12 -1

CHAPTER

Environment
Cost
Management

12 -2

Objectives
1. Discuss the importance
of measuring
After studying
this
environmentchapter,
costs. you should
2. Explain how environmental
be able to: costs are
assigned to products and processes.
3. Describe the life-cycle cost assessment
model.
4. Compare and contrast activity- and strategicbased environmental control.

12 -3

The Benefits of Ecoefficiency

Ecoefficiency essentially
maintains that organizations
can produce more useful
goods and services while
simultaneously reducing
negative environmental
impacts, resource
consumption, and costs.

12 -4

Incentives and causes for increased

efficiency:
1) Customers are
demanding products
that are
environmental
friendly

12 -5

Incentives and causes for increased

efficiency:
1) Customers are
demanding products
that are
environmental
friendly
2) Employees prefer to
work for
environmentally
respective firms

12 -6

Causes and
Incentives for
Ecoefficiency

Customer Demand
For Cleaner Products

12 -7

Cost Reduction and

Competitive
Advantage

Better Employees
and Greater
Productivity

ECOEFFICENCY

Innovations and
New Opportunities

Lower Cost of
Capital and Lower
Insurance

Significant Special Benefits

Leading to Improved Image

12 -8

Environmental Quality
Cost Model
Environmental costs are costs that are incurred
because poor environmental quality exists or may
exist.
Environmental costs can be classified in four
categories: prevention costs, detection costs, internal
failure costs, and external failure costs.

Classification of Environmental
Costs by Activity
Prevention Activities
Evaluating and selecting suppliers
Evaluating and selecting pollution control equipment
Designing processes
Designing products
Carrying out environmental studies
Auditing environmental risks
Developing environmental management systems
Recycling products
Obtaining ISO 14001 certification

12 -9

Classification of Environmental
Costs by Activity
Detection Activities
Auditing environmental activities
Inspecting products and processes
Developing environmental performance measures
Testing for contamination
Verifying supplier environmental performance
Measuring contamination levels

12 -10

Classification of Environmental
Costs by Activity
Internal Failure Activities
Operating pollution control equipment
Treating and disposing of toxic waste
Maintaining pollution equipment
Licensing facilities for producing contaminants
Recycle scrap

12 -11

Classification of Environmental
Costs by Activity
External Failure Activities
Cleaning up a polluted lake
Cleaning up oil spills
Cleaning up contaminated soil
Settling personal injury claims (environmentally related)
Restoring land to natural state
Losing sales due to poor environmental reputation
Using materials and energy inefficiently
Receiving medical care due to polluted air (S)
Losing employment because of contamination (S)

12 -12

12 -13

Numade Corporation
Environmental Cost Report
For the Year Ended December 31, 2004
Environmental Costs
Prevention costs:
Training employees
Designing products
Selecting equipment
Detection costs:
Inspecting processes
Developing measures

Percentage of
Operating Costs

$ 60,000
180,000
40,000

$280,000

$240,000
80,000

320,000

Continued

1.40%

1.60

12 -14

Environmental Costs
Internal failure costs:
Operating pollution
equipment
Maintaining pollution
equipment
External failure costs:
Cleaning up lake
Restoring land
Incurring property
damage claim
Totals

Percentage of
Operating Costs

$400,000
200,000 $ 600,000

3.00%

$900,000
500,000

400,000

1,800,000
$3,000,000

9.00
15.00%

12 -15

Numade Corporation
Environmental Financial Statement
For the Year Ended December 31, 2004
Environmental benefits:
Cost reductions, contaminants

$ 300,000

Cost reductions, hazardous waste disposal

400,000

Recycling income

200,000

Energy conservation cost savings

100,000

Packaging cost reductions

150,000

Total environmental benefits

Continued

$1,150,000

12 -16

Numade Corporation
Environmental Financial Statement
For the Year Ended December 31, 2004
Environmental costs:

Prevention costs

$ 280,000

Detection costs

320,000

Internal failure costs

600,000

External failure costs

1,800,000

Total environmental costs

$3,000,000

12 -17

Environment Product Costs

The environmental costs of
processes that produce,
market, and deliver products
and the environmental
postpurchase costs caused by
the use and disposal of the
products are examples of
environmental product costs.

12 -18

Full environmental
costing is the
assignment of all
environmental costs,
both private and
societal, to products.

12 -19

Full private
costing is the
assignment of
only private cost
to individual
products.
Private costing is probably a good starting point
for many firms.
Private costs can be assigned using data created
inside the firm.

