CHAPTER 17

SUSTAINABILITY AND MANAGEMENT

ACCOUNTING

ANSWERS TO REVIEW QUESTIONS

17.1 This statement is incorrect. Sustainability requires organisations to consider the interrelated impacts of
their activities on the economy, the environment and society. The core elements of sustainability include
the following:
Sustainability is concerned with the future and with the ability to maintain certain values, assets or
capabilities over the long term.
Sustainability involves decisions that address the interaction between environmental, social and
economic domains.
Sustainability requires choices considering equity within society and across generations.
While sustainability is based on the concept of sustainable development, which is defined by the UN as
development that meets the needs of the present without compromising the ability of future generations
to meet their own needs (United Nations, 1987a), the United Nations also intended it to apply to private
institutions, organisations and enterprises (United Nations, 1987b). Thus, sustainability requires that
organisations consider the impacts of their activities on the economy, the environment and society. This
involves generating profits in ways that may minimise damage to the economy, environment and
community, both now and in the future. It could also include undertaking actions that lead to
improvement in performance across the economy, environment and community.

17.2 Research reported in the chapter suggests that the reasons organisations engage in sustainability reporting
include: its usefulness in identifying environmental and social changes that impact on the business and its
stakeholders; the insights it provides in the development of a strategy to manage risk and opportunities; its
guidance in creating innovative new products; and its support for actions that grow market share. Overall
these findings support the view that sustainability and perceptions of sustainable development have an
impact on the achievement of economic objectives. Students may like to consider this in the context of
institutional theory and attaining legitimacy as discussed in Chapter 1.

17.3 An integrated report is a concise report with the prime purpose of explaining how an organisation creates
value over time. It is required to explain how, in the context of its external environment, an organisations
strategies, governance, performance and prospects lead to value creation in the short, medium and long
term. Integrated reports explain value creation and value diminution in terms of the impact of an
organisations activities on 'the six capitals'. Sustainability reports focus on the economic, environmental
and social impacts of an organisations operations. While the sustainability report provides a triple fronted
overview of the outcome of its operations, the context for their operations and the planning for the future
are seen in the integrated report.

17.4 Employees can influence the adoption of sustainable work practices in several ways. Employees who
value sustainability principles may put pressure on their employer to adopt more sustainable work
practices, and may choose to leave the employ of an organisation if the organisation fails to adopt
sustainable work practices. Employees are often the frontline of contact between the organisation and
customers and community groups, so the success of the adoption of sustainable work practices may
depend on whether employees choose to cooperate in their adoption.
Customers vote with their feet. Pressure is brought to bear on organisations by customers and they may
no longer purchase from that organisation if they dislike the ethical principles or work practices of that
organisation.
Community groups are very good at publicising what they regard as the poor ethical conduct of
organisations. This creates pressure on the organisation when they react to the possibility of losing
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
 customers due to their poor image. Local community groups (i.e. the community providing employees)
can often obtain support for local sporting activities, pressure for quick settlement of debts to local
suppliers who depend on a good cash flow, and influence the employment of disadvantaged people such
as those from minority groups or others who are physically or intellectually challenged.
Other stakeholders can bring pressure to bear in a variety of ways, many of which can be found in Exhibit
17.3 of the textbook.

17.5 Traditionally management accounting systems have only included measures related to the financial impact
of operations and then incorporated these into decision-relevant reports. Management accounting systems
can be adapted to assist sustainability reporting by defining, tracking, measuring and recording cost and
performance measures that are relevant to the environmental and social impact of operations, then
presenting them in ways that assist sustainable decision making and sustainability reporting.

17.6 The future impacts of current operations, in this context, are difficult to report. The reasons include:
it is difficult to identify what impacts will be important to future generations, so what are
appropriate measures to monitor between now and then
there is great difficulty assessing future impacts even when it is determined which ones should be
forecast; many of these costs are external to the organisation (for example, the impact on the future
health of employees and the local community)
many of these costs are almost impossible to measure in financial terms (such as the impact on
family life for an employee who contracted a terminal illness)
the evaluation of future impacts is difficult because there are usually not any available benchmarks.

17.7 EMSs are systems that help manage the environmental performance of an organisation. They include
recycling systems and systems that monitor and control waste. EMAs are management accounting
systems and practices installed to provide information about the environmental impact of an
organisations activities. Many environmental management accounting techniques can be used to help
organisations to plan and implement their EMS and comply with the ISO 14000 series, which set out the
international standards that apply to environmental management systems. For example, ISO 14031
focuses on environmental performance measures and ISO 14040 deals with life cycle assessments.

17.8 Many answers are possible. Some examples follow. Management accounting information can be used to
support a sustainability approach by:
Including in product costs the environmental costs of activities undertaken to produce products.
Auditing and evaluating social and environmental practices of suppliers to inform supplier costing
and supply chain management decisions.
Incorporating social and environmental measures and targets into the evaluation of performance of
departments, divisions and managers.
Incorporating evaluations of social and environmental impacts into decisions on capital investment.
Identifying and evaluating the social and environmental costs incurred throughout a products life
cycle including contingent and societal costs associated with the manufacturing process and final
disposal of products.
Including social and environmental information and its evaluation into the process of making
tactical decisions such as make or buy, adding to or deleting from a product range and undertaking
a special order.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
17.9 Tier-2 and Tier-3 costs are both difficult to identify and report, but for different reasons. Tier-2 costs are
the costs of monitoring and reporting activities to comply with regulations. They are called hidden costs
because although they exist in the accounting system, they are likely to be reported as part of other
monitoring and reporting costs. They may be hidden within the overhead and salary costs of various
activities. Tier-3 costs are costs that have not been incurred yet, their incurrence is in some doubt and/or
the amount of the cost is in doubt. They are called contingent costs.

Environmental Examples
costs

Tier 2: The cost of monitoring emissions

Hidden costs The current cost of managing contamination of the operating site, such as
ongoing clean-up

Tier 3: Anticipated fines for reported contraventions of water contamination

regulations
Contingent costs
Future clean-up costs of site contamination

17.10 Managers may wish to recognise Tier-4 and Tier-5 environmental costs, which are external to the
organisation, because they provide indicators of potential future problems:
Tier-4 costs, relationship and image costs, reflect perceptions of various stakeholders such as the
community, employees and consumers which can influence a businesss reputation, demand for its
products and shares, its ability to attract and retain employees, and its overall viability.
Tier-5 costs, societal costs, although very difficult to estimate, represent the costs to society and the
environment of the organisations activities and therefore can indicate issues for the sustainability
of the activities, and possibly the industry. Although the organisation may not be able to be held
legally responsible for these costs they have the potential to adversely affect now or in the future its
reputation, sales, share price and long-term viability.

