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Evi Kurniati, Bambang Rahadi and Mohammad Danial, 2010. Implementing Environmental Management Accounting ISSN 0126-2807 (Ema) In Improving Eco-Efficiency On Corporate Activities: Case Study On Sugarcane Company. Volume 5, Number 4: 403-410, October-December, 2010 © T2010 Department of Environmental Engineering Sepuluh Nopember Institute of Technology, Surabaya & Indonesian Society of Sanitary and Environmental Engineers, Jakarta Open Access http://www.trisanita.org

This work is licensed under the Creative Commons Attribution 3.0 Unported License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Research Paper

IMPLEMENTING ENVIRONMENTAL MANAGEMENT ACCOUNTING (EMA) IN IMPROVING ECO-EFFICIENCY ON CORPORATE ACTIVITIES: CASE STUDY ON SUGARCANE COMPANY

EVI KURNIATI*, BAMBANG RAHADI and MOHAMMAD DANIAL

Natural Resources and Environmental Engineering Laboratory, Department of Agricultural Engineering, Faculty of Agricultural Technology, Brawijaya University, Jl. Veteran, Malang, Indonesia.

*Corresponding Author: Phone: +62-341-9749084; Fax: +62-341-568415; E-mail: [email protected] Received: 2nd September 2010; Revised: 8th November 2010; Accepted: 8th November 2010

Abstract: The basic concept of Environmental Management Accounting (EMA) is how to apply the Eco-Efficiency rules in order to preserve the sustainability of company business's management. Eco-Efficiency means ratio between Financial Performance Indicators (FPIs) covered in Monetary Environmental Management Accounting (MEMA) and Environmental performance indicators (EPIs) covered in Physical Environmental Management Accounting (PEMA). This research aims to evaluate the eco-efficiency status of Sugarcane Company. This research was conducted at one of sugarcane factories placed at Malang, East Java, Indonesia from September to December 2006. Information needed covers physical information i.e. materials input, products and nonproducts output (solid, waste water, gas emission) and monetary information i.e. production costs, costs-related waste process, labor costs, and benefit. The ecoefficiency status was described low to high performance. The environmental impacts were also evaluated by using Centrum voor Milliukunde Universiteit Leiden (CML) method in order to support PEMA. The result showed that the process efficiency were 86.07%. The company was in relatively low eco-efficiency status caused by high environmental performance but low in financial performance. There were amount of material losses and solid wastes that cause high costing. The biggest impact comes from particulate matter that contribute human toxicity potential equivalent to 1.4 kg-DBC (Dichlorobenzene), but the value was still in normal level according to CML standard.

Keywords: Eco-Efficiency, Environmental Management Accounting

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Journal of Applied Sciences in Environmental Sanitation, 5 (4): 403-410.

Evi Kurniati, Bambang Rahadi and Mohammad Danial, 2010. Implementing Environmental Management Accounting (Ema) In Improving Eco-Efficiency On Corporate Activities: Case Study On Sugarcane Company.

INTRODUCTION Company's performance related to environmental issues was concerned most nowadays. These were involving very much on its policy making. Environmental and financial performances were usually managed separately due to the difficulty of data acquisition and calculation of its impact conversion to money [1]. The industrial situation in the South-East Asia region is characterized on the one hand by economic growth and accompanied, on the other hand, by high inputs of environmental resources. In addition, companies are facing stress from competition and cost pressures as well as increasing global business activities [2]. To be realized that good environmental performance can improve the product image, while the waste can also give additional income to the company. The International Federation of Accountants defines Environmental Management Accounting (EMA) as the management of environmental and economic performance through the development and implementation of appropriate environment-related accounting systems and practices [3]. EMA provides tools and methods to help managers assess the impact of measures taken to improve both corporate financial and environmental performance. EMA also systematically integrates environmental of the corporation into management accounting and decision making process and helps internal management to collect, analyze and communicate environmental-related monetary and physical information. In particular, it reveals financial benefits ad potential cost saving that can be gained from addressing environmental challenges facing the business. By identifying and reducing environmental costs, EMA can help to increase the profit margin and the market share of the organization. At the same time it supports the optimization of the organization's environmental performance and improves decision-making and stakeholder relation [4,5]. The EMA aims to identify the environmental damage, to measure the social and benefit cost, to report the environmental accounting, and to account the external problem quantitatively. EMA covers four important components that are (1) Physical Environmental Management Accounting (PEMA) and Monetary Environmental management Accounting (MEMA), (2) Historical and Future orientation, (3) Short and long term focus, and (4) General/routine and incidental information. The PEMA was stated as Material and Energy Flow Accounting (MEFA). MEFA was defined as material and energy flow from one to the next process and from external to internal process in the factory. The environmental impact measured in physical unit and physical value [6]. The frameworks of MEFA included identifying and classifying the material and energy input and output, analyzing the environmental impact, and formulating indicators. The MEMA was mainly about Environmental Cost Accounting (ECA). ECA was defined as recorded direct and indirect cost caused by the environmental impact. The ECA could identify and analyze costs related to the environmental and also investigate its source. These costs were: (1) Materials costs of product outputs includes the purchase costs of natural resources such as water, and other materials that are converted into products, by-products and packaging, (2) Materials costs of non-product outputs includes the purchase (and sometimes processing) cost of

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Journal of Applied Sciences in Environmental Sanitation, 5 (4): 403-410.

