COST MANAGEMENT

Don R. Hansen
Maryanne M. Mowen
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Chapter Seventeen

Environmental Cost
Management

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Learning Objectives
Explain the importance of measuring

environmental costs.
Explain how environmental costs are

assigned to products and processes.

Describe the life cycle cost assessment model.
Describe activity-based and strategic-based

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

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Causes and Incentives for Ecoefficiency

Customer Demand
for Cleaner Products

Cost Reduction
and Competitive
Advantage

Innovation
and New
Opportunities

Better Employees
and Greater
Productivity
ECOEFFICIENCY

Significant Social
Benefits Leading to
Improved Image

Lower Cost of
Capital and
Lower Insurance
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Environmental Costs

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.

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Prevention Activities
Evaluating and selecting suppliers
Evaluating and selecting pollution control

equipment
Designing processes
Designing products
Carrying out environmental studies

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Prevention Activities (continued)

Auditing environmental risks

Developing environmental management systems
Recycling products
Obtaining ISO 14001 certification

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Detection Activities
Auditing environmental activities
Inspecting products and processes
Developing environmental performance measures
Testing for contamination
Verifying supplier environmental performance

Measuring contamination levels

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Internal Failure Activities

Operating pollution control equipment
Treating and disposing of toxic waste
Maintaining pollution equipment
Licensing facilities for producing contaminants
Recycling scrap

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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
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External Failure Activities (continued)

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)

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External Failure Activities (continued)

Losing a lake for

recreational use (S)

Damaging ecosystems

from solid waste

disposal (S)

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Environmental Cost Report

Percentage of
Operating
Costs*

Environmental
Costs
Prevention costs:
Training employees
Designing products
Selecting equipment
Detection costs:
Inspecting processes
Developing measures
Internal failure costs:
Operating pollution equipment
Maintaining pollution equipment
External failure costs:
Cleaning up lake
Restoring land500,000
Property damage claim
Totals
$3,000,000

$ 60,000
180,000
40,000$ 280,000

2.80%

$240,000
80,000320,000

3.20%

$400,000
200,000600,000

6.00%

$900,000
400,000 1,800,000
30.00%

18.00%

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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.

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Environmental Financial Statement

Environmental benefits:
Cost reductions, contaminants
Cost reductions, hazardous waste disposal
Recycling income
Energy conservation cost savings
Packaging cost reductions
Total environmental benefits

$ 300,000
400,000
200,000
100,000
150,000
$1,150,000

Environmental costs:
Prevention costs
Detection costs
Internal failure costs
External failure costs
Total environmental costs

$ 280,000
320,000
600,000
1,800,000
$3,000,000
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Environmental Product Costs

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

Activities
Cleanser ACleanser B
Evaluate and select suppliers
$0.20$ 0.05
Design processes (to reduce pollution)
0.100.10
Inspect processes (for pollution problems)
0.250.15
Capture and treat chlorofluorocarbons
0.051.00
Maintain environmental equipment
0.000.50
Toxic waste disposal
0.101.75
Excessive material usage
0.08 0.25
Environmental cost per unit
$0.78$ 3.80
Other manufacturing costs (nonenvironmental)
9.02 16.20
Total unit cost
$9.80$20.00
Units produced

100,000100,000
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Product Stewardship
Product stewardship is the
practice of designing,
manufacturing, maintaining,
and recycling products to
minimize adverse
environmental impacts. Life
cycle assessment is the
means for improving product
stewardship.
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Life Cycle Assessment

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

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Life Cycle Cost Assessment

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

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Product Life Cycle Stages

Raw
Materials

Controlled
by
Supplier

Production
Controlled by
Manufacturer
Packaging

Recycling

Product
Use/Maintenance

Disposal

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Controlled by Customer

Life Cycle Assessment Stages

Life cycle assessment is defined by three formal
stages:
1.
Inventory analysis
2.
Impact analysis
3.
Improvement analysis

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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.
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Inventory Analysis (continued)

Paper cup
Material usage per cup
Wood and bark (g)
Petroleum (g)
Finished weight (g)
Utilities per Mg of material
Steam (kg)
Power (GJ)
Cooling water (M3)
Water effluent per Mg of material
Volume (M3)
Suspended solids (kg)
BOD (kg)
Organochlorides (kg)
Metal salts (kg)

Polyfoam cup
33.00.0
4.13.2
10.011.5
9,000-12,0005,000
3.50.4-0.6
50154
50-1900.5-2.0
35-60trace
30-500.07
5-70
1-2020
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Inventory Analysis (continued)

Paper cup
Air Emissions per Mg of material
Chlorine (kg)
Sulfides (kg)
Particulates (kg)
Pentane (kg)
Recycle potential
Primary user
After use
Ultimate disposal
Heat recovery (Mj/kg)
Mass to landfill (g)
Biodegradable

Polyfoam cup
0.50
2.00
5-150.1
035-50
PossibleEasy
LowHigh
2040
10.111.5
YesNo
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Impact Analysis
Impact analysis assesses
the environmental
effects of competing
designs and provides a
relative ranking of those
effects.

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

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Environmental Perspective
We can identify at least 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
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Objectives and Measures

Objectives

Measures

Minimize hazardous materials

Types and quantities (total and per unit)

Percentage of total materials cost
Productivity measures (output/input)

Minimize raw or virgin materials

Types and quantities (total and per unit)

Productivity measures (output/input)

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Objectives and Measures (continued)

Objectives

Measures

Minimize energy requirements

Types and quantities (total and per unit)

Productivity measures (output/input)

Minimize release of residues

Pounds of toxic waste produced

Cubic meters of effluents
Tons of green house gases produced
Percentage reduction of packaging
materials

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Objectives and Measures (continued)

Objectives

Measures

Maximize opportunities to recycle Pounds of materials recycled

Number of different components
Percentage of units remanufactured
Energy produced from incineration

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Nonvalue-Added Cost Trends:

Environmental Costs
Year
Nonvalue-Added Environmental Activity
2000
Inspecting processes
$ 240,000
Operating pollution equipment
400,000
Maintaining pollution equipment
200,000
Cleaning up water pollution
900,000
Property damage claim
400,000
Totals
$2,140,000

2001
$ 200,000
350,000
200,000
700,000
300,000
$1,750,000

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Environmental Cost Trend Graph

Environmental
Costs/Sales %

X
X
X
X

Periods

8
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Bar Graph for Trend Analysis

CFC Emissions
100
80
60
40
20
0

1998

1999

2000

2001

Pounds emitted
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Hazardous Waste Pie Chart

Treated 15.0%
Incineration 35.0%
Recycled 5.0%

Landfilled 25.0%

Incineration
Deep-well Injected
Landfilled
Recycled
Treated

Deep well injected 20.0%

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End of Chapter 17

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