17.11 Many answers are possible here. Two examples of social and environmental cost information and how it
may change management decision making are:
A monthly reporting system that highlights the cost of reprocessing and disposal of waste material
may encourage management to change their production processes to reduce waste.
A costing system that focuses on recording the energy used in alternative manufacturing processes
may encourage management to adopt the process that uses the least energy.

17.12 The following are examples of social and environmental impacts that if reduced, would also reduce costs.
(a) Local government council: encouraging residents to recycle paper, which the council can then sell
to paper manufacturers.
(b) Motor vehicle repairer: reusing chemicals and recycling motor vehicle parts rather than disposing
of them.
(c) University: encouraging academic staff to reduce the amount of photocopying. This reduces the
cost of paper and electricity and reduces the need to continually replace and service a large number
of photocopy machines.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
17.13 Adopting a supply chain perspective made a large difference to G Michell & Sons. Prior to the exercise
the costing system spread all costs across all wool products on a per bale basis. This ignored the extra
costs caused by the different processing costs for the different grades of wool purchased. The exercise
revealed the difference in processing costs, environmental impact and yield between dirty wool and higher
grades of wool. The new costing system was the able to take these factors into consideration:
the new product costs sent a signal to the traders to pay less for dirty wool, which costs the company
and the environment in terms of usage of energy and chemicals.

17.14 The LCA for Oxford Landing wine has two aspects:
First it illustrates the value chain, identifying the flow of materials and activity at each stage. The
materials and activities are identified as waste (does not add value to anyone), necessary but non-value-
adding (that is, value-adding to the business but not to the customer), and value adding to the customer.
This analysis encourages managers at each stage of the value chain to minimise non-value-adding activity
and eliminate waste.
The other aspect of the LCA is to show, for each stage of the value chain, the level of greenhouse gas
emissions associated with the activities undertaken. The emission impacts are graded as none/minimal,
low, medium and high. Highlighting the greenhouse gas emissions impacts enables and encourages
managers to focus on the higher emission activities to minimise these impacts. For example, growers (who
are responsible for about 28.2 per cent of the greenhouse gas emissions in this LCA) can easily see that
irrigation and harvesting have low emissions but that they should try to reduce the high emissions
resulting from viticulture practice. Similarly, 30.2 per cent of the emissions occur at Yalumba/Angaston,
nearly all of which comes from packaging and bottling. Managers at this point in the value chain may be
investigating recyclable materials and low impact processes for packing and bottling.

17.15 Some firms have worked with customers to reduce the number of deliveries that are sent by air, since road
and sea transport is less polluting. This change requires the cooperation of customers with regard to the
timing of the placement of the order. The number of dispatches may also be reduced by negotiation.
Another example is the way eggs to be used in baking are delivered by supplier to customers. Eggs that
are transported in their shells suffer a high level of breakage unless they are contained in costly packaging.
Also, on receipt of a delivery, the customer must dispose of any broken eggs and then break open the
remaining eggs ready for mixing into batter. The supplier and buyer decided that breakage costs and
environmental costs would decrease if the eggs were shelled by the supplier and transported in liquid
form in canisters that could be cleaned and recycled.

17.16 Under ISO 14031, the major types of performance indicators may be outlined as follows:
Operational performance indicators which provide information such as waste levels and energy
consumption, relative to volume of production, sales or some other activity. Thus, an organisation
may measure the number of kilograms of waste material disposed of in landfill, or waste material as
a percentage of material used or as a percentage of production output.
Management performance indicators measure the efforts of management to improve the
environmental performance of their organisation. These include the cost of supplier audits, the
number of cases of non-compliance with regulations and any cost of correcting non-compliance,
and the cost and time devoted to staff environmental training. These are not outcome measures, as
they do not capture the impact of an organisations activities. They can be described as input
measures; compliance may or may not lead to improved environmental outcomes.
Environmental condition indicators measure the actual condition of the environment at a local,
national or global level. This is a difficult area to quantify, as many organisations and other factors
may contribute to the condition of the local environment. Thus, it may be difficult to single out the
impact of a single organisation. Nevertheless, there are examples where distinct changes in
environmental conditions can be closely linked to the activities of a specific organisation. For
example, the level of noise pollution experienced close to an airport may be linked to the activities
of that airport. Thus, the airport owner could monitor the noise level. Also, a sewerage processing
plant, which is allowed to pump recycled output into the ocean, could monitor the quality of the
water discharged. In both of these cases, it is possible to measure the impact in quantitative terms:
average and maximum decibels of noise and percentage of bacteria per litre of discharge.
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
17.17 The balanced scorecard can be adapted to include an additional perspective that relates to social and
environmental performance, and links to the other four BSC perspectives (financial, customer, internal
business process, and learning and growth). This may be appropriate where sustainability is a part of the
businesss core strategy; there is a need to focus managers attention on sustainability as a core value;
there are important sustainability issues facing the business; or the business consumes a large amount of
resources related to sustainability.
Alternatively, the BSC can be adapted by integrating measures of social and environmental drivers and
outcomes within the four BSC perspectives. For example, Novo Nordisk included a range of social and
environmental measures within the customer, internal business process and learning and growth
perspectives of its BSC, and described these perspectives as customer and society, business processes
and people and organisation respectively.

17.18 Financial perspective: On-going site contamination clean-up costs.

Stakeholder perspective: Time spent by employees on community projects.
Internal business process: Percentage of deliveries that use green diesel.
Percentage of invoices from local suppliers received and paid electronically.
Learning and growth: Employee surveys that assess level of commitment to environmental
principles.

17.19 The capital expenditure evaluation process may include a consideration of environmental and social costs
and benefits. In some cases these impacts can be estimated as cash inflows or outflows, discounted to their
present value. (The evaluation of capital expenditure processes is described in Chapter 21.) However, in
many cases these will be qualitative considerations which may not enter into the formal cash flow
analysis. These factors may include the impact of a new plant on the local community and on employee
wellbeing, the loss of reputation if a plant is moved to a cheaper, off-shore location and the risk of future
fines and regulations if current environmental regulations are strengthened.

