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 strategic-
based 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 12 -7
For Cleaner Products

Cost Reduction and Better Employees

Competitive and Greater
Advantage Productivity

ECOEFFICENCY

Lower Cost of
Innovations and
Capital and Lower
New Opportunities
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.
 12 -9

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 -10

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 -11

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 -12

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 -13

Numade Corporation
Environmental Cost Report
For the Year Ended December 31, 2004
Percentage of
Environmental Costs Operating Costs
Prevention costs:
Training employees $ 60,000
Designing products 180,000
Selecting equipment 40,000 $280,000 1.40%
Detection costs:
Inspecting processes $240,000
Developing measures 80,000 320,000 1.60

Continued
 12 -14

Percentage of
Environmental Costs Operating Costs
Internal failure costs:
Operating pollution
equipment $400,000
Maintaining pollution
equipment 200,000 $ 600,000 3.00%
External failure costs:
Cleaning up lake $900,000
Restoring land 500,000
Incurring property
damage claim 400,000 1,800,000 9.00
Totals $3,000,000 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 $1,150,000

Continued
 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 100,000
Packaging cost reductions 1,800,000
Total environmental costs $1,150,000
 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 Cleanser A Cleanser B
Evaluate and select suppliers $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
Environmental cost per unit $0.78 $ 3.80
Other manufacturing costs (nonenvironmental) 9.02 16.20
Unit cost $9.80 $20.00

Units produced 100,000 100,000

 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.
 12 -24
Product-Life
Cycle Stages Raw Controlled
Materials by
Supplier

Production
Controlled by
Manufacturer

Packaging

Product
Recycling Use and Disposal
Maintenance

Controlled by Customer
 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
Petroleum (g) 4.1 3.2
Finished weight (g) 10.0 11.5
Utilities per mg of material:
Steam (kg) 9,000-12,000 5,000
Power (GJ) 3.5 0.4-0.6
Cooling water (m3) 50 154
Water effluent per mg of material:
Volume (m3) 50-190 0.5-2.0
Suspended solids (kg) 35-60 trace
BOD (kg) 30-50 0.07
Organochlorides (kg) 5-7 0
Metal salts (kg) 1-20 20
 12 -28

PAPER CUP POLYFORM CUP

Air Emissions per mg of material:
Chlorine (kg) 0.5 0
Sulfides (kg) 2.0 0
Particulates (kg) 5-15 0.1
Pentane (kg) 0 35-50
Recycle potential:
Primary user Possible Easy
After use Low High
Ultimate disposal:
Heat recovery (Mj/kg) 20 40
Mass to landfill (g) 10.1 11.5
Biodegradable Yes No
 12 -29

PAPER CUP POLYFORM CUP

Material usage $0.010 $0.004
Utilities 0.012 0.003
Contaminant-related
resources 0.008 0.005
Total private costs $0.030 $0.012
Recycling benefits
(societal) -0.001 -0.004
Environmental cost
per unit $0.029 $0.008
 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 YEAR
ENVIRONMENTAL ACTIVITY 2004 2003

Inspecting processes $ 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
Totals $1,750,000 $2,140,000
 12 -34
Environmental Cost Trend Graph
Environmental
Costs/Sales

1 2 3 4 5 6 7 8
Periods
 12 -35
Bar Graph for Trend Analysis
CFC Emissions
100

80

60

40

20

0
2001 2002 2003 2004

Pounds emitted
 12 -36
Hazardous Waste Pie Chart
Treated 15.0%
Incinerated 35.0%
Recycled 5.0%

Landfilled 25.0%

Deep-well injected
Incinerated 20.0%
Treated
Recycled
Landfilled
Deep-well injected
 12 -37

Chapter Twelve

The End
12 -38