Investigating the effectiveness in capturing environmental costs: The cause of small to medium enterprises in the Saudi manufacturing sector

This study investigates the current design of costing systems used by Saudi small and medium enterprises (SMEs) in the manufacturing industry. It investigates the ability of SMEs’ costing systems (traditional or advanced) to capture environmental costs. The primary reason for this study is because there is a lack of research on Saudi SMEs and Environmental Management Accounting (EMA). This study adopts the contingency theory of business, which applies contingent variables to the issue being investigated. The contingent variables for this study are types of costing systems, the types of manufacturing, and their cost structures. The data was collected using an online, web-based questionnaire. Data was analyzed employing descriptive and multivariate analysis techniques. The study found that 65% of the targeted SMEs used traditional costing systems and 18.5% reported activity-based costing (ABC). Descriptive and multivariate analyses show that firms using ABC exhibited significantly greater ability to respond to environmental issues than firms using traditional systems; sector differences were not statistically significant. Cost-structure results provide partial support: several component-level correlations were significant and consistent with environmental costs being concentrated in overhead and indirect accounts, while direct materials and labor showed small positive links with the factors examined. This study recommends that SMEs in Saudi Arabia should change their costing approaches from a traditional system to a more advanced method, which will enable them to better identify and manage environmental costs and avoid wastage, penalties and fines from environmental and regulatory bodies.