Three phases of the case study and their associated objectives
The three phases which are included in this case study are: phase one, phase two and phase three. The first phase entails the study of the existing management accounting system and an examination of how the costs and revenue opportunities occasioned by the environmental impacts are treated within this system. The four key issues which are considered in this phase relate to energy usage, paper usage, waste management, and water usage. It was noted that costs, which are occasioned by the environmental impacts, were treated just like the normal overheads. This indicates that the school does not have a method of ensuring responsible accounting for these costs in the current management accounting framework.
In the second phase, the objective was to examine the possibility that the costs and revenue opportunities, which were occasioned by the environmental impacts, were not being captured in the existing management accounting framework. The main purpose of this phase was to come up with ways of ensuring that these costs and revenue opportunities are captured in the system in a way that can enhance their identification.
In the third phase, the objective was to carry out a trial to determine the efficiency of the Environmental Management Accounting and compare it with the existing management accounting, which was being used in the organization. This was done to ensure that the proposed system would serve the interests of the organization better than the existing management accounting system. It was noted that the failure to record these costs and revenue opportunities in the right way resulted to a situation where the management was unable to make the right decisions. This had an impact on the productivity of the organization.
Explanation of Blackbaud school accounting and reporting system that is in operation at MLC
The Blackbaud school accounting is used to record the admission and registration of the students. It is also used to perform the accounting for non-profit making organizations. In addition, it incorporates the students’ records. Under the reporting function, the system is used to generate trial balance, income statements, balance sheet and the general ledger. However, the system does not allow for the generation of income and expenditure statement and cash flow forecast. These two functions can only be performed manually. This accounting system has been designed to cater for non-profit making enterprises.
The income is recorded in terms of tuition fees, fees charged on extra subjects, subsidies and also other sources of income. Most expenses are classified under administration and general overhead categories. Other classifications include: building and equipment, gardens and grounds, boarding, catering, caretaking and cleaning, information technology and health centre. These other categories are used to apportion costs such as salaries, wages and sundry expenses. The budgeting process is carried out at the beginning of the school year.
The capital expenditure function is classified in two parts namely: capital works and capital replacements. Under the capital works, the school council evaluates the relative importance of each of them and determines the capital works which are going to be carried out. This facilitates floating of tenders to determine the costs for these projects. The cost forms the basis for either the rejection or the acceptance of the projects. Capital replacements are usually proposed by the teachers. The departments determine the high priority projects, which are forwarded to the school council for approval and subsequent implementation.
Environmental impacts associated with MLC’s operations and how the costs associated with the environmental impacts are treated and flow through MLC’s accounting system
The environmental impacts identified in MLC’s operations include: energy usage, water usage, waste management and paper usage. Since the existing management accounting system does not sufficiently record the costs associated with the environmental impacts, the costs which arise as a result of energy usage, paper usage and water usage are captured under administration and general overheads. Additionally, the costs which are associated with waste management are captured under caretaking and cleaning overheads.
The flow of those costs through the MLC’s accounting system is such that they are entered directly into the expense accounts. This facilitates the apportionment of these costs to both the boarding and tuition functions based on the discretion of the person doing the coding. After the costs have been entered into the expense accounts, they are incorporated in the income and expenditure report for a particular period which shows the costs classified under the overheads.
It can be concluded that the current accounting system only takes into account the financial aspects of costs in preparing the information required in decision making. On the contrary, it does not take into account the environmental impact cost, which is crucial information that could facilitate effective decision making process by the management. According to Warren, Reeve and Duchac (2011), the failure by the management to take into account environmental impact costs has the likelihood of making the organization incur additional costs in future in order to evaluate, report, and prevent the effects of environmental impact. This could have the effect of increasing the operational costs of the organization in the long run.
Limitations of the existing accounting system with regard to cost savings and how costs can be reclassified to improve decision making.
The limitation of the existing accounting system is that it does not allow for the allocation of costs to the relevant responsibility centers. Costs due to the environmental impacts are classified under either ‘administration or general’ overheads or under the caretaking and cleaning expenses. As a result, there is no motivation for the departmental heads to control or to even minimize those costs. This implies that the organization does not have effective measures to reduce or eliminate unnecessary costs.
To facilitate effective decision making, the costs should be reclassified on the basis of various responsibility centers in the school. This could either be based on the subjects that are taught in the school or the activities that are carried out to facilitate the day to day running of the school. This would have the effect of reducing the costs which are attributable to the administration function.
According to Schaltegger, Bennett and Burritt (2008), improving the process of accounting the costs starts by evaluating the existing accounting system. Afterwards, the management will need to look into the various aspects of environmental impact costs. In this regard, the organization should pursue measures which are meant to minimize costs or increase opportunities for revenue. The other process involves the proposals to improve the current accounting system with a view of making it more effective. Finally, the management can carry out a trial of the proposed changes to ensure that they are consistent with the needs of the organization.
How Activity Based costing can be beneficial to MLC
Activity based costing can help in enhancing accurate costing for the various assets, activities and products. Additionally, it can facilitate the process of assessing the performance of the employees in charge of particular functions on the basis of pre-determined criteria to avoid bias. It is also a very realistic and practical method of capturing the costs incurred in the MLC. Activity based costing uses the concept of unit cost rather than the total costs. This helps the management to identify areas that need to be looked into in order to minimize the total cost for the entire organization. As a result, it facilitates a much effective means of providing the information which is required in the decision making process.
It facilities the identification of the cost areas which utilizes both low and high costs. This helps the management to put the necessary measures in order to minimize the costs. It can also help an organization to have competitive advantage since it helps in the improvement of business processes. It also helps the management in making the distinction between the necessary and the unnecessary costs. Therefore, it can be concluded that activity based costing is a very efficient method of accounting for costs (Goektuerk 2007).
