AS BELOW
eco no m ic i m pacts .
C urre nt c o sts r e la te d t o c u rre nt o pera tio ns
H ow to a cco unt f o r c urre nt s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts r e la te d to c urre nt
o pera ti o ns i s l e ss c o ntr o vers ia l; th ese c o sts s h o uld b e r e fle cte d i n o pera ti n g a cti v iti e s, p ro cesse s,
a nd p ro ducts . H ow ev er, th e d iffic ulty f o r m any o rg aniz a ti o ns h as b een to s e p ara te ly i d enti fy a nd
acco unt f o r th o se c o sts a s s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts . I n s o m e c o m panie s, s o cia l,
e nv ir o nm enta l, a nd e co no m ic c o sts r e la te d to p ro ducti o n a re a cco unte d f o r a s m anufa ctu rin g
o verh ead c o sts a nd a re a rb itr a rily a llo cate d to a cti v iti e s, p ro cesse s, a nd p ro ducts u sin g a c o st
d riv er th at d oes n o t r e fle ct th e r e la ti o nsh ip b etw een th e c o st i n curre d a nd th e a cti v ity , p ro cess, o r
pro duct. S ti ll o th er s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts a re a cco unte d f o r a s a d m in is tr a ti v e
overh ead c o sts , a nd a re n ev er a llo cate d to a cti v iti e s, p ro cesse s, o r p ro ducts . T his m akes i t
d iffic ult to u nd ers ta nd th e s o cia l, e nv ir o nm enta l, a nd e co no m ic c o st i m pacts o f o pera ti o nal
d ecis io ns, w hic h a gain i m ped es e ffe cti v e d ecis io n-m akin g. T ools s u ch a s l ife -c ycle c o sti n g,
acti v ity -b ase d c o sti n g, a nd f u ll s o cia l a nd e nv ir o nm enta l c o st a cco unti n g c an h elp m anagers to
b ette r c ap tu re a nd a ssig n th ese c o sts .
F utu re c o sts r e la te d t o c u rre nt o pera tio ns
It c an b e d iffic ult to a ccura te ly p re d ic t th e f u tu re s o cia l, e nv ir o nm enta l, a nd e co no m ic b enefits ,
c o sts , a nd l ia b iliti e s r e la te d to p ast o r e v en to c urre nt p ro ducti o n. E sti m ati n g f u tu re i m pacts
d ep end s o n m any f a cto rs th at m ay b e u ncle ar to day, i n clu d in g c hangin g s o cia l a nd l e gal s tr u ctu re s.
It i s u nlik ely th at P hilip M orris u nd ers to od, 4 0 y ears a go , th at c hanges i n th e s o cia l a nd l e gal
clim ate i n th e U S w ould r e su lt i n e xte nsiv e p ro duct l ia b ility c o sts f o r c ig are tte s. R eco gniz in g
p ote nti a l f u tu re l ia b iliti e s m ay c ause a c o m pany to m odify i ts s tr a te gy, p ro duct o r p ro ducti o n
pro cesse s, o r i ts a cco unti n g a nd m anagem ent d ecis io ns.
T he d iffic ulty o f p re d ic ti n g c hanges th at m ay o ccur i n th e s o cia l a nd l e gal c lim ate , a lo ng w ith
th e i n ab ility to r e aso nab ly e sti m ate a nd m easu re th e e co no m ic i m pact o f th o se c hanges, i s o ne
re aso n w hy m any f u tu re c o sts a re n o t a cco unte d f o r i n th e f o rm al a cco unti n g s y ste m . H ow ev er,
th ere a re s o m e f u tu re c o sts th at c an b e r e aso nab ly u nd ers to od a nd s h o uld f e atu re i n th e d ecis io n-
m akin g p ro cess, s u ch a s p ost- c o nsu m er u se a nd r e cyclin g c o sts , d is p osa l c o sts , f a cility
d eco m mis sio nin g c o sts , n atu ra l r e so urc e r e sto ra ti o n c o sts , a nd r is k a nd l e gal l ia b ility c o sts . O th er
co sts th at a re l e ss p re d ic ta b le , s u ch a s th o se r e la te d to c hangin g s o cia l a nd l e gal s tr u ctu re s o r
re p uta ti o nal c o sts a nd th e c hangin g c o sts o f te chno lo gy, a ls o n eed to b e f a cto re d i n to th e d ecis io n-
m akin g p ro cess.
