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3/5/2004 Green Budget Matrix Model 1

Green-Budget Matrix Model:Theory and Practices

EMAN-EU 2004 Conference

(March 2004)

Yoshihiro ITO (Kobe University),

Hiroyuki YAGI (Yokohama National University) andAkira OMORI (Aichi Gakuin University)


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A Structure of Presentation

1. Introduction

2. Necessity of Environmental Budgeting in Firms

3. Theory of the Green-Budget Matrix Model

4. Case Studies at Japanese Firms

5. Conclusion


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Working Groups on EMA (METI Project)

WG1: Tools for Environmental Capital Investment

Decision Making

WG2: Tools for Environmental Cost Management

WG3: Material Flow Cost Accounting

WG4: Environment Oriented Life Cycle Costing

Authors were engaged in WG2

Prof. ITO was the chairperson of WG2.

1. Introduction


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2. Necessity of Environmental Budgeting

in Firms

Corporate budgeting is useful to internal management.

Three roles of budgeting.

(1) Planning, (2) Control, and (3) Coordination

From the viewpoint of environmental conservation

activities,

A lot of economic resources are invested in these activities.

There are need to formulate a budget to accomplish target

which are set at the beginning of the fiscal year.


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There are many Japanese corporations that haveformulated and implemented environmentalaccounting. (From a survey of MOE)

355 listed corporations(2002)



But a few corporations have introduced environmentalbudgeting into their environmental accountinginformation systems (From a survey of YokohamaNational University).

Some evidences supports the contention that budgetingfor environmental conservation activities plays a usefulrole in their management.

2. Necessity of Environmental Budgeting in

Firms (continued)


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What is the Green-Budget Matrix Model (GBMM)?

An approach which adapts the framework of the quality

cost matrix model to environmental cost management.

The aims and/or objectives of the model.

Reduction of environmental costs.

Reduction of environmental burden.

Generation of various information which will support

environmental activities.

3. Theory of the Green-Budget Matrix Model


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Classification of Environmental Costs used in the

GBMM.

3. (continued)

The expenses for monitoring

environmental effects that a firm is

responsible for, and the checking

and inspecting expenses to prevent

the designing, developing and

shipping of environmentally

harmful products.

Environmental

appraisal costs

TheEx ante expenses designed to

prevent environmental problems

from arising and to reduce future

outlay.

Environmental

conservation costs


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The losses borne by community or

residents. These losses are causedby inadequacies in a firms

environmental conservation

measures, inspection procedures and

so on.

External

environmentallosses

The losses caused by imperfectenvironmental conservation

measures, inspection and so on.

Internalenvironmental

losses


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Structure of the GBMM and the Process of

Preparing the Matrix

C1

C2

C3

C4 - - - - Cm

L 1(*1) - Rij (*2) - - - - - - - - - - - - -

L 2 - - - - - - - - - - - - - - -

L 3 50 - -

1.2/4.0

0.4/4.0

-

2.0/4.0 -

0.4/4.0

- 5 10 4 20 4.0

- - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - -

- - - - - - - - - - - - - - - -

L n - - - - - - - - - - - - - - -

500 100%

Total

Total

(*1)

(*2)

(*3) Wai = Absolute weight ( i = 1.2.n )

Li = Environmental internal and external losses (i = 1.2..n )

Rij = Correlation between costs and losses (j = 1.2..m )

Total absolute

weight

Evaluation

weightof

losses

Environmental conservation costs (Cj) (j = 1. 2..m )

(+Environmental appraisal costs)

Materiality

Targeted

amountof

losses

Estimated environmental costs

and/or losses

Actual environmental costsand/or losses

Green budget weight

Difficulty

Absolute

weight

Internal

environmental

losses

External

environmenta

llosses

Actual

amount

Details of

expenses

Details ofactivities

(Wai)

(*3)


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Process of Preparing the Matrix

(1) Identifying the details of internal environmental losses

and external environmental losses.(2) Evaluating materiality of each detail of losses.

(3) Setting targets by each detail and evaluating each

difficulty to accomplish the targets.

(4) Deciding absolute weight and evaluation weight of losses.

