Section A- COST ACCOUNTING SYSTEMS 30%

1. Discuss costing methods and their results.

(a) Compare and contrast marginal (or variable), throughput and absorption accounting
methods in respect of profit reporting and stock valuation;
Marginal (or variable), throughput and absorption accounting systems of profit
reporting and stock valuation.

Theory of constraints and throughput accounting
The theory of constraints was developed by Goldratt and Cox (1986) in the US in the book
called The Goal. The main aim was to help managers improve overall profitability of the
company by looking at constraints or bottlenecks which stop or slow down production.
Galloway and Waldron (1988-89) in the UK developed an accounting based technique using
the idea of the theory of constrains, which is known as throughput accounting. They saw
that production or throughput is that which should be maximised and unbroken in order to
improve contribution of a company.
A managers aim in this situation would be to operate the bottleneck resource at 100%
capacity, whilst running non-bottleneck resources at a speed that matches this (which may not
be at 100%). This would be efficient use of resources, but also would avoid the pile up of
unnecessary work-in-progress in a JIT environment.
Throughput accounting aims to maximise contribution whilst minimising conversion (labour
and overhead) cost. Throughput accounting is also known as super variable costing.
Throughput contribution = Sales less material cost
It is assumed only materials and components are the variable cost.
Conversion cost = all other fixed cost
Return per factory hour calculates the benefit or contribution earned per unit of bottleneck
resource.

Traditionally when absorption costing was used, managers could improve results by setting
production levels higher than sales (therefore the carry forward of fixed overhead this period
to the next in the valuation of closing stock), however stock piling is not a good thing and
such stock piling will not improve performance if you use the TA ratios instead to assess a
manager.
Method for throughput accounting analysis
Identify the bottleneck resource This is that resource which is scarce and the aim
being to produce until the bottleneck resource is fully utilised. Examples of this are
labour or materials.
Throughput contribution per unit Calculate throughput contribution for each of
the products that are being manufactured which use the bottleneck resource.
Throughput contribution is sales less material costs only.
Bottleneck resource used in each product Calculate how much of the bottleneck
resource is used in the manufacture of each product.
Contribution per unit of bottleneck resource Calculate how much throughput
contribution is earned per unit of the bottleneck resource used in the production of
each product. To work this out we simply divide the throughput contribution per unit
by the bottleneck resource used in each product.
Rank - In order of highest throughput contribution per unit of bottleneck resource and
manufacture that product which yields the most throughput contribution per
bottleneck resource first, then the next highest after demand has been met on the first.
This should continue until all the bottleneck resource has been used.
Advantages of throughput accounting
It looks at maximising the benefit from the bottleneck resource by using it
efficiently and not concerned about increasing profit through manipulation.
Reduces stock holding costs of other resources which are not bottleneck
resources as only what is needed to complete whole products will be bought.
Simpler to calculate and easier to understand than more traditional costing
methods.
Disadvantages of throughput accounting
It is a short-term decision-making tool as it ignores indirect costs which do
still need to be recovered over the long-term.
Looks in detail at material cost only as the theory assumes that this is the only
variable cost in the short-term, but other costs such as labour may also be
variable in the short-term.
Absorption costing
Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level in order to find the overhead absorption
rate. This is a simple fixed overhead costing method, allowing fixed overhead to be
allocated to products, jobs, and stock or work-in-progress.
Overhead absorption rate (OAR) = Budgeted production overhead
Normal level of activity
Any under charge to the profit and loss account would be an under absorption
of production overhead e.g. DR profit and loss account CR Production overhead
control account.
Any over charge to the profit and loss account would be an over absorption of
production overhead e.g. CR profit and loss account DR Production overhead control
account.
Marginal costing
A marginal cost (direct or variable cost) is a cost that can be avoided if a unit is not produced
or incurred if a unit was produced. Fixed cost remains constant whether a unit is or is not
produced. Marginal (or variable) costing assigns only variable costs to cost units while fixed
costs are written off as period costs.
Cost per unit:
Direct costs of production
Direct labour X
Direct material X
Direct variable production overhead X
Total direct variable cost or total prime cost X Marginal costing stock valuation
Indirect production overhead absorbed X
Full production cost X Absorption costing stock valuation




(b) Discuss a report which reconciles budget and actual profit using absorption and/or
marginal costing principles;
Activity based costing (ABC)
Activity based costing (ABC) looks in more detail about what causes fixed overhead to be
incurred and works out many cost drivers (activities).
Steps in ABC
1. Group types of fixed overhead together.
2. Calculate from fixed overhead cost pools a fixed overhead cost per driver.
3. Absorb fixed overhead using multiple cost drivers.
A cost driver is any factor that causes a change in the cost activity, so it is important to
identify a causal relationship between the cost driver and the cost.

Advantages of ABC
More efficient management of resources by understanding what drives fixed
overhead incurred e.g. elimination, reduction or improvement in the efficiency of
how resources are used can improve profitability.
Better costing information for planning and control e.g. how different products,
customers or distribution channels consume different resources.
More realistic and competitive pricing to cover overhead.
Better profitability analysis because there is more accuracy over costs. It is used in
the retail sector to understand the profitability of different products and services.
Disadvantages of ABC
Time consuming and expensive system to run and maintain e.g. bespoke
management information systems.
Limited analysis if only a small range of products or a single product is produced.
Danger of going into too much detail. For example the need to strike a balance
between benefit and cost of information.
Assumes fixed overhead is driven directly by volume however in reality it tends to
behave in a stepped cost way.
It maybe seen as a 100% accurate which is not true as it is only improves our
understanding of overhead cost consumption but it will not tell us how the overheads
were precisely consumed.

