Environmental Costing Flash cards

Question 1

Environmental Costing — Brief Summary

Answer 1

Environmental costing is the process of identifying, measuring, and assigning costs related to environmental impacts within a business. It integrates environmental factors into traditional cost accounting to help companies manage, reduce, and report environmental costs effectively. This approach supports better decision-making, compliance with regulations, and promotes sustainability.

This approach supports better decision-making, compliance with regulations, and promotes sustainability.

Question 2

A Summary of Environmental Costing In My Own Words

Answer 2

Environmental costing is basically about figuring out how much a company’s activities cost the environment—and putting a price tag on those impacts. It’s not just about money spent on things like waste disposal or pollution control, but also the hidden costs, like damage to nature or health that might not show up directly on the balance sheet.

Companies use environmental costing to track these costs so they can make smarter decisions—like using less energy, reducing waste, or switching to cleaner tech—which can save money and protect the planet at the same time. It also helps businesses follow laws and avoid fines.

A big part of it is thinking about the whole lifecycle of a product—from raw materials to disposal—so the company knows the full environmental cost, not just what happens in the factory.

The idea behind environmental costing is “if you cause the pollution, you should pay for it,” so companies factor those costs into pricing and planning.

Overall, it’s about being responsible, sustainable, and transparent while improving efficiency and sometimes even gaining a competitive edge by showing customers they care about the environment.

Question 3

What is Environmental Management Accounting (EMA)?

Answer 3

EMA involves identifying, collecting, analyzing, and using environmental cost and performance information for internal decision-making. Example: A factory tracks its waste disposal costs to reduce pollution and save money.

Question 4

What are the two main types of environmental costs?

Answer 4

Monetary costs (direct and indirect) and physical costs (material/waste volumes). Example: Monetary cost = pollution fines; physical cost = tons of waste produced.

Question 5

Define environmental costing.

Answer 5

Environmental costing quantifies environmental impacts in monetary terms to include them in product or process costs. Example: A company adds the cost of carbon taxes to product pricing.

Question 6

What are direct environmental costs?

Answer 6

Costs that can be directly traced to environmental activities, like waste treatment or pollution control. Example: Cost of installing a water treatment plant.

Question 7

What are indirect environmental costs?

Answer 7

Costs that are not directly traceable but relate to environmental impact, such as overhead or administration costs for compliance. Example: Salaries of environmental compliance staff.

Question 8

Why is environmental costing important for businesses?

Answer 8

It helps improve cost control, compliance, reputation, and supports sustainable decision-making. Example: Reducing energy use lowers costs and carbon footprint.

Question 9

Give an example of environmental costs related to waste disposal.

Answer 9

Fees for hazardous waste removal and landfill charges. Example: A chemical plant pays to dispose of toxic waste safely.

Question 10

What is a pollution prevention cost?

Answer 10

Cost incurred to prevent pollution before it occurs, e.g., cleaner technologies or process changes. Example: Investing in energy-efficient machinery to reduce emissions.

Question 11

What is compliance cost?

Answer 11

Expenses to meet environmental regulations such as permits, reporting, and audits. Example: Paying for emission testing required by law.

Question 12

What are internal environmental costs?

Answer 12

Costs incurred inside the company like waste management and resource use. Example: Recycling scrap materials within the factory.

Question 13

What are external environmental costs?

Answer 13

Costs borne by society due to environmental damage from business activities. Example: Health costs from air pollution near factories.

Question 14

How can environmental costing influence pricing decisions?

Answer 14

By including environmental costs, firms can price products more accurately reflecting true costs. Example: A paper company charges more for recycled paper to cover recycling costs.

Question 15

What is life cycle costing (LCC) in environmental terms?

Answer 15

Calculating total environmental costs over a product’s entire life cycle from production to disposal. Example: A car manufacturer considers fuel efficiency and end-of-life recycling costs.

Question 16

What is the ‘polluter pays’ principle?

Answer 16

The polluter is responsible for paying for the environmental damage they cause. Example: A factory fined for contaminating a river must pay cleanup costs.

Question 17

Define eco-efficiency.

Answer 17

Creating more goods/services with less environmental impact and resource use. Example: Using less water in textile production reduces costs and pollution.

Question 18

What role does environmental costing play in sustainability reporting?

Answer 18

It provides quantified environmental cost data for sustainability disclosures. Example: A company reports its reduced carbon emissions and associated cost savings.

Question 19

Give an example of an environmental cost saving.

Answer 19

Reducing energy consumption lowers electricity bills and emissions. Example: Installing LED lighting saves money and energy.

Question 20

What are environmental opportunity costs?

Answer 20

Costs related to missed environmental opportunities, like not recycling or reusing materials. Example: Not recovering scrap metal results in lost revenue.