17.20 During construction:

Air pollution from the site.
Noise pollution from construction.
After construction:
Blocking the sunlight from apartments and offices that previously enjoyed sunlight and a scenic view.
Increased demand by new residents for local services such as parking, food and transport, can reduce the
quality of life for existing local residents. In contrast, changes made to accommodate the increased
demand may give the locals access to increased choice of local services.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
SOLUTIONS TO EXERCISES
EXERCISE 17.21 (10 minutes) Sustainability
1 False. At a minimum sustainability involves doing no harm, both now and in the future, to the economy,
environment and community.
2 True. As a sustainability approach involves managing a business by considering its impacts on the broader
economy, the environment and society, the associated assessment of performance is concerned with
outcomes both within and outside the business.
3 False. The most obvious measures of a companys economic performance are its financial statements, but
sustainability reports are more comprehensive because they include broader measures of economic
impact, such as the impact on the economys infrastructure and its financial relationship with the
government.
4 False. Banks, suppliers, community groups, non-government organisations (NGOs), such as Greenpeace,
the Australian Conservation Foundation and the World Wildlife Fund, the media, and governments and
regulators may also be important stakeholders. Identifying relevant stakeholders and assessing their
influence is integral to risk management as under certain circumstances any stakeholders can put pressure
on a business to improve its sustainability practices and be more responsible.
5 False. Many businesses consider a sustainability approach as a source of shareholder value, through its
positive effects on employee morale, innovation, customer relationships, reputation/brand, managing
supplier relationships, risk management and cost savings.

EXERCISE 17.22 (15 minutes) Integrated reporting: internet search

The information is very easy to obtain from the web link provided. Links are then provided to the IR initiatives
for many firms. For tutorial discussions it is suggested that firms be allocated to provide a range in the
discussion. Extensive detail is given for many firms including Aegon NV (Financial Services) which explains in
some detail how IR:
has increased awareness of the interconnection between financial and non-financial information in
running the business...
The same links reveal problems for Aegon such as:
This has now led Aegon to start mapping its value chain in much greater detailthats a challenge for an
insurance company which doesnt have a conventional value chain, but which has relationships with
customers which can last 20, 30 or 40 years. For many people, insurance products are something of a
mystery, and explaining the connection between products and investments, on the one hand, and claims
and benefits on the other, can be difficult.
One possible focus of the discussions could be to compare experiences in different industries.

EXERCISE 17.23 (20 minutes) Decision making; considering economic, environmental

and social factors: manufacturer
1 Cost of paying paint recyclers to remove the waste = 300 kilolitres $50.00 = $15 000.00
Dumped in landfill after processing into solid waste = 300 kilolitres x 5 kg
= 1500 kilograms landfill
Cost of renting a recycling machine = $15 000.00
Operating cost = 300 kilolitres $0.30 = $90.00
Total cost = $15 090.00
The process wasted dumped in landfill = 300 kilolitres x 10 kg = 3000 kilograms landfill
Thus, the second alternative of renting a recycling machine is more expensive than paying for recyclers to
remove the waste. Also the second alternative results in more material being disposed of to landfill. The
financial assessment of the second alterative needs to include the additional cost of dumping to landfill,
which would seem to be included in the price paid to the recyclers under the first alternative.
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
2 Social and environmental factors:
Impact on employees of handling waste material.
Health, noise of other impacts on local community from operating the recycling machine.
Emissions associated with the two alternatives including energy use of operating new recycling
machine and delivering waste to landfill, and energy use of paint recyclers to pick up waste, then
recycle and deliver to landfill.
Impact of landfill activity on immediate community and into the future, noting that the second
alternative results in twice the amount of landfill.

3 Yes, implications for the broader economy include:

Increases in overall energy use and emissions.
Increases in the amount of waste dumped to landfill, the finite resource of landfill space becomes
more scarce and the costs of landfill increase for all households and businesses.
Adverse effects on the health and welfare of employees and/or the community, health care costs
and therefore taxes may increase and labour availability may decrease.
The multiplier effect. For example, the use of the new machine by Freaky Furniture Ltd could
stimulate investment in producing more machines (to meet increased demand for machines) more
than using the existing machine of the recycling firm to process the waste, and this may have a
more positive effect on economic growth.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
EXERCISE 17.24 (30 minutes) Life cycle analysis; environmental and social impacts:
fast food company

The life cycle assessment (LCA) format shown in the text is a convenient way to lay out this answer. Many
answers are possible, within reason, so this is a guide to possibilities.

Life Cycle

INPUTS GROWERS PROCESSORS OUTLETS CONSUMERS

Seedlings Land Baking Receiving Type of
Grain for management Butchery Storage burger
crops and Horticulture Mincing Customer Type of
feed practice Patty making service coffee/tea
Fertilisers & Animal Slaughter Waste and Type of fruit
chemicals husbandry Salad returns juice
Chicks, calves Harvest preparation Take away Price
Irrigation Sauce making
packaging Ambience
Dispatch Fish
Selection of
Fish farms processors
cakes
Freshness of
salad

Examples of environmental impacts:

Carbon Depletion of Carbon Waste Traffic usage

emissions minerals in emissions disposal of roads and
soil Odorous emissions parking
Soil erosion emissions Litter from Disposal
Destruction Overuse of take away problems re
of river water packaging packing
system Waste Noise from Light pollution
outlet Pressure on
High power parents to
usage for buy children
lighting unhealthy
meals

Examples of social impacts:

Hardship due Animal rights Employment Employment Outing with
to increase in concerns opportunities Meeting few parking
respiratory Employment Work place problems
diseases opportunities training- Opportunity Opportunity
Distress over for less well qualifications for eating out for socialising
treatment of qualified for less Rare chance
chicks, calves workers wealthy for
people inexpensive
Opportunity catered
to use as childrens
internet cafe party

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
EXERCISE 17.25 (30 minutes) Performance measurement: hospital
Many answers are possible. Students are likely to encounter difficulties in identifying economic performance
measures (that is, measures that reflect the impact of the department on the broader economy). These measures
are more likely to be relevant at the level of the hospital rather than for each department. Examples follow:

Performance measures
Department
Economic Environmental Social

Maintenance Staff salaries (impact on Percentage of waste Percentage of staff

the economy) recycled engaged through
government sponsored
Staff superannuation Litres of fertilisers used
job-start programs
contribution in the grounds
Percentage of staff
Workers compensation Litres of water used
entitled to sick and
claims
annual leave
Average length of
service of staff

Housekeeping Staff salaries Percentage of cleaning Number of

products used rated as disadvantaged staff
Staff superannuation
environmentally employed
contributions
friendly
Differences between
Workers compensation
Percentage of containers minimum hourly rates
claims
recycled payable and hourly rates
actually paid to staff
Percentage of staff
entitled to sick and
annual leave

Nutrition Purchase of Australian Percentage of food Average length of

produce and beverages wasted service of staff
Staff superannuation Kwh of electricity used Number of apprentices
contributions per fully trained
Kg of waste recycled
employee
Workers compensation
claims

Radiology Staff salaries Kwh of electricity used Percentage of staff from

minority groups
Staff superannuation Kg of radioactive waste
contributions disposed of Differences between
minimum hourly rates
Workers compensation Kg of photographic
payable and hourly rates
claims waste disposed of
actually paid to staff
Percentage of
employees entitled to
sick and annual leave

