Full cost accounting
Encyclopedia
Full cost accounting generally refers to the process of collecting and presenting information - about environmental, social, and economic cost
s and benefit
s/advantages (collectively known as the "triple bottom line") - for each proposed alternative when a decision is necessary. It is a conventional method of cost accounting that traces direct costs and allocates indirect costs. A synonym, true cost accounting (TCA) is also often used. Experts consider both terms problematic as definitions of "true" and "full" are inherently subjective (see Green economics for more on these problems).
Since costs and advantages are usually considered in terms of environmental
, economic and social
impacts, full or true cost efforts are collectively called the "triple bottom line
". A large number of standards now exist in this area including Ecological Footprint
, eco-labels, and the United Nations
International Council for Local Environmental Initiatives
approach to triple bottom line using the ecoBudget metric. The International Organization for Standardization
(ISO) has several accredited standards useful in FCA or TCA including for greenhouse gas
es, the ISO 26000
series for corporate social responsibility
coming in 2010, and the ISO 19011
standard for audit
s including all these.
Because of this evolution of terminology in public sector
use especially, the term full-cost accounting is now more commonly used in management accounting
, e.g. infrastructure management and finance. Use of the terms FCA or TCA usually indicate relatively conservative extensions of current management practices, and incremental improvements to GAAP
to deal with waste output or resource input.
These have the advantage of avoiding the more contentious questions of social cost.
of the vehicle's value.
), some of which even do not show up in the firm's bottom line.
It also contains fixed overhead, fixed administration expense etc.
Integrated solid waste management systems consist of a variety of municipal solid waste
(MSW) activities and paths. Activities are the building blocks of the system, which may include waste collection
, operation of transfer station
s, transport to waste management facilities, waste processing and disposal, and sale of byproducts. Paths are the directions that MSW follows in the course of integrated solid waste management (i.e., the point of generation through processing and ultimate disposition) and include recycling
, composting, waste-to-energy
, and landfill
disposal. The cost of some activities is shared between paths. Understanding the costs of MSW activities is often necessary for compiling the costs of the entire solid waste system, and helps municipalities evaluate whether to provide a service itself or contract out for it. However, in considering changes that affect how much MSW ends up being recycled, composted, converted to energy, or landfilled, the analyst should focus the costs of the different paths. Understanding the full costs of each MSW path is an essential first step in discussing whether to shift the flows of MSW one way another.
When municipalities handle MSW services through general tax funds, the costs of MSW management can get lost among other expenditures. With FCA, managers can have more control over MSW costs because they know what the costs are.
See through the peaks and valleys in MSW cash expenditures
Using techniques such as depreciation and amortization, FCA produces a more accurate picture of the costs of MSW programs, without the distortions that can result from focusing solely on a given year's cash expenditures.
Explain MSW costs to citizens more clearly
FCA helps you collect and compile the information needed to explain to citizens what solid waste management actually costs. Although some people might think that solid waste management is free (because they are not billed specifically for MSW services), others might overestimate its cost. FCA can result in "bottom line" numbers that speak directly to residents. In addition, public officials can use FCA results to respond to specific public concerns.
Adopt a business like approach to MSW management
By focusing attention on costs, FCA fosters a more businesslike approach to MSW management. Consumers of goods and services increasingly expect value, which means an appropriate balance between quality and cost of service. FCA can help identify opportunities for streamlining services, eliminating inefficiencies, and facilitating cost-saving efforts through informed planning and decision-making.
Develop a stronger position in negotiating with vendors
When considering privatization of MSW services, solid waste managers can use FCA to learn what it costs (or would cost) to do the work. As a result, FCA better positions public agencies for negotiations and decision-making. FCA also can help communities with publicly run operations determine whether their costs are competitive with the private sector.
Evaluate the appropriate mix of MSW services
FCA gives managers the ability to evaluate the cost of each element of their solid waste system, such as recycling, composting, waste-to-energy, and landfilling. FCA can help managers avoid common mistakes in thinking about solid waste management, notably the error of treating avoided costs as revenues.
Fine-tune MSW programs
As more communities use FCA and report the results, managers might be able to "benchmark" their operations to similar communities or norms. This comparison can suggest options for "re-engineering" current operations. Furthermore, when cities, counties, and towns know what it costs to manage MSW independently, they can better identify any savings that might come from working together.
has tended to move more towards longer term measures to avoid accusations of political favoritism towards specific solutions that seem to make financial or economic sense in the short term, but not longer term.
