Environmental Cost Accounting

1
Environmental Cost Accounting and Green Supply
Chain Management
2
Basic types of costs

• Direct and indirect costs (direct costs can be
  traced directly to cost objects)
• Variable and fixed costs (variable costs are
  functions of output or variable cost can be
  changed in the short run)
• Internal and external costs (internal costs
  are costs incurred by the studied agency)
• ? Indirect costs need to be allocated through
  cost accounting systems
• ? Fixed costs are not impacted by short-term
  decisions
• ? External costs do not impact the studied agency

Note Costs are measured in monetary units,
10 kWh is not an energy cost,
10kg of CO2 is not an environmental cost
3
Life cycle costing

• Internal life cycle costingof materials
• Purchasing
• Handling
• Storage
• Recovery
• Disposal
• Take-back

• Life cycle costing of products
• Materials production
• Component manufacturing
• Product assembly
• Product use
• Product end-of-life management
• Logistics between all above processes

4
Definition and Types of Environmental Costs

• Definition of Environmental Cost
• Expenditures that arise from either compulsory or
  voluntary activities to achieve environmental
  objectives (does not include external cost).
• Environmental cost can thus be divided
  intoregulatory (or compliance) cost and
  voluntary cost.
• There are four types of environmental activities
  
• Prevention activities
• are undertaken to eliminate potential causes
  of adverse environmental impacts. Examples
  Product and process redesign, using clean
  technologies
• Assessment activities measure and monitor
  potential sources of environmental damage.
  Examples Measure emission levels, contamination
  build-up, environmental audits
• Control activities are designed to control
  and contain source of environmental impact.
  Examples End-of-pipe technology like scrubbers,
  waste water treatment, etc.
• Failure activities
• are undertaken to remediate accidental
  environmental damage Examples Industrial site
  clean-up, dealing with oils spills, leaks, etc.

5
Accounting for Environmental Costs

• EnvironmentallyRelated Activities
• Safe workplace
• Safe handling of materials
• Waste reduction
• Pollution control
• Product take-back
• Site cleanup
• Emission permits
• public relations
• Etc.

Regulatory Reasons (Laws)

• Purpose of
• Activity
• Prevention
• Assessment
• Control
• Failure

Costsof Activity
Voluntary Reasons (Society, Culture,Customers)
6
Magnitude and Sources of Environmental Costs

• In the S.C. Johnson case environmental cost
  exceeded operating profit for the product.
• In the Dow case the use of a seemingly
  inexpensive solvent created environmental
  problems that jeopardized an entire product line.

Source WRI 1995
7
Direct and Indirect Environmental Costs
Direct versus indirect environmental costs

• Direct costs are directly attributable to
  environmental activities that are part of a
  companys operating, investing and financing
  activities (Example waste disposal fees,
  emission permits, pollution control equipment)
• Indirect costs are not directly attributable to
  environmental activities that are part of a
  companys operating, investing and financing
  activities (Example Overhead costs, corporate
  image and public relationship costs)

• All identified environmental cost, fixed or
  variable, direct or indirect, should be allocated
• to the activities that generate the
  environmental costs (cost center)
• and to the ultimate causes of the activities
  (cost driver).

8
Allocation of environment-driven indirect cost
Costdriver
Costcenter 1
Costcenter 2
Costcenter 3
Product output 800kg
Input 1,000kg
Waste 50kg
Waste 50kg
Incinerator
Waste 100kg
Cost allocation basis Amount of waste
incinerated
Total cost of incineration 800
9
Allocation of environment-driven indirect cost
Total cost of overhead 9,000
Cost allocation basis Amount of material
processed
Overhead
Costdriver
Costcenter 1
Costcenter 2
Costcenter 3
850kg
900kg
Product output 800kg
Input 1,000kg
50kg
50kg
100kg
10
Allocation of environment-driven indirect cost
Total cost of overhead 9,000
Cost allocation basis Amount of processed
material that will become waste
Overhead
Costdriver
Costcenter 1
Costcenter 2
Costcenter 3
850kg
800kg
900kg
1000kg
Input
Product output
50kg
50kg
100kg
11
Allocation of environment-driven indirect cost
Total cost of overhead 9,000
Cost allocation basis Amount of processed
material that will become waste
Overhead
654.5 327.3
163.6
Costdriver
Costcenter 1
Costcenter 2
Costcenter 3
Product output 800kg
Input 1,000kg
Waste 50kg
Waste 50kg
Incinerator
Waste 100kg
Allocation key Amount of waste incinerated
Total cost of incineration 800
12
Allocation of environment-driven indirect cost
Total cost of overhead 9,000
Cost allocation basis Amount of processing that
waste has gone through
Overhead
Costdriver
Costcenter 1
Costcenter 2
Costcenter 3
850kg
800kg
900kg
1000kg
Input
Product output
50kg
50kg
100kg
13
Allocation of environment-driven indirect cost
Total cost of overhead 9,000
Cost allocation basis Amount of processing that
waste has gone through
Overhead
327.3 327.3
490.9
Costdriver
Costcenter 1 7.3/kg
Costcenter 2 10.5/kg
Costcenter 3 13.8/kg
Product output 800kg
Input 1,000kg
Waste 50kg
Waste 50kg
Incinerator
Waste 100kg
Allocation key Amount of waste incinerated
Total cost of incineration 800
14
Consequential assessment of environment-driven
indirect cost
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1250
640
800
1000
200
160
250
Disposal 20/ton of waste
Plant
15
Consequential assessment of environment-driven
indirect cost
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1250
640
800
1000
200
160
250
Disposal 20/ton of waste
Plant Performance
Total revenue 358,400 Input cost
25,000 Process cost 305,000 Disposal cost
12,200 Total operating cost 342,200 Operating
income 16,200 Profit margin 16,200 /
358,400 4.52
1250 tons x 20 3050 tons x 100 610 tons x 20
Disposal cost is 3.57 of operating cost and 3.4
of net sales.
16
Consequential assessment of environment-driven
indirect cost
Process 1
Process 2
Process 3
yield 80 100/ton of input
yield 80 100/ton of input
yield 80 100/ton of input
input 20/ton
Output 560/ton
1250
640
800
1000
200
160
250
Disposal 20/ton of waste
All three process managers suggest pollution
prevention measures to the plantmanager that
would each create a zero-waste process and each
cost 4,000. What should the plant manager
decide?
17
Reading for Monday, May 4 Corbett C J, Klassen
R D (2006) Extending the Horizons Environmental
Excellence as Key to Improving Operations, MSOM
8(1) Winter 2006, pp. 5-22 Posted on course
website as Corbett Klassen 2006