How costs associated with environmental impacts within MLC can be allocated and the limitations associated with the cost drivers identified in the study
The costs can be allocated on the basis of the activities which give rise to those costs. This would ensure that the apportionment of those costs is done in a practical manner. In order to facilitate this apportionment, the organization should identify the activities which are performed in the organization as well as the resources which are expended by each activity. This should be done in order to determine the true cost of each of the identified activities. Under the energy usage, the cost which has been identified is the light and power cost. The apportionment of this cost is going to be made on the basis of surface area as a percentage of the total combined surface area of the school.
Under the paper usage, the cost which has been identified is the photocopying cost. This cost is going to be allocated on the basis of the total number of copies made for a particular department as a percentage of all the copies made in the school.
The cost which has been identified under the water usage is the water costs. In order to ensure the effective apportionment of this cost, there were two areas that were identified. The areas include the water spent in the toilet and the water spent by the washing machines. As a result, the apportionment is going to be on the basis of the percentages of the water used in each of the two areas.
Under the waste management, the various costs which were identified include: tipping fees, document shredding costs and grease tap removal costs. All these costs would be charged to a particular responsibility centre, which would facilitate their apportionment on the basis of the floor area as a percentage of the total floor area of the school.
The disadvantage of the use of the floor area as the basis of the apportionment of the costs is that if the responsibility centre reduces its usage of a particular component, it might not result to a commensurate reduction of the costs apportioned to that particular centre.
Benefits to the responsibility centers within AMP from maintaining records on both energy and water usage
One of the benefits of the responsibilities centers is that they allow for easy identification of the relevant costs. In addition, apportionment of costs on the basis of responsibility centers allows for the right decisions to be arrived at regarding the best ways of minimizing those costs. It can be argued that the relevant departmental heads would be in a better position to control those costs. This would have the implication of ensuring that the financial statements produced would accurately portray the true actual costs.
Moreover, allocation of the costs to the relevant responsibility centers facilitates the apportionment of those costs to the relevant sub centre. This enhances efficiency of monitoring those costs. Therefore, the school will enhance its cost reduction and revenue generating opportunities. This will have the effect of minimizing the costs for both the energy and water usage. As both the water and energy cost comprise a huge component of the total cost for the organization, it will result to grater profitability for the organization.
Furthermore, the allocation of costs to the responsibility centers facilitates cost planning. This ensures that the company does not incur unnecessary costs which affect its profitability. It also helps in improving the overall performance of the entire organization because the relevant departmental heads are aware that they will be assessed on their performance on the costs which have been charged to their departments. It also helps the organization to groom its employees to take more challenging roles in future by giving them an opportunity to be in charge of a small part of the organization and thereby honing their leadership skills (Leung 2011).
How MLC could develop additional records for identifying, allocating and managing the costs associated with waste and how the associated financial benefits should be accounted for
Currently MLC does not have sufficient records which can aid in the identification and apportionment of the management waste costs. In order to effectively manage the costs associated with waste management, the school should consider the following: Firstly, the management would need to consider the time spent by the staff in attending to the waste management issues. This would help the management to develop records which would help them to account for the time wasted as a percentage of the total time. This would facilitate the effective apportionment of this time to waste management.
The cost incurred to purchase the equipment, which is used for the purpose of ensuring the efficiency of waste management activities, should be looked into. Therefore, MLC should have records which capture the costs of these assets. Another cost that would need to be allocated to waste is the cost incurred in training the employees on the effective waste management practices. For this reason, the management would also require other records to capture the costs incurred in training the employees.
The management would also need to consider the cost of the waste materials which should then be allocated to waste appropriately. The records adopted should be such that the cost of the waste materials is appropriately captured. As a result of these measures, any benefits which are realizable under this plan should be attributable to the responsibility centre which facilitated such benefits. The benefits accruing from this approach should help in reducing the costs incurred in waste management, which would result to a corresponding decrease in the total costs for the organization.
How a life cycle costing system (LCC) could be implemented within MLC and the environmental impact issues that would need to be considered and costed within the LCC exercise
The life cycle costing system (LCC) can be defined as an accounting method, which attempts to record all the costs associated with a particular asset or product over its useful life. In the implementation of the LCC, the school would need to carry out a thorough analysis of all the projects that they need to undertake. This would be a complete departure to the past where the decision to commission the commencement of a project was wholly dependent on the cost of acquisition.
Some of the issues that would need to be considered in capital budgeting would include: the cost of acquisition, finance costs, maintenance costs, operational costs and the cost of disposal. This would ensure that the decisions regarding a particular project will be arrived at after taking into account the aforementioned issues. This would aid in effective comparison of competing projects and eliminate the possibility of engaging in projects which could end up being very expensive to maintain in the long run.
This approach would result into substantial saving in terms of environmental impacts costs which would arise as a result of the operational, maintenance and disposal stages in the life of the that project or asset. Some of the issues which could be captured aptly by this approach include disposal issues, energy usage issues, the need for efficiency in operation of the assets, the requirements for maintenance, and consumptions needs for the assets. This would be a very efficient way of ensuring that the organization minimizes the environmental impact costs. This would result to effective utilization of the resources at its disposal because of the massive savings which would come as a result of using LCC in decision making.
Reference List
Goektuerk, H 2007, Activity–Based Costing(ABC) – Advantagesand Disadvantages, GRIN Verlag Publishers, Norderstedt.
Leung, D 2011, Inside accounting, Gower Publishing Ltd, Aldershot.
Schaltegger, S Bennett, M and Burritt, R 2008, Environmental management accountingfor cleaner production, Springer Publishing company, New York.
Warren, C Reeve, J and Duchac, J 2011, Accounting, Cengage learning Publishers, Hampshire.