Customer profitability analysis (CPA)
Relating specific costs to serving customers or groups of customers, so that their relative
profitability can be assessed. CPA uses ABC techniques in order to allocate cost.
Customer profitability analysis (CPA) focuses on cost reduction by understanding how
customers consume different support resources e.g. processing, delivery, sales visits,
telephone support, internet support etc. It allows an organisation to concentrate on the most
profitable of its customers.
Other types of customer driven costs include
1. Location
2. Delivery frequency
3. Quality provided
4. After sales service activities
5. Sales and promotion effort
6. Administration
Benefits of CPA
Customer group (segment) profitability can be better understood e.g. marketing focus
on the most profitable customers.
Unprofitable customers groups can be rationalised or strategies implemented to
reduce their consumption of resources.
More effective pricing policies e.g. financial effect of customer proposals can be
better analysed when negotiating with customers.
Limitations of CPA
Limited analysis if only a small range of customer groups.
Time consuming and expensive system to run and maintain e.g. bespoke
management information systems.
Assumes fixed overhead is driven directly by volume however in reality it tends to
behave in a stepped cost way

Why the allocation of direct support overhead to products?
Warehousing cost involves refrigeration and storage overhead, the more bulky a product is,
the more floor area it consumes, a limiting factor for most retail organisations e.g. dairy or
frozen produce will cost more to store within refrigerated units. Transport with dedicated
refrigeration will consume more overhead in delivery cost; more bulkiness means a lower
number of units being transported each time, giving a higher unit cost per delivery. The
higher the cubic capacity of a product the more shelf space it uses, the bigger the weight and
cubic capacity the greater the handling costs for staff once a product arrives in store. By
understanding what drives cost when resources are consumed to support products, this will
enable a retailer to maximise throughput of the most profitable products, as well as giving
more effective information to control cost and manage store resources e.g. making sure
vehicles carry full loads to reduce the number of journeys.
Strategies to improve customer or product profitability
1. Increase price
2. Increase volume sold
3. Reduce support activities that incur specific customer or product cost
4. Withdrawal e.g. discontinue selling
Viewing either products or customers as a source of earnings
Profitability analysis often ignores the life cycle of earnings from customers or
products e.g. students at university may have low earning potential before graduating,
however could be a bigger source of earnings when they graduate and become more
affluent.
Basis of calculating earnings can be subjective e.g. what costs do we include and how
do we attach them?
Decisions about earnings often ignore interdependence e.g. unprofitable products may
attract more customers into a store to buy other items.
Product or customer views of earnings can conflict e.g. low profit on product A but
customer B buys other products as well therefore a source of high earnings. So do
discontinue A? DPP would suggest so however CPA may not.
Direct product profitability (DPP)
DPP is a decision making tool that helps a food merchandiser by providing a better indication
of the profitability of products on the supermarket shelves. DPP allocates direct product
costs to individual products. These costs are subtracted from gross profit to derive at DPP for
each product. The normal indirect costs attributed to products would be distribution,
warehousing and retailing. DPP would ignore indirect costs such as head office overhead,
only product specific fixed (indirect) cost would be analysed. e.g. shelf filling, warehousing
and transportation
Closing Less
Opening Add
or CLOA

Activity based budgeting (ABB)
ABB uses cost driver data in the budgetary planning and control stage, in other words cost
levels are forecast and determined by using ABC techniques. Therefore ABB is a form of
budget preparation that focuses on the activities of an organisation. All costs are related to
those activities and can be split into primary activities (value added activities) and secondary
activities (non-value added activities). Non-value added activities if not supporting the value
added activities effectively, should be questioned as to whether it should exist at all.
Job and batch costing
Job costing is a form of specific order costing where costs are charged to individual orders or
jobs for customers e.g. printers or a special purpose machine, tailor made to order.
Batch costing is a form of specific order costing; similar is most ways to job costing e.g. the
job would be to manufacture a large number of identical items (or a batch), such as 1000
identical commemorative mugs.
Service costing
Characteristics of service organisations
Intangible e.g. cannot touch or feel what is offered
Simultaneous e.g. cannot be returned if faulty
Perishable e.g. cannot be stored
Heterogeneous e.g. differences in the exact service supplied each time not perfectly
identical (homogenous)
Why use service costing
To help control the departments costs e.g. budgetary control
To help improve the efficiency of how the service is used by other departments when
internal or external charging takes place
Examples of cost units for service organisations
Cost per Hour
Cost per Tonne
Cost per Kilogram
Examples of composite cost units
Cost per tonne per mile
Cost per passenger per mile


(c) Discuss activity-based costing as compared with traditional marginal and absorption
costing methods, including its relative advantages and disadvantages as a system of cost
accounting;
Activity-based costing as a system of profit reporting and stock valuation.
Contrasting absorption with marginal costing profit
Tip: The only reason why profits will differ under both methods of costing is due to the way
that each method values finished goods inventory. The marginal costing method values
inventory at variable production cost only never full production cost. The absorption costing
method values inventory at full production cost.
When production volume > sales volume during a period
Inventory levels rise (closing inventory > opening inventory) therefore a greater amount of
fixed overhead under absorption costing is being carried forward to the following period
within the valuation of the closing inventory, therefore creating a higher profit than
marginal costing.
When production volume < sales volume during a period
Inventory levels fall (closing inventory < opening inventory) therefore a smaller amount of
fixed overhead under absorption costing is being carried forward to the following period
within the valuation of the closing inventory, therefore creating lower profit than marginal
costing.
When production volume = sales volume during a period
Inventory levels remain unchanged (closing inventory = opening inventory) therefore both
methods would give exactly the same profit.
What are the differences between Absorption costing and ABC?
There are two main methods of costing, absorption and activity based costing. There are some
vital differences between the two and so the pros and cons of each must be taken into account to
assess the suitability of each method.
The main difference is that ABC takes more than one cost driver into account, meaning that the
final costing figure is more accurate than when using the standard absorption method, for example
if a company made two similar products; product 1, which is a low volume item that requires many
machine setups, more testing, and special engineering tasks and product 2, which is a high
volume item that requires minimal setups and special operations, and is running continuously. If
we were to apply the traditional absorption costing method, it would use the machine hours as the
cost driver, and so product 2 would incur massively higher costs, due to it using the most machine
hours, even though product one required far more additional activities, setups, and testing. This
shows how the traditional method is not appropriate when a company produces multiple
products/services that require very different inputs.
ABC is a more accurate system for assigning costs to products, as it traces all activities and
assigns them to products by using multiple cost drivers. It also allocates the usage of common
business resources to each product, again by the use of cost drivers such as labour hours. It is
also useful for identifying products/services that are too costly to be profitable; although they may
seem to be generating a profit, they actually use up far too many resources to be profitable.
However, there are disadvantages to this method; high volumes of specific data must be
accurately collected, which could prove to be extremely time consuming. It can also itself incur
costs, as it would be fairly costly to implement.
Absorption costing also has its advantages over ABC; it is far easier to implement and run as it
requires less volume of data and only takes a few cost drivers into account, normally
machine/labour hours.
However, disadvantages include the fact that it doesnt take into account any indirect costs such
as administration and distribution costs; it focuses on the fixed and variable costs. Also, is does
not differentiate between fixed and variable costs, therefore the final costing can sometimes be
inaccurate. It is also very difficult for management to make decisions based on the costing figures
as they may not be accurate enough for the managers to make an informed, concise decision.
Difference in Approach
The major difference between absorption costing vs. activity based costing is the approach.
Absorption costing allocates costs to product units, whereas activity based costing traces the costs
of product units.
Absorption costing is the traditional cost accounting method that focuses on the product or service
when fixing costs. It works under the simple approach of assigning resources to products or
services directly.

