Eco-Efficiency Measures in The Leather Industry. An Educational Case

Jinga, Gabriel; Dumitru, Madalina; Glavan, Elena-Mariana; Radu, Gabriel Article Eco-Efficiency Measures in The Leather Industry. An Educational Case Journal of Accounting and Management Information Systems (JAMIS) Provided in Cooperation with: The Bucharest University of Economic Studies Suggested Citation: Jinga, Gabriel; Dumitru, Madalina; Glavan, Elena-Mariana; Radu, Gabriel (2024) : Eco-Efficiency Measures in The Leather Industry. An Educational Case, Journal of Accounting and Management Information Systems (JAMIS), ISSN 2559-6004, Bucharest University of Economic Studies, Bucharest, Vol. 23, Iss. 2, pp. 365-380, https://doi.org/10.24818/jamis.2024.02004 This Version is available at: https://hdl.handle.net/10419/310895 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ Accounting and Management Information Systems Vol. 23, No. 2, pp. 365-380, 2024 DOI: http://dx.doi.org/10.24818/jamis.2024.02004 Eco-efficiency measures in the leather industry. An educational case Gabriel Jingaa, Mădălina Dumitru1,a, Elena-Mariana Glăvana and Gabriel Radua aBucharest University of Economic Studies, Romania Abstract Research Question: How can a company in the leather industry improve its eco-efficiency? Motivation: In the academic literature, there is a significant number of contributions that address the intersection between accounting and sustainability. However, the number of papers dedicated to education is rather limited. Management accounting is a domain which can broadly contribute to sustainability, as the professionals are collecting, interpreting, and presenting information on a regular basis. Idea: In this paper, we provide an educational case regarding a few eco-efficiency measures in the leather industry. Data: Data are collected from one of the biggest leather goods producers in Romania. Some of the figures were adjusted for confidentiality reasons. Tools: The material flow cost accounting methodology was used to explain the implementation of environmental management accounting in the case company. Contribution: The study improves the literature on educational cases that can be used in teaching environmental management accounting. The described case study is useful both in an online and offline environment. Keywords: eco-efficiency; environmental management accounting; material flow cost accounting; case study; accounting education. JEL codes: M410 1 Corresponding author: Mădălina Dumitru, Bucharest University of Economic Studies, Email: [email protected]. Accounting and Management Information Systems 366 Vol. 23, No. 2 1. The case 1.1 Company profile Company A is a wholly family-owned business. It was established in 1992, with the owners starting out with $700 in the retail business of haute couture fabrics. In 1996 they became the largest fabric retailer in the country (representing the main European manufacturer in Romania) and got in touch with the fashion world. At first, they imported shoes and other leather goods from Italy. In 2000, Company A switched from fabric trading to the production of shoes and other leather goods. The first shoe factory (almost 600 square metres) was built at a cost of about €200,000. At first, they were made by hand due to a lack of equipment. In 2002 a second factory (1,500 square metres) was opened. In 2004 the company invested in equipment such as computerised cutting machines and production lines. In 2007 a new factory was opened in a Romanian town with a tradition in the leather industry. The factory initially produced 450 items per day, but production has gradually increased. The company’s position on the Romanian market was consolidated by opening new stores in major shopping centres and expanding to other Romanian cities. 2008 was the year when managers began to make changes in the decision-making process. The year was marked by a major financial crisis and the company had to close several stores. The management stopped developing the entity on the Romanian market and started to open and licence the business abroad. The company opened stores in Sofia and Vienna. In 2011, it also started to develop an online sales platform, which grew steadily, exceeding after the pandemic the sales of the largest physical store in Bucharest. Online trade has also been extended to other member countries of the European Union, using the ‘one-stop-shop’ mechanism. In 2012 it doubled the production capacity of the factory set up outside Bucharest. After the pandemic, the company acquired two new factories in other traditional regions of Romania and moved its production from the centre of Bucharest to these two locations. The pandemic affected sales, which saw a 20% decrease compared to 2019. The effect was noticed on the short term, because in 2021 it managed to reach the same level of sales as in 2019, and in 2022 it had a spectacular 30% increase compared to 2021. During the pandemic it did not restructure, it just closed some stores based on performance, rather than on pandemic criteria. In brief, the performance for 2021 looks like this: Eco-efficiency measures in the leather industry. An educational case Vol. 23, No. 2 367 Table 1. Company A Performance for 2021 Items Amounts (EUR) Sales 20,000,000 Cost of goods sold 8,000,000 Gross income 12,000,000 EBITDA 2,600,000 Total assets 20,000,000 Total liabilities 10,000,000 Number of employees 500 Monthly average cost per employee 1100 The company is not listed at any stock exchange. It has a CEO, a CFO, and a creative director. The organisation chart includes the administrative department, the commercial department, and the production department. The production department is divided into two divisions: leather goods and footwear. The leather goods division employs about 100 people, including a director, four administrative staff, and seventy-nine workers. The footwear division has 220 employees, including two managers and six administrative employees. 