp Washing Project Assumptions
and Projected Annual Savings (thousands of euro)
Yearly Savings
Cost Item
[thousands of euro]
Basic Assumptions
Chemicals
27
7% Annual growth
Fees for COD Discharges
93
In the first year 2004
291
Starting from 2005
Steam
65
3% Annual growth
Environmental Fines
34
Estimated
106

---

03-88226.qxd 04/11/2003 17:22 Page 107
Part III Case Studies
Table 28. Kappa--NSSC Pulp Washing Project Financial Indicators
(thousands of euro)
Environmental Risks and Contingency
Description
Costs Considered
Base Situation
PBP
normal
2 years 2003
3 years 2005
dynamic
3 years 2004
3 years 2005
IRR %
normal
60.66
49.50
modif.
60.66
49.50
NPV [thousands of euro]
4714.20
3018
NPV ratio
2.47
1.58
2. Green liquor sludge disposal
This proposed investment focuses on recovering chemicals from the green
liquor, which is produced in the sludge washer in the Recovery plant.
This will result in improved water quality and reduced pollutant levels.
Due to current loss of chemicals and water contamination, the plan is
to install the new equipment consecutive to the existing sludge washer,
ensuring maximum sludge separation and thickening of sludge from sus-
pension to dumping consistency. All obtained filtrates will be re-used in
the technology.
The device started operating in the first half of the year 2003. The assumed
life span is 15 to 20 years.
Table 29 and 30 provide an overview how important the consideration of
environmental benefits is in project appraisals, especially in terms of inter-
nal rate of return.
Table 29. Kappa--Green Liquor Project Assumptions and Projected
Annual Savings (thousands of euro)
Yearly Savings
Cost Item
[thousands of euro]
Basic Assumption
Waste Treatment Costs
5.3
Fees for storage of the sludge
Recovery of Chemicals from Sludge
74.9
7% annual growth
Fees for Wastewater
10
Starting from 2004
Fines
34
107

---

03-88226.qxd 04/11/2003 17:22 Page 108
Introducing Environmental Management Accounting at Enterprise Level
Table 30. Kappa--Green Liquor Project Financial Indicators
Environmental Risks and Contingency
Description
Costs Considered
Base Situation
PBP
normal
4 years 2006
5 years 2007
dynamic
4 years 2006
7 years 2007
IRR %
normal
37.13
14.65
modif.
15.83
6.39
NPV [thousands of euro]
224.03
31.53
NPV ratio
1.03
0.13
F.
Recommendations
As a multinational corporation, KAPPA a.s. has developed an advanced
and modern control system. Only the environmental factors were not
taken into account appropriately. In this area the control system could be
modified and enhanced.
Based on the experience of the pilot EMA project, modifications in the
design and structure of the internal information system and structure of
accounts with special focus on the analytical accounts should be under-
taken, as well as the development of written procedures. The latter, either
as an independent document or as part of other relevant documentation
systems in the company, should define what are considered environmental
expenditures and revenues, how they are identified within the adminis-
tration and bookkeeping processes and procedures, in which form, how
and to whom these costs are reported and with what frequency.
As stated, it is necessary to create separate accounts for the maintenance
of environmental equipment, raw materials of non-product outputs as well
as re-think the depreciation policy of the company.
G. Conclusions
As shown in figure XII, environmental costs, even though perceived by
the company as high, were still much lower than the real costs. The first
rough calculation proved that real costs to be more than 2.5 times higher,
than the company originally thought.
108

---

03-88226.qxd 04/11/2003 17:22 Page 109
Part III Case Studies
A more detailed look inside the structure and nature of the costs does not
allow breaking down the environmental costs into great detail, also due
to lack of identification within the existing information system. However,
the environmental costs calculated were revealed to be 5 times higher
than originally estimated by the company.
The results emphasise that environmental costs should be tracked much
more carefully due to the fact that:
Proper allocation, understanding the nature and size of costs and their
reflection in everyday routine data serves as a background for appro-
priate evaluation and decision-making processes, and consequently for
the correct identification of reduction measures.
More and more attention is being paid by state administrations and
the public on the environmental actions and expenditures of com-
panies, including new statistical requirements. Proper reflection of
real environmental costs in the internal information system of the
company then serves as basic resource for: formal reporting demands
both present authorities and future (EUROSTAT), voluntary reports
(environmental reports by the company), PR and other forms of
communication.
The following important lessons were drawn from the EMA project:
EMA implementation needs to be treated and operated as a process.
At the pilot stage: EMA requires personnel involvement from differ-
ent organizational units and a strong commitment of all involved
employees, regardless of their level in the company hierarchy.
This process should go throughout both the horizontal and vertical
levels of the company.
The time line for full EMA implementation is estimated at 8-12 months.
109

---

03-88226.qxd 04/11/2003 17:22 Page 110

---

03-88226.qxd 04/11/2003 17:22 Page 111
REFERENCES
An Introduction to Environmental Accounting As A Business
Management Tool: Key Concepts And Terms, Washington D.C., 1995
(www.epa.gov/oppt/acctg/pubs/busmgt.pdf)
International Standards Organization: ISO 14004: 1996 Environmental
Management Systems--General Guidelines on Principles, Systems and
Supporting Techniques, 1996, p. 2.
International Standards Organization: ISO 14001: 1996 Environmental
Management Systems Specification with Guidance for Use, 1996.
Martin Bennet and Peter James, The Green Bottom Line--Environmental
Accounting for Management: Current Practice and Future Trends, Greenleaf
Publishing, 1998.
R. De Palma and V. Dobes, Increasing Productivity and Environmental
Performance: An Integrated Approach - Know-How and Experience from
the UNIDO TEST project in the Danube River Basin, UNIDO, October 2003.
Stefan Shaltegger and Roger Buritt, Contemporary Environmental Accounting,
Issues, Concepts and Practice, Greenleaf Publishing, 2000, pp. 131-136.
UNDSD: Environmental Management Accounting, Procedures and
Principles, United Nations, New York, 2001, p. 19.
UNDSD: Improving Government's Role in the Promotion of Environmental
Managerial Accounting, United Nations, New York, 2000, pp. 14-39.
111

---