(d) Apply standard costing methods, within costing systems, including the reconciliation of
budgeted and actual profit margins;
Criticisms of standard costing in general and in advanced manufacturing
environments in particular.
A standard cost is a planned (budgeted) or forecast unit cost for a product or service, which is
assumed to hold good given expected efficiency and cost levels within an organisation.
A standard cost normally represents the planned (budgeted) or forecast unit cost for material,
labour and overhead expected for a product or service.
Types of standard cost
Ideal standard
Attainable (or expected) standard
Current standard
Loose Standard
Basic Standard
Historical Standards
Practical advice for setting standards
1. Use challenging but realistic targets.
2. Consult with and allow staff to participate when setting targets.
3. Clear trust and communication between management and staff.
4. Standards or targets used must be realistic and achievable.
Standard costing can be used for
Preparation of budgets
Controlling performance
Inventory valuation
Simplifying cost bookkeeping
Motivating and rewarding staff
Criticisms of standard costing
Sometimes it can be hard to define a current or attainable standard.
Less human intervention means labour standards are becoming less valuable.
Automation produces greater uniformity and consistency of product therefore less
likelihood of material and labour variances actually occurring.
Standard costing is an internal not external control measure.
Uncontrollability of any exceptions highlighted.
Revision to standards too infrequent to guide or improve performance over time.
Modern manufacturing techniques such as TQM and quality circles means the
frequency and materiality of variances should not occur so often.
Integration of standard costing with marginal cost accounting, absorption cost
accounting and throughput accounting.
Manufacturing standards for material, labour, variable overhead and fixed overhead.
Price/rate and usage/efficiency variances for materials, labour and variable overhead.
Further subdivision of total usage/efficiency variances into mix and yield
components.
(Note: The calculation of mix variances on both individual and average valuation
bases is required).
Fixed overhead expenditure and volume variances. (Note: the subdivision of fixed
overhead volume variance into capacity and efficiency elements will not be
examined).
Print pages from chapter 4
(e) Explain why and how standards are set in manufacturing and in service industries with
particular reference to the maximisation of efficiency and minimisation of waste;
Standards and variances in service industries (including the phenomenon of
McDonaldization), public services (e.g. Health), (including the use of diagnostic
related or reference groups), and the professions (e.g. labour mix variances in
audit work).
The characteristics of services
Intangibility e.g. no material substance or physical existence
Legal ownership e.g. difficult to return if faulty
Instant perishability e.g. cannot be stored for future use
Heterogeneity e.g. performed different each time
Inseparability e.g. cannot be separated from the person who provides it
McDonaldization
George Ritver in his book The McDonaldization of Society listed the advantages of
producing standard (homogenous or identical) products, the pinnacle comparison being
McDonalds, with its fast food strategy of uniformity of operations and delivery on a global
basis.
Advantages of McDonaldization
Standardisation reduces cost and improves efficiency.
Control
Efficiency
Predictability
Calculability
Proficiency
Diagnostic related or reference groups (DRG) can applied to a Big Mac
Standard costing can be applied to service organisations such as the health services,
accountancy practices, fast food outlets etc. The diagnostic reference group or healthcare
resource group is a system of classifying hundreds of different medical treatments within the
healthcare sector. It applies standardisation by recognising that similar medical illnesses
require essentially similar treatments and care. There are around 800 DRG classifications
that exist within the healthcare industry sector.
DRG applied to health care services
Standardise resources e.g. beds/wards/consultancy time/medication etc.
Standardise patient treatment e.g. specifications of how treatments are applied.
Standardised codes for insurance companies or payments to the NHS (or other
private health care providers) based on standard prices used.
Government can benchmark performance and provide league tables for hospitals.
Sales price and sales revenue/margin volume variances (calculation of the latter on a
unit basis related to revenue, gross margin and contribution margin). Application of
these variances to all sectors, including professional services and retail analysis.
Print page from chapter 4
Planning and operational variances.
Planning and operational variances
Planning variances are caused by the budget (standard) at the planning stage being wrong
e.g. budgeting errors or poor planning when the budget was prepared. The budget (standard)
used would need revising if operational variance calculations are to be more realistic.
Planning variances help ensure that all planning errors within the budget (standard) are
adjusted for or removed; the standard used for operational variances would therefore be more
realistic.
Operational variances are the normal variance calculations as learned and applied earlier
within this chapter.
Process of calculating planning variances
1. All planning variances follow a similar proforma because they all adjust the flexed
budget up or down due to the revision of a standard. Just like operational variances
planning variances can be favourable or adverse.
2. When the planning variance is calculated and the budget (standard) adjusted,
operational variances would then be calculated using any new (revised) standards.
The effect is to sub-divide variances into two components
1. The planning variance which is beyond the operational control of management and
staff e.g. errors due to poor planning.
2. The operational variance which is normally within the control of staff and now more
realistic as a yardstick because calculations would include any revisions to standard.
Advantages of calculating planning variances
Highlights variances between controllable and uncontrollable.
Helps motivate managers and staff.
Better management information for control purposes.
Limitations of calculating planning variances
Determining bad planning or bad management can sometimes be a thin line.
Time consuming and costly than the conventional approach
Factors to consider before investigation or control action is taken
1. Size or materiality of the variance.
2. The general trend of the variance.
3. Consideration of the type of standard used.
4. Interdependence with other variances.
5. The likelihood of identifying the cause of the variance if it were investigated.
6. The likelihood that if the cause is controllable and can be rectified.
7. The cost of investigation and correction compared to the benefits e.g. cost savings.
Statistical methods for interpretation
Variances can be expressed relatively rather than absolutely, the variance always expressed
as a percentage of standard (never actual) cost. These percentages can be plotted on a graph
over time to provide trend analysis for variances.

