The flexible budget for plant A in year 2 indicates 9,000 gallons of water would be used assuming no improvements in efficiency. However, actual usage is only 8,900, yielding an efficiency improvement of 1.1% [((9,000-8,900)/9,000)*100]. The flexible budget for plant B is 20,000 gallons of water in year 2 compared to 19,000 gallons that are actually used, indicating an efficiency improvement of 5% [((20,000-19,000)/20,000)*100]. Note that plant B experiences an improvement in water efficiency, but water intensity increased potentially giving users the erroneous impression that sustainability performance worsened.
The flexible budget methodology easily handles the calculation of changes in efficiency for the entire company. When both plants are analyzed in the aggregate, the total flexible budget amount for water is 29,000 gallons (9,000+20,000). Total actual usage is 27,900 gallons (8,900+19,000) resulting in an overall efficiency improvement of 3.8% [((29,000-27,900)/29,000)*100].
In calculating the overall average water intensity, many companies simply sum differing units of output, as in this example where product X is measured in bottles and product Y is measured in tons. A common solution to this problem is to convert physical measures of output to the sales value of output and then combine revenue totals. Unfortunately, this approach adds to the confounding factors impacting intensity measures when prices are changing. Note that differing output measures do not present a problem for the flexible budget approach. This is because the production output is used only to calculate the flexible budget value that in our example is expressed as gallons of water regardless of how units of production are measured. Notice that although water efficiency improves in example 4, overall water intensity increases. This is due to the fact the production mix shifts from the less water intensive product Y to the higher water intensive product X. This product mix shift dominates the efficiency improvement.In conclusion, the flexible budgeting approach to measuring changes in sustainability aspect efficiency correctly adjusts for the presence of fixed components of aspect consumption (or production as in the case of greenhouse gases). In contrast, intensity measures fail to adjust for the fixed and variable components of sustainability aspects and do not provide an accurate indication of the actual change in efficiency. When production volumes change, fixed components of sustainability aspects cause intensity measures to change even when there is no change in aspect efficiency.
As corporate responsibility reporting becomes mainstream around the globe, organizations look to CPAs to provide analysis and reliable measurements to monitor their sustainability performance. The AICPA urges its members to be the forerunners in the sustainability reporting movement by elevating its credibility. Therefore, in our next article, additional issues in the implementation of the flexible budgeting approach for measuring efficiency improvements will be explored. Specifically, we will discuss the challenges in defining the appropriate degree of refinement in segmenting a company, materiality considerations for fixed components, and issues relating to confounding factors influencing the sustainability aspect such as variations in the weather.
Jon Bartley, CPA, Ph.D., is Professor Emeritus of Accounting and former Dean of the Poole College of Management, North Carolina State University in Raleigh, NC. You can reach Jon at firstname.lastname@example.org
Y.S. Al Chen, Ph.D., CPA, CITP, CGMA, CMA, CFM, is Professor of Accounting at the Poole College of Management, North Carolina State University in Raleigh, NC. You can reach Al at email@example.com
Stephen K. Harvey, M.S., M.B.A., P.E., is former Global Director of Environment, Health and Safety for Bacardi Limited and is currently Industry Fellow in Corporate Responsibility at the Poole College of Management, North Carolina State University. You can reach Steve at firstname.lastname@example.org
D. Scott Showalter, CPA, CGMA, CGFM, is Professor of Practice at the Poole College of Management, North Carolina State University in Raleigh, NC. You can reach Scott at email@example.com
Gilroy Zuckerman, Ph.D., is Associate Professor of Accounting and former Associate Dean of Academic Affairs of the Poole College of Management, North Carolina State University in Raleigh, NC. You can reach Gil at firstname.lastname@example.org
 AICPA, January 26, 2017 http://www.aicpa.org/InterestAreas/BusinessIndustryAndGovernment/Resources/Sustainability/Pages/ImproveSustainabilityMeasures.aspx
AICPA, April 17, 2017
 The CPA’s Role in Sustainability Assurance. Balancing Priorities: Profits, People and Planet, AICPA, 2015. https://www.aicpa.org/InterestAreas/BusinessIndustryAndGovernment/Resources/Sustainability/DownloadableDocuments/AICPA-Sustainability-Assurance-Brochure.pdf
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