Corporate decision makers sometimes call on FCA/TCA measures to decide whether to initiate recalls
, practice voluntary product stewardship
(a form of recall at the end of a product's useful life). This can be motivated as a hedge
against future liabilities arising from those who are negatively affected by the waste a product becomes. Advanced theories of FCA, such as Natural Step, focus firmly on these. According to Ray Anderson
, who instituted a form of FCA/TCA at Interface Carpet, used it to rule out decisions that increase Ecological Footprint
and focus the company more clearly on a sustainable marketing strategy.
The urban ecology
and industrial ecology
approaches inherently advocate FCA - treating the built environment
as a sort of ecosystem to minimize its own wastes.
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
s and benefit
Cost-benefit analysis
Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...
s/advantages (collectively known as the "triple bottom line") - for each proposed alternative when a decision is necessary. It is a conventional method of cost accounting that traces direct costs and allocates indirect costs. A synonym, true cost accounting (TCA) is also often used. Experts consider both terms problematic as definitions of "true" and "full" are inherently subjective (see Green economics for more on these problems).
Since costs and advantages are usually considered in terms of environmental
Natural environment
The natural environment encompasses all living and non-living things occurring naturally on Earth or some region thereof. It is an environment that encompasses the interaction of all living species....
, economic and social
Social
The term social refers to a characteristic of living organisms...
impacts, full or true cost efforts are collectively called the "triple bottom line
Triple bottom line
The triple bottom line captures an expanded spectrum of values and criteria for measuring organizational success: economic, ecological, and social...
". A large number of standards now exist in this area including Ecological Footprint
Ecological footprint
The ecological footprint is a measure of human demand on the Earth's ecosystems. It is a standardized measure of demand for natural capital that may be contrasted with the planet's ecological capacity to regenerate. It represents the amount of biologically productive land and sea area necessary to...
, eco-labels, and the United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
International Council for Local Environmental Initiatives
ICLEI
ICLEI - Local Governments for Sustainability, founded in 1990 as the 'International Council for Local Environmental Initiatives', is an international association of local governments and national and regional local government organizations that have made a commitment to sustainable development...
approach to triple bottom line using the ecoBudget metric. The International Organization for Standardization
International Organization for Standardization
The International Organization for Standardization , widely known as ISO, is an international standard-setting body composed of representatives from various national standards organizations. Founded on February 23, 1947, the organization promulgates worldwide proprietary, industrial and commercial...
(ISO) has several accredited standards useful in FCA or TCA including for greenhouse gas
Greenhouse gas
A greenhouse gas is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone...
es, the ISO 26000
ISO 26000
ISO, the International Organization for Standardization, has launched an International Standard providing guidelines for social responsibility named ISO 26000 or simply ISO SR and was released on 1 November 2010.-Guidance without certification:...
series for corporate social responsibility
Corporate social responsibility
Corporate social responsibility is a form of corporate self-regulation integrated into a business model...
coming in 2010, and the ISO 19011
ISO 19011
ISO 19011 is an international standard that sets forth guidelines for:*quality management systems auditing*environmental management systems auditingIt is developed by the International Organization for Standardization....
standard for audit
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
s including all these.
Because of this evolution of terminology in public sector
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
use especially, the term full-cost accounting is now more commonly used in management accounting
Management accounting
Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control...
, e.g. infrastructure management and finance. Use of the terms FCA or TCA usually indicate relatively conservative extensions of current management practices, and incremental improvements to GAAP
Gaap
In demonology, Gaap is a mighty Prince and Great President of Hell, commanding sixty-six legions of demons. He is, according to The Lesser Key of Solomon, the king and prince of the southern region of Hell and Earth, and according to the Pseudomonarchia Daemonum the king of the western region and...
to deal with waste output or resource input.
These have the advantage of avoiding the more contentious questions of social cost.
Concepts
Full cost accounting embodies several key concepts that distinguish it from standard accounting techniques. The following list highlights the basic tenets of FCA.- Accounting for costCostIn production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
s rather than outlays (see explanation below) - Accounting for hidden costs and externalities
- Accounting for overhead and indirect costs
- Accounting for past and future outlays
- Accounting for costs according to lifecycle of the product
Costs rather than outlays
Expenditure of cash to acquire or use a resource. A cost is the cash value of the resource as it is used. For example, an outlay is made when a vehicle is purchased, but the cost of the vehicle is incurred over its active life (e.g., 10 years). The cost of the vehicle must be allocated over a period of time because every year of its use contributes to the depreciationDepreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
of the vehicle's value.