(f) Interpret material, labour, variable overhead, fixed overhead and sales variances,
distinguishing between planning and operational variances;
Interpretation of variances: interrelationship, significance.
Variance analysis
Variance analysis is a budgetary control technique, which compares planned (budgeted) or
forecast costs and revenues to actual financial results, it measures the differences between
standard (budgeted) and actual performance. Variance analysis is used to improve
operational performance through control action by management e.g. investigation of any
variance causes and correction of them to prevent in future any further deviations from plan.
A variance is the difference between planned, budgeted or standard cost and the actual
cost incurred. The same comparisons may be made for revenues.
(CIMA)
Reasons why variances occur
Inaccurate data used to compile standards.
Standard used either not realistic or out of date.
Efficiency of how operations were undertaken and performed by staff.
Random or chance events occurring.
There are many variance proforma calculations that need to be learned and applied as part of
your studies. These proforma are essential to learn and practice in order to truly understand
and interpret what variances mean. Once variances have been calculated either F or A is
used as terminology to indicate favourable or adverse differences between actual and
standard performance. Favourable means that actual results were better than standard.
Adverse means that actual results were worse than standard. Remember variances are just
reconcilable differences between a budget (standard) and actual results so in the case of an
adverse variance this would mean that actual cost will be higher or profit lower when
compared to the budget, and vice versa if a variance was favourable.
Interpretation of variance calculations
In your exam you could be asked to interpret the variances you have calculated or interpret
from variances already provided to you in a question. The examiner may require you to
explain some possible reasons why a favourable or adverse variance has occurred. It is
important to give an answer that is practical and relates to the scenario or organisation, also
to apply consistent explanations with your answer e.g. if an adverse variance then give
possible reasons for the cause of an adverse not favourable variance. Possible causes or
reasons for variances have been included in the table below.
Material mix and yield (productivity) variances
When different types of materials can be used as substitutes for each other, a standard mix
can usually be determined to ensure a quality product at the lowest possible cost. If the actual
material mix varies from the standard mix, both quality and cost may be affected. The sum
of the material mix and yield variances will be equal the material usage variance.
The material mix variance can be calculated by using two different methods, the individual
valuation bases which is the easiest to apply and the average valuation bases. If the
examiner does not specify which method to use, the individual valuation bases is the easiest
method to apply, both methods give the same answer as a total mix variance, but the
individual values for each material which make up the mix variance will be different
depending on each method used.
Yield (or productivity) variances measure the amount of output (unit of product or service)
from a given amount of input (total materials mixed). Producing more output than expected
from a given amount of material input, indicates greater efficiency of production, the
variance would be favourable, indicating that money has been saved by using material more
efficiently. Producing less output than expected from a given amount of material input,
indicates lower efficiency of production, the variance would be adverse, indicating that
money has been wasted by using material less efficiently.
Labour mix and yield (productivity) variances
When different types of labour e.g. different grades or skills, can be used as substitutes for
each other, the labour efficiency variance can be subdivided into a mix and yield
(productivity) variance when there exists two or more types of labour that can be substituted
for one another e.g. to provide a service or manufacture a product. The sum of the labour mix
and yield variances will be equal the labour efficiency variance.
The labour mix variance can be calculated by using the same two different methods that can
be applied to material mix and yield variances, the individual valuation bases which is the
easiest to apply and the average valuation bases. If the examiner does not specify which
method to use, the individual valuation bases is the easiest method to apply, both methods
give the same answer as a total mix variance, but the individual values for each type of
labour which makes up the mix variance will be different depending on each method used.
The yield variance for labour is also an identical calculation when compared to material
yield. For labour mix and yield follow the same guidance as for material mix and yield but
use labour hours and labour rates rather than material usage and material prices.
.
There can be an interdependent relationship (both connected to each other), between a mix
and yield variance, for example a higher skill of labour used in substitute for a lower skill of
labour would normally give an adverse mix variance, (higher skills normally demand a
higher labour rate), but at the same time perhaps a favourable yield variance, due to the
greater experience and efficiency of the higher skill of labour substituted.
(g) Prepare reports using a range of internal and external benchmarks and interpret the
results;
Benchmarking.
A continuous, systematic process for evaluating the products, services and work processes
of an organisation that are recognised as representing best practice, for the purpose of
organisational improvement.
(Michael Spendolini)
Types of benchmarking
Internal
Best practice or functional
Competitive
Strategic
The process
Selecting what you want to benchmark
Consider benefits against the cost of doing it
Assign responsibilities to a team
Identify potential partners/known leaders
Breakdown processes to complete
Test and measure e.g. observation, experimentation or investigation/interview
Gather information
Gap analysis
Implement changes/programmes/communicate
Monitor and control
Repeat regularly