Nursing Staff salaries Percentage of waste that Number of paid hours

is recycled of staff released to assist
Staff superannuation
with community events
contributions Kwh of electricity used
on the wards Number of apprentices
Workers compensation
per fully trained
claims Kg of waste recycled
hospital employee

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
EXERCISE 17.26 (15 minutes) Environmental and social costing for decisions: orchard
1 An analysis of costs for the waste cleaning system for the next 10 years:

Cost of new equipment* $489 345

Total operational cost ($15 904 10) 159 040

Total cost of cleaning of system ($14 900 2) 29 800

Total value of reclaimed water (15 987 10) (159 870)

Total cost for 10 years $518 315

*The annual depreciation is an allocation of cost of the new equipment over its useful life and therefore is
excluded from this analysis.
Costs that will be avoided if the new system is purchased include the workers compensation claim of
$5500. The cost of any fines that may relate to the leakage of waste into the Murray River is unknown.
2 The cost of the new waste water system is significant. In order to assess whether the new system should be
purchased, the company will need to consider the impact of not implementing the system, and how much
importance it places on these factors compared to the quantifiable cost. These factors include the impact
of continuing to dump waste in the river on employees, the community and the environment. There may
also be a reputational impact of continuing to dump the waste.

EXERCISE 17.27 (25 minutes) Environmental and social costs; costing for decisions:
refinery
1 The financial cost to the refinery of investing in the new equipment is shown below.

Additional costs Cost savings Net cost

Initial outlay $289 000 $289 000

1 145 500 $20 500 125 000

2 130 000 20 500 109 500

3 125 000 20 500 104 500

4 125 000 20 500 104 500

5 125 000 20 500 104 500

Total cost $837 000

2 The financial benefit to the community = 50 000 5 years 50 tonnes $1 = $12 500 000
3 A more comprehensive analysis would cover matters such as:
The potential availability of government assistance such as grants or sponsorship, given that the
costs of the project are borne by the company, but the community benefits are high.
The potential for dormant medical conditions caused by toxic by-products that may give rise to a
class action in the future.
An investigation into and estimation of the effect of a carbon tax.
An investigation into the state of current technology and technology in the pipeline for reducing
toxic pollutants and carbon emissions especially as the new equipment under consideration reduces
but does not eliminate them.
The effect on export demand of both reducing emissions and not reducing carbon emissions, given
that countries are in the process of addressing climate change.
The effect on reputation and flowthrough economic effects of voluntarily implementing an EMS.
Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
EXERCISE 17.28 (20 minutes) Performance measurement: community organisation

1 (For details of operations students could refer to the web pages of the SLSA.)
number of students addressed in the Beach to Bush educational program
member retention
donations from local community groups
number of participants in the On The Same Wave program
number of hours members spend protecting coastal biodiversity in the Ecosurf program
volunteer satisfaction
number of volunteers
community satisfaction
amount of government funding.

2 Community and volunteer satisfaction measures are often measured using surveys and there is a limit on
how often these surveys can be administered to clients and volunteers. Over-surveying can reduce the
reliability of the results. Overall, volunteer measures need to be used carefully and should not be used
punitively, as this may result in a loss of volunteers. Negative performance areas may be difficult to
improve in the light of limited resources.

EXERCISE 17.29 (20 minutes) ISO 14031: manufacturer

1 Performance indicators

Operational performance Energy consumption 1278.5 kwh

indicators Waste dumped in landfill 4.8 tonnes

Staff OH&S training 487 hours

Management audits of the casting plant 3 p.a.

Management performance
indicators Audits of suppliers environmental
practices 2 p.a.

Staff environmental training 57 hours

Environmental condition
Air pollution of the Penrith district 25 ppm
indicators

2 A variety of measures could be added or adapted. For example, some of the operational measures could be
expressed relative to production volume or to material used. This would allow performance to be validly
compared over successive time periods. Some of the measures could also be expressed in financial terms.
For example, the cost of dumping waste and of energy could be included.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
EXERCISE 17.30 (15 minutes) Sustainability balanced scorecard: airline industry

1 This is difficult to say, but there could be several reasons. For example, it may value financial goals more
than its environmental goals. Perhaps the management qualities and service culture that is measured
emphasises environmental concerns?

2 Measures might include:

litres of fuel used per 100 kilometres
percentage of aircraft with certified low environmental emissions
noise levels of aircraft
percentage of staff engaged under flexible work hours schemes
money donated to third-world sustainability projects
number of staff sponsored to study for degrees
percentage of women in management.
See the Lufthansa website for social and environmental reports and KPIs:
www.lufthansagroup.com/en/responsibility/ climate-and-environmental-responsibility.html

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
SOLUTIONS TO PROBLEMS

PROBLEM 17.31 (30 minutes) Sustainability reporting; comparative analysis: internet

search
Doing an internet search for Sustainability report mining reveals reports for many mining companies including
Newcrest, BHP Billiton, Karara, AngloGold Ashanti, Xstrat, Orica, Downer Group, Newmont, and Oz Minerals.
While the answers to the specific questions are important in themselves, of greater educational benefit to the
student is the process of finding the answers, by browsing through information about the organisations and their
operations, reporting and rationales for what they do.

PROBLEM 17.32 (30 minutes) Identifying, classifying and managing environmental

costs
Many answers are possible. Some examples follow:

Environmental costs Conventional Hidden Contingent Relationship Societal

and image

Water used to maintain x

campus gardens
Log of
kilolitres of
water used
and rainfall

Carbon emissions monitoring x

and reporting
Number of
hours spent on
monitoring
and reporting

Contamination from chemicals x

in science labs (potential)
Log of spills
and accidents
and clean up
procedures
undertaken

Impact on campus reputation x

and image of using fleet cars
Analysis of
that are not fuel efficient
changeover
and running
costs of
providing
fuel efficient
fleet cars

Waste dumped to landfill x

(rather than providing means
Cost /benefit
on campus for recycling)
analysis of
providing
recycling
facilities

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
PROBLEM 17.33 (30 minutes) Cost analysis: winery

1 Tier Environmental costs $

1 Conventional costs

Training costs to improve the management of effluent disposal 5 600

Cleaning of exhaust fans 4 891

Scrap value of broken bottles (12 561)

Developing air pollution monitoring systems 14 897

Obtaining ISO1 4001 certification 67 908

2 Hidden costs

Study tour to the Barossa Valley to select new equipment to 4 769

reduce wastes

Inspection of drainage systems 15 421

Fine for minor leakage of untreated waste into the Margaret 12 569
River

Restoring land where wastes were dumped in the 1980s 16 986

4 Relationship and image costs

Workers compensation claim due to poor environmental 5 652

practices

Lost sales due to poor environmental reputation 3 787

Total environmental costs $139 919

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
2, 3 Other Tier 3, 4 and 5 costs that could have been included and steps to minimise these costs:

Tier Cost Steps to reduce these costs

3 Future cost of cleaning up contaminated Implement monitoring systems to eliminate

river leakage of contaminants into the waterways.

