true cost accounting

true cost accounting

The Significance of True Cost Accounting in Sustainable Business Practices

1. Introduction to True Cost Accounting

Accounting is a complex subject that has been the home of a number of different disciplines all dealing with different aspects of money and its relationship to the physical world. The last 150 years have been increasingly dominated by financial accounting, which uses largely monetary metrics for assessing economic performance and emphasizes regulations and norms that favor market exchange and market structures. It is this market fundamentalism that colored financial accounting, leaving it dominated by standard performance metrics ignoring non-monetary costs, which creates a growing discrepancy between measures of economic results and accounting book results. In response, companies are motivated by non-homogenized interests and societal norms to develop strategic responses in terms of their value-generating activities that reflect the external factors that have not been accounted for in their standard performance metrics. However, financial accounting remains an important tool for the financial decision-maker and the improvement of accounting standards means reconciling the use of accounting by different categories of stakeholders.

The purpose of this chapter is to discuss the significance of true cost accounting in the business sector and raise related questions. It does not aim to give a full review of true cost accounting. Over the last few decades, we have seen a rapid increase in the extent to which voluntary stakeholders’ dialogue has become a factor in shaping companies’ value-generating strategies. The debate about accounting practice taking into account that businesses have social, environmental, and other impacts on society and the broader economy is focused on the concept of true cost accounting. Traditional accounting systems have focused on market-based and homogenized economic performance and wealth or stock accumulation.

2. The Principles and Concepts of True Cost Accounting

In economics, assuming prices are formed fairly, private true costs correspond to the sum of private production costs and private positive external effects. Social true costs include private true costs and all (positive and negative) social (i.e., including environmental) external effects that are referred to as such because free markets fail to factor them into production consumption decisions and that remain consequently uncaptured. To illustrate, a peach grown with no artificial inputs and no positive environmental external effects in Georgia costs 1 Euro to a consumer in Tbilissi and around 50 Euro cents to the producer. But the true cost of a peach from Georgia still remains very elusive.

In true cost accounting, the true cost refers to the total cost of production and consumption, including external costs such as natural resource depletion, climate change, and pollution. It also takes into account the positive external effects of industrial activity on society. In one simple formula, it is the sum of the production costs touching four different types of ‘capitals’: natural, social, economic, and human. The concept of true cost accounting was born in the 1920s, abandoned in effect in the 1930s, and recently reconsidered due to growing concerns about the overexploitation of natural resources and the rising environmental and social costs. In this paper, the emergence of the concept of true cost accounting, the principles and concepts of true cost accounting, and the possibilities to realize some types of true costs are presented and critically reviewed.

3. Applications and Benefits of True Cost Accounting in Business

As previously outlined, TCA models are robust, decision-based, financial accounting practices that can be used to identify and measure positive and negative externalities. TCA methodologies are already being applied and tested globally across the textile and garment industry, as seen in Modules 1 and 2. These TCA methods have evolved from life cycle assessment (LCA) and include ecosystem evaluation, social cost valuations, sustainable interest tracing, and attributional responsibility. Moreover, financial perspectives such as economic, financial, and management accounting inform TCA metrics. TCA, therefore, integrates accounting, economics, and natural and social sciences to create a comprehensive and internally consistent valuation tool. Scientific advances have made it possible, at one and the same time, to develop TCA applications with improved accuracy and realistic trends that can provide comparison benchmarking.

This section will outline how businesses can adopt TCA methodologies into their operational structures and reporting models, and the associated benefits they can derive from doing so. Real-world case studies will be used to evidence the practical applications and benefits of TCA models when implemented in business operations.

4. Challenges and Limitations of Implementing True Cost Accounting

In general, TCAs demand time, human and financial resources, but they provide a small number of measurable indicators of different social and environmental side effects of doing business. Additionally, the variety of methods and models of TCSs is not always applicable to different sectors or business scales. The differences in documentation in financial or non-financial reports make the goals of setting targets of TCSs difficult to accomplish. The diversity in organizational culture or in sustainable business strategies, beyond size, legal status or operation range, causes the driving force and demand for environmental and/or social accounting reports. The complexity of external audits or the absence of legal obligations in revealing hidden or externalized costs makes TCSs hardly enforceable in the near term. However, the changes in Corporate Social Responsibility (CSR) reporting directives will significantly affect the form, function, scope and subject of accounting reports that entities submit in future. Their significance will also increase based on the ongoing global economic crisis, the post-Kyoto requirements on environmental policies and other social needs, insofar as they can detail environmental or social externalities.

5. Future Prospects and Recommendations for the Integration of True Cost Accounting

Given the desire of business to propel truth to both the economic and social relations presented within TCA or TT approaches, and given that several businesses or industrial sectors have begun to integrate these progressive results of true cost forward, the present work is seen in the broader context of fostering and consolidating better relationships within responsible activities to nurture added environmental or wider social benefits such as climate change mitigation technologies, primarily Generation 3+, the hydrogen connected contributions of exceptional technologies, and direct air capture.

Consideration of future prospects and recommendations suggests that the introduction of true cost accounting or quick tests should be based upon three fundamental elements. Firstly, the business case itself must be presented in a clearer manner, with the assistance of social and ecological metrics and a system of true cost proportional internalization. Secondly, the ability to implement and operationalize such accounting instruments predetermines their success, and finally, the common momentum for the global acceptance of such measures, either in the form of recommendations or mandatory further integration.