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Environment Cost Management

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

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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.

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Incentives and causes for increased efficiency:
1) Customers are demanding products that are environmental friendly

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

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Causes and Incentives for Ecoefficiency

Customer Demand For Cleaner Products Cost Reduction and Competitive Advantage Better Employees and Greater Productivity

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ECOEFFICENCY Lower Cost of Capital and Lower Insurance

Innovations and New Opportunities

Significant Special Benefits Leading to Improved Image

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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

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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

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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

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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)

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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 $ 60,000 180,000 40,000 $240,000 80,000 Continued Percentage of Operating Costs

$280,000 320,000

1.40% 1.60

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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 $900,000 500,000 400,000 1,800,000 $3,000,000 9.00 15.00% 3.00%

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

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Numade Corporation Environmental Financial Statement For the Year Ended December 31, 2004
Environmental costs: Prevention costs Detection costs Internal failure costs External failure costs Packaging cost reductions Total environmental costs $ 280,000 320,000 600,000 100,000 1,800,000 $1,150,000

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

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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.

ABC Environmental Costing
Evaluate and select suppliers Design processes (to reduce pollution) Inspect processes (for pollution problems) Capture and treat chlorofluorocarbons Maintain environmental equipment Toxic waste disposal Excessive materials usage Environmental cost per unit Other manufacturing costs (nonenvironmental) Unit cost Units produced $0.20 0.10 0.25 0.05 0.00 0.10 0.08 $0.78 9.02 $9.80 100,000 $ 0.05 0.10 0.15 1.00 0.50 1.75 0.25 $ 3.80 16.20 $20.00 100,000

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Cleanser A Cleanser B

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

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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 assigns costs and benefits to the environmental consequences and improvements.

Product-Life Cycle Stages

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Raw Materials

Controlled by Supplier

Controlled by Manufacturer



Product Use and Maintenance


Controlled by Customer

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Assessment Stages
 Inventory analysis  Impact analysis  Improvement


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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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Materials 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) 50-190 35-60 30-50 5-7 1-20 9,000-12,000 3.5 50 33.0 4.1 10.0

0.0 3.2 11.5 5,000 0.4-0.6 154 0.5-2.0 trace 0.07 0 20

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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 20 10.1 Yes Possible Low 0.5 2.0 5-15 0

0 0 0.1 35-50 Easy High 40 11.5 No

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Material usage Utilities Contaminant-related resources Total private costs Recycling benefits (societal)

$0.010 0.012 0.008 $0.030 -0.001

$0.004 0.003 0.005 $0.012 -0.004 $0.008

Environmental cost per unit $0.029

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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
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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NONVALUE-ADDED ENVIRONMENTAL ACTIVITY Inspecting processes Operating pollution equipment Maintaining pollution equipment Cleaning up water pollution Property damage claim Totals

YEAR 2004 $ 200,000 350,000 200,000 700,000 300,000 $1,750,000 2003 $ 240,000 400,000 200,000 900,000 400,000 $2,140,000

Environmental Cost Trend Graph
Environmental Costs/Sales

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Bar Graph for Trend Analysis
CFC Emissions
100 80 60 40 20 0 2001 2002 2003 2004

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Pounds emitted

Hazardous Waste Pie Chart
Treated 15.0% Incinerated 35.0% Recycled 5.0%

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Landfilled 25.0% Deep-well injected 20.0%

Incinerated Treated Recycled Landfilled Deep-well injected

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Chapter Twelve

The End

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