1.2 Environmental management accounting at Company A 1.2.1 Organisation of management accounting In Romania, most companies prepare financial accounting information for reporting purposes only. This was the case for Company A until 2007, when it implemented an ERP system. Since then, the decision-making process has changed. Environmental information is present in the form of reporting to state authorities. These include an annual report on waste management and an annual report on packaging materials and packaging waste. The owners of the company want to find a set of practical measures to improve the eco-efficiency in the future. Eco-efficiency is defined as “The delivery of competitively priced goods and services that satisfy human needs and bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the life-cycle, to a level at least in line with the Earth’s estimated carrying capacity” (www.wbcsd.org). As a result, the implementation of a new ERP started in 2022. One of the objectives is for the production process to track waste separately and allocate costs to it, and to take steps to recover it either by selling it at reduced prices or by selling or handing it over free of charge to waste collection and recycling companies. The production cost is calculated by adding to the cost of raw materials a percentage of labour and other overheads (e.g. rent, utilities). This cost was calculated at the beginning of the collection, twice a year. The standard cost is established as a percentage (30%) of the selling price, which is determined by the sales department. Variances are calculated in terms of actual cost only at the global level. The CFO says: “In this industry, it’s all about collection, not cost. It’s the collection that Accounting and Management Information Systems 368 Vol. 23, No. 2 matters.” Another goal of the implementation of the new ERP was to track profitability model-by-model. As a result, there will be a shift from standard production costing to actual costing. The CFO would like to implement real-time accounting. Thus, the valuation of finished goods will be done at the cost of materials consumed according to the manufacturing order plus a labour cost calculated on the basis of actual times worked plus a share of manufacturing overheads also allocated on the basis of actual time worked (direct labour). Basically, for the same product, you can have different costs for different orders. The variances will no longer be calculated at the global level after the implementation of the second ERP. According to the CFO, one problem with the current system is the level of inventories. There are poorly procured inventories or finished goods obtained without a marketing forecast and without knowing whether a model will be sold in 100 or 500 pieces. So, acquisition is not efficient, which can lead to environmental problems (inventories of raw materials left unused or inventories of finished goods not sold). To overcome this problem, the finance manager says he wants to improve production planning, starting with marketing prospects on a focus group basis, knowing the estimated quantity to be sold for each collection. As far as raw materials are concerned, the company’s representatives want to negotiate with the supplier returning the unused inventories of raw materials, and to pay only for the quantity actually consumed. 1.2.2 Reasons for using environmental management accounting The company wants to implement environmental management accounting (EMA) to improve its performance and its production process. The most harmful environmental impact relates to the disposal of leather waste. The impact is twofold: first, due to the quantity and second, due to the type of waste. The company includes an average of 50 types of products in each collection, each with a unique design. Some products require special materials that are not used in other products. The waste resulting from the cutting of shoe uppers, for instance, represents 50-70% of the total solid waste produced by shoe factories. For natural leather the percentage of waste generated at the cutting process is 25-35% and for textiles it is 20-25% (http://www.afirmgroup.com/hongkong/17%20Hengstmann%20Waste%202010.pdf). Complete disposal of this waste is not possible, but options are being sought to optimise the cutting process. In 2008, the company introduced the separation of waste types. The company pays for the removal of leather waste about €20,000 per year. As a starting point, a list of the most relevant steps in the production process has been drawn up. 1.2.3 The steps in the production process The steps in the production process for a bag model are as follows:  Receipt of raw materials; Eco-efficiency measures in the leather industry. An educational case Vol. 23, No. 2 369  Cutting of flexible material parts (parts for the sides, outer linings, intermediate linings);  Stamping and preparation of rigid material parts;  Preparation of parts for assembling bag faces: levelling, thinning, edge burning, edge painting, stamping, marking parts for gluing, etc.;  Assembly by gluing and sewing the faces;  Positioning metal fittings, sewing zippers;  Finishing and final inspection of the bag;  Marking, packing, storing, and dispatching the bag. Within this company, a production process forms a quantity centre. Therefore, a quantity centre is associated with each type of product. Quantity centres are established based on loss analysis and process analysis. 