Accounting for environmental and sustainability factors: formula sheet

Key formulas

Definition of EMA

EMA = monetary information + physical information on environmental impacts

Quote both parts in definition questions. Physical data is what separates EMA from conventional costing.

Environmental cost categories

Conventional costs + hidden costs + contingent costs + image and relationship costs + externality costs

A common way to classify costs. Externalities are borne by society, not the firm, so they are usually outside the firm's accounts.

Materials balance principle

Input materials = product output + waste and emissions

Used in input/output analysis. Every tonne bought but not sold in the product is waste that has a cost.

Classification by nature

Conventional | Hidden | Contingent | Image and relationship | Externality

Use when the question asks what kind of cost it is or how visible it is.

Classification by purpose

Prevention | Appraisal | Internal failure | External failure

Use when the question asks about timing: before a problem, checking, or after it.

Failure test

Internal failure = pollution dealt with inside the organisation; External failure = pollution released and dealt with outside

Look at whether the damage has left the organisation.

Prevention versus failure

Higher prevention and appraisal spend usually aims to reduce failure costs

Same trade-off as the quality cost model, but not always proven to give a lower total.

Cost driver rate

Rate = Environmental cost pool ÷ Total driver volume

For example, waste disposal cost ÷ total kg of waste. Use the driver that really causes the cost.

Cost assigned to a product

Cost assigned = Driver rate × Driver volume used by the product

Add this to the product's other costs to give a fuller cost.

Traditional absorption rate (for comparison)

Rate = Total overheads ÷ Total activity base (e.g. labour hours)

This spreads environmental costs evenly, whatever the product's real pollution.

Cost per unit

Cost per unit = Total cost assigned to product ÷ Units produced

Compare the result with the traditional figure to see the distortion.

Mass balance

Total inputs (by weight/volume) = Product output + Waste output

Use the same unit throughout. If the two sides differ, the gap is an unrecorded loss such as evaporation.

Waste quantity

Waste = Total input − Product output

Use this when waste is not given directly.

Cost split by weight

Cost of a flow = (Quantity of that flow ÷ Total output quantity) × Total cost of the stage

Usual approach in MFCA when processing costs are shared in proportion to physical quantity. Use it for material, energy, labour and overheads.

Cost of negative product

Negative product cost = Material cost of waste + Share of system costs (energy, labour, overheads)

Shows the full cost of waste, which is much higher than the material cost alone.

Waste as a percentage

Waste % = Waste ÷ Total input × 100

Useful for comment and for comparing periods or processes.

ABC cost driver rate

Rate = Cost pool total ÷ Total volume of cost driver

Use a separate rate for each environmental activity, such as ₹ per kg of hazardous waste.

Overhead absorbed by a product under ABC

Cost charged = Rate × Driver units used by the product

Add this to direct costs, then divide by units for cost per unit.

Total life cycle cost

Total LCC = Pre-production + Production + Distribution and service + End-of-life costs

End-of-life costs include decommissioning, restoration and disposal.

Life cycle cost per unit

LCC per unit = Total life cycle cost ÷ Total units over life

Compare with lifetime revenue per unit to test whether the product is profitable overall.

Present value of a future cost

PV = Future cost × discount factor

Use only when the question gives a discount rate or factors.

Triple bottom line

TBL = People (social) + Planet (environmental) + Profit (economic)

A reporting framework, not a calculation. The three areas are reported separately and cannot be summed into one figure.

Resource intensity measure

Resource used per unit = total resource used ÷ units of output

Use for energy, water, materials or emissions. Compare with prior periods and targets.

Recycling or waste rate

Recycling rate (%) = recycled waste ÷ total waste × 100

Use the same definition of total waste each period or the trend is meaningless.

Percentage change

% change = (current − previous) ÷ previous × 100

A fall in emissions or waste is favourable. Check the direction before commenting.

Quick revision

• EMA gathers physical data (materials, energy, water, waste) and monetary data (costs and savings) on environmental impact.
• Many environmental costs are hidden in general overheads, so they are not visible to decision makers.
• Environmental costs can be grouped as prevention, appraisal, internal failure and external failure.
• Internal failure costs arise inside the business, such as waste treatment; external failure costs arise after release, such as clean-up or fines.
• Some external costs fall on society and are not paid by the business, so they are not in the accounts.
• Input/output analysis balances the physical inputs against outputs, including waste, in line with the idea that what goes in must come out.
• MFCA values waste at the full cost of the materials, labour and overheads that went into it, not just the material cost.
• ABC helps allocate environmental overheads to products according to the activities that cause them.
• Life cycle costing includes costs from design through to disposal, so end-of-life and clean-up costs are considered early.
• The triple bottom line looks at people, planet and profit, not only financial results.
• Sustainability reporting helps stakeholders judge long-term performance, but it is often voluntary and hard to compare.

Common mistakes

• Writing a general essay on climate change instead of on accounting. Fix: Keep every point tied to measuring, allocating or reporting environmental costs for decisions.
• Describing EMA as only about money. Fix: State that EMA also uses physical data such as quantities of waste, energy and water.
• Treating hidden and contingent costs as the same thing. Fix: Hidden costs are real and incurred now but not separately identified. Contingent costs may or may not arise in future.
• Calling a cost of cleaning waste inside the factory an external failure cost. Fix: Internal failure is damage dealt with before release. External failure applies when pollution has reached outsiders or the environment.
• Treating environmental costs as only fines and clean-up. Fix: Include waste, wasted materials, energy, permits, monitoring and prevention costs. Look inside overheads.
• Spreading environmental costs on labour hours. Fix: Choose a driver linked to the cause, such as waste volume. Say why labour hours would distort the cost.
• Costing waste at material cost only. Fix: Apply the share of every cost pool to waste, not only the material. This is the whole point of MFCA.
• Mixing units, such as litres with kg or tonnes with kg. Fix: Convert everything to one unit before you start the mass balance.
• Leaving out end-of-life costs such as decommissioning and disposal in LCC. Fix: Always list all four stages. Tick off decommissioning, restoration and disposal before you total.
• Choosing a cost driver that does not cause the cost, such as labour hours for waste treatment. Fix: Ask what makes the cost rise. For hazardous waste treatment it is kg of waste, not hours worked.

Exam tips

• Always mention both monetary and physical information when you define EMA.
• Tie each driver or cost to the scenario. Generic lists earn few marks.
• In objective questions, watch for options that describe conventional costing as if it were EMA.
• Make as many distinct points as marks available, and keep each to one or two sentences.
• If asked to evaluate, include at least one limitation such as measurement difficulty or cost.
• Check whether the question wants classification by nature or by purpose. Mixing them loses marks.
• In written answers, define the category in a few words, then tie it to the scenario item. Evidence from the scenario earns the marks.
• Remember that one cost can fit both lists, such as a fine being contingent and external failure. Say which you are using.