The Green Bottom Line: Standardizing Environmental Management Accounting for Organizational, Material and Energy Efficiency

1. Introduction

Management accounting plays a critical role in organizations by applying financial management accounting principles to create, preserve, and enhance enterprise value for stakeholders [1]. It serves as an essential component of management, providing valuable information for business strategy, decision-making, resource allocation, performance improvement, and overall organizational sustainability [2].

Emerging trends in management accounting are driven by the need to adapt to dynamic business environments and meet global challenges. These trends focus on various aspects, including improving product quality, reducing corporate costs, increasing productivity, and integrating environmental considerations into production processes [3,4]. Organizations are increasingly recognizing the importance of environmental sustainability and the role of management accounting in addressing environmental issues [5–7].

In today's business landscape, the integration of environmental and energy management systems has become crucial for effective environmental management accounting (EMA) [8]. Environmental and energy management systems provide organizations with frameworks and tools to manage and account for environmental aspects and impacts [9,10]. They enable a proactive approach to environmental performance and facilitate the optimization of environmental costs [11,12]. Standardized cost accounting of material and energy flows in organizations represents a powerful tool for aligning economic and environmental objectives, fostering a green economy, and promoting efficiency, environmental performance, and sustainable production [7,13,14]. It enables organizations to identify, measure, and manage the environmental costs associated with their operations.

2. Literature Review

The growing awareness and concern surrounding environmental and energy issues, combined with the increasingly complex global business environment, have compelled companies to address environmental and energy management challenges. Researchers such as Lopéz-Gamero et al. [15], Galdeano Gomez et al. [16], and Henri et al. [17] emphasize the strategic importance of accounting for environmental and energy costs within enterprises.

Environmental Management Accounting (EMA) practices offer businesses a means to promote sustainable growth by facilitating cost reduction, cleaner production methods, competitive advantage [18,19], improved pricing strategies, and increased shareholder value. As highlighted by Burritt & Schaltegger [8], EMA serves as a crucial decision-making tool for managing environmental costs.

However, traditional approaches often overlook the full financial implications of waste, which is a significant yet hidden burden for businesses, as noted by Jasch [20]. By solely considering waste disposal costs and neglecting the underlying expenses related to raw materials, labour, and energy, the true cost of waste is not fully captured.

To align economic and environmental objectives, it is imperative to enhance efficiency in material and energy usage. The adoption of material flow accounting has proven effective in reducing environmental impacts and improving productivity, as exemplified by Hinz, Wagner & Enzler [21]; Kokubu-Kitada [22]; and Majernik [23].

Despite the increasing recognition of the importance of environmental and energy management in business, there is a literature gap regarding the specific application and effectiveness of material flow accounting as a tool for optimizing material and energy flows. While studies have highlighted the benefits of implementing environmental management accounting practices, there is a lack of comprehensive research on how material flow accounting can contribute to achieving economic and environmental objectives simultaneously.

The aim of our research is to bridge this literature gap by investigating the role of material flow accounting in enhancing the efficiency of material and energy utilization within businesses. Specifically, we seek to explore how the implementation of material flow accounting practices can lead to improved environmental performance and cost savings. By examining real-world examples and conducting a thorough analysis, we aim to provide insights into the potential benefits and challenges of adopting material flow accounting as a strategic tool for sustainable resource management. Ultimately, our research aims to contribute to the existing knowledge base on environmental management accounting and provide practical recommendations for businesses striving to achieve both economic and environmental sustainability.

3. Modelling the Processability of Cost Accounting for Material and Energy Flows

Cost accounting of material and energy flows in organizations serves as a proactive quantitative management tool, involving several hierarchically ordered implementation steps [24]. The level of detail and complexity of economic-environmental analysis depends on factors such as organization size, nature of activities and products, process structure, selection of quantification nodes, and the presence of an environmental management system (EMS) following ISO 14001 or a less formal or non-existent system.

Cost accounting of material and energy flows can be conducted within an organization with or without a standard EMS. The process becomes easier, faster, and more efficient when integrated into a certified system based on ISO 14001, and even more streamlined within an integrated management system (IMS) encompassing environmental and energy aspects following ISO 50001 [25]. Environmental-energy cost accounting of material flows yields valuable information at different stages of the continuous improvement cycle, benefiting both the environmental profile and economic performance of the organization [8].

This approach enables organizations to incorporate financial considerations and forecasts when setting long and short-term development goals. Understanding the potential environmental aspects, impacts, risks, and financial implications of processes enhances the quality of an organization's environmental profile assessment and provides valuable insights for management decision-making [8,14,22].

Figure 1 illustrates the process of implementing the steps involved in environmental cost accounting of material-energy flows within an enterprise, while Table 1 further specifies these steps.

4. Modelling Material and Energy Flows and Costing

In the business environment, and particularly for enterprises, there is a growing need for accurate and visual models that depict the various quantity nodes where materials are stored, used, and transformed. Understanding the transfer of materials between different quantity nodes, such as production and recycling units, is crucial.