Evi Kurniati, Bambang Rahadi and Mohammad Danial, 2010. Implementing Environmental Management Accounting (Ema) In Improving Eco-Efficiency On Corporate Activities: Case Study On Sugarcane Company.

energy, water and other materials that become non-product output (waste and emission), (3) Waste and emission control costs includes handling, treatment, disposal of waste and emissions, remediation and compensation related to environmental damage, and any control-related regulatory compliance costs, (4) Prevention and other environmental management costs includes the cost of preventive environmental management activities such as cleaner production projects, environmental planning and systems, environmental measurement, communication and any other relevant activities, (5) Research and development project costs related to environmental issues, and (6) Less tangible costs includes both internal and external issues such as liability, future regulation, productivity, company image, stakeholder relations and externalities [7]. The environmental investment assessment aims to measure the potential benefits with effectiveness in cost. The assessment covers the investment cash flows, discounted, net present value (NPV), payback period (PP), and profitability index (PI) [2]. Eco-efficiency defined as ratio between the value of economic (held in MEMA) and ecological performance indicators (in PEMA) [2]. The translation of these concepts in company's activities such as: minimizing the material, energy and waste, extending product durability, improving recycle material, maximizing the use of renewable resources, and increasing the intensity of services. This research was conducted at one of sugarcane factories placed at Malang, East Java, Indonesia from September to December 2006. Founded in 1905, this factory can now deliver 60,000 tons sugar annually. MATERIALS AND METHODS Two types of data were required in this research such as data related to material and energy flow accounting (MEFA) and environmental cost accounting (ECA). The MEFA data covered input and output data along 8 month of year 2006 process season (April to December 2006). The input data covered raw material (sugarcane), additional material (imbibitions water), chemical component (i.e. sulfur, lime, etc.), package (sack), energy (electricity and steam), and direct labor. While, the output data were main product (sugar and molasses), solid waste (baggases and fly ash), waste water (i.e. COD and SO4), and gas emission (i.e. SOx, NOx, H2S, NO2, CO, and particulate matter). The ECA data covered direct cost of environmental activity such as procurement cost of raw material, auxiliary material, package, waste treatment cost, energy consumption, environmental monitoring and reporting and other cost from the process. The data was then analyze with by following steps, (1) material and energy flow accounting (MEFA) including the potential environmental impact measurement, (2) environmental cost accounting (ECA), (3) determining the environmental performance index (EPIs) and the financial performance index (FPIs), (4) eco-efficiency analysis, and (5) developing alternatives in order to increase the performance index. MEFA gave information about material and energy balance that occurred on the process. MEFA usually presented in mass unit (grams, kilograms, or tons) of solid waste, waste water, and gas emission. The potential environmental impact was determined using CML- Centrum voor Milieukunde Universiteit Leiden method. This method was usually used on emission trade 405

Journal of Applied Sciences in Environmental Sanitation, 5 (4): 403-410.

Evi Kurniati, Bambang Rahadi and Mohammad Danial, 2010. Implementing Environmental Management Accounting (Ema) In Improving Eco-Efficiency On Corporate Activities: Case Study On Sugarcane Company.

measurement at multinational and companies in European Union (EU) area [8]. This method characterized and categorized thousands material that potential to endanger the environment such as global warming, eutrophication, acid rain potential, desertification and others. CML database covered the environmental impact measurement including the characterization factors of each of hundreds pollutant compound and its equivalent impact. This research used the physical data from MEFA such as SO2, NOx, H2S, NO2, CO, COD, SO4, and particulate matter from waste and air emission to determine the impact of human toxicity potential (HTP), acid rain potential (AP), photochemical oxidation potential (POCP), eutrophication potential (EP) and global warming potential (GWP). Characterization of impact factors as seen on Table 1. Table 1: Characterization of impact factors on CML method [8] Item HTP factor AP factor kg 1.4-DBC kg SO2 eq. (Dichlorobenzene) eq. 0.10 1.00 1.25 0.50 0.22 1.88 1.20 0.50 POCP factor kg Ethylene eq. 0.048 EP factor kg PO4 eq. 0.13 0.13 1.00 0.022 0.82 0.65 GWP factor kg CO2 eq.