(5) Deploying the details of environmental conservation

costs.

(6) Evaluating the relationship between cost and loss in each

cell.

(7) Calculating green budget weight.(8) Environmental budgeting.


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(1) Identifying the details of internal environmental

losses and external environmental losses.

Necessary to classify internal and external

environmental losses systematically and to accurately

ascertain these amounts and quantities.

(2) Evaluating materiality of each detail of losses. Materiality = The priority given to tackling the

problem depending on seriousness or the situation of

the firm.

The materiality are evaluated according to a five-

point scale for each detail of losses.


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(3) Setting targets by each detail and evaluatingeach difficulty to accomplish the targets.

First, the next periods targets are determined by

each details loss. Next, the difficulty will be evaluated according to

the five-point scale.

(4) Deciding absolute weight (Wai) and evaluation

weight of losses. First, the absolute weight is calculated by

multiplying the materiality and difficulty by eachdetail.

Next, sum all the details, and then calculate theevaluation weight of losses.

=

=

=n

i

niwa

WaiEW

1

).....2.1(


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(5) Deploying the details of environmental

conservation costs.

The details of environmental conservation costs andappraisal costs are arranged on the column in the

matrix.

(6) Evaluating the relationship between cost and loss

in each cell. (strong correlation), (moderate correlation),

and (weak correlation) for each cell.

Next, the marks could be converting to numerical

values, as 5 points, as 3points and as1point.


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(7) Calculating the green budget weight.

The numerical values of each cell are added by each

columns.

(8) Environmental budgeting.

Total amount of environmental conservation costs are

allocated proportionally to each detail by ratios of the

green budget weight.

Consequently, the targeted costs for the

environmental conservation (and appraisal) activities

could be determined.


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4. Case Studies at Japanese Firms4-1. A Case study at Nitto Denko Corp.

Nitto Denko is a industrial tape manufacturing firm.

Nitto Denko has applied environmental accounting to

environmental budget since fiscal year 2000. (Nitto

Denko Corp., 2003, 21)

Why Nitto Denko introduced the Matrix? Nitto Denko has already introduced the PAF classification as

a support tool to quality improvement.

Nitto Denko is pursuing to reduce the value of industrial

wastes, hence, it is important to measure failure costs or

environmental losses.


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Nitto Denkos case (continued)

Nitto Denko selected a division to make trial of the

matrix.

Usefulness of the matrix to the firm.

Managers can understand the correlation between

environmental impact costs and environmental

conservation costsby using the matrix.

The matrix can lead managers to grasp and solve some

environmental related problem within the division.

The matrix can be connected with material flow cost

accounting that the firm already introduced.

Hence, using both tools can contribute to clear up thecauses of the generation of wastes, and to plan and

analyze improvement measures.


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Green-Budget matrix prepared by a division of Nitto Denko Corp.

Details of expenses

Actual

amount

%

SOx levy 308.0K Y 1 300K\ 3 3 2.1

(Materials containing sulfer)

Value of industrial 374.8M Y 5 337M\ 5 25 17.6(Ori inal estimation)

Energy 129.4M Y 4 128M\ 4 16 11.3

Organic solvents 70.6M Y 4 64M\ 5 20 14.1

Water 3.6M Y 1 3.6M\ 3 3 2.1

0 0.0

Waste recycling rate 98% 3 100% 3 9 6.3

Value of industrial

waste ratio9.5% 5 8.4% 5 25 17.6

Consumption of energy

er roduct unit843L/M\ 4 831L/M\ 4 16 11.3

(l/million yen)

7.8% 5 4.5% 5 25 17.6

10.2 2.8 0.2 6.8 8.5 2.1 7.1 13.3 16.9 13.9 18.2 142 100%

12,263 3,394 254 8,219 0 10,199 2,563 8,462 1 5,950 0 0 0 0 0 20,222 16,687 2 1,787 0 0 0 Total KY

11,660 2,817 841 7,539 0 8,663 2,562 7,811 1 7,646 0 0 0 0 0 16,387 14,061 1 6,548 0 0 0 Total KY

Multiplying the materiality and difficulties by each detail.

