DETERMINING ENVIRONMENTAL COSTS IN VIETNAMESE ENTERPRISES - CASE STUDY OF VIGLACERA HALONG JOINT STOCK COMPANY

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1 DETERMINING ENVIRONMENTAL COSTS IN VIETNAMESE ENTERPRISES - CASE STUDY OF VIGLACERA HALONG JOINT STOCK COMPANY Nguyen Thi Huong Lien Nguyen Thi Hong Thuy Nguyen Hoang Thai ABSTRACT By collecting and processing secondary data, this study determined the environmental costs of Viglacera Ha Long Joint Stock Company based on the Environmental Management Accounting (EMA) method and compared the outcome with the traditional method. The result indicates that environmental cost under the EMA method is two times greater than the one determined under traditional cost, in which the major difference is resulted from environmental protection and management, raw material costs of non-product outputs and non-product outputs treatment cost. Based on the information about the environmental cost provided, the management of Viglacera Ha Long will apply the necessary improvement to mitigate waste, reduce selling price, enhance product quality and competitive position, contribute to environmental improvement and build up the image of green business. Key words: Environmental Costs, Environmental Management Accounting, Raw Material Cost of Non-product Outputs, Nonproduct Output Treatment Costs. Introduction Nowadays, businesses have realised that maximizing profits at all costs is no longer the most effective way to maintain and enhance the business competitive advantage. The growing importance of environmental issues has put pressure on companies to look for new, creative and cost effective ways to manage and mitigate environmental impacts in a sustainable manner. In addition, there is also an increasing consensus that traditional costing system does not adequately account for the actual environmental costs incurred by companies as much of these costs were hidden under overhead accounts. Therefore, it does not provide accurate information for decision-making to manage the environment (Christ and Burrit, 2013). Environmental management accounting (EMA) can be defined as the generation, analysis and use of financial and non-financial information in order to optimize corporate environmental and economic performance and to achieve sustainable business (Bennett et al., 2002). Frost and Wilmhurst (2000) argue that without the implemention of environmental management accounting, businesses have missed cost cutting opportunities, failed to accurately determine selling price, and could not make the right business decisions. This results in reducing the quality of customer service, while increasing the risk of investments and other decisions with long-term consequences. According to the United Nations Division of Sustainable Development (UNDSD, 2001), EMA refers to identifying, collecting, analysing and using two types of information for internal decision making including physical information about material, energy and water flow balances, and monetary information about environment costs, benefits and savings related to the environment. At the business level, EMA includes the identification and management of environment costs and other product costs, thereby considering the impact of business operations on the environment. In Vietnam, several studies focus on the benefits of EMA, model of identifying, recording and managing environmental costs, environmental reporting and disclosure. Nguyen (2005) in the study of applying environmental management accounting methods in small and medium enterprises in Hanoi shows the benefits of applying EMA including accurate management of raw materials, energy and wastes in the production process; more correct estimation of solid waste and water waste; better analysis of the financial situation and the benefits of the environmental protection activities at the enterprise and better monitoring the envionment in the course of business production. Le (2015) finds that environmental reporting made by Vietnamese listed companies on their web sites and in the annual reports is of relatively low quality with mostly positive and descriptive disclosure. Another research of Bui (2010) on the model of managing and recognizing environmental costs in Vietnamese coal mining enterprises proposes a general model for environmental cost management based on the three main activities including direct environment protection, mineral resources exploitation, and other activities. The model helps to identify a partial hidden environmental costs and recalculate product costs by taking environmental issues into account. Besides, Ha (2014) attempts to identify, categorize and record several types of environmental costs, income and savings from environmental activities, and set the preliminary framework for Vietnamese firms environmental report. However, limitation of these studies is the lack of a consistent method used to determine environmental costs in both physical and monetary terms with regard to material, energy and water flow balances. 26