SO2 NOx H2S NO2 CO COD Particulate matter SO4

RESULTS AND DISCUSSION Material and Energy Flow Accounting (MEFA) The total input mass was 1,392,936.59 ton, output mass 1,222,632.94 ton, and mass loss 170,303.94 ton. The total energy consumed was 22,566.07 MWh of electricity and 427,979.60 MWh of fuel energy. The total employees work was 43,836 day work or 156 day work, each. Material and Energy Flow Accounting (MEFA) was conducted at each process stages for the high accuracy of analysis. The process of sugar follows several steps such as milling, sap refining, evaporating, boiling, rotating, packaging, and storing. The materials usage of sugar process can be seen on Fig. 1. While, the water usage flow diagram can be seen on Fig. 2. The wastes of the process were solid waste, waste water and gas. The solid wastes such as cane pulp, fly ash and bagasse. The cane pulp used as firing in kettle/boiler station, fly ash that produced 50 tons/day used as land fill and fertilizer, and bagasse (4.34% from the total sugar cane input) used as bio-compos. The liquid wastes come from condenser cooling, washing process, and kettle blow down water. The waste water comes from cooling system that contain high acidity (4-5) and high temperature (50°C). The material and energy flow of the process can be seen on Fig. 3. It covers the input material and output material (includes wastes).

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Journal of Applied Sciences in Environmental Sanitation, 5 (4): 403-410.

Evi Kurniati, Bambang Rahadi and Mohammad Danial, 2010. Implementing Environmental Management Accounting (Ema) In Improving Eco-Efficiency On Corporate Activities: Case Study On Sugarcane Company.

Fig. 1: Flow process of sugar

Fig. 2: Water usage flow diagram 407

Journal of Applied Sciences in Environmental Sanitation, 5 (4): 403-410.

Evi Kurniati, Bambang Rahadi and Mohammad Danial, 2010. Implementing Environmental Management Accounting (Ema) In Improving Eco-Efficiency On Corporate Activities: Case Study On Sugarcane Company.

Fig.3: Material and energy flow of the sugar process in one process season (8 months) By using environmental impact factors on Table 1, the measured impact assessment can be seen on Table 2. Table 2: Environmental impact potential Item Total mass of waste (kg) HTP factor kg 1.4-DBC eq 681.08 2.06 0.031 1,792.20 AP factor kg SO2 eq. 7,094.55 0.83 0.26 746.75 POCP factor kg Ethylene eq. 340.54 EP factor kg PO4 eq. GWP factor kg CO2 eq.

SO2 NOx H2S NO2 CO COD Particulate matter SO4

7,094.55 1.65 0.14 1,493.50 8,966.40 410,640.54 47,261.26 17,507.38

0.22 194.16 8,966.40 9,034.92

38,754.23 11,379.80

The biggest impact comes from particulate matter that contribute human toxicity potential equivalent to 1.4 kg-DBC (Dichlorobenzene). The value was in normal level according to CML standard. 408

Journal of Applied Sciences in Environmental Sanitation, 5 (4): 403-410.

Evi Kurniati, Bambang Rahadi and Mohammad Danial, 2010. Implementing Environmental Management Accounting (Ema) In Improving Eco-Efficiency On Corporate Activities: Case Study On Sugarcane Company.

Environmental Cost Accounting (ECA) Environmental cost in environmental management accounting perspective defined as costs of objects that potentially to produce wastes including its preventive efforts [9,10]. The details of environmental cost either direct or indirect were covered in ECA. One of the methods was environmental cost iceberg method. This method used zero wastes scenario in order to estimate the hidden and transparent cost. Hidden costs defined as unreported costs such as incidental cleaning, extra cost of waste treatment and others. The environmental cost comes up from refining and kettle station. Environmental costs at refining station must be 195,246,985.38 IDR or 3,233.38 IDR per ton of wastes. It was higher than the real cost. The real cost is 571,036,705.38 IDR or 9,456.63 IDR per ton of wastes with the hidden cost reached 65.81%. While, the environmental costs at kettle/boiler station must be 30,231,635.50 IDR or 3,233.38 IDR per ton of wastes. The real cost is 150,401,058.45 IDR or 16,085.68 IDR per ton of wastes with the hidden cost reached 79.9%. The hidden cost might be come from dust collector's cleaning, labour cost of fly ash treatment and others. The total environmental counted cost was 25,542.3 IDR per ton waste or 4.82% of production cost. Mostly was hidden cost that is 19,075.6 IDR or 74.68% of the total environmental cost. Eco-efficiency Performance Eco-efficiency performance was measured through the comparison between environmental performance indicators (EPIs) and the financial performance indicators (FPIs). It determined according to the company's target. The EPIs measured from the process efficiency (output-input comparison) because of its related to total amount of mass loss from process that will converse into waste. The FPIs measured from the ratio between gross margins with company's profit from product. The eco-efficiency graphic can be shown on Fig. 4. The graphic showed that the company's initial position was on high EPIs (86.07%) but low FPIs (40.07%).