M any m anagers f in d th at p ra cti c es s u ch a s l ife -c ycle a naly sis a nd f u ll s o cia l a nd e nv ir o nm enta l
co st a cco unti n g a re u se fu l i n h elp in g th em to i d enti fy a nd e v alu ate th e l o nger-te rm i m pacts o f
curre nt d ecis io ns. O th er a p pro aches i d enti fie d i n th is b ook p ro vid e w ays to m easu re a nd i n te gra te
s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts a nd b enefits i n to o pera ti o nal a nd c ap ita l i n v estm ent
d ecis io ns.
C ostin g s y ste m s
Id enti fy in g th e f u ll r a nge o f c o rp ora te s u sta in ab ility i m pacts i s a n i m porta nt s te p to w ard b ette r
m anagem ent d ecis io n-m akin g. O nce i d enti fie d , th e i m pact o f th ese c o sts o n th e c o m pany’s
a cti v iti e s, p ro cesse s, p ro ducts , a nd s e rv ic es c an b e a naly ze d u sin g a v aila b le to ols . A n um ber o f
co m panie s h av e b egun th e tr a nsiti o n to i m pro ved s o cia l a nd e nv ir o nm enta l c o st a cco unti n g i n tw o
109 ways: b y c la rify in g th eir u nd ers ta nd in g o f i n te rn al s o cia l a nd e nv ir o nm enta l c o sts th ro ugh A BC
(a cti v ity -b ase d c o sti n g), a nd b y p la cin g a v alu e o n s ig nific ant e xte rn al c o sts , th ro ugh L C C ( life -
cycle c o sti n g) o r o th er a p pro aches. O th er c o m panie s h av e c ho se n to u se F C A ( fu ll c o st
a cco unti n g) to i n clu d e a b ro ad er s e t o f e xte rn al c o sts a lo ng w ith f u tu re c o sts i n to m anagem ent
d ecis io n-m akin g.
A ctiv it y -b ase d c o stin g
Tw o o fte n-s ta te d r e aso ns f o r u nre lia b le a cco unti n g d ata a re th e te nd ency to a llo cate s o cia l,
e nv ir o nm enta l, a nd e co no m ic c o sts to o verh ead a nd th e te nd ency to c o m bin e s o cia l,
e nv ir o nm enta l, a nd e co no m ic c o sts i n c o st p ools w ith n o nenv ir o nm enta l c o sts . T his h am pers
m anagem ent’ s a b ility to a sse ss s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts a nd m ake i n fo rm ed
d ecis io ns. F or e xam ple , A M P L td ., a n A ustr a lia n-b ase d g lo bal f in ancia l s e rv ic es o rg aniz a ti o n,
analy ze d i ts e nv ir o nm enta l a cco unti n g a nd i d enti fie d are as w here c o sts w ere b ein g i n accura te ly
a ggre gate d . C osts f o r w aste c o lle cti o n a nd d is p osa l a nd w aste w ate r w ere i n clu d ed i n th e r e nt
exp ense p aid f o r b uild in gs. T he a ggre gati o n o f th ese s e rv ic es m ad e i t d iffic ult to i d enti fy
o pportu niti e s to r e d uce w aste a nd i ts a sso cia te d c o sts . T he c o m pany c o nd ucte d a w aste a ud it o f
one o f i ts o ffic es a nd i d enti fie d th at g enera l a nd k itc hen w aste c o uld b e r e d uced b y 6 5–80%
th ro ugh r e cyclin g. 9
In cre asin gly , c o m panie s h av e s e en th e b enefit o f m eth o ds s u ch a s A BC to i d enti fy , m easu re , a nd
tr a ck s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts a nd to a ssig n th em to a cti v iti e s, p ro cesse s,
p ro ducts , s e rv ic es, c usto m ers , a nd c hannels . W hile tr a d iti o nal c o st a cco unti n g a ssu m es th at
p ro ducin g p ro ducts a nd s e rv ic es c ause s c o sts , A BC a ssu m es th at a cti v iti e s p erfo rm ed f o r
pro ducts , s e rv ic es, a nd c usto m ers c ause th e c o sts . A BC f ir s t a ssig ns c o sts to th e a cti v iti e s
p erfo rm ed b y th e o rg aniz a ti o n ( d ir e ct l a b or, e m plo yee tr a in in g, r e gula to ry c o m plia nce), a nd th en
attr ib ute s th ese c o sts to p ro ducts , c usto m ers , a nd s e rv ic es b ase d o n a c ause -a nd -e ffe ct
re la ti o nsh ip .