Costing, in essence, involves the allocation of system costs, energy costs, material costs, and waste management costs to individual material and energy flows within a company. Once all costs associated with a specific quantity node have been identified (through positive and negative product analysis), these costs are further assigned and distributed to the outputs of each quantity node within the production process of a specific product. This allocation is based on the proportion of material inputs and the corresponding material losses.

5. Inputs and Outputs of Business Processes

The overall balance of material and energy flows within an enterprise is founded on the recognition that whatever enters the enterprise must also exit the enterprise at some point. This includes all input materials, energy, information, as well as products and by-products. It is crucial to compare the procured inputs with the total production volume, sales statistics, and waste and emissions records. The objective is to enhance the company's efficiency in utilizing materials and energy, leading to improvements in economic, environmental, and energy aspects.

The cost accounting process is depicted in Figure 2. For instance, out of 100 kg of raw material input, 30 kg is allocated to material losses. Consequently, the total costs are distributed in this ratio, except for waste management costs, which are only allocated to material losses. This is because only the material losses require additional processes and financial resources for waste management.

The modelling and models serve as representations of the overall material flows within the chosen boundaries for cost analysis. The specification of material costs can generally be categorized into two situations:

• Simple manufacturing process: This involves tracing the flow of each material and energy from start to finish, from input to output. In this case, it is possible to track and identify the contribution of each material and energy input in the final products.
• Complex process: In more complex processes, the initial material and energy inputs are transformed into intermediate inputs, which cannot be individually recognized in the final products. In such cases, the intermediate products are considered as outputs. Please refer to Figure 3 for a visual representation.

In a simple production process, two quantity nodes are defined, each generating a product and a corresponding material loss. However, for more intricate processes, the consideration of intermediate products as outputs becomes necessary to accurately capture the material flows.

The precise composition of semi-finished product flows and material losses is often unknown in complex systems, making it challenging to calculate the exact unit material cost for these material-energy flows.

Table 2 presents the material costs associated with the model depicted in Figure 3. Please note that for the sake of simplicity, the table does not encompass all costs within the quantity nodes. The total unit material cost has been estimated by considering the cost of the initial material inputs at 77.5 EUR/kg.

Energy, system, and waste management costs, along with their allocation to products and material losses, are ideally determined directly from the available production cost data for each quantity node. If direct determination is not possible, these costs should be estimated using other available data, such as the organization's standardized energy management indicators.

There are four methods that can be employed:

1.

Allocating energy, system, and waste management costs between quantity nodes:

2.

More aggregated data for the entire process or technical installation can be utilized to quantify the costs of quantity nodes (QNs) in two sequential steps. First, these costs are calculated for the entire process within the cost accounting boundaries. Subsequently, they are allocated to individual quantity nodes based on an appropriate criterion, such as machine time, production volume, number of employees, hours worked, production area, etc. Table 3 provides an example of such a breakdown for a specified period.

3.

Allocating energy, system, and waste management costs to products and material losses in each quantity node:

4.

In this approach, all waste management costs are attributed to material losses. Table 4 illustrates such an allocation for a specific period using the percentage distribution of material in QN1 and QN2 as the criterion. For example, in QN1, 87.5% of the material is allocated to products (70 kg/80 kg), while 12.5% is allocated to material losses (10 kg/80 kg). Similarly, in QN2, 66.67 % is allocated to products (60 kg/90 kg), and 33.33% is allocated to material losses (30 kg/90 kg) [23].

5.

Alternative to percentage distribution of material:

6.

Instead of using a percentage distribution of material based on weight, an alternative approach can be employed. This alternative approach utilizes the weight distribution of all materials in each quantity node as the allocation criterion. If this is not feasible, the percentage distribution of the main material directly related to the process is used as the criterion.

7.

An alternative approach to the allocation criteria for energy consumption:

8.

The common criterion for allocating energy consumption between products and material losses is the mass distribution of material inputs. However, if more detailed information on the energy efficiency of machines in the quantity nodes is available, a more accurate quantification of inefficiency and energy waste can be implemented (Figure 4). For example:

(a)

If 10% of a machine's operation represents idle running, this portion of energy is allocated to material losses rather than products.

(b)

A material inefficiency of 20% results in allocating 80% of the remaining energy consumption to products.

(c)

A 15% reduction inefficiency from the optimal state leads to allocating only 85% of the increased energy consumption to products.

When employing the alternative approach, the energy consumption in quantity nodes is divided as follows:

• Energy allocated to products: 90%, 80%, 85%, 61.2%
• Energy allocated to material losses: 100% - 61.2% = 38.8%

The higher percentage of energy allocated to material losses in the alternative approach indicates inefficiency and highlights opportunities for improvement.

Table 3. Breakdown of energy, system and waste management costs (EUR).

Cost Types	QN1	QN2	Total
Energy costs	400	300	700
System costs	800	1200	2000
Waste management costs	300	400	700

Table 3. Breakdown of energy, system and waste management costs (EUR).

Cost Types	QN1	QN2	Total
Energy costs	400	300	700
System costs	800	1200	2000
Waste management costs	300	400	700

Table 4. Distribution of energy, system and waste management costs per products and material losses in QN1 and QN2 (EUR).