Hidden costs
The value of goods and services is reflected as a cost even if no cash outlay is involved. One community might receive a grant from a state, for example, to purchase equipment. This equipment has value, even though the community did not pay for it in cash. The equipment, therefore, should be valued in an FCA analysis.Overhead and indirect costs
FCA accounts for all overhead and indirect costs, including those that are shared with other public agencies. Overhead and indirect costs might include legal services, administrative support, data processing, billing, and purchasing. Environmental costs as indirect costs include the full range of costs throughout the life-cycle of a product (Life cycle assessmentLife cycle assessment
A life-cycle assessment is a technique to assess environmental impacts associated with all the stages of a product's life from-cradle-to-grave A life-cycle assessment (LCA, also known as life-cycle analysis, ecobalance, and cradle-to-grave analysis) is a technique to assess environmental impacts...
), some of which even do not show up in the firm's bottom line.
It also contains fixed overhead, fixed administration expense etc.
Past and future outlays
Past and future cash outlays often do not appear on annual budgets under cash accounting systems. Past (or upfront) costs are initial investments necessary to implement services such as the acquisition of vehicles, equipment, or facilities. Future (or back-end) outlays are costs incurred to complete operations such as facility closure and postclosure care, equipment retirement, and post-employment health and retirement benefits.Waste management
For example, the State of Florida uses the term full cost accounting for its solid waste management. In this instance, FCA is a systematic approach for identifying, summing, and reporting the actual costs of solid waste management. It takes into account past and future outlays, overhead (oversight and support services) costs, and operating costs.Integrated solid waste management systems consist of a variety of municipal solid waste
Municipal solid waste
Municipal solid waste , commonly known as trash or garbage , refuse or rubbish is a waste type consisting of everyday items we consume and discard. It predominantly includes food wastes, yard wastes, containers and product packaging, and other miscellaneous inorganic wastes from residential,...
(MSW) activities and paths. Activities are the building blocks of the system, which may include waste collection
Waste collection
Waste collection is the component of waste management which results in the passage of a waste material from the source of production to either the point of treatment or final disposal...
, operation of transfer station
Transfer station
A transfer station is a building or processing site for the temporary deposition of waste. Transfer stations are often used as places where local waste collection vehicles will deposit their waste cargo prior to loading into larger vehicles...
s, transport to waste management facilities, waste processing and disposal, and sale of byproducts. Paths are the directions that MSW follows in the course of integrated solid waste management (i.e., the point of generation through processing and ultimate disposition) and include recycling
Recycling
Recycling is processing used materials into new products to prevent waste of potentially useful materials, reduce the consumption of fresh raw materials, reduce energy usage, reduce air pollution and water pollution by reducing the need for "conventional" waste disposal, and lower greenhouse...
, composting, waste-to-energy
Waste-to-energy
Waste-to-energy or energy-from-waste is the process of creating energy in the form of electricity or heat from the incineration of waste source. WtE is a form of energy recovery...
, and landfill
Landfill
A landfill site , is a site for the disposal of waste materials by burial and is the oldest form of waste treatment...
disposal. The cost of some activities is shared between paths. Understanding the costs of MSW activities is often necessary for compiling the costs of the entire solid waste system, and helps municipalities evaluate whether to provide a service itself or contract out for it. However, in considering changes that affect how much MSW ends up being recycled, composted, converted to energy, or landfilled, the analyst should focus the costs of the different paths. Understanding the full costs of each MSW path is an essential first step in discussing whether to shift the flows of MSW one way another.
Benefits to waste management
Identify the costs of MSW managementWhen municipalities handle MSW services through general tax funds, the costs of MSW management can get lost among other expenditures. With FCA, managers can have more control over MSW costs because they know what the costs are.
See through the peaks and valleys in MSW cash expenditures
Using techniques such as depreciation and amortization, FCA produces a more accurate picture of the costs of MSW programs, without the distortions that can result from focusing solely on a given year's cash expenditures.
Explain MSW costs to citizens more clearly
FCA helps you collect and compile the information needed to explain to citizens what solid waste management actually costs. Although some people might think that solid waste management is free (because they are not billed specifically for MSW services), others might overestimate its cost. FCA can result in "bottom line" numbers that speak directly to residents. In addition, public officials can use FCA results to respond to specific public concerns.
Adopt a business like approach to MSW management
By focusing attention on costs, FCA fosters a more businesslike approach to MSW management. Consumers of goods and services increasingly expect value, which means an appropriate balance between quality and cost of service. FCA can help identify opportunities for streamlining services, eliminating inefficiencies, and facilitating cost-saving efforts through informed planning and decision-making.