B ette r c o st m anagem ent r e q uir e s th e a ccum ula ti o n o f s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts
a nd tr a cin g th o se c o sts to th e a cti v iti e s th at c ause th em . C are fu lly i d enti fy in g a ll s o cia l,
e nv ir o nm enta l, a nd e co no m ic c o sts h as o fte n p ro duced to ta ls th at a re f o ur to f iv e ti m es th e
esti m ate d a m ounts . T hese c o sts o fte n h id den i n m anufa ctu rin g o verh ead i n clu d e: p erm its , p enalti e s
and f in es, w ate r a nd a ir tr e atm ent c o sts , e nerg y c o sts , w aste tr e atm ent a nd d is p osa l, tr a in in g,
in sp ecti o ns, a nd p ro te cti v e e q uip m ent. A ls o f r e q uentl y o verlo oked a re s o cia l, e nv ir o nm enta l, a nd
eco no m ic c o sts th at a re b urie d i n a d m in is tr a ti v e o verh ead , s u ch a s r e co rd -k eep in g c o sts ,
c o m munity r e la ti o ns c o sts , s ite s tu d ie s, l e gal c o sts , a nd a ud its . B y a ttr ib uti n g s o cia l,
e nv ir o nm enta l, a nd e co no m ic c o sts to th e a cti v iti e s th at g enera te th em , m anagers a nd e m plo yees
can b e m oti v ate d to f in d a lte rn ati v es th at l o w er th o se c o sts a nd i n cre ase p ro fita b ility .
A n A BC m eth o dolo gy p ro vid es d eta ile d a cti v ity -c o st a nd r e la te d i n fo rm ati o n, a nd i s e sp ecia lly
u se fu l f o r a n o rg aniz a ti o n th at h as m any s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts e m bed ded i n i ts
m anufa ctu rin g a nd a d m in is tr a ti v e o verh ead c o st s tr u ctu re s, a nd th at a ls o h as s o m e d egre e o f e ith er
p ro cess o r p ro duct v aria ti o n. A n A BC a naly sis p ro vid es a b ette r u nd ers ta nd in g o f a c o m pany’s
c o sts , l in ks s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts to m anagem ent o bje cti v es a nd a cti v iti e s,
im pro ves d ecis io n-m akin g, a nd s u p ports f u ll c o st a cco unti n g a s w ell a s L C C. 10
L if e -c y cle c o stin g
L C A ( life -c ycle a sse ssm ent) i s a d esig n d is c ip lin e u se d to m in im iz e th e e nv ir o nm enta l i m pacts o f
11 0 pro ducts , te chno lo gie s, m ate ria ls , p ro cesse s, i n d ustr ia l s y ste m s, a cti v iti e s, o r s e rv ic es. L C C, a n
exte nsio n o f th e b asic L C A , a tte m pts to i d enti fy a ll th e c o sts — in te rn al a nd e xte rn al— asso cia te d
w ith a p ro duct, p ro cess, o r a cti v ity th ro ugho ut a ll s ta ges o f i ts l ife . L ife -c ycle c o st h as b een
d efin ed a s th e a m orti z e d a nnual c o st o f a p ro duct, i n clu d in g c ap ita l c o sts , a nd d is p osa l c o sts
d is c o unte d o ver th e l ife ti m e o f a p ro duct. 1 1 W ith r e gard to s o cia l a nd e nv ir o nm enta l c o sts , L C C
co nsis ts o f m oneti z in g s o cia l a nd e nv ir o nm enta l i m pacts th ro ugho ut a p ro duct’ s l ife -c ycle . I t
r e q uir e s th e m easu re m ent o f p re se nt a nd f u tu re c o sts a nd b enefits o f a c o m pany’s p ro ducts ,
se rv ic es, a nd a cti v iti e s a nd c an b e a n i m porta nt p art o f th e i m ple m enta ti o n o f a s u sta in ab ility
s tr a te gy.