3 Penalties for failing to clean Testing to ensure that all sites are pollutant
contaminated site prior to commencing free before operations commence.
operations

4 Loss of reputation due to engaging in Implement systems to ensure that all work
environmentally damaging work practices are environmentally responsible.
practices

4 Loss of reputation due to not informing Sponsor social events and conduct open
the local community of future plans for days to create a good reputation and produce
expansion of the wine making operations regular newsletters to inform the community
of future plans.

5 Cost on individuals, the health system, on Health warnings and campaigns to

families and society of high levels of encourage responsible consumption of wine
wine consumption

5 The impact on the quality of the Ongoing clean-up of the river and
swimming and leisure activities of the restoration of picnic and leisure facilities.
community due to decades of release of
waste matter into the river system.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
PROBLEM 17.34 (30 minutes) Analysis of economic, environmental and social costs:
manufacturer

1 Rank the alternatives using financial criteria only.

Rockhampton Chengdu

Material cost per unit $103 $79

Labour cost per unit $12 $1.65

Fixed manufacturing cost $100 000 $50 000

The material and labour cost per unit and the total fixed manufacturing cost of the Chengdu plant is
clearly lower than that of the Rockhampton plant.

2 The Chengdu plant generates 35 kilograms of waste per sofa compared to Rockhamptons 15 kilograms
per sofa, and employees work more weeks per year in Chengdu. The Rockhampton plant has few airborne
pollutants and does not contaminate waterways and sewers, and there will be severe unemployment if the
plant is closed. This makes the opening of the Chengdu plant less desirable on social and environmental
grounds.

3 A decision to close the Rockhampton plant and open the Chendu plant would impact the broader economy
by, for instance, curtailing the flow-on economic effects of local employment (through reduced local
spending in Rockhampton which may affect other local businesses), additional unemployment benefits
being met by the Australian taxpayer and reduced tax revenue to the government.

4 To: Board of Directors, Rockhampton Sofa Company (RSC)

From: I M Clever
Re: Evaluating the arguments for moving RSC operations to Chengdu, China
From a financial perspective there appears to be a strong case for transferring RSC operations to China, as
savings can be made in material, labour and other manufacturing costs. However, management need to
decide how to evaluate the trade-off between the lower costs of the Chengdu plant versus the negative
social, environmental and economic impacts associated with moving from Rockhampton to Chengdu.
Also, there may be some financial impacts not reflected in the current analysis, such as the costs of
terminating Rockhampton employee contracts and the potential loss of sales associated with the much
longer delivery time from Chengdu (or the higher costs of holding larger inventories to overcome this
problem). In addition the company may experience a loss of sales because of damage to RSCs reputation.
In conclusion, this decision is likely to depend on how the company prioritises the financial aspects versus
the broader economic, environmental and social aspects.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
PROBLEM 17.35 (30 minutes) Analysis of environmental costs: local government

1 Model

Petrol/LPG Petrol/electric Diesel

Purchase price $175 000 $590 000 $292 500

Maintenance costs 345 000 420 000 667 500

(750 000 0.46) (750 000 0.56) (750 000 0.89)

Fuel consumption 275 625/50 625 78 750 123 750

(Petrol: 7500 35 1.05=275 625) (7500 10 1.05) (7500 15 1.1)
(LPG: 7500 15 0.45=50 625)

Cost of replacement engine 14 000 19 000 0

Total cost over 3-year life $809 625/584 625 $1 107 750 $1 083 750

The Petrol/LPG vehicle is the best on financial grounds, costing between $584 625 and $809 625 over the
three years, depending on whether LPG or petrol is used, followed by the petrol electric model and the
diesel.
2 On environmental grounds the petrol electric wins hands downlower emissions and less use of fossil
fuels. The diesel is better on emissions and uses less fuel than the petrol/LPG model.

3
To: Brisbane Council
From: I M Green
Re: Evaluating proposed minibus models
The council should purchase the petrol/LPG model if it wishes to minimise financial cost and run mainly
on LPG. However, this model results in higher CO 2 emissions, particularly when compared to the
petrol/electric model. The petrol/electric model ranks the highest on environmental grounds. However, the
cost of this model is significantly higher than the petrol/LPG model over the three-year life of the bus,
particularly if the petrol/LPG model is run on LPG alone. The council needs to consider its priorities. Is it
willing to pay the extra cost of the petrol/electric model to achieve a better environmental outcome?

PROBLEM 17.36 (15 minutes) Life cycle environmental and social impacts: suppliers
and customers
Although the entry for the Austin Hospital starts by stating how much the hospitals costs would reduce as a
result of their reprogramming of the air conditioning and ventilation systems, information is separately given
with regard to the quantity of greenhouse gases, solid waste, liquid waste and energy that is saved annually. The
leading paragraph for the Warrnambool Cheese and Butter Factory highlights the energy saving from
synchronising certain operations and the other environmental impacts and cost savings come later. Would the
push for environmental improvement programs have been as successful if it were not easy to show long term
cost savings? One issue for discussion could be what might be an acceptable average payback period.
It is suggested that the students should be required to provide more information about their cases than the data in
the blue panel on the web page.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
PROBLEM 17.37 (40 minutes) Balanced scorecard; sustainability reporting: travel
company
1 There are two different approaches to modifying the balanced scorecard to take account of Forests
concerns. An additional environmental perspective can be included which would consist of specific
strategies, objectives and measures, identified through a cause and effect process. Alternatively,
environmental goals and measures can be integrated into the existing BSC perspectives. For example,
internal business processes could include the goal of improving environmental performance and include
measures such as the percentage of office waste recycled and energy used. The learning and growth
perspective could include measures related to the goal of improving the environmental awareness of
employees, such as the number of employees certified as environmental experts or the number of
employee suggestions submitted to improve the environmental performance of the company.
2 There are many possible answers to this question. Students may choose to create one, two or three
separate perspectives/dimensions, or to modify the existing BSC perspectives. In this case the economic,
environmental and social perspectives, objectives and measures could be incorporated into the other four
perspectives. An example answer follows. Although shown as separate perspectives, note that the
objectives and measures in the economic, social and environmental perspectives link to and could also be
incorporated into the four existing BSC perspectives. Alternatively these three perspectives could be
combined into a single sustainability perspective.