Develop a stronger position in negotiating with vendors
When considering privatization of MSW services, solid waste managers can use FCA to learn what it costs (or would cost) to do the work. As a result, FCA better positions public agencies for negotiations and decision-making. FCA also can help communities with publicly run operations determine whether their costs are competitive with the private sector.
Evaluate the appropriate mix of MSW services
FCA gives managers the ability to evaluate the cost of each element of their solid waste system, such as recycling, composting, waste-to-energy, and landfilling. FCA can help managers avoid common mistakes in thinking about solid waste management, notably the error of treating avoided costs as revenues.
Fine-tune MSW programs
As more communities use FCA and report the results, managers might be able to "benchmark" their operations to similar communities or norms. This comparison can suggest options for "re-engineering" current operations. Furthermore, when cities, counties, and towns know what it costs to manage MSW independently, they can better identify any savings that might come from working together.
Motives for adoption
Various motives for adoption of FCA/TCA have been identified. The most significant of which tend to involve anticipating market or regulatory problems associated with ignoring the comprehensive outcome of the whole process or event accounted for. In green economics, this is the major concern and basis for critiques of such measures as GDP. The public sectorPublic sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
has tended to move more towards longer term measures to avoid accusations of political favoritism towards specific solutions that seem to make financial or economic sense in the short term, but not longer term.
Corporate decision makers sometimes call on FCA/TCA measures to decide whether to initiate recalls
Product recall
A product recall is a request to return to the maker a batch or an entire production run of a product, usually due to the discovery of safety issues. The recall is an effort to limit liability for corporate negligence and to improve or avoid damage to publicity...
, practice voluntary product stewardship
Product stewardship
Product stewardship is a concept whereby environmental protection centers around the product itself, and everyone involved in the lifespan of the product is called upon to take up responsibility to reduce its environmental impact. For manufacturers, this includes planning for, and if necessary,...
(a form of recall at the end of a product's useful life). This can be motivated as a hedge
Hedge (finance)
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
against future liabilities arising from those who are negatively affected by the waste a product becomes. Advanced theories of FCA, such as Natural Step, focus firmly on these. According to Ray Anderson
Ray Anderson (entrepreneur)
Ray C. Anderson was founder and chairman of Interface Inc., one of the world's largest manufacturers of modular carpet for commercial and residential applications and a leading producer of commercial broadloom and commercial fabrics...
, who instituted a form of FCA/TCA at Interface Carpet, used it to rule out decisions that increase Ecological Footprint
Ecological footprint
The ecological footprint is a measure of human demand on the Earth's ecosystems. It is a standardized measure of demand for natural capital that may be contrasted with the planet's ecological capacity to regenerate. It represents the amount of biologically productive land and sea area necessary to...
and focus the company more clearly on a sustainable marketing strategy.
The urban ecology
Urban ecology
Urban ecology is a subfield of ecology which deals with the interaction between organisms in an urban or urbanized community, and their interaction with that community. Urban ecologists study the trees, rivers, wildlife and open spaces found in cities to understand the extent of those resources and...
and industrial ecology
Industrial ecology
Industrial Ecology is the study of material and energy flows through industrial systems. The global industrial economy can be modeled as a network of industrial processes that extract resources from the Earth and transform those resources into commodities which can be bought and sold to meet the...
approaches inherently advocate FCA - treating the built environment
Built environment
The term built environment refers to the human-made surroundings that provide the setting for human activity, ranging in scale from personal shelter and buildings to neighborhoods and cities that can often include their supporting infrastructure, such as water supply or energy networks.The built...
as a sort of ecosystem to minimize its own wastes.
See also
- Environmental accounting
- Environmental pricing reformEnvironmental pricing reformEnvironmental pricing reform is the process of adjusting market prices to include environmental costs and benefits.An externality exists where a market price omits environmental costs and/or benefits...
- Externalities
- Genuine Progress IndicatorGenuine Progress IndicatorThe genuine progress indicator is an alternative metric system which is an addition to the national system of accounts that has been suggested to replace, or supplement, gross domestic product as a metric of economic growth...
- Opportunity costOpportunity costOpportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
- Pollution credit
- Whole-life costWhole-life costWhole-life cost, or Life-cycle cost , refers to the total cost of ownership over the life of an asset . Also commonly referred to as "cradle to grave" or "womb to tomb" costs. Costs considered include the financial cost which is relatively simple to calculate and also the environmental and...