Sum all details, and then calculate the environmental weight of losses that can be calculated to make the vokume of each detail re-

The numerical values of each cell are added by each detail of the environmental conservation costs.

The grade could be assigned numerical values, such as (3point), (2point), and (1point), and then allocate the weight of the environmental losses to each

cell by each row in the work sheet proportionally.

Environmental weight of

Environmental conservation

costs:

Environmental budget weight:

Notes:

Environmental budget weight

120,000

106,535

Budgeted amount of current period (plan)

Actual amount of previous period

Total

absolute

Internalenvironmental

losses

(monetaryconversion)

Lossescausedbyinefficie

ntuse

ofresources

Losses of corporate prestige

Externalenvironmentallosses

(Massconversion)

Voluntary

Solvent emission ratio

P

ersonnelexpenses

Environmental

p

rotectionactivities,

includingnature

conservation,plantingof

D

onationorfinancial

sup

portofenvironmental

groups

Disclosing

environmental

informationand

environmental

Recyclingwastes

Othecostcontributing

to

resourcecirculation

O

pperationalcosts

Absolute weight:

Otherglobal

environmental

c

onservationcosts

Theefficient

uti

lizationofresources

Conservationofwater

andtheutilizationof

rainwater

Appropriate

d

isposalofwastes

Preventingair

pollution

Preventingwater

pollution

Preventingother

t

ypesofpollution

Energysaving

Difficulty

Absoluteweight

Environmentalweight

oflosses

Pollution

prevention costs

Global

environmental

conservation

Resource circulation costs

Thedefference

betweenthecostof

conventionally

purchacedmaterials

orservicesand

thecostofthose

materialsands

ervicesprocured

throughgreenpurchasing

Thecollectionandrecycling

ofus

edproducts

Providing

environmentally

friendlyproductsand

s

ervicies

Additional

costforreducing

theeniron

mentalimpactof

container

sandpackaging

Environmental conservation costs

Materiality

Targetedam

ountoflosses

Admin

istrationcosts

R&D

costsSocial activity costs

Details of activities


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4-2. Other Pilot Projects of GBMM

(1) Toyo Seikan Kaisha Ltd.A packaging container manufacturing company.

(2) Toshiba Corporation.

An integrated manufacturer of electrical and electronicproducts spanning.

(3) Kyushu Electric Power Co. Inc.

An electric power company.

(4) Nissan Motor Co. Ltd.

A automobile manufacturing company.

(5) Kirin Brewery Co. Ltd.An alcohol beverage manufacturing company.


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Toshiba (Toshiba, 2003, pp. 10-11)

Estimated and disclosed their environmental benefits

by monetary term.

Closely related to external environmental losses.

39,61218,16821,444Total

3,4629502,512The extent to which risks are reduced after theinvestment compared with before the investment is

calculated

Risk preventionbenefits

6,8675,3161,551Reduction of environmental impacts at the usage

phase expressed in monetary value

Customer

benefits

22,70910,46712,242Benefits concerning reduction in environmental

impacts expressed in monetary value

Assumed benefits

6,5741,4355,139Benefits that can be directly converted into

monetary value, such as reduced charges for

electricity, water, etc.

Actual benefits

TotalAffiliatedcompanies

ToshibaDetailClassification


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5. Conclusion Quite a few firms have exclusively focused on the

external reporting aspect of environmental accountingin Japan.

They also estimate environmental budget in the nextfiscal year.

However, sophisticated future action-plan for theirenvironmental management has not made yet in manyJapanese firms.

Therefore, the success of EMS cannot be expectedwithout having;

An action-plan which provides a map for driving activities,and

A budget which guarantees to put the plan into effect.


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Therefore,

The GBMM is the most useful instrument for

supporting managers in this context.

Usefulness of the Green-Budget Matrix.

The GBMM is a tool to support managers;

with identifying what sort of activities drive excellent

environmental performance, and with allocating the economical resources for them

effectively.

The GBMM generates useful information for analyzing the

status quo, foreseeing the future EMS and promotes co-

recognition about their mission among organizationalmembers.


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Recently, the development of Excel-based

software has prompted an increase in number of

Japanese firms which implement the Green-

Budget matrix.