(h) Explain the impact of just-in-time manufacturing methods on cost accounting and the
use of back-flush accounting when work-in-progress stock is minimal.
Back-flush accounting in just-in-time production environments. The benefits of just-
in-time production, total quality management and theory of constraints and the
possible impacts of these methods on cost accounting and performance
measurement.
Backflush accounting
Backflush accounting is a method associated with a Just In Time (JIT) production system,
which attaches a standard cost to the output of a unit sold within the accounting system,
standard costing may also be used for the valuation of stock and work-in-progress.
The main difference between this system and others is that costs are attached to output
completed and sold in a period, in other words costs are recognised at the point of sale rather
than the point of production.
Traditionally process accounts were used to record costs as they were allocated to production
or between the different work-in-progress accounts within the system. Large amounts of
closing WIP and accounting transfers were valued every step of the way, by using cost per
equivalent unit techniques for valuation purposes, and this was done each time output moved
from one process or WIP account to another.
Standard cost book-keeping may also be used within process accounting, with material,
labour cost etc being recorded at actual cost and transferred to the process accounts at
standard cost, giving the cost variances at the end of the period within the expense accounts.
Modern systems
JIT e.g. minimal or zero stock
TQM e.g. immaterial variances as little wastage or scrap
Backflush accounting questions the traditional approach and asks why there is a need to have
a highly detailed costing/valuation system due to very little stock/WIP and very immaterial
variances? What value does such information now add to help management? A lot of time
and energy went into creating systems in the past, that work out every step of the way, every
fraction of pence, to allocate the cost of processing to a single unit of closing WIP or finished
output sold, but today this is seen as a non-value added activity.
Instead backflush accounting could be used.
Standard costing may still be used in a back-flush accounting system; however there are only
two trigger points that would cause an accounting entry in this system.
When an actual cost is incurred
When units leave the system to go to a customer e.g. a sale made
All other internal entries are minimised, eliminating or simplifying WIP accounts, with no
unnecessary accounting system that records and values WIP each time it moves from one
account to the other and no complex method of stock valuation e.g. standard costing used.
There should be immaterial or no variances or differences between actual and standard cost at
the end of a period, however if they do exist they would be transferred to cost of sales at the
end of the period.
Advantages of backflush accounting
A simple system as it just values stock that is sold or completed.
Reduces the number of accounting entries.
Excellent system if stock held is immaterial or does not change very much from one
period to the next.
5.5 Modern manufacturing environment
Before the 1970s the main problem was geographical distance, mainly that of communication
and logistics of moving materials. There was less effort guided towards efficiency and cost
reduction e.g. any cost rises were passed on to the customer by adding it to the price.
From the 1970s onwards saw the establishment of global networks for acquisition of raw
materials and components. Also high innovation, faster changing environments and shorter
product life cycles all fuelled by.
1. Higher quality lower priced goods from overseas companies
2. Deregulation and privatisation of industries during the 1980s
3. Better information systems/IT to manage this complexity and diversity
Traditional manufacturing came from the following types.
1. Job e.g. specific manufacturing to clients order
2. Batch e.g. standardised or identical units manufactured in one operation
3. Mass e.g. continuous production of standardised or identical units
Modern manufacturing tools and techniques
Lean production or the Toyota production system (TPS)
Lean production (also known as the Toyota Production System) is a manufacturing
methodology originally developed by Toyota
to get the right things to the right place at the right time.
Lean production focuses on delivering resources when and where they are needed.
The Toyota Production System (TPS) was built on two main principles: Just In Time (JIT)
and Jidoka e.g. continuous improvement of quality within the production system. Underlying
the entire Toyota production process is the concept that "good thinking means good product.
Lean production techniques focus on reducing waste, cycle times, defects, inventory, travel
time of parts and non value added activities. Lean techniques can also he applied to services
e.g. process improvements can be made and sustained, although not always in the same way
as manufacturing. A service organisation generally does not hold any inventory, but it can
have a backlog of service requests and waiting lists which can impact on customer relations,
in contrast to a manufacturer, no warehouse can hold that service request backlog.
Lean production tools and techniques
Getting things right first time (total quality management) e.g. minimisation of internal
and external failure cost.
Minimising inventory e.g. JIT stock control to improve cash-flow management.
Minimising waste e.g. zero wastage policy.
Flexible workforce practices e.g. focus factories, cell manufacturing, teamwork,
multi-skilled employees and empowerment to shorten lead times.
High commitment to human resource policy e.g. investment in training and
development, quality circles and performance related reward schemes
Management and workforce culture of commitment to continuous improvement
Joseph Juran an early 20th century quality management theorist, suggested a Pareto
relationship existed between work systems and quality problems e.g. 85% of quality
problems are caused by ineffective work systems. The conclusion is that management should
concentrate on work systems more than anything else when it comes to improving quality
within an organisation.
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Advantages of lean production
Increased capacity.
Reduced wastage, idle time, reworks and production cost.
Improved flexibility, efficiency and lead times to respond quickly to changes in
customer demand.
Higher quality of product or service.
Increased customer satisfaction and brand loyalty e.g. less complaints, warranty
claims and returns.
Economies of scope.
Economies of scope is possible when resources such as machinery or labour can be shared to
manufacture different products e.g. a condition where fewer inputs can produce a greater
variety of outputs (products), using multi skilled staff and multi purpose machinery. A greater
business value and lower cost can be achieved by jointly producing different products using
the same common inputs e.g. flexibility to diversify production without significant
investment required, because scope exists to substitute resources from one process to another.
Multi skilled operatives allow greater flexibility and economies of scope. For example rather
than just being a miller or grinder or welder, operative workers could be trained to do all
three jobs. These operatives can also be trained to perform routine maintenance on machines
and equipment, in order to diagnose and correct routine problems earlier, rather than relying
on a specialised maintenance crews. Such techniques facilitate and support JIT production
methods.
Disadvantages of lean production
Continuous cost of investment in retraining displaced or reassigned operators.
Learning new skills and strategies to cope with new methods.
Change management a long-term educational strategy of gaining commitment, trust
and support from the workforce e.g. does not happen over night and not just a
temporary thing management are trying out.
Poor morale, motivation and resistance from the workforce during changeover.
Total productive maintenance (TPM) is a concept to improve the productivity of
organisations equipment and can contribute towards an effective lean production system.
TPM aims to shorten lead times by ensuring production and machine maintenance staff work
closer together. Machine operators are empowered and trained in order to speed up routine
servicing, fault diagnosis and maintenance of operating machinery
Benefits of TPM
Less equipment downtime and major stoppages in production giving greater
efficiency of production flow.
Better understanding by production staff of the performance of their equipment,
helping to diagnose and rectify problems quicker and improve production flow.
Less reworks, scrap and wastage levels through better maintenance.
More effective teamwork helping to improve flexibility.
Increased enthusiasm and motivation by involvement of the workforce.
Improved service to customers by reducing lead times and improving quality.
Just In Time (JIT)
The JIT philosophy requires that products should only be produced if there is an internal or
external customer waiting for them. It aims ideally for zero stock e.g. raw materials delivered
immediately at the time they are needed, no build up of work-in-progress in production and
finished goods only produced if there is a customer waiting for them. This means cash is not
tied up unnecessarily within raw material, work-in-progress or finished goods stock, allowing
more effective cash flow management for the organisation. JIT is an example of a chase
demand strategy for balancing capacity (supply) and demand.
Characteristics of JIT
1. Closer relationships with suppliers maintained
2. Smaller and more frequent deliveries to plan and administrate
3. Higher quality machines with regular maintenance to avoid delays
4. Involvement and training of staff to maintain flexibility
Focus factories
The aim of focus factories is to reduce the cost of part finished stock e.g. work-in-progress.
Part finished stock is expensive not only to store, but it also cannot be sold because it is not
ready and could be delaying potential sales. Focus factories reorganise traditional factories,
which normally take parts of several products and mass produce in anticipation of demand,
instead manufacturing is organised into smaller stand alone factories or cells, with each team
responsible for making a complete product. In contrast focus factories are product as
opposed to process driven. This facilitates expertise to be developed, reduces waiting times,
speeds up production and less inventory is held.
Dedicated cell production
Traditional production has been about the specialisation of workers, machines and mass
production lines. In cell production there exists multi-skilled teams, who are responsible for
delivering work in progress or finished goods, on to the next production cell. Each team may
also be responsible for routine maintenance, quality control and health and safety.
Reorganisation production in to cells with dedicated teams, can enhance efficiency,
synergise worker skills and knowledge and improve motivation of the workforce e.g. team
spirit.
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Total Quality Management (TQM)
TQM is the process of embracing a quality conscious philosophy or culture, as well as
adopting quality standards and procedures within an organisation, aiming towards perfection
and continuous improvement.
The meaning of quality can be subjective but generally it can mean non-inferiority,
superiority or usefulness of the product or service the customer is buying. A common
interpretation of quality is "fitness for its use or purpose".
Characteristics of TQM
Commitment to developing processes that achieve high product quality and customer
satisfaction.
Commitment to continuous improvement.
Involvement of the entire workforce.
Quality assurance through statistical method a key component.
Kaizen, the Japanese equivalent to TQM means continuous improvement by small
incremental steps.
1. Get it right the first time.
2. Continuous improvements e.g. aim towards zero defects, wastage and returns.
3. Quality assurance procedures e.g. ISO 9000 certification.
4. Benchmarking.
5. Understanding customer values and engineering these into products and processes.
6. Culture of quality everyones concern.
7. Participation and teamwork encouraged.
8. Cultural change in the long-term of workers perceptions and attitudes e.g. quality
everyones concern and an internal customer perspective.
9. Design of better products is everyones concern.
Therefore World Class Manufacturing (WCM) companies aimed towards the following
1. Higher quality products.
2. Flexibility, productivity or efficiency increases.
3. Meeting customer needs e.g. competitive advantage.
4. Higher customer satisfaction.
This was all been facilitated by JIT methods, TQM, and changes in manufacturing
technology, as well as closer relations with customers and suppliers and training of staff and
the use of their knowledge.
Advantages of TQM
Reduced idle time, wastage, reworks and costs of production.
Improved efficiency and lead times to respond more flexibly to customer demand.
Higher staff morale through empowerment and involvement.
Higher quality of product or service e.g. customer satisfaction and brand loyalty.
Problems of implementing TQM
Lack of education about the benefits.
Lack of support from the workforce.
Reluctance to try new ideas in case of failure.
Staff turnover creates greater cost of training.
High cost of implementation, quality systems and processes.
Quality control (QC) v quality assurance (QA)
Quality control systems include sampling, inspection and testing of raw materials, work-
inprogress
or finished goods stock. Also the monitoring of customer complaints and analysis
of product faults reported from internal testing or customer returns. Quality control systems
obtain feedback about historical performance in order to improve performance of the
organisation in future (feedback control). It is the control of quality through inspection and
appraisal.
Quality assurance is a planned and systematic action to provide adequate confidence that an
item or product conforms to established technical requirements e.g. training of staff to ensure
high standards, or suppliers guarantee high quality through systems and assurance standards
(feed forward control). This is more aligned towards a TQM philosophy, QA when
contrasted to QC is about the concept of prevention, rather than diagnosis and cure.
5.7 Costs of quality
Costs which result from imperfect systems, processes, products or services.
Prevention cost
Appraisal cost
Internal failure cost
External failure cost
Dimensions of quality
The dimensions of quality refer to the attributes that quality achieves.
1. Product specification e.g. functionality, durability and reliability, the product
produced and delivered as specified.
2. Product designed specifically to meet customers expectations e.g. rapid customer
feedback into the design of new products, added value and innovation.
3. Product service and support e.g. physical appearance of the organisation, trust,
helpfulness, courteousness, empathy, effective listening and approachability of staff.
The effectiveness of customer care and the efficiency of service and support.
4. Administration e.g. speed and accuracy of processing, invoicing and delivery.
Even service organisations can benefit by using the above dimensions
1. Customer expectations.
2. Process of delivery e.g. operations.
3. Attitude and behaviour of staff e.g. operations.
4. Physical environment e.g. appearance of staff, vans, offices.
5.9 Communication of quality within an organisation
1. Establish senior management commitment and support for TQM.
2. Present TQM. Create dissatisfaction with the previous state e.g. hold consultative
meetings and educate/communicate or workforce may not be motivated to change.
3. Hold TQM workshops and training sessions. Participation to aid change e.g. full
consultation and evaluation of different solutions with those effected. Establish
quality circles.
4. Establish standards and procedures for benchmarking.
5. Restructure reward systems.
6. Establish information systems to monitor and control quality.
7. Review and feedback for continuous improvement.