Perspectives Objectives Lag Indicators Lead Indicators

Financial Increase net profit Net profit or ROI Market share

Improve cash flow Net cash inflow Increased revenue

Customer Increase market share of Market share Number of innovative tours

green tours offered
Customer satisfaction
Improve customer rating Number of implemented
satisfaction with innovations
innovative tours

Internal Develop innovative tours Number of Number of suggestions for

business that are environmentally implemented innovations
processes sensitive and highlight innovations
Number of hours of research
the social benefits of
into potential innovations, or
experiencing the natural
cost of expert consultant
world
report into ecologically
responsible innovations

Learning and Improve environmental Post-tour audit Number of training hours

growth knowledge and measures of state of
Pre-tour audit measures of
sensitivity of employees sensitive area
state of sensitive area

Economic Increase number of tour Percentage of staff Number of job advertisements

directors with local directing tours in in local media
knowledge and recruit their local areas
from the local area of
environmentally
sensitive destinations

Environmental Do no harm to Target measures of Number of hours of research

environmentally state of sensitive area undertaken, or cost of expert
sensitive areas consultant report into potential
ecological effects of tours

Social Enhance awareness of Number of tour Number of media mentions

the benefits of bookings
experiencing the natural
world

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
3 Recommending adding another perspective to a balanced scorecard will require judgment depending on
the particular circumstances of the entity. The BSC is designed so that the customer, internal business
process, and learning and growth perspectives cascade down from the financial perspective, effectively
reflecting causes and effects of the financial outcomes. If this cause and effect approach is implemented
rigorously, a separate perspective may be needed to recognise any non-market impacts, such as damage to
the environment that is not reflected in the costs incurred by Clean Living. On the other hand,
sustainability is central to the mission of the business and a crucial element in its differentiation and
creation of competitive advantage. Additional economic, social and environmental perspectives may
further focus the attention of managers and staff on sustainability as a core corporate value. Other general
reasons why a business may add social and/or environmental perspectives to their BSC include the
existence of important sustainability issues, from the point of view of reputation or impact; and the need to
link the use of significant resources allocated to sustainability to its strategies.

PROBLEM 17.38 (30 minutes) Capital investment analysis including environmental

factors: manufacturer
1 System 1 water System 2 air System 3
cooled cooled refrigerant

Initial cost $275 000 $465 000 $685 150

Cost of coolant 2 300 000 0 80 000

Maintenance costs 900 000 700 000 350 000

Energy costs 950 000 750 000 520 000

Cost of refurbishment* 105 000 20 000 120 000

Total costs over 20 years $4 530 000 $1 935 000 $1 755 150

* refurbishment occurs at the beginning of Yr 6, 11, and 16 for Systems 1 and 3, and Yr 11 for System 2.

2 System 3 is the most cost effective system, followed by System 2 and System 1. While System 3 is the
most expensive to purchase, it has the lowest maintenance and energy cost. While System 1 is the
cheapest to purchase, it has a very high cost of coolant, and maintenance and energy costs are high.
Management wants to ensure minimal disruption to the local residents, so should also consider how they
might be affected by each of the three systems. System 3 emits the lowest level of noise, followed by
System 2 and 1. System 3 does entail 50 litres of waste refrigerant per year and this might be of concern,
whereas System 2 has no waste. System 1 involves 230 000 kilolitres of wasted water. Thus, assuming
that management is able to dispose of the waste refrigerant in a responsible way, System 3 seems to be the
most desirable purchase. If the waste is an issue, then System 2 is the next most desirable, assuming the
noise level is not considered excessive.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
SOLUTIONS TO CASES

CASE 17.39 (60 minutes) Analysis of environmental, social and economic information
for decisions: manufacturer

1 Problem 1
Setting up the plant in Vendora raises financial and sustainability issues for investigation and
consideration including:

the full financial impact of the proposal on the reduction in costs at the Wollongong plant and the
costs to be incurred by pre-processing in Vendora, although the Finance Manager considers the set-
up costs of $1.2 million to be very reasonable and it seems that net production costs will reduce if a
pre-processing plant is opened in Vendora.
the net economic benefits to employment, local suppliers and community of setting up a plant in
Vendora.
the net social impact on employees and their families and the health system in Vendora. If the
proposed pre-processing plant substitutes for the spice processing undertaken by existing spice
processors in Vendora then the company has the opportunity to provide more reasonable working
conditions for employees, including a higher wage rate than $3 per hour, reduced working hours and
less exposure to chemical fumes. However, these changes may make the cost of the pre-processing
plant less attractive to the company.
the environmental implications of sourcing spices from Vendora and Celadon. If using long-life
toxic chemical sprays on plantations, or other supplier practices, are of concern to the Parks Spice
Company then spice may need to be sourced from other countries, or if possible an arrangement
made with the plantations that any spice supplied must be grown using sustainable practices. Again,
any such an arrangement with suppliers is likely to push up the price of spice supplies.

Problem 2
Investing in equipment to reduce air pollution raises financial and sustainability issues including:

there are no immediate financial benefits of incurring expenditure on implementing a new filtering
system to reduce emissions ($290 000 to purchase and $17 500 per year to run). However, there may
be long-term financial benefits flowing from the investment as it may add to the reputation of the
company and reduce the possibility of penalties for infringements of emission standards;
an investment in a new filtering system and subsequent reduction in emissions may have some
economic impacts on community welfare such as reduced stress and health costs and reduced costs
of cleaning discoloured buildings;
there may be social benefits of an investment in the new filtering system in that there would be less
potential to be fined for violations of air pollution standards and certainly a reduction in emissions
would be well received and improve the companys reputation in the local and broader community.
currently, the company is not violating any environmental standards at the Wollongong plant.
However, the air pollution and smell emitted from the plant is of concern to the community. This is
reflected in recent newspaper articles, some of which make unsubstantiated claims of waste water
contamination. Whether deserved or not the company is under scrutiny and its environmental
reputation is deteriorating.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
 Problem 3
Overall, the staff morale performance indicator is satisfactory and improving at the Wollongong plant.
However, 12 staff are experiencing clashes with management and they have low morale.
The financial impact of offering these staff redundancies would be an upfront cost $285 000, and
recruitment and training costs of new staff. An alternative is to pay a consultant $43 000 to mediate the
issue between the staff and management. Otherwise the issues may escalate and cause low morale to
spread to a greater number of staff. Another option is to simply do nothing.
Deciding which alternative to follow depends on an assessment of the likelihood of either course of action
resolving the issue. It could be argued that the redundancies do not solve the problem, as those employees
may carry their dissatisfaction to the community and possibly voice concerns about the practices of the
company. This may raise issues, fairly or unfairly, about the sustainability practices of Parks Spice
Company and adversely affect its reputation and possibly affect its financial future. It may be desirable to
engage the consultant to see if the problem can be solved.
In any case if the company is committed to solving its problems in a socially responsible manner it should
spend resources to solve the problem. The company needs to balance its need to achieve short-term profits
with its desire to follow sound social and environmental practices.

