Environmental full-cost accounting (EFCA) is a method of cost accounting that traces direct costs and allocates indirect costs by collecting and presenting information about the possible environmental, social and economical costs and benefits or advantagesin short, about the "triple bottom line"for each proposed alternative. It is also known as true-cost accounting (TCA), but, as definitions for "true" and "full" are inherently subjective, experts consider both terms problematic.
Since costs and advantages are usually considered in terms of environmental, economic and social impacts, full or true cost efforts are collectively called the "triple bottom line". Many standards now exist in this area including Ecological Footprint, eco-labels, and the United Nations International Council for Local Environmental Initiatives approach to triple bottom line using the ecoBudget metric. The International Organization for Standardization (ISO) has several accredited standards useful in FCA or TCA including for greenhouse gases, the ISO 26000 series for corporate social responsibility coming in 2010, and the ISO 19011 standard for audits including all these.
Because of this evolution of terminology in the public sector use especially, the term full-cost accounting is now more commonly used in management accounting, e.g. infrastructure management and finance. Use of the terms FCA or TCA usually indicate relatively conservative extensions of current management practices, and incremental improvements to GAAP to deal with waste output or resource input.
These have the advantage of avoiding the more contentious questions of social cost.
Concepts
Full-cost accounting embodies several key concepts that distinguish it from standard accounting techniques. The following list highlights the basic tenets of FCA.
Accounting for: Costs rather than outlays (see explanation below); Hidden costs and externalities; Overhead and indirect costs; Past and future outlays; Costs according to lifecycle of the product.
Costs rather than outlays
Expenditure of cash to acquire or use a resource. A cost is the cash value of the resource as it is used. For example, an outlay is made when a vehicle is purchased, but the cost of the vehicle is incurred over its active life (e.g., ten years). The cost of the vehicle must be allocated over a period of time because every year of its use contributes to the depreciation of the vehicle's value.
Hidden costs
The value of goods and services is reflected as a cost even if no cash outlay is involved. One community might receive a grant from a state, for example, to purchase equipment. This equipment has value, even though the community did not pay for it in cash. The equipment, therefore, should be valued in an FCA analysis.
Government subsidies in the energy and food production industries keep true costs low through artificially cheap product pricing. This price manipulation encourages unsustainable practices and further hides negative externalities endemic to fossil fuel production and modern mechanized agriculture.
Overhead and indirect costs
FCA accounts for all overhead and indirect costs, including those that are shared with other public agencies. Overhead and indirect costs might include legal services, administrative support, data processing, billing, and purchasing. Environmental costs as indirect costs include the full range of costs throughout the life-cycle of a product (Life cycle assessment), some of which even do not show up in the firm's bottom line. It also contains fixed overhead, fixed administration expense etc.
Past and future outlays
Past and future cash outlays often do not appear on annual budgets under cash accounting systems. Past (or upfront) costs are initial investments necessary to implement services such as the acquisition of vehicles, equipment, or facilities. Future (or back-end) outlays are costs incurred to complete operations such as facility closure and postclosure care, equipment retirement, and post-employment health and retirement benefits.
Examples
Waste management
The State of Florida uses the term full-cost accounting for its solid waste management. In this instance, FCA is a systematic approach for identifying, summing, and reporting the actual costs of solid waste management. It takes into account past and future outlays, overhead (oversight and support services) costs, and operating costs.