Measuring and Managing Environmental Sustainability: Using Activity-Based Costing/Management (ABC/M)

An environmentally sustainable organization balances its current strategic and financial objectives with long-term natural resource preservation and usage to meet the needs of the present without compromising those of future generations. There is an opportunity to leverage accounting tools to effectively manage environmental sustainability initiatives within organizations.

Every organization’s operations have an environmental impact. There are pressures – strategic, regulatory, and otherwise – to reduce the impact through responsible environmental stewardship. These pressures require organizations to change the way they do business, and assign additional costs to address the environmental impact. These costs have a significant effect on the way an organization does business. Building a clear understanding of the environmental impact and the actual costs associated with reducing the impact can provide an organization with a competitive advantage over those organizations that cannot quantify or evaluate their own environmental impact.

Accurately quantifying the environmental impact and the costs of remediation efforts is challenging because they do not show up as part of traditional cost accounting models. Under traditional applications of activity-based costing/management (ABC/M), costs associated with environmental stewardship are not explicitly identified. Understanding these costs and layering them into an organization’s decision-making processes will allow the organization to effectively and efficiently utilize its resources. ABC/M is a tool organizations can utilize to more accurately account for their environmental impact. It is based on the principle that it is not the products or services that an organization produces that generate costs, but rather the activities that are performed in producing the products and services. ABC/M provides information on the rate at which activities consume resources as well as why the resources are being used, and provides a link between resources consumed and the organization’s outputs.

Traditionally, ABC/M has been used by accountants. Over time, the use of ABC/M has moved beyond pure cost analysis. ABC/M has been used to track non-cost value items like full-time equivalents (head count) and effort (in the form of hours).

The purpose of this article is to describe how a well-developed ABC/M model can provide not only a management view of cost data but also a management view of greenhouse gas (GHG) emission data. Further, combining cost and GHG emissions data to arrive at product/service and activity level information for each measure type provides a significant opportunity for organizations to maximize the management of their environmental impact. A model that includes cost, revenue, and GHG emissions would provide GHG/cost/revenue metrics that would allow organizations to measure profit and GHG emission impacts for product lines or services. This model provides a clear perspective on how the GHG footprint of r products, services, and activities relates to profit. This information will provide managers with powerful information on how to reduce an organization’s costs and GHG footprint.

This article is part of a series authored by the Consortium for Advanced Management – International (CAM-I) which explores how the Consortium’s proven cost, performance and process management tools can be applied to environmental sustainability. This article focuses on GHG emissions as an example of an environmental sustainability issue; however, the principles can be easily extended to other environmental concerns, such as water usage, waste, pollutants, or any other environmental measure.