2 Viet Nam sustainable development strategy for is to maintain a sustainable economy which closely and harmoniously combines with social development, natural resources and environmental protection. Companies undertaking business operations are required to take environmental issues into consideration to meet the needs of stakeholders including customers, suppliers, creditors and authorities. EMA studies around the world have indicated potential benefits from the application of EMA, such as EMA helps to identify and estimate the costs incurred from environment-related activities and seek to control these costs, identify and monitor the usage and cost of resources including water, electricity and fuel and enable these costs to be reduced, etc., (Kaplan Financial, 2012). In Vietnam, research on EMA is still a new topic, especially there is a lack of research on EMA at the corporate level to facilitate the identification and determination of the environment costs so as to create a precondition for business to execute the sustainable development strategy, reduce the negative impacts on the environment. By collecting and processing secondary data, this study identifies the environmental cost under EMA method and compares the results with traditional method, helps the management to fully identify and accurately recognize the environment costs. The secondary data collected including financial statements, accounting books, production reports in 2015, the indicators of environmental pollution and policies related to environmental protection of a specific company, Viglacera Ha Long Joint Stock Company. The Environmental Costs Identification Method According to the traditional methods, businesses are less likely to focus on the environmental costs as many of environment costs are hidden in manufacturing overhead costs. According the United Nations Division of Sustainable Development (UNDSD, 2001), the traditional accounting system accounts for the environmental costs as general operation costs. As a result, production managers have no incentive to reduce environmental costs, and the executives are often unaware of the importance of environmental cost. When the environmental costs are included in the general operation cost and distributed to all the product lines, low environmental cost products will bear the additional cost. This results in inaccurate selling price which reduces the profitability of these products. According to UNDSD (2001), environmental costs include: - Waste treatment costs: including depreciation of related equipment, maintainance, warranty, and services; external service charges, taxes, penalties, compensations for damage, researve for cleaning cost, rehabilitation cost. - Expenditures for environmental protection and management: including external labour costs and services costs, environmental management activities, research and development cost, extra cost for learner technologies and other costs. The next two costs will be related to the cost of materials, capital and wasted labour due to ineffective production producing waste and emissions. - The cost of purchasing raw materials for non-product output: waste and emission have extremely high treatment cost. - Cost of processing non-product output: a part of non-product output (low quality) needs to be reprocessed or used as input into another process. Processing costs incude labour costs, depriciation, technology and equipment investment. Determine Environmental Costs under EMA Method at Viglacera Ha Long JSC The reason for choosing brick manufacturing industry to apply EMA method is that it is the industry to consume natural resources and potentially destroy the environment. Brick factories with drying towers and burning kilns have discharged a large amount of exhaust air containing carbon dioxide and fluorine into environment. Viglacera Ha Long Joint Stock Company is therefore considered likely to cause environmental pollution during the production process. Introduction about Viglacera Ha Long Joint Stock Company Viglacera Ha Long Joint Stock Company, a precursor of Ba Lan Brick Factory which was established in 1978 is a member of Viglacera Glass and Ceramics Corporation. The main business of the company is to produce products from clay, exploit and trade in construction materials, design consultancy, application, transfer technology of construction material production. With the goal and mission to provide high quality products of roof tiles, clay tiles, ceremic tiles, during the past years, Viglacera Ha Long JSC is the leading company in building material industry in Vietnam. At present, Viglacera Ha Long JSC is the pioneer in applying and transferring new modern technology into production of new products, such as clinker bricks, ceramic tiles. Flow chart of materials and energy In order to apply EMA, it is necessary to understand the flow chart of raw materials and wastes generated at production process stage, the causes of wastes generation to calculate the hidden environmental costs. Based on flow chart, the input - output table of the company is set up as follows: Table 1: Input- output table of Viglacera Ha Long JSC 27