5.10 Quality Circles (QCs)
Quality circles is an American idea, whereby a group of 5 to 8 employees, normally working
in the same area, volunteer to meet on a regular basis to identify areas for improvement or
analyse work related problems in order to find solutions. Quality circle volunteers normally
attend during paid time and normally under leadership. Results and conclusions lead to the
implementation of solutions by group members. Quality circles support other concepts like
TQM and lean production; it is a form of participative management using problem solving
techniques.
Workforce identifies areas for improvement.
Workforce analyse their work related problems to find better solutions e.g. brainstorm
for new ideas and alternatives.
Workforce investigates reports and discusses their findings and implements
improvement.
Benefits of QCs
Improved quality.
Higher customer satisfaction and goodwill.
Reinforces TQM cultural philosophy.
Best people to know about improvement are the workers.
Greater morale and motivation of staff e.g. empowerment.
Improved productivity, efficiency and less idle time.
Entrepreneurial ideas encouraged and could lead to a competitive advantage
2. explain the role of MRP and ERP systems.
(a) explain the role of MRP and ERP systems in supporting standard costing systems,
calculating variances and facilitating the posting of ledger entries.
MRP and ERP systems for resource planning and the integration of accounting
functions with other systems, such as purchase ordering and production planning.
Advanced manufacturing technologies (AMT)
IT and its usefulness to operations have become more and more important in order to help
companies achieve total quality management. Below are the main AMTs that are used my
major companies.
Flexible manufacturing systems (FMS) consist of several machines along with parts and
tool handling devices such as robots, arranged so that it can handle any family of products or
parts for which the system has been designed and developed. Such systems aim to achieve
greater economies of scope for the manufacturer, the capability of economic production of
small batches of a variety of products or parts with minimal set up time. These systems are
highly computerised, automated and integrated.
Computer aided design (CAD) automates the development of new product designs faster.
When integrated with expert systems CAD can automatically work out the stress and strain of
different materials required to support new designs. Through good design it can assure better
quality of the product when it is manufactured or assembled e.g. design, drafting and display
of graphically oriented information early in the design process aids good production
planning.
Computer aided manufacturing (CAM) automates production e.g. robotic and
programmable production cycles. This can reduce defects and wastage within the production
process due to a reduction in human labour required e.g. human beings are careless, clumsy
and easily make mistakes.
Optimised production technology (OPT) optimises the use of bottleneck resources
(limiting factors) e.g. the binding constraints that limit capacity and throughput. Examples
include programmable production cycles to match the speed of non-bottleneck resources to
the running of bottleneck resources maintained at full capacity. OPT helps to avoid the build
up of unnecessary work in progress and supports a JIT environment.
Materials requirement planning (MRP I) is an inventory control system which provides an
automated list of components and materials required for the type and number of products
entered. This allows better production planning and accuracy of inventory management.
Manufacturing resource planning (MRP II) Evolved from MRP I. A system that
incorporates not only material requirements, but all manufacturing resources such as different
labour types, machine types and other manufacturing resources required for the type and
number of products entered. It could even produce the budgeted cost for each batch or unit of
product entered aiding effective production planning, control and cash-flow management. A
useful capability to answer "what-if" questions.
Computer-integrated manufacturing (CIM) means manufacturing supported by
computers. The total integration of computer aided design, manufacturing, quality control
and purchasing in one centralised system.
Enterprise-wide systems (ERP systems) also referred to as enterprise resource planning
(ERP) or enterprise computing. Enterprise-wide systems are information systems that are
used throughout a company or enterprise. A company-wide computer software system used
to manage and coordinate all the resources, information and functions of a business. To be
considered an ERP system, a software package must provide the function of at least two
systems e.g. payroll and accounting functions if integrated, could be technically considered
an ERP package. ERP is the modern extension of MRP (material requirements planning, then
later manufacturing resource planning) systems and CIM (Computer Integrated
Manufacturing).
Enterprise-wide systems enable the effect on different enterprise support resources or
business processes to be forecast more accurately, when increasing or decreasing volumes
sold or produced. Such resources incorporated are not just production related; they include
forecasts for other support departments and even entire divisions. Enterprise-wide systems
require effective integration of information systems e.g. a central database.
All functional departments are integrated in one holistic information system. As well as
integrating manufacturing, warehousing, logistics, and information technology, it would also
include accounting, human resources, marketing and strategic management.
SAP Business One is an integrated finance and business management software solution, it
includes everything you need to manage a business: e.g. financials, accounts
payable/receivable, banking, inventory, customer relationship management, production,
service management, human resources and reporting.
Benefits of ERP systems
Integration of software applications can speed up exception reporting.
Real-time data capture and reporting of financial results.
Presents information for all levels of management.
Can be integrated with customers or suppliers to speed up lead times and improve the
quality of supply chain management.
More effective planning e.g. forecasting the impact changing volumes will have on
company wide cost, sales and profitability. A useful capability to answer "what-if"
questions.
Limitations of ERP
Inadequate investment in training for end users.
Bespoke and expensive to develop and maintain.
High switching cost.
Industry standard prescriptions for ERP systems may not gain competitive advantage.
Too difficult to adopt some business process into an ERP model.
Only as reliable as the programmers that programmed it.
Database approach therefore risk of losing information or security breaches.3. apply principles of
environmental costing.
(a) apply principles of environmental costing in identifying relevant internalised costs and
externalised environmental impacts of the organisations activities.
Types of internalised costs relating to the environment (e.g. emissions permits,
taxes, waste disposal costs) and key externalised environmental impacts, especially
carbon, energy and water usage. Principles for associating such costs and impacts
with activities and output.
Environmental cost accounting is how environmental costs are identified and allocated to
the material flows or other physical aspects of a firms operations.
Internalised costs relating to the environment
Environmental costs
Environmental related taxes
Environmental losses
Environmental provisions
Non financial disclosures
Energy and water useage
Energy and water consumption have proven to be both very costly to businesses as well as
having significant impact on the environment through increased carbon emissions.
Businesses should look towards ways of conserving the use of these resources as far as
practicable. Energy and water consumption are closely liked as energy is needed to heat up
water and so a reduction in water useage would mean a reduction in energy useage as well.
ABC and environmental cost accounting
Conventional management accounting has been criticised for ignoring the separate
identification, classification, measurement and reporting of environmental information,
especially direct and indirect environmental costs. Environmental costs such as energy, water
and waste disposal are not traced to specific production processes and are "lumped in" with
general business overheads and allocated to cost objects.
More companies are now identifying and measuring direct environmental costs by revising
allocation bases so as to separate out indirect environmental costs using activity based
costing, (ABC). Environmental cost accounting can be seen as a specific application of ABC,
which focuses on the environment as a key cost driver. ABC allows us to distinguish between
environmental related costs normally attributed to joint environmental cost centres (e.g.
incinerators or sewage plants) and environmental driven costs, which can be direct, indirect
and contingent, and which are hidden in the general overhead.
Using ABC, environmental costs are removed from overhead costs and traced to products and
services by identifying the resources, activities and the attendant costs and quantities used to
produce the output. This reduces the potential for cross subsidisation of dirty or
environmentally damaging products, processes, sites and departments. ABC can be employed
to chart the use and allocation of material, financial and energy resources on the basis of
process and product lifecycles. It should include the allocation of usual production costs such
as pollution control and the use of raw materials and energy, as well as hidden and less
tangible costs and benefits, (capital costs such as emissions monitoring equipment, and
expenses such as monitoring and testing procedures), plus liability costs. Removing
environmental costs from overhead costs and accurately allocating them to specific products
results in far fewer distortions in product costing.
Activity based costing also applies to the end of a product's life cycle. This is particularly
important in Europe where environmental legislation is increasingly forcing companies to be
responsible for the 'take back' and disposal of products at their end of life, and to remediate
land used for production facilities. Companies wishing to minimise product take back,
recycling and site clean up costs will need to recognise and consider environmental costs
during product and process design stages where they have the greatest influence. A
comprehensive ABC model will help identify all the activities and the total resource costs
related to preventing and remediating expected environmental damage. Current
environmental costs must be correctly attributed to both existing products and past products.
A failure to recognise in today's production costs the costs of future disposal, recycling and
remediation will underestimate the total costs of producing today's products. Activity based
costing can also be used to create activity based energy consumption models. Here energy
consumption is translated into a cost driver. In a similar way, waste indices and indicators can
be developed, becoming waste drivers where costs can be assigned to specific waste
generation and waste disposal.
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Comprehensive analysis of environmentally related activities is also a key requirement in
order to assess levels of environmental hazard and toxicity and their associated costs. Such
analysis identifies and assigns key cost drivers and product consumption patterns thus
permitting a good attribution of environmental costs to individual products. To the extent that
some environmental costs are traced to specific processes, all the products converted by these
processes will be assigned a share of the process-specific environmental costs. Thus an ABC
model of environmental expenses can inform product design and process selection decisions
in order to reduce total life-cycle costs of products: including materials acquisition, materials
conversion, materials disposal and recycling. In addition, ABC can be applied to
environmental costs so as to quantify the cost saving effects of environmental measures.
Disadvantages of using ABC
ABC initiatives do not automatically reveal environment driven costs, substantial
inputs by environmental managers are required in order to ensure the costs of all
environmentally related activities are included.
Using ABC to identify and allocate environmental costs requires the clear definition,
monitoring and reporting of such costs.
Tracking systems for environmental wastes and toxicities of wastes from
manufacturing systems is necessary in order to most accurately assign such costs.
This in turn provides data for the estimation of potential liabilities, costs of disposal
and other life cycle costs.
Advantages of using ABC
It integrates environmental cost accounting into the strategic management process,
thus linking environmental issues into management objectives and activities.
Costs can be more accurately integrated within manufacturing planning, control and
other information systems. This provides an extensive consideration of the
environmental effects throughout the product life-cycle.
Ensures that intangible and uncertain environmental factors can be brought into any
decision-making framework, even though it may not be certain which environmental
costs are the most relevant or material to the organisation.
It allows us to use cost data to develop superior strategies in order to gain sustainable
competitive advantage.
The inclusion of internal environmental costs in its accounting assists a company in
maximising its current profitability.
Inclusion also helps ensure that the company recognises and accounts for its external
environmental costs, especially where it is likely it will be required to internalise these
costs in the near future.