2 Further information could include:

detailed cost information related to problem 1
managements attitude to the trade-off between financial goals and social/environmental goals
current profitability of the company and whether target profits are being achieved.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
CASE 17.40 (40 minutes) Environmental performance indicators; sustainability
reporting: insurance company
1 Sustainability reporting involves reporting three aspects of an organisations performance: economic,
social and environmental. WealthWise may adopt this approach because it is consistent with the
companys underlying principles and mission of being socially and environmentally responsible, while at
the same time it needs to be accountable to shareholders for the financial health of the company. The
sustainability report captures achievement across each of these three areas. This approach has also
attracted customers to the company, and investors that focus on ethical and green investments.
2 The KPIs should reflect the three areas of the mission statement and the profitability goal of the company.
However, currently the alignment is not close enough and more measures could be included to capture
additional and broader aspects of performance.
The financial indicators could be expanded to separate out the performance of the share portfolio, and the
performance of the insurance business. Profitability is monitored through the three financial measures of
net profit, gross insurance premiums and ROI. Increased overall profitability is mainly the result of strong
returns on its investments in shares and WealthWise makes a loss on its core business of insurance. The
cause of the loss on the insurance business may be at least partly due to claims paid out as a result of
natural disasters. An indicator of the claims paid would be helpful in explaining the financial situation and
the changes in it over time; large payouts due to natural disasters, for instance to businesses damaged by
the tsunami in Phuket and Langkawi, are not ongoing and the long-term financial viability of the
insurance company needs to be ascertained and addressed.
The economic indicators of using local suppliers, hiring local staff and developing projects for the public
benefit support the areas of the mission statement of acting in a socially responsible way in the general
community and promoting a better social and possibly physical environment.
Some of the social indicatorsemployee satisfaction ratings, and percentage of women in top three tiers
of managementaddress the aim to support employees in achieving their personal and career goals. The
second aimto act in a socially responsible way when dealing with insurance clients and the general
communityrelates to the social indicators of ethical ranking of sales staff by customers. However there
is some evidence that the treatment of tsunami victims insurance claims has not been consistent with
acting in a socially responsible way when dealing with insurance clients. This ethical ranking may not be
as high as previously and this should signal to the CEO that the reputation of WealthWise may be in
jeopardy. The other social indicatorsthe number of indigenous employees and number of staff hired
who were previously unemployed teenagersrelate to the third aim to promote a better social and
physical environment for the world.
The environmental indicators also address this third aim. However, these environmental indicators focus
on encouraging environmental practices related to the operational areas of the business and do not monitor
the environmental issues related to its investment portfolio. The companies in which WealthWise has
invested may not necessarily adopt a sustainability approach consistent with its own. Again the reputation
of WealthWise may suffer if stakeholders choose to make an issue of any lack of integrity.
3 Alternative and/or additional measures include:
the ROI of the insurance business
the ROI of the investment portfolio
claims paid
the percentage of investments in certified socially and environmentally responsible companies
the percentage of investments in companies that have had adverse media reports concerning their
environmental and social activities
the number of employees sponsored in further education courses
client satisfaction measure, oriented towards assessing the ethical stance of the company and its
employees
instances of adverse media publicity in relation to company activities
number of suggestions by employees for the adoption of new social or environmental practices by
the company
number of employees participating in community-oriented volunteer activities.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
4 The company needs to consider carefully the mission and the stated goals of the company to ensure that
performance measurement and incentive systems are put in place to encourage employees and
management to act in the intended manner. It will also need to assess whether actions and decisions that
have been taken are consistent with the mission and goals.
The current set of performance indicators does address the four important aspects of performance:
financial, economic, social and environmental. However, actions and decisions are taking place in the
company that are not consistent with the stated mission, and these activities would not be picked up
through the current set of performance indicators.
As well as designing more tailored performance indicators, management will need to consider how these
are reported and used as motivators for staff. Currently, sustainability reports may be used to inform
external stakeholders. However, internal reporting may need to be more frequent and the performance
indicators need to be cascaded to the various departments in the company. A balanced scorecard could be
implemented which explicitly includes performance measures that are oriented towards the different
aspects of the mission across the different levels of the company. Management also needs to think about
the linkages between the various indicators to ensure that the measures are internally consistent and lead
to higher levels of performance outcomes. Management needs to consider how trade-offs between the
activities represented by the indicators are handled, especially trade-offs between financial and social
activities and financial and environmental activities. Targets for various indicators may help in this task.
Management may wish to implement incentives to encourage staff to attain performance targets. These
could take the form of financial rewards, or incentives that reinforce the other aspects of the companys
mission. These could include travel vouchers for environmental tours or awards for the best environmental
or social practice.
Overall, if management wishes to encourage employees to behave in an economically, socially and
environmentally responsible manner then they need to lead by example.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
CASE 17.41 (40 minutes) Sustainability and performance measurement: energy
supplier

1 Stakeholders and associated strategies:

Investors
Provide shareholder returns in the top third of comparable companies
This strategy aims to provide a return that should be sustainable, that should compensate for investment
risk and exceed the opportunity costs of retaining investment funds in Origin. It aims to meet investors
needs for longer term returns from this segment of the share market.

Customers
Be recognised as the leading provider of green energy products.
Increase sales of low carbon intensity products to 10 per cent of total supply chain greenhouse gas
emissions by 2012.
These two strategies aim to meet the need and desire of customers to reduce their carbon footprints.
Proactively resolve customer complaints. Reduce ombudsman complaints by 30 per cent.
This strategy aims to meet the needs of customers when they have a complaint by providing quicker
service and resolution.