Fig.4: Eco-efficiency portfolio In the concept of 3R (reduce, reuse, and recycle) waste will have value added either financially or environmentally. Fly ash may have opportunity as added value to the company. Fly ash needs high costing management such as transporting, land filling and treating. Alternative 409

Journal of Applied Sciences in Environmental Sanitation, 5 (4): 403-410.

Evi Kurniati, Bambang Rahadi and Mohammad Danial, 2010. Implementing Environmental Management Accounting (Ema) In Improving Eco-Efficiency On Corporate Activities: Case Study On Sugarcane Company.

proposed was recycling fly ash as a paving block. The composition must be 15% cement, 15% fly ash, and 70% sand in order to reach the best quality. This proposal reduces about 10% of fly ash total mass produced and would become about 950,000 paving block. Four paving press machine was needed for the investment operated by 8 workers. The profit sets as 20% of the production costs. The alternative investment was feasible, because it has positive value of NPV (50,576,588.69 IDR), 10.44 months payback period, and 3.26% profitability index. The proposed alternative could increase the FPIs to 43.33%. It was still in low FPIs (less than 50%). Therefore, the company must consider the other alternative of production efficiency such as increasing the percentage of sugar yield (from 7.22% into 7.7%), thrifting the production costs (10% of former production costs), and/or minimizing mass loss from production (from 13.93% into 7%). These alternatives could increase the FPIs into 55.33% (Fig. 4). CONCLUSIONS The biggest impact comes from particulate matter that contribute human toxicity potential, equivalent to 1.4 kg-DBC (Dichlorobenzene), but the value was still in normal level according to CML standard. The total environmental counted cost was 25,542.3 IDR per ton waste or 4.82% of production cost. Mostly was hidden cost that is 19,075.6 IDR or 74.68% of the total environmental cost. The company has low financial performance (40.07%) and high environmental performance (86.07%). The alternative investment was feasible, because it has positive value of NPV (50,576,588.69 IDR), 10.44 months payback period, and 3.26% profitability index. The proposed alternative could increase the FPIs to 43.33% and EPIs into 86.18%. The other considering proposed alternative of increasing the production efficiency could increase the FPIs into 55.33% and the EPIs into 93.09%.

References 1. Irawan, A. B., 2001. Analisa Kemungkinan Penerapan Environmental Costing di Indonesia (Possibility Analysis of Environmental Costing Application in Indonesia). Jurnal Lintasan Ekonomi (Lintasan Ekonomi Journal). XVII (1). 2. Herzig, C. and T. Viere, 2004. Environmental Management Accounting (EMA) for Small and MediumSized Enterprises. Centre for Sustainability Management (CSM), University of Lueneburg. Germany. 3. International Federation of Accountants (IFAC), 1998. Environmental Management in Organizations. The Role of Management Accounting. Study 6. New York. 4. Schaltegger, S. and R. Burritt, 2000. Contemporary Environmental Accounting, Issues, Concepts and Practice. Greenleaf Publ., London. 5. Germany Federal Ministry for the Environment and Federation of Germany Industries (Eds.), 2002. Sustainability Management in Business Enterprises. Concept ad Instruments for Sustainable Development. Germany Federal Ministry for the Environment. Berlin. 6. Burrit, R., T. Hahn and S. Schaltegger, 2002. Towards a Comprehensive Framework for Environmental Management Accounting, Links between Business Actors and Environmental Management Accounting Tools. Australian Accounting Review 12(4):93-109. 7. Savage, D.E. and C. Jasch, 2005. International Guidance Document Environmental Management Accounting. International Federation of Accountant (IFAC). New York. USA. 8. Guinée, J.B., M. Gorrée, R. Heijungs, G. Huppes, R. Kleijn, A. de Koning, L. van Oers, A. Wegener Sleeswijk, S. Suh, H.A. Udo de Haes, H. de Bruijn, R. van Duin, M.A.J. Huijbregts, 2002. Handbook on life cycle assessment. Operational guide to the ISO standards. Kluwer Academic Publishers, ISBN 1-4020-0228-9, Dordrecht, 2002, 692 pp. 9. Anshari, S., J. Bell, T. Klammer, and C. Lawrence, 1997. Measuring and Managing Environments Cost. Irwin. Chicago II. 10. Balley E. P., 1991. Full Cost Accounting for Life Cycle Cost A Guide for Engineers and Financial Analysis. Environmental Finance Spring.

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