C ano n a sse sse s th e C O 2 e m is sio ns o f i ts p ro ducts o ver th eir e nti r e l ife -c ycle ( F ig . 4 .1 ) a nd
im ple m ents c o ncre te p la ns b ase d o n f in d in gs. E nti r e l ife -c ycle C O 2 e m is sio ns i n 2 012 w ere
a p pro xim ate ly 4 ,8 90,0 00 to ns, a n a p pro xim ate ly 1 4% d ecre ase o ver 2 011 . 12
F IG URE 4 .1 C anon e valu ate s lif e -c y cle C O 2 e m is sio ns o f it s p ro ducts
S ourc e : C ano n ( 2 013) S usta in ability R ep ort
F ull c o st a cco untin g
S om e c o m panie s u se F C A to i n clu d e a b ro ad er s e t o f e xte rn al c o sts a lo ng w ith f u tu re c o sts i n to
m anagem ent d ecis io n-m akin g. F C A a llo cate s a ll d ir e ct a nd i n d ir e ct c o sts to a p ro duct o r p ro duct
lin e f o r i n v ento ry v alu ati o n, p ro fita b ility a naly sis , a nd p ric in g d ecis io ns. I n o th er w ord s, L C C
tr a nsla te s s o cia l a nd e nv ir o nm enta l p erfo rm ance i n to f in ancia l c urre ncy, a nd F C A i n te gra te s th ese
v alu es i n to th e f r a m ew ork o f a cco unti n g. F or e xam ple , B axte r I n te rn ati o nal c alc ula te s a nd r e p orts
i ts p ositi v e a nd n egati v e s u sta in ab ility i m pacts a s s u b se ts o f tr a d iti o nal a cco unts , a llo w in g
su sta in ab ility i te m s to b e e asily i d enti fie d . 13 T he c o m bin ati o n e nab le s m anagers to i n te gra te
s u sta in ab ility i m pacts i n to d ecis io ns s u ch a s p ro duct c o sti n g, p ro duct p ric in g, c ap ita l i n v estm ents ,
p ro duct d esig n, a nd p erfo rm ance e v alu ati o ns.
A n F C A f r a m ew ork a llo w s f o r c o nsid era ti o n o f e xte rn al o r s o cie ta l c o sts a nd b enefits ( e .g .
co sts to h um an h ealth a nd th e n atu ra l e nv ir o nm ent) a lo ng w ith i n te rn al o r p riv ate c o sts a nd b enefits
i n th e d ecis io n-m akin g p ro cess. T his r e q uir e s a c o m pany to i n te gra te p re se nt a nd f u tu re s o cia l,
e nv ir o nm enta l, a nd e co no m ic i m pacts i n to i ts p ro cess a nd p ro duct c o sti n g s y ste m , i n clu d in g c o sts
r e la te d to c o nti n gent l ia b iliti e s a nd i m age a nd r e la ti o nsh ip c o sts a nd b enefits .
1 11 FC A a d ap ts e xis ti n g m anagem ent d ecis io n s u p port s y ste m s to a cco m modate th e n ew i n fo rm ati o n
genera te d th ro ugh L C C. A n i m porta nt e le m ent o f F C A i s th e c o nsid era ti o n o f f u tu re s o cia l,
e nv ir o nm enta l, a nd e co no m ic c o sts a nd a llo cati o n o f th ese c o sts to p ro ducts . T hen, p re se nt a nd
fu tu re e nv ir o nm enta l c o sts s h o uld b e i n te gra te d i n to th e p ro duct c o sti n g s y ste m .