3 Input Output Material Product + Clay + Brick + Coal + Comedy + Tile Fuel Waste + Diesel oil + Waste water + Electricity + Air emissions + Water + Defective products + Noise + Waste + Dirt (Source: Viglacera Ha Long JSC's financial statements and environmental monitoring report in 2015) Table 2. Costs and revenue of Ha Long Viglacera Joint Stock Company in 2015 (Unit: VND thousand) No. Indicators Cost 1 Direct cost of production - Main material + Clay + Coal - Fuel - Labor 2 Overhead costs - Depreciation and amortization - Electricity - Water - Cost of waste treatment 862,209, ,813, ,569,427 30,190, ,636, ,054, ,957,500 56,980,363 3,920,480 16,313, ,883,092 - Other overhead costs 3 Administration cost 54,661,000 4 Selling cost 118,203,000 5 Total costs 1,439,128,250 6 Revenue 1,561,480,000 Determine environmental costs by traditional method (Source: Viglacera Ha Long JSC's financial statements in 2015) According to the traditional method currently applied by the company, environmental costs are tangible or end-of-pipe costs, including the cost of solid waste treatment. The total cost of waste disposal of the company is shown in the Table 3 below. - Cost of waterwaste treatment: During the process of forming (kneading, clay mixing and brick making) and daily activity, the company discharges large amounts of wastewater which needs to be treated and filtered before being discharged into the environment. The cost of wastewater treatment for the whole process of production and living includes annual depreciation of water treatment system, drainage and dredging drain with a total value of VND 1,224,479 thousand, maintenance costs of VND 279,466 thousand, labour cost of VND 720,000 thousand. - Cost of solid waste treatment: solid waste including surplus clay, and brick waste is transported to grind and used for remanufactured additivesis. This cost includes the annual depreciation of waste landfillers, removal of soil, transportation and storage of clay and coal by VND 1,332,121 thousand; maintenance of VND 237,710 thousand, transportation costs of VND 2,585,996 thousand. - Cost of exhaust emission treatment: mainly generated in the burning stage which generates CO2, dust and other emissions. At this stage, the company has invested in ventilation equipment technology, vacuum cleaner, spray dust system, smoke exhaust exhaust gas, greenhouse using solar heat to dry bricks, home tunnel, etc. This cost includes annual depreciation of machines and houses of VND 6,095,275 thousand; maintenance of VND 2,038,016 thousand and salary for workers of VND 1,800,000 thousand. Table 3. Waste Treatment Costs of Viglacera Halong Joint Stock Company No. Waste Treatment Costs Unit Cost 1 Wastewater treatment cost VND thousand 2,223,945 2 Solid waste treatment cost VND thousand 4,155,827 3 Gas waste treatment cost VND thousand 9,933,291 Total Cost VND thousand 16,313,063 28

4 It can be observed that the environmental management policy of Viglacera Ha Long focuses on the cost of end-of-pipe processing but has not identified other hidden environmental costs. Therefore, Viglacera Ha Long needs to fully account for environmental costs in order to accurately determine product costs, ensure that products that generate less environmental costs do not bear other additional costs. Determine the environmental costs under the EMA In the financial report in 2015, the company only identifies the costs of end-of-pipe treatment as environmental costs without realizing that other environmental costs are hidden in product costs. In this section, hidden environmental costs will be fully detected following the EMA approach including the following four environmental costs. (1) Waste treatment cost - Depreciation of related equipment: Include pipeline end-of-pipe treatment equipment to minimize the environmental impact of waste and emissions such as depreciation of waste water treatment equipment of VND 1,224,479 thousand, emission of VND 6,095,275 thousand and depreciation of solid waste disposal equipment of VND 1,467,136 thousand. - Maintaining equipment, raw materials and services include maintenance costs for wastewater treatment equipment of VND 279,466 thousand, gas waste of VND 2,038,016 thousand, solid waste of VND 102,695 thousand. - Labour cost including costs for cleaning workers of VND 144,000 thousand; weeding, planting trees of 120,000 thousand; workers operating wastewater treatment equipment of 720,000 thousand; gas waste of VND 1,800,000 thousand, transportation of solid waste of VND 2,585,996 thousand. - External services, fees and taxes: the company annually pays environmental protection fees for industrial wastewater of VND 20,758 and natural resource of VND 562,400 thousand. - Fines and compensation fee: The company has not been fined or paid any compensation related to environmental issues. - Environmental legal liability insurance: Vietnam companies in general and Viglacera Ha Long Joint Stock Company in particular have not applied liability insurance for environmental issues such as insurance of damage environment. - Contingencies for