1.2.4 Important environmental issues Important environmental issues arise: (a) in the production processes, from cut scraps of unusable raw materials (especially leather, cardboard); (b) in the distribution and return processes, due to products that are no longer sold because the collection changes. Materials used in the production process include leather, textiles, metal fittings, cardboard, packaging materials, and other consumables. Electricity is consumed in production, and waste (mostly leather pieces), dust, and odours are generated in the production unit. All finished products are packed in cardboard boxes for transport from factories to stores. Raw materials are also received in boxes. During the most recent five years, the company has taken steps to manage this cardboard waste by contracting a specialised company to collect and recycle it. For paper waste, separate collection bins have been purchased for each administrative office. Some types of glue used in the production process have a dangerous chemical composition. They are harmful to the health of employees. Greenhouse gas emissions are generated by company cars, as goods are transported with owned vehicles. For online sales, the delivery to the customer is done by courier, which uses road transport and generates more pollution than the delivery from the store. The company is concerned about contracting with electric car courier companies. The dust from the production process is stored in bags. The production process of company A has an environmental impact on water, air, and soil. The situation of material consumption for one month and generated waste is shown in Table 2. Accounting and Management Information Systems 370 Vol. 23, No. 2 Table 2. Materials used and waste generated by the production process for 32,750 pairs of shoes and 20,160 units of other finished goods No. Materials Quantity consumed Packaging materials Waste quantity Waste management Raw materials 1 Natural leather 11,400 kg Cardboard and plastic 1620 kg (14 . 21%) Specialized company 2 Synthetic leather 1600 kg 37 kg (2.31%) Specialized company 3 Textile materials 3600 kg 85 kg (2.36%) Specialized company 4 Inner sole 32,750 pairs Cardboard 1000 kg Temporary storage and lifting by a specialised company 5 Sole 32,750 pairs 6 Other stiffeners 9600 pieces 7 Metallic accessories 7300 kg Consumables 8 Sewing thread 2000 m 9 Sewing needles 9600 pieces 10 Shoe cream 200 pieces Plastic containers 200 pieces Specialized company 11 Glue 900 kg Metallic boxes 150 metallic boxes Managed within the company 12 Water-based paints 300 kg 13 Thinner 20 l 14 Marking pencils 18,000 pieces Cardboard 2 kg Temporary storage and lifting by a specialised company 15 Sealing tape 200,000 pieces Cardboard 3 kg Temporary storage and lifting by a specialised company Packaging materials 16 Paper 2820 kg - 400 kg Temporary storage and lifting by a specialised company 17 Cardboard boxes 32,750 pieces Cardboard 30 kg Temporary storage and lifting by a specialised company 18 Plastic bags 140 kg - - 19 Binding rope 450 kg - - 20 Car dboard 1200 kg Bulk 1200 kg Specialized company 21 Paper bags 16,700 pieces Cardboard 10 kg Specialized company Eco-efficiency measures in the leather industry. An educational case Vol. 23, No. 2 371 To get an overview of the production process, an accounting system has been set up for material and energy flows, and associated costs. We present the inventories balances (material balance in a quantity centre defined for a type of bag) (Table 3). Table 3. Material balance (in physical units) Item Initial balance Input Ending balance Output 0 1 2 3 4 = 1 + 2 – 3 Natural leather (m 2 ) 6 65 8.54 62.46 Textile materials (m 2 ) 2 19 1 20 Metallic a cces s ori es (no.) 20 1750 44 1726 Paper bags (no.) 5 35 10 30 Part of the input-output table for a bag type is shown below (Table 4). Some of the costs (energy, maintenance) are allocated at the end of the month. The type of bag chosen for this study is representative of the company, as it follows the average values recorded in one month. Table 4. Input-output table for a type of bag produced in November 2021 Input Output Article Unit Q Total cost (EUR) Data source and quality Article Unit Q Total cost (EUR) Data source and quality Natural leather m 2 20.4 489.60 Computed Bag pieces 30 … Computed Textile materials m2 6.9 31.74 Computed Leather waste m2 … … Computed Other raw materials EUR 100 Computed Textile waste m2 … … Computed Metallic accessories (rivets, ornaments, shaped rings, zippers, l et ter) pieces 480 131.88 Computed Dust m3 0.1 - Estimated Other consumables EUR - 56,98 Computed … Cardboard boxes pieces 5 45 Computed Electricity kWh - 1,28 Estimated Accounting and Management Information Systems 372 Vol. 23, No. 2 Input Output Article Unit Q Total cost (EUR) Data source and quality Article Unit Q Total cost (EUR) Data source and quality System cost (labor – design and assemble, depreciation and maintenance, transport) EUR - 972 Estimated Waste management EUR - 7 Estimated It is assumed that the leather and textile waste follow the same average percentages as shown in Table 2. As it is part of normal losses, it is not valued in the accounts (zero value) but it will be valued according to the material flow cost accounting (MFCA) method. Note that raw material inputs and losses are given in square metres. The MFCA method requires inventories to be valued in the same unit of measurement, allowing costs to be apportioned. 