Cost Types	QN1	QN2
Energy costs	400	300
Products	350	200
Material losses	50	100
System costs	800	1200
Products	700	800
Material losses	100	400
Waste management costs	300	400
Products	0	0
Material losses	300	400

Table 4. Distribution of energy, system and waste management costs per products and material losses in QN1 and QN2 (EUR).

Cost Types	QN1	QN2
Energy costs	400	300
Products	350	200
Material losses	50	100
System costs	800	1200
Products	700	800
Material losses	100	400
Waste management costs	300	400
Products	0	0
Material losses	300	400

Figure 4. Quantification of energy losses.

Figure 4. Quantification of energy losses.

6. Integrated Presentation and Analysis of Cost Data

Material, energy, system, and waste management cost data can be summarized in various ways to facilitate further analysis and utilization. In our case study, we have presented a material flow cost matrix in Table 5, which incorporates the data for the two quantity nodes (QNs) examined in Figure 3. Additionally, Figure 5 visually represents this information through a clear and informative Sankey diagram.

Explanatory notes: a, b, c, d - values of costs transferred from QN1 to QN2, The data have been taken from Table 2, Table 3 and Table 4.

The energy costs in QN2 were determined to be 433 EUR for products and 217 EUR for material losses, based on the percentage material distribution in QN2 (66.67 % for products and 33.33 % for material losses). The total energy cost amounts to 650 EUR, which comprises the energy cost of products in QN1 (350 EUR) and the new input in QN2 (300 EUR).

Similarly, the system cost in QN2 was calculated as 1 270 EUR for products and 633 EUR for material losses, using the percentage material distribution in QN2 (66.67 % for products and 33.33 % for material losses). The overall system cost totals 1 900 EUR, consisting of the system cost for products in QN1 (700 EUR) and the new input in QN2 (1 200 EUR).

7. Implications and Benefits of Adopting Material-Energy Flows Accounting

By combining the principles of environmental management systems and rigorous accounting methodologies, companies can achieve significant improvements in both economic efficiency and environmental performance, including:

• Cost Reduction: The implementation of a functional environmental management system and the adoption of cost accounting practices for material-energy flows can yield significant cost reductions for companies. By meticulously tracking and analyzing material and energy costs, organizations can identify areas of inefficiency and waste, leading to the implementation of cost-saving measures, resource optimization, and reduction of material and energy losses. This proactive approach enables companies to achieve improved profitability by minimizing production costs.
• Environmental Performance: The establishment of an environmental management system and the integration of cost accounting practices focused on material-energy flows empower companies to assess and address their environmental impacts. Through quantification and analysis of these impacts, organizations can develop effective strategies to mitigate their carbon footprint, minimize waste generation, and enhance overall environmental performance. This comprehensive approach ensures that companies prioritize sustainability objectives and contribute to the preservation of the environment.
• Regulatory Compliance: Stringent environmental regulations and requirements are imposed by regulatory bodies on businesses across various industries. By implementing an environmental management system aligned with ISO standards and employing accurate cost accounting practices for material-energy flows, companies can ensure compliance with these regulations. The ability to precisely track and report environmental performance facilitates audits and regulatory inspections, enabling companies to demonstrate their adherence to regulatory guidelines effectively.
• Sustainable Supply Chain: Extending the material-energy flow cost accounting system to encompass the supply chain enables collaborative efforts between companies, suppliers, and customers to optimize resource utilization and improve environmental performance. This integrated approach fosters sustainable practices throughout the entire value chain, promoting the achievement of sustainability objectives and enhancing the reputation of all stakeholders involved.
• Decision-Making and Goal Setting: The availability of reliable and accurate data on material-energy flows empowers informed decision-making and goal setting within organizations. By leveraging this data, companies can identify areas for improvement, establish realistic targets for reducing material and energy consumption, and effectively track progress towards sustainability goals. This data-driven approach facilitates strategic decision-making that aligns economic and environmental objectives, enabling companies to make informed choices that balance financial viability with environmental responsibility.

8. Conclusions

The global consumption of materials and energy has been steadily increasing in recent years, despite the implementation of various regulatory measures at both global and regional levels. In the manufacturing industry, for instance, material and energy costs account for approximately 50% of a company's total expenses. Reducing their consumption can lead to tangible economic and environmental benefits, such as savings in material, energy, and waste management expenses.

The key solution to address the challenges faced by companies lies in implementing a functional environmental management system that is built and certified according to the international standards of the ISO 1400 family. Our research in this field highlights that cost accounting of material-energy flows, as a management tool, enables a comprehensive improvement of both the economic efficiency and environmental performance of the product system. This approach allows for the examination and enhancement of the transformation process from inputs to desired outputs.

By employing more precise cost accounting models for material-energy flows, the data becomes readily demonstrable, accessible, and useful in the continuous pursuit of optimization opportunities. It also aids in setting realistic economic and environmental development goals for the enterprise. A material-energy flow cost accounting system, adhering to ISO standards, can be implemented in various types of enterprises, economies, and industries, with the potential for extension to the entire supply-customer chain.