cleaning and rehabilitation expenses: At present, the company has no provision for cleaning and rehabilitation expenses. Table 4. Summary of costs related to waste disposal costs No. Items Costs 1 Depreciation of related equipment 8,786,889 2 Maintenance of equipment, materials and services 2,420,178 3 Labor costs 5,369,996 4 External services, fee and taxes 583,158 5 Penalties and compensation cost 0 6 Liability insurance for the environment 0 7 Provisions for cleaning and restoration costs 0 Total Cost 17,160,221 (2) Costs for environmental protection and management - External services for environmental management: Viglacera Ha Long signed a contract with Ha Long Urban Environment Company to collect waste daily at the end of the day at the cost of VND 62,000 thousand per year. In addition, the company also has to pay dirt reduction water spraying system and cleaning factory of VND 10,698 thousand; electricity for spray system of VND 7,200 thousand and cleaning equipment of 60,573 thousand for the year Human resources for environmental management in general: because there is no worker in charge of environmental management, there is no cost. - Research and development costs: The company does not have any research activities related to environmental issues. - Additional costs for cleaning technology: The company does not have a cleaner production program. - Other environmental management costs include the annual wages of environmental experts who observe the measurement of waste gas, wastewater, noise and air to report the current status of the environment to the Quang Ninh Department of natural resources of VND 54,000 thousand; fire and explosion prevention equipment of VND 53,933 thousand; the annual medical test fee for employees of VND 712,760 thousand and the cost of protective clothing of VND 3,977,439 thousand. Table 5. Summary of environmental protection and management costs 29

5 No. Environmental protection and management costs Cost (VND thousand) 1 External services for environmental management 140,471 2 Human resources for environmental management activities in 0 general 3 Research and development 0 4 Additional funding for cleaner technology 0 5 Other environmental management costs 4,798,132 Total costs 4,938,603 (3) Cost of raw materials of non-product output Table 2 summaries the Company's expenses and revenue, it can be seen that the raw material cost accounts for a large proportion of 55.27% of the total direct cost. Through the interviews with the company's chief accountant, the loss of raw materials in production was about 1.5%. Thus, it is clear that the cost of raw materials that produce non-products is a significant number that businesses often overlook when determining environmental costs. In addition, the value of waste packaging is not recyclable when buying fuels such as diesel oil, peanut oil, and sand. Chemical and chemical packaging such as glue, manganese, chemical additives, paint, etc., put into production that make up the waste is also the environmental cost (estimated consumption of packaging is 1%). Table 6 shows details of each material cost non-product of Viglacera Ha Long. Table 6. Cost of raw materials of non-product output No. Non-product output materials Cost 1 Clay (1.5%) 1,722,196 2 Coal (1.5%) 4,973,541 3 Diesel oil (1.5%) 452,859 4 Packaging (1%) 172,249 5 Operating Materials (1.5%) 195,018 6 Electricity (1,5%) 854,705 7 Water (1,5%) 58,807 Total costs 8,429,375 (Source: Calculation from Viglacera Halong Financial Report 2015) (4) Cost of processing non-product outputs The company utilizes non-product to crush as additive to recycle, so this cost includes depreciation of grinding machines, maintenance and salaries for operators. Table 7. Cost of processing non-product outputs No. Cost of processing non-product outputs Cost 1 Depreciation of the crushed machine 1,360,171 2 Maintenance 272,034 3 Salary for operators 162,000 Total Cost 1,794,205 Table 8. Summary of environmental costs No. Environmental costs Cost 1 Cost of waste treatment 17,160,221 2 Prevention and environmental management 4,938,603 3 Cost of non-product output 8,429,375 4 Cost of processing non-product outputs 1,794,206 5 Total Cost 32,322,405 Therefore, the EMA method has extracted environmental costs into the four types of costs in which some of costs are hidden under traditional costs. Table 9 illustrates the cost difference between the EMA method and the traditional method. 30