Question 21

How can companies identify environmental costs?

Answer 21

By reviewing processes, resource use, waste outputs, and regulatory fees. Example: Auditing energy bills and waste disposal invoices.

Question 22

What is the impact of ignoring environmental costs?

Answer 22

Understating product costs, risking fines, and damage to reputation. Example: A company ignoring pollution control faces expensive lawsuits.

Question 23

What is a tangible environmental cost?

Answer 23

Costs that are measurable and recorded in financial accounts. Example: Cost of water treatment chemicals.

Question 24

What is an intangible environmental cost?

Answer 24

Costs difficult to quantify, like loss of biodiversity or public image damage. Example: Negative media coverage affecting sales.

Question 25

How does environmental costing assist in decision-making?

Answer 25

By revealing hidden costs and encouraging environmentally friendly choices. Example: Choosing suppliers with green certifications.

Question 26

Explain the concept of 'green costing'.

Answer 26

Incorporating environmental costs into traditional costing methods to reflect true product costs. Example: Adding costs of waste recycling to manufacturing overhead.

Question 27

What is an environmental audit?

Answer 27

A systematic review of environmental policies, costs, and compliance. Example: An external audit checks if emissions limits are met.

Question 28

How do environmental costs affect product design?

Answer 28

Designers aim to reduce environmental impact and associated costs. Example: Designing packaging with less plastic.

Question 29

What is the relationship between environmental costing and Corporate Social Responsibility (CSR)?

Answer 29

Environmental costing supports CSR by measuring and managing environmental impacts. Example: Reporting reduced water usage aligns with CSR goals.

Question 30

How can technology reduce environmental costs?

Answer 30

By improving resource efficiency and lowering waste emissions. Example: Using solar panels to reduce electricity costs.

Question 31

What is cradle-to-grave costing?

Answer 31

Considering environmental costs from resource extraction through disposal. Example: Calculating emissions and waste for an electronic device throughout its life.

Question 32

Give an example of environmental cost in supply chain management.

Answer 32

Costs of transporting goods with low-emission vehicles. Example: Choosing eco-friendly logistics partners.

Question 33

What is the impact of environmental costing on competitive advantage?

Answer 33

Helps firms innovate, reduce costs, and improve brand image. Example: A company markets its product as eco-friendly, attracting customers.

Question 34

What is the purpose of assigning environmental costs to cost centers?

Answer 34

To identify areas with high environmental costs and target improvements. Example: Waste disposal costs allocated to the manufacturing department.

Question 35

How does environmental costing relate to risk management?

Answer 35

Helps identify financial risks from environmental liabilities and regulations. Example: Estimating costs of future carbon taxes.

Question 36

What is the role of incentives in reducing environmental costs?

Answer 36

Encouraging employees or suppliers to adopt eco-friendly practices. Example: Bonuses for reducing energy use.

Question 37

Give a real-life example of environmental costing impacting a business decision.

Answer 37

IKEA invests in renewable energy and sustainable materials to reduce long-term costs and improve its green image.

Question 38

Key Subheadings OF EMA:

Answer 38

Environmental Management Accounting (EMA) is The practice of collecting and analyzing environmental cost data for internal decision-making. **Types of Environmental Costs** Direct Costs: Easily traced to environmental activities (e.g., waste treatment). Indirect Costs: Not directly traceable but related to environmental impact (e.g., compliance staff salaries). Internal Costs: Costs within the company (e.g., recycling). External Costs: Costs imposed on society (e.g., pollution effects). Tangible vs Intangible Costs: Measurable vs difficult to quantify (e.g., reputation damage). **Environmental Cost Categories** Pollution Prevention Costs: Costs to avoid pollution (e.g., cleaner tech). Compliance Costs: Costs to meet regulations (e.g., permits, audits). Waste Disposal Costs: Costs for managing waste and hazardous materials. Life Cycle Costing (LCC) & Cradle-to-Grave Costing Assessing total environmental costs over the entire product life cycle, from raw material extraction to disposal. **‘Polluter Pays’ Principle** The concept that polluters bear the costs of the environmental damage they cause. **Environmental Costing and Pricing** Incorporating environmental costs into product pricing for true cost reflection. **Role in Sustainability and CSR Reporting** Using environmental cost data to support corporate sustainability initiatives and public reporting. **Environmental Auditing** Systematic review of environmental policies and costs to ensure compliance and identify improvements. **Environmental Opportunity Costs** Costs of missed environmental benefits, like failing to recycle valuable materials. Impact on Business Decisions and Competitive Advantage Using environmental costing to improve efficiency, innovation, and brand image. Risk Management and Incentives Identifying environmental risks and encouraging eco-friendly practices within the organization.