1.2.5 Cost allocation Applying the concept of MFCA changes slightly the view that the cost is fully absorbed by the finished goods. MFCA treats waste as (abnormal) material losses and allocates a share of the cost of raw materials and processing to them. The allocation is based on the amount of raw material that is transformed into finished goods or becomes waste. The cost of waste management is fully included in the cost of material loss. 1.2.6 Gross margin The input-output tables help Company A track environmental cost values. With their help, it is possible to estimate the financial consequences of material losses in production. One of the indicators calculated by the entity is the gross margin. 1.2.7 Measures to increase eco-efficiency The implementation of MFCA allows the company to identify waste processing costs and processes with high raw material losses. Measures to increase ecoefficiency are currently being sought for the production process and the sales (distribution) process. Eco-efficiency measures in the leather industry. An educational case Vol. 23, No. 2 379 Burritt, R.L., Schaltegger, S., & Zvezdov (2010) “Carbon management accounting: practice in leading German companies”, Centre for Accounting, Governance and Sustainability Occasional Working Papers, no. 2, May, University of South Australia, Adelaide, available online at http://www.unisa.edu.au/ siteassets/episerver-6-files/global/business/centres/cags/docs/occasionalworking-papers/cags_occasional_working_paper_no-2-2010cags.pdf, accessed 20 February 2024. Burritt, R. L., Schaltegger, S., & Christ, K. L. (2023) “Environmental management accounting - developments over the last 20 years from a framework perspective”, Australian Accounting Review, vol. 33: 336-351, https://doi.org/ 10.1111/auar.12407. Dragomir, V.D., & Dumitru, M. (2024) “The state of the research on circular economy in the European Union: A bibliometric review”, Cleaner Waste Systems, 7, 100127, https://doi.org/10.1016/j.clwas.2023.100127. Herzig, C., Viere, T., Schaltegger, S., & Burritt, R.L. (2012) “Environmental Management Accounting. Case studies of South-East Asian Companies”, Routledge. IFAC (1998) “Environmental management in organizations: the role of management accounting [Study #6]”, New York: Financial and Management Accounting Committee, available online at https://www.icjce.es/images/ pdfs/TECNICA/C01%20-%20IFAC/C.01.072%20-%20PAIB%20- %20Studies/FMA-Study_06.pdf, accessed 20 February 2024. Institute of Management Accounting (2019) “IMA Management Accounting Competency Framework. Statement on Management Accounting”, Montvale, NJ, available online at file:///C:/Users/Mada/Downloads/ IMA%20Framework%2011-28-23.pdf, accessed 29 December 2023. Institute of Management Accounting (2022) “Management Accountants Role in Sustainable Business Strategy A Guide to Reducing a Carbon Footprint”, Montvale, NJ, available online at Management Accountant's Role in Sustainable Business Strategy: A Guide to Reducing a Carbon Footprint | IMA (imanet.org), accessed 20 February 2024. Kokubu, K., Campos, M.K.S, Furukawa, Y., & Tachikawa, H. (2009) “Material flow cost accounting with ISO 14051”, ISO Management Systems, vol. 9, no. 1, January-February: 15-18. Krawczyk, K., & Showalter, D.S. (2020) “Utilizing environmental remediation to teach research skills: An instructional case”, Journal of Accounting Education, 51, 100659, https://doi.org/10.1016/j.jaccedu.2020.100659. Schaltegger, S., Bennett, M., Burritt, R.L., & Jasch, C. (2008) “Environmental management accounting for cleaner production”, Dordrecht: Springer. Schaltegger, S., & Burritt, R.L. (2000) “Contemporary environmental accounting: issues, concepts and practice”, Sheffield: Greenleaf. Sharma, U., & Stewart, B. (2022) “Enhancing sustainability education in the accounting curriculum: an effective learning strategy”, Pacific Accounting Review, vol. 34, no. 4: 614-633. https://doi.org/10.1108/PAR-02-2021-0029 Accounting and Management Information Systems 380 Vol. 23, No. 2 Vanini, U., & Bochert, S. (2024) “Integration of sustainability issues into management accounting textbooks”, Journal of Accounting Education, vol. 66, 100886, https://doi.org/10.1016/j.jaccedu.2024.100886. Wagner, B. (2015) “A report on the origins of Material Flow Cost Accounting (MFCA) research activities”, Journal of Cleaner Production, vol. 108, Part B: 1255-1261, https://doi.org/10.1016/j.jclepro.2015.10.020. Wagner, B., & Enzler, S. (eds) (2006) “Material flow management: improving cost efficiency and environmental performance”, Heidelberg: Physica. http://www.afirm-group.com/hongkong/17%20Hengstmann%20Waste%202010. pdf