6 Table 9. Environmental costs according to EMA and traditional methods EMA method Traditional method Thousand VND Ratio (%) Thousand VND Waste treatment cost 17,160,221 53% Waste treatment cost 16,313,063 -Depreciation 8,786,889 -Depreciation 8,786,889 -Maintenance 2,420,178 -Maintenance 2,420,178 -Labor cost 5,369,996 -Labor cost 5,105,996 -Provision and services 583,158 Environmental protection and 4,938,603 15% management Cost of non-product output 8,429,375 26% materials Cost of processing non-product 1,794,205 6% outputs Total 32,322, % Total 16,313,063 The environment cost calculated based on EMA is approximately 2 times higher than traditional methods. According to traditional method, the environmental cost is the total cost of waste disposal, whereas under the EMA this expense represents only 53% of the total environmental cost and environmental protection and management account for 15%, 26% of the cost of non-product materials respectively and 6% of non-product output costs. This shows that Viglacera Ha Long only recognizes the end of pipe treatment costs, other environmental costs are hidden in the direct cost and overhead of production process. If the costs of raw materials, fuel and packaging of non-product outputs (currently accounting for 26% of total environmental costs) are properly considered, the management is able to reduce loss of materials, thereby reducing the selling price, improving the company s competitive advantage. Moreover, if the cost of non-product output is reduced, the waste treatment costs and the treatment cost of non-productive outputs will also decrease accordingly resulted in the reduction of costs and negative impact on the environment. The research provides a specific case of Vietnamese manufacturing enterprise using EMA method to determine environmental costs. The case of Viglacera Halong is considered a typical study for other companies to follow EMA to achieve better cost control, reputation improvement and sustainable development. EMA method guided by UNDSD (2001) shows total environmental costs at the corporate level as environmental protection costs including emission treatment, pollution prevention plus costs of wasted materials, wasted capital and labor. Waste in this context means production inefficiency, therefore the identification and measurement of waste may help the company to minimize waste and increase production efficiency. Moreover, fully determining the environmental costs is an important condition for businesses to adopt modern management accounting tools such as input/outflow analysis, flow cost accounting, activity-based costing, and lifecycle costing. For example, combining environmental cost determination with activity-based cost accounting helps businesses to allocate production costs more appropriately and determines cost per product more accurately than the traditional methods. Based on the understanding of environmental costs combined with professional experience, managers of Viglacera Ha Long will apply the necessary improvement measures to minimize waste and help reduce costs, improve product quality, enhance the competitive position, contribute to improving the environment and build up the image of green business. However, further research needs to be done to find out obstacles and applicable conditions for the adoption of EMA in Vietnam. Acknowledgements The research is financed under the project number B References Bui Thi Thu Thuy (2010), Study of the Model of Managing and Recognizing Environmental Costs in Vietnamese Coal Mining Enterprises, Doctoral Dissertation, Hanoi University of Mining and Geology. Bennett, D., Bouma, J. J., and Wolters, T. J. (2002). Environmental Management Accounting: Informational and Institutional Developments: Springer. Christ, K.L, R.L. Burrit (2013). Environmental management accounting: the significance of contingent variables for adoption. Journal of Cleaner Production. 41, EMA-SEA (2007), Environmental Management Accounting for South-East Asia, downloaded on April 15 th from Capacity Building International, Germany. Frost, G. and Wilmshurst, T., (2000), The Adoption of Environment-Related Management Accounting: an Analysis of Corporate Environmental Sensitivity, Accounting Forum 24 (4): , Business Source Premier. Ha Xuan Thach (2014), Oriented Development of Environmental Management Accounting in the Vietnamese Accounting System, Proceedings of the International Conference Accounting and Auditing in the Process of Reform and Integration, Danang University, Vietnam. 31

7 Kaplan Financial Knowledge Bank (2012), Environmental Management Accounting, downloaded on June 10 th from Le Ngoc My Hang (2015), Accounting for Sustainable development: an Examination of Corporate Environmental Disclosures by Vietnamese Listed Firms, International Conference on Accounting N , Danang University, Vietnam. Nguyen Chi Quang (2005), Study of the Application of Environmental Management Accounting in SMEs in Hanoi, Institution of Science and Environment Technology - Hanoi University of Science and Technology. United Nations Division for Sustainable Development (2001), Environmental Management Accounting Procedures and Principles (EMARIC Environmental Management Accounting Research and Information Center). Nguyen Thi Huong Lien VNU, University of Economics and Business E4, 144 Xuan Thuy, Hanoi, Vietnam liennth@vnu.edu.vn Nguyen Thi Hong Thuy National Economics University, School of Accounting - Auditing 207 Giai Phong, Hanoi, Vietnam thuynhkt@neu.edu.vn Nguyen Hoang Thai VNU, University of Economics and Business E4, 144 Xuan Thuy, Hanoi, Vietnam nht0308@gmail.com Pham Le Ngoc Phuong VNU, University of Economics and Business E4, 144 Xuan Thuy, Hanoi, Vietnam phuongpham895@gmail.com 32