The cost report also provides information regarding the relative distribution of environmental costs. Thus, eighty percent of environmental costs are failure costs—costs that result from poor environmental performance.
Environmental Costing
Environmental Product Costs
Unit-Based Environmental Cost Assignments
For example, what if the window parts are responsible for all or most of the emissions. If window parts are responsible for all emissions, then the environmental cost should be $1.50 per piece for this product and $0 per piece for door parts.
The M ethylene Chloride Example Revisited
Using this rate yields a unit environmental cost of $0.75 for each product ($3 1/4 machine hour). Tracing the environmental costs to the products responsible for the environmental costs is a fundamental requirement of a sound environmental accounting system.
Life-Cycle Cost Assessment
The "dirty" products can then be the focus of efforts to improve environmental performance and economic efficiency. Exhibit 16-6 reveals, for example, that Solvent IIY has more environmental problems than Solvent IX. It is clear that Solvent IIY offers the greatest potential for environmental and economic improvement.
Product Life Cycle
As illustrated, the various life cycle stages may be under the control of someone other than the manufacturer of the product. Note that the source of materials for the product can come through extraction (raw materials) or from recycling. If all or some of the product's components cannot be recycled, disposal is required and waste management becomes an issue.
If a cost accounting system is going to play a role in life cycle assessment, then the most obvious system is to estimate and allocate the environmental costs incurred by the producer in each of the stages of the life cycle.
Assessment Stages
Impact analysis assesses the environmental effects of competing designs and provides a relative ranking of these effects. Improvement analysis aims to reduce the environmental impacts revealed by the inventory and impact steps.
Inventory Analysis
Impact Analysis
Cost Assessment
The unit life-cycle costs provide a summary of the relative environmental impacts of the two products and serve to support the qualitative interpretations of the operational and subjective environmental data in Exhibit 16-8. For example, Chrysler Corporation used life-cycle cost management analysis to select a mercury-free switch over a mercury switch for the hood lighting package. Before accounting for associated environmental costs, the mercury switch had a $0.12 cost advantage over the mercury-free switch.
However, after factoring in environmental costs arising from sources such as recyclability, end-of-cycle disposal costs, tooling costs (for making labels), labeling requirements, insurance premiums, environmental training, personal protective equipment and emissions, the cost advantage shifted to the mercury-free switch ( that produced a $0.12 advantage over the mercury switch—a reversal of $0.24).22.
Improvement Analysis
Strategic-Based Environmental Responsibility Accounting
Environmental Perspective
Possible measures therefore include the total quantities and unit quantities of the different types of materials and energy (e.g. kilos of toxic chemicals used), productivity measures (output/materials, output/energy) and the costs of hazardous materials (energy). expressed as a percentage of the total material costs. The fourth key objective can be achieved in two ways: (1) using technology and methods to prevent the release of residues once they have been produced, and (2) avoiding the production of the residues by identifying root causes and redesign products and processes. to remove the causes. Measures include the number of pounds of recycled materials, the number of different materials (the fewer, the better), the number of different components (the fewer, the better for recycling), the percentage of units remanufactured, and the energy produced by combustion.
Tons of Greenhouse Gases Produced Percent Reduction in Packaging Materials Increase in Recyclability Pounds of Recycled Materials.
The Role of Activity M anagement
Design for the Environment
Financial M easures
If measures are taken to improve environmental performance, this can lead to cost trends without added value: environmental costs. This chart is of particular interest because it tracks all environmental costs, not just those that do not add value. Environmental costs are the costs incurred because there is or may be poor environmental quality.
Eco-efficient improvements should produce favorable financial effects that can be measured using trends in non-added environmental costs and total environmental costs.
E N VIRO NM E N TAL C OSTS
Life cycle cost assessment allocates costs to the environmental impacts of competing product designs. These costs are a function of the materials used, the energy consumed and the environmental emissions resulting from the manufacture of a product. The environmental perspective has five objectives that relate to material and energy consumption, production and emissions of environmental residues, and recycling.
Design for the environment approaches are then used to eliminate these non-value adding activities.
R e quir e d
L UTIO N
Would life cycle costing provide stronger evidence for the environmental suitability of each product. Measured by environmental cost per unit, Rapidfeed appears to be the product that causes the most environmental damage, confirming the president's beliefs. Thus, a life cycle assessment provides a more comprehensive analysis of environmental effects than unit environmental cost (unless the unit cost is a unit life cycle environmental cost).
In addition, the environmental perspective is related to the other four perspectives of the Balanced Scorecard.