The Kyoto Protocol
The Kyoto Protocol is an international agreement linked to the United Nations Framework
Convention on Climate Change. The major feature of the Kyoto Protocol is that it sets
binding targets for 37 industrialised countries and the European community for reducing
greenhouse gas (GHG) emissions. These amount to an average of five per cent against 1990
levels over the five-year period 2008-2012. The Protocol commits industrialised countries to
stabilize GHG emissions.
Recognising that developed countries are principally responsible for the current high levels of
GHG emissions in the atmosphere as a result of more than 150 years of industrial activity, the
Protocol places a heavier burden on developed nations under the principle of common but
differentiated responsibilities.
The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into
force on 16 February 2005. 184 countries have ratified its Protocol to date.
Under the treaty, countries must meet their targets primarily through national measures.
However, the Kyoto Protocol offers them an additional means of meeting their targets by way
of three market-based mechanisms.
The Kyoto mechanisms are:
Emissions trading.
Clean development mechanism (CDM).
Joint implementation (JI).
The mechanisms help stimulate green investment and help countries meet their emission
targets in a cost-effective way.
Emissions trading allow countries that have emission units to spare to sell this excess
capacity to countries that are over their targets. Hence a new commodity was created in the
form of emission reductions or removals. Since carbon dioxide is the principal greenhouse
gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any
other commodity. This is known as the "carbon market."
In order to address the concern that countries could "oversell" units, and subsequently be
unable to meet their own emissions targets, each country is required to maintain a reserve in
its national registry. This reserve, known as the "commitment period reserve", should not
drop below 90 per cent of the countrys assigned amount or 100 per cent of five times its
most recently reviewed inventory, whichever is lowest.
The Clean Development Mechanism (CDM) allows a country to implement an emissionreduction
project in developing countries. Such projects can earn saleable certified emission
reduction (CER) credits, each equivalent to one tonne of CO2, which can be counted towards
meeting Kyoto targets.
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A CDM project activity might involve, for example, a rural electrification project using solar
panels or the installation of more energy-efficient boilers.
The mechanism stimulates sustainable development and emission reductions, while giving
industrialised countries some flexibility in how they meet their emission reduction or
limitation targets.
Joint implementation allows a country to earn emission reduction units (ERUs) from an
emission reduction or emission removal project in another member country, each equivalent
to one tonne of CO2, which can be counted towards meeting its Kyoto target.
Joint implementation offers parties a flexible and cost-efficient means of fulfilling a part of
their Kyoto commitments, while the host country benefits from foreign investment and
technology transfer.
The Kyoto Protocol is generally seen as an important first step towards a truly global
emission reduction regime that will stabilize GHG emissions, and provides the essential
architecture for any future international agreement on climate change.
By the end of the first commitment period of the Kyoto Protocol in 2012, a new international
framework needs to have been negotiated and ratified that can deliver the stringent emission
reductions the Intergovernmental Panel on Climate Change (IPCC) has clearly indicated are
needed.