12 -20

ABC Environmental Costing

Activities
Evaluate and select suppliers

Cleanser A Cleanser B
$0.20

$ 0.05

Design processes (to reduce pollution)

0.10

0.10

Inspect processes (for pollution problems)

0.25

0.15

Capture and treat chlorofluorocarbons

0.05

1.00

Maintain environmental equipment

0.00

0.50

Toxic waste disposal

0.10

1.75

Excessive materials usage

0.08

0.25

$0.78

$ 3.80

9.02

16.20

$9.80

$20.00

100,000

100,000

Environmental cost per unit

Other manufacturing costs (nonenvironmental)
Unit cost
Units produced

12 -21

Product stewardship is
the practice of
designing,
manufacturing,
maintaining, and
recycling products to
minimize adverse
environmental impacts.

12 -22

Life-cycle assessment
identifies the
environmental
consequences of a product
through its entire life
cycle, and then searches
for opportunities to obtain
environmental
improvements.

12 -23

Life-cycle cost
assessment assigns
costs and benefits to
the environmental
consequences and
improvements.

Product-Life
Cycle Stages

12 -24

Raw
Materials

Controlled
by Supplier

Production
Controlled by
Manufacturer

Packaging

Recycling

Product
Use and
Maintenance

Controlled by Customer

Disposal

12 -25

Assessment Stages
Inventory analysis
Impact analysis
Improvement

analysis

12 -26

Inventory Analysis
Inventory analysis
specifies the types and
quantities of materials
and energy inputs
needed and the resulting
environmental releases
in the form of solid,
liquid, and gaseous
residues.

12 -27

PAPER CUP

POLYFORM CUP

Materials usage per cup:

Wood and bark (g)

33.0

0.0

4.1

3.2

10.0

11.5

Steam (kg)

9,000-12,000

5,000

Power (GJ)

3.5

0.4-0.6

Cooling water (m3)

50

154

50-190

0.5-2.0

Suspended solids (kg)

35-60

trace

BOD (kg)

30-50

0.07

5-7

1-20

20

Petroleum (g)

Finished weight (g)

Utilities per mg of material:

Water effluent per mg of material:

Volume (m3)

Organochlorides (kg)
Metal salts (kg)

12 -28

PAPER CUP

POLYFORM CUP

Air Emissions per mg of material:

Chlorine (kg)

0.5

Sulfides (kg)

2.0

5-15

0.1

35-50

Possible

Easy

Low

High

20

40

Mass to landfill (g)

10.1

11.5

Biodegradable

Yes

No

Particulates (kg)
Pentane (kg)
Recycle potential:

Primary user
After use
Ultimate disposal:
Heat recovery (Mj/kg)

12 -29

PAPER CUP

Material usage

POLYFORM CUP

$0.010

$0.004

Utilities

0.012

0.003

Contaminant-related
resources

0.008

0.005

$0.030

$0.012

-0.001

-0.004

Environmental cost
per unit
$0.029

$0.008

Total private costs

Recycling benefits
(societal)

12 -30

Impact Analysis
Impact analysis
assesses the
environmental
effects of competing
designs and provides
a relative ranking of
those effects.

12 -31

Improvement Analysis
Improvement analysis
has the objective of
reducing the
environmental impacts
revealed by the
inventory and impact
steps.

12 -32

Environmental Perspective
Five core objectives for the environmental
perspectives:
Minimize the use of raw or virgin materials
Minimize the use of hazardous materials

Minimize energy requirements for production and

use of the product
Minimize the release of solid, liquid, and gaseous
residues
Maximize opportunities to recycle

12 -33

NONVALUE-ADDED
ENVIRONMENTAL ACTIVITY
Inspecting processes

YEAR
2004

2003

$ 200,000

$ 240,000

Operating pollution equipment

350,000

400,000

Maintaining pollution equipment

200,000

200,000

Cleaning up water pollution

700,000

900,000

Property damage claim

300,000

400,000

$1,750,000

$2,140,000

Totals

Environmental Cost Trend Graph

Environmental
Costs/Sales

Periods

12 -34

Bar Graph for Trend Analysis

CFC Emissions
100
80
60
40
20
0
2001

2002

2003

Pounds emitted

2004

12 -35

Hazardous Waste Pie Chart

Treated 15.0%
Incinerated 35.0%

Recycled 5.0%

Landfilled 25.0%

Incinerated
Treated
Recycled
Landfilled
Deep-well injected

Deep-well injected
20.0%

12 -36

12 -37

Chapter Twelve

The End