E COEFFICIE N CY
It is thus explicitly recognized that improving environmental performance means that capacities, processes, customers and economic consequences must be taken into account. No effort was made to improve environmental performance beyond the minimum performance that met environmental regulations (improving environmental performance and increasing economic efficiency were considered incompatible goals). Recently, two alternative views of environmental cost management have been proposed: (1) eco-efficiency and (2) guided eco-efficiency.
Explain why eco-efficiency may be a better view of the world than that advocated by compliance management.
Some argue that even if the eco-efficiency argument is true, regulatory intervention may still be necessary. Explain what is meant by well-designed regulation and identify the key assumptions that must hold for a managed view of eco-efficiency to be valid.
An evaporator system has been installed to treat wastewater and collect usable solids for other uses. This prevents 112 million kilos of cardboard from ending up in landfills and saves two million trees per year. Scrubber equipment is being installed to ensure that air emissions are lower than legally permitted levels.
Products are inspected to ensure that the gas emissions produced during operation follow legal and company guidelines.
E N VIRO NM E N TAL C OST R EPORT
After the activated carbon's useful life, a soft drink manufacturer returns this material, used to purify water for its beverages, to the supplier. To reduce energy consumption, magnetic ballasts are replaced with electronic ballasts, and more efficient bulbs and light sensors are installed. A soft drink company uses the following practice: At all bottling plants, packaging damaged during filling (glass, plastic and aluminium) is collected and recycled.
R EPORTI N G S OCIAL C OSTS
The cost to acquire and operate this equipment is $500 per five units of contaminants. If discharged into local streams during the life cycle, the cost is estimated. Evaluate the relative environmental impacts of the two approaches to surfactant production using only operational environmental measures.
Which parts of the life cycle described by the inventory analysis are controlled by the supplier.
The company's environmental engineers also indicated that in Europe and Japan, approximately 75 percent of packaging will participate in waste-to-energy incineration programs to generate steam or electricity. In the United States, only about 25 percent of packaging will participate in such programs. Environmental Engineering also noted that saving 300 pounds of cardboard is equivalent to saving one tree.
How many trees are saved as a result of recycling and reducing the demand for boxes.
Now suppose that a design engineer has indicated that by reducing the package seal from the industry standard one-half inch to one-quarter inch, an additional 5 percent reduction in bag packaging can be achieved.
To communicate the environmental progress made, management has decided to issue an annual environmental progress report on a voluntary basis. Limon also asked an international CPA firm to prepare an auditor's report that would comment on the reasonableness and fairness of Limon's approach to assessing and measuring environmental performance. At the end of 2007, the controller collected data that would be used in the preparation of the environmental progress report.
Required
E NVIRONMENTAL R ESPONSIBILITY
A CCOUNTING , C OST T RENDS
How does this compare to the conclusion that would be reached using a non-normalized measure of progress.
C OST C LASSIFICATION , E COEFFICIENCY , S TRATEGIC E NVIRONMENTAL O BJECTIVES
E NVIRONMENTAL F INANCIAL R EPORTING , E COEFFICIENCY , I MPROVING E NVIRONMENTAL P ERFORMANCE
Redesigning the product made it possible to replace a material that produced less ozone-depleting substances. Because of the improvements, the company was able to reduce demand for pollution control equipment (with associated depreciation and operating costs) and avoid fines and legal costs. Once the results of the project are realized, the design costs can be reduced to lower levels.
However, because some ongoing design activities are required to maintain the system and improve it as needed, the environmental engineering costs will not be reduced below the $90,000 reported in 2007.
E NVIRONMENTAL F INANCIAL R EPORT
A SSIGNMENT OF E NVIRONMENTAL C OSTS
L IFE -C YCLE A SSESSMENT
Explain why a manager would want to include information on product use and disposal in an environmental performance assessment.
E NVIRONMENTAL R ESPONSIBILITY A CCOUNTING , B ALANCED S CORECARD
The other would be given the responsibility to redesign products and processes with the objective of reducing waste production. All employees will be sent to several training seminars to learn about environmental management. After the processes and products were redesigned, it would participate in a third-party environmental certification program so that customers could be assured that the environmental improvements were worthwhile.
Express the environmental improvement strategy as a series of cause-and-effect relationships, expressed as if-then statements.
C OLLABORATIVE L EARNING E XERCISE
Explain why adding an environmental perspective to the Balanced Scorecard is considered legitimate. The cost of landfilling hazardous waste is $50 per ton; injection is $60 per ton; incineration costs $70 per ton; the treatment is $100 per ton; and recycling provides a benefit of $10 per ton. However, recycling can only be done for a certain type of hazardous waste and only with a successful return of 70 percent.
Groups labeled A will solve requirement 1, B will solve requirement 2, C will solve requirement 3, and D will solve requirement 4.
C YBER R ESEARCH C ASE