Full c o st a cco untin g v ersu s f u ll c o st p ric in g
A c o m mon m is c o ncep ti o n i s th at F C A i m plie s th e e xp re ssio n o f f u ll c o sts i n p ric es a s w ell. I t i s
im porta nt to s e p ara te th e d ecis io n to a d opt F C A m eth o ds ( o r a ny o f th e o th er m eth o ds d is c usse d
here ) f r o m th e d ecis io n to i n co rp ora te th ese c o sts i n to p ro duct p ric in g. C orp ora ti o ns s h o uld a d opt
F C A s o th at th ey w ill b ette r u nd ers ta nd b oth th e p re se nt a nd f u tu re c o sts o f c urre nt p ro ducti o n a nd
can u se th at i n fo rm ati o n to g uid e d ecis io ns th ro ugho ut th e v alu e c hain . W heth er to m ake th is n ew
in fo rm ati o n tr a nsp are nt i n p ro duct p ric in g i s a no th er i s su e. P ric es m ay c o nti n ue to b e d ete rm in ed
b y th e m ark et, b ut a n a sse ssm ent o f th e c o m pany’s p ro fita b ility m ust u se m ore c o m ple te
i n fo rm ati o n a b out p re se nt a nd f u tu re s o cia l, e nv ir o nm enta l, a nd e co no m ic c o sts .
S um mary o f c o stin g s y ste m s
Com panie s a re i n cre asin gly tr y in g to i m pro ve th eir c o sti n g o f s o cia l, e nv ir o nm enta l, a nd e co no m ic
im pacts . I n 2 003, C ano n i n tr o duced a p ro gra m i n w hic h e ach d ep artm ent b ears th e f in ancia l
b urd en o f i ts o w n w aste p ro cessin g. P rio r to th is p ro gra m , th e g enera l a ffa ir s d iv is io n h and le d a ll
th e c o sts o f w aste d is p osa l. I n th e n ew p ro gra m , w aste , i n clu d in g p ap ers a nd p la sti c s, g enera te d
b y e ach w ork p la ce i s c o lle cte d a t a r e cyclin g c ente r w here th e d ep artm ent, ty p e o f w aste , a nd
am ount a re r e co rd ed . E ach d ep artm ent i s th en a sse sse d a w aste -p ro cessin g f e e f o r th e w aste
p ro duced . 14 U sin g a f u ll e nv ir o nm enta l c o sti n g s y ste m i s b enefic ia l b ecause :
• M any e nv ir o nm enta l c o sts c an b e e lim in ate d b y s im ple c hanges
• S om e e nv ir o nm enta l c o sts a d d n o v alu e to th e p ro cess o r p ro duct a nd u su ally c o nsti tu te c o st
sa v in gs
• U nd ers ta nd in g th e e nv ir o nm enta l c o sts c an l e ad to b ette r p ric in g a nd c re ati o n o f v alu e o f
go ods a nd s e rv ic es 15
P art o f th e r e aso n th at m ore c o m panie s h av e n o t a d opte d F C A i s th e d iffic ulty i n v alu in g s o cia l,
e nv ir o nm enta l, a nd e co no m ic i m pacts . 1 6 H ow ev er, a n e sti m ati o n o f th ese i m pacts ( d is c usse d i n
C hap te rs 6 a nd 7) c an h elp c o m panie s i n te rn aliz e e xte rn al c o sts . A s c o m panie s i m pro ve th e
co sti n g o f s o cia l, e nv ir o nm enta l, a nd e co no m ic i m pacts , th ey g ain a c le are r u nd ers ta nd in g o f th e
co m ple te c o sts o f p ro ducts , s e rv ic es, p ro cesse s, a nd o th er a cti v iti e s. T his s h o uld l e ad to a b ette r
und ers ta nd in g a nd i m pro ved m anagem ent o f b oth s u sta in ab ility a nd f in ancia l p erfo rm ance.
R is k a sse ssm en t
Today, r is k s a re b oth l a rg er a nd m ore v arie d th an p re v io usly th o ught a nd h av e b een s e en i n
c o m panie s a nd c o untr ie s th at th o ught th ey w ere s h ie ld ed . 17 W ith g lo baliz a ti o n i n cre asin g r a p id ly ,
a c o m mon c halle nge i s h o w to i n te gra te s o cia l, e nv ir o nm enta l, a nd p oliti c al r is k s s u ch a s p oliti c al
in sta b ility , p oliti c al c o rru p ti o n, b usin ess c o rru p ti o n, c hild l a b or p ra cti c es, a nti - c o rp ora te
s e nti m ent, te rro ris m , a nd e nv ir o nm enta l p ollu ti o n i n to m anagem ent d ecis io ns.
S om e b usin esse s a re p ro ne to s o cia l, e nv ir o nm enta l, a nd p oliti c al r is k s b ecause o f th e l o cati o n
11 2