The concept of sustainability in operations management
Sustainability within operations management is about preserving natural resources for future
generations. A fully sustainable operation is one that has a zero impact or a positive impact
on the ecological environment. More companies are beginning to consider how their
operations affect the environment and future generations; they are beginning to acknowledge
new practices of doing business in a way that balances economic and environmental
needs. The field of operations management has a vital role to play in the long-term
sustainability of our economy.
Practices for minimal long-term effect on the environment
Reduction in the use of toxic substances.
Reduced reliance on petroleum and other non-renewable energy sources.
Use of naturally renewable materials.
Use of biodegradable materials e.g. naturally reabsorbed into the ecosystem.
Use of organic materials e.g. grown without synthetic fertilizers or pesticides.
Fair trade e.g. certified policies and standards for a fair living wage and safe work
environments. No third world sweatshops!
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The organisations environmental footprint or environmental impact is determined by the
amount of depleted raw materials and non-renewable resources it consumes to make its
products, and the quantity of waste and emissions that is generated in the process. The life
cycle of a product should take into consideration the raw materials it uses in production, all
other manufacturing processes, all distribution and transportation costs caused by a products
existence, right through to its final disposal.
To produce 1 ounce of gold creates 30 tonnes of toxic waste because of the compound
cyanide used in the process for extracting gold.
1 ounce of gold will make a wedding ring.
Bennett and James areas for environmental responsibility
Production e.g. minimising waste and toxic emissions.
Environmental auditing e.g. to comply with legislation, but also an issue of integrity
to take a more proactive stance.
Ecological approach e.g. minimising waste throughout entire value or supply chain.
Quality e.g. set targets to reduce environment waste and emissions.
Accounting e.g. account for social costs to society or third parties, for investment
appraisal decisions.
Economic e.g. internal economic charges for any social cost created by divisions to
encourage its minimisation.
ISO 14001 is an international standard for Environmental Management Systems and offers
internationally recognised environmental certification. To gain accreditation a documented
and structured approach must be adopted for setting environmental targets and monitoring
systems implemented to ensure environmental management systems are effective e.g.
meeting targets for minimisation of energy consumption, waste and emissions.