Communities
Actively consult with the community at all locations where Origin has a material impact.
This strategy aims to generate goodwill within communities by meeting their need for a voice in what
happens in their neighbourhoods
Identify opportunities for the reduction and reuse of waste.
This strategy aims to reduce waste to landfill which will help towards meeting the need in communities
for environmental responsibility and sustainability
Reduce the greenhouse gas emissions intensity of electricity supply chain to 10 per cent less than the
National Electricity Market by 2020.
Reduce the greenhouse gas emissions of gas production by 15 per cent by 2012.
The above two strategies aim to meet the need of communities to mitigate climate change

Employees
Embed environmental leadership in all training and decision-making processes.
This strategy aims to meet the need for employees to feel empowered and that they work for a socially
responsible company
Achieve a Total Recordable Incident Frequency Rate (TRIFR) of 4.
This strategy aims to meet the need for employees to feel safe in their workplace and that they work for a
socially responsible company.
Eliminate barriers to employment, development and workplace opportunities so that workforce
attracts and represents diversity from the communities in which it operates.
This strategy aims to meet the needs of employees and potential employees for equal opportunity and
work opportunities within the communities in which they live.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
2a Cause and effect link between the objective and the strategy:

Objectives Strategies Cause Explanation

and
effect
link

To provide sustainable Provide shareholder returns in the Yes The achievement of sustainable
returns to Origins key top third of comparable returns is made more likely by
economic stakeholders companies pursuing a steady and realistic
strategy of a return level within
the top third of comparable
companies

To reduce the greenhouse Be recognised as the leading Yes Customers purchasing low
gas intensity of customers provider of green energy products carbon intensity products will
energy consumption reduce the greenhouse gas
Increase sales of low carbon
intensity of their energy
intensity products to 10% of total
consumption
supply chain greenhouse gas Yes
emissions by 2012

To maintain community Proactively resolve customer Yes Resolving complaints quickly

support and goodwill for the complaints. Reduce ombudsman and consulting with
companys activities complaints by 30% communities is likely to
generate support and goodwill
Actively consult with the
for the companys activities
community at all locations where
Origin has a material impact
Yes

To take all feasible steps to Identify opportunities for the Yes Responsibly managing waste
eliminate or minimise any reduction and reuse of waste minimises the adverse effects of
adverse impact that activities the waste on the environment
have on the environment

To reduce the greenhouse Reduce the greenhouse gas Yes Reducing greenhouse gas
gas intensity of energy emissions intensity of electricity emissions intensity in the
production and distribution supply chain to 10% less than the supply chain of electricity and
and non-producing assets National Electricity Market by gas production will reduce
2020 greenhouse gas intensity of
Origins activities
Reduce the greenhouse gas
emissions of gas production by
15% by 2012 Yes

To eliminate or manage Embed environmental leadership Yes Environmental leadership and

hazards and practices in in all training and decision- culture and aiming for few
business that could cause making processes incidents will help to eliminate
injury or illness to people, or manage adverse effects on
Achieve a Total Recordable
damage to property or third parties
Incident Frequency Rate (TRIFR) Yes
unacceptable impacts on the
of 4
environment

To provide and maintain a Eliminate barriers to employment, Yes A culture of equal opportunity
satisfying and rewarding development and workplace and drawing employees from
work environment for all opportunities so that workforce the surrounding communities
employees attracts and represents diversity will assist in providing a
from the communities in which rewarding workplace for
operate employees

Source: Origin Energy 2009 Sustainability Report 2008 available at

http://www.originenergy.com.au/files/OriginSustainabilityReport2008.pdf Accessed 4 August 2014

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
2 b and 3 Lead and Lag Indicators and the balanced scorecard perspectives:

Perspective /Objectives Strategies Lag Lead

Financial
Provide shareholder returns in Shareholder Various measures of the
To provide sustainable
the top third of comparable return rating drivers of profitability
returns to Origins key
companies from the other
economic stakeholders
perspectives such as
market share and
reducing costs of waste
disposal
Customer
Be recognised as the leading Market share of Revenue growth in green
To reduce the greenhouse
provider of green energy green energy energy
gas intensity of customers
products
energy consumption Sales Number of new green
Increase sales of low carbon percentage of customers
intensity products to 10% of low intensity
total supply chain greenhouse carbon products
gas emissions by 2012

To maintain community Proactively resolve customer Average time Number of customer

support and goodwill for complaints. Reduce taken to resolve complaints
the companys activities ombudsman complaints by 30% complaint
Number of consultations
Actively consult with the Number of with community or its
community at all locations community representatives
where Origin has a material protests or
impact adverse media
mentions
Business processes
Identify opportunities for the Kilograms of Number of opportunities
To take all feasible steps
reduction and reuse of waste waste or cost of identified and acted upon
to eliminate or minimise
waste disposal
any adverse impact that
activities have on the
environment
To reduce the greenhouse Reduce the greenhouse gas Greenhouse gas Costs incurred in
gas intensity of energy emissions intensity of electricity emissions of reducing emissions from
production and distribution supply chain to 10% less than providing providing electricity
and non-producing assets the National Electricity Market electricity
Costs incurred in
by 2020
Greenhouse gas reducing emissions from
Reduce the greenhouse gas emissions of gas production
emissions of gas production by producing gas
15% by 2012
To eliminate or manage Embed environmental Number of staff Number of training
hazards and practices in leadership in all training and trained in hours*
business that could cause decision-making processes* environmental
Number of hazards
injury or illness to people, leadership*
Achieve a TRIFR (Total identified
damage to property or
Recordable Incident Frequency TRIFR
unacceptable impacts on
Rate) of 4
the environment

Eliminate barriers to Employee Composition percentages

Learning and growth
employment, development and satisfaction of workforce
To provide and maintain a
workplace opportunities so that rating
satisfying and rewarding Number of training
workforce attracts and
work environment for all Number of hours in environmental
represents diversity from the
employees promotion and business processes
communities in which it
opportunities
operates

* These would also be relevant to the Learning and growth perspective

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd
IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e
4 Given that the environmental strategies are already closely tied to business processes and customers there
is probably little need for a separate and specific environmental dimension. Likewise the customer and
learning and growth perspectives could incorporate the strategic focus on developing new green products.
However Origin is a major player in Australias energy market, which aims to be recognised as the
leading provider of green energy products. The political climate and the expectations of a community
facing a carbon constrained future means that long-term sustainability must be a key focus for an energy
company. The strategy to actively consult with the community at all locations where Origin has a
material impact does not address the wider concerns of society about climate change. There could be
advantages, therefore, in adding a fifth dimension which focuses on core strategies related to climate
change/sustainability.
Origins actions and approach to climate change are likely to have broad economic and social implications
for Australia. A fifth dimension could address Origins strategies in research and development of
alternative renewable and green energy sources. The existing strategy to maintain community support and
goodwill for the companys activities could be included in this fifth dimension because it is not fully
addressed through interactions with customers in the market. A fifth dimension that addresses the bigger,
longer term issues and their associated strategies could help to provide focus for large capital expenditure
decisions. A proposed renewable energy project that may not be currently viable on financial grounds may
nevertheless need to be undertaken for social and political reasons and less immediate and more intangible
external costs and benefits may need to be factored into the decision. Indeed, undertaking a renewable
energy project may well require community and political support to raise the necessary funds.
Fifth dimension measures should link to relevant measures in the other four perspectives.

Copyright 2015 McGraw-Hill Education (Australia) Pty Ltd

IRM t/a Langfield-Smith, Thorne, Smith, Hilton Management Accounting 7e