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Vdocuments - MX Solution Manual Managerial Accounting Hansen Mowen 8th Editionsch 17
Vdocuments - MX Solution Manual Managerial Accounting Hansen Mowen 8th Editionsch 17
1. Firms are interested in environmental cost- 8. Functional-based costing must first isolate
ing because the costs of complying with en- the environmental costs and assign them to
vironmental regulation have increased and an environmental costing pool. Next, a pool
because improving environmental perfor- rate is computed using direct labor hours or
mance can reduce costs and provide a machine hours (or some other unit-level
competitive advantage. driver). Finally, the rate is used to assign
environmental costs to products based on
2. Ecoefficiency is the belief that organizations their usage of direct labor hours or machine
can produce more goods and services while
hours. The approach breaks down when
simultaneously reducing negative environ- there is product diversity because unit-level
mental consequences, resource consump- drivers would not likely reflect the environ-
tion, and costs.
mental resources being consumed by each
3. The six incentives, or causes, for ecoeffi- product.
ciency are (1) customers desire to buy clean 9. Activity-based costing first identifies envi-
goods, (2) better employees and greater
ronmental activities and determines the cost
productivity, (3) lower cost of capital and of each activity. Next, activity rates are com-
cheaper insurance, (4) societal benefits and puted. Finally, environmental costs are
improved image, (5) innovations and
assigned to each product based on their
searches for new opportunities, and (6) cost consumption of individual environmental ac-
reductions and increased competitiveness. tivities.
4. An environmental cost is a cost incurred
10. The environmental cost per unit of product
because poor environmental quality exists or
may exist. signals two things. First, it indicates how
much opportunity exists for improving envi-
5. The four categories of environmental costs ronmental and economic performance.
are prevention, detection, internal failure, Second, it is a measure of the relative clean-
and external failure. Prevention costs are liness of products. The “more dirty” products
costs incurred to prevent degradation to the should receive greater attention than the
environment. Detection costs are incurred to ones that are “more clean.”
determine if the firm is complying with envi-
ronmental standards. Internal failure costs 11. Life-cycle assessment is an approach that
are costs incurred to prevent emission of identifies the environmental consequences
contaminants to the environment after they of a product through its entire life cycle and
have been produced. External failure costs then searches for opportunities to obtain en-
are costs incurred after contaminants have vironmental improvements.
been emitted to the environment.
12. The environmentally important life-cycle
6. Realized external failure costs are environ- stages of a product are resource extraction,
mental costs paid for by the firm. Unrealized product manufacture, product use, and re-
or societal costs are costs caused by the cycling and disposal.
firm but paid for by third parties (members of
society bear these costs). 13. The three steps of life-cycle assessment are
inventory analysis, impact analysis, and im-
7. Full environmental costing means that all provement analysis. Inventory analysis spe-
environmental costs are assigned to the cifies the materials and inputs needed and
product, including societal costs. Full private
the resulting environmental releases in the
costing means that only private costs are
form of solid, liquid, and gaseous residues.
assigned to products.
Impact analysis assesses the envi-
581
ronmental effects of competing designs and ing their use ensures that future generations
provides a relative ranking of those effects. will have access to them.
Improvement analysis has the objective of
18. Possible measures for minimizing the re-
reducing the environmental impacts re-
lease of residues include pounds of toxic
vealed by the inventory and impact steps.
materials, cubic meters of effluents, tons of
14. Life-cycle costing improves life-cycle as- greenhouse gases produced, and percen-
sessment by assigning economic conse- tage reduction of packaging materials.
quences to the environmental impacts iden-
19. Agree. Assuming the concept of ecoefficien-
tified in the inventory and impact steps.
cy is valid, then all environmental failure ac-
Assessing the financial consequences al-
tivities should be classified as nonvalue-
lows competing designs to be compared on
added. These activities represent the con-
a common measure, allowing an environ-
sequences of inefficient production ap-
mental ranking of competing designs.
proaches, and adopting more efficient
15. The justification for adding an environmental approaches can eliminate the need for these
perspective to the Balanced Scorecard is types of activities.
based on the concept of ecoefficiency. If
20. Design for the environment means that
ecoefficiency is a valid concept, then adding
efforts are made to design products and
an environmental perspective is legitimate
processes to minimize environmental de-
because improving environmental perfor-
gradation. This approach covers the entire
mance can be the source of a competitive ad-
life cycle and affects products, processes,
vantage.
materials, energy, and recycling.
16. The five core objectives of the environmen-
21. The value of financial measures of environ-
tal perspective are: (1) to minimize the use
mental performance is easy to identify: envi-
of hazardous materials; (2) to minimize the
ronmental improvements should produce
use of raw or virgin materials; (3) to minim-
significant and favorable financial conse-
ize energy requirements for production and
quences. If ecoefficient decisions are being
use of the product; (4) to minimize the re-
made, then environmental costs should de-
lease of solid, liquid, and gaseous residues;
crease as environmental performance im-
and (5) to maximize opportunities to recycle.
proves. Examples of financial measures in-
17. Minimizing the use of raw materials is an clude hazardous materials as a percentage
environmental issue because many raw ma- of total materials cost, cost of energy usage
terials are limited in quantity and are nonre- (and the trend), total internal failure costs,
newable. For example, only a finite amount total external failure costs, prevention costs,
of petroleum reserves exists. Thus, conserv- and detection costs.
582
EXERCISES
17–1
1. d 9. a
2. e 10. e
3. d 11. d
4. a 12. b
5. e
6. c
7. b
8. e
17–2
583
17–3
1. External failure costs for the environmental model are made up of two catego-
ries: those paid for by the firm and those paid for by a third party (society). In
the TQM model, all external failure costs are assumed to be paid for by the
firm.
2. The external failure cost curve is simply the horizontal axis because the firm
pays for nothing. The total cost curve is the control cost curve (the sum of
preventive and detection costs). The incentive is to degrade as much as poss-
ible to lower control costs. Thus, the optimal operating point from the firm’s
perspective is total pollution because all external failure costs are paid for by
someone else. Ecoefficiency has no meaning in this extreme case. The role of
government here is to convert the externalities to private costs. Regulation is
required to enable ecoefficiency—to make it an operable concept.
17–4
584
17–5
1. Lemmons Pharmaceuticals
Environmental Cost Report
For the Year Ended December 31, 2008
Environmental Costs Percentage*
Prevention costs:
Environmental studies $ 240,000
Environmental training 150,000 $ 390,000 0.33%
Detection costs:
Testing for contamination $ 1,200,000
Measuring contamination levels 120,000 1,320,000 1.10
Internal failure:
Treating toxic waste $ 9,600,000
Operating equipment 1,970,000
Maintaining equipment 720,000 12,290,000 10.24
External failure:
Inefficient materials usage $ 2,400,000
Cleanup of soil 3,600,000 6,000,000 5.00
Totals $20,000,000 16.67%**
*Of operating costs ($120,000,000)
**Rounded
585
17–5 Concluded
3. Both items should be added to the external failure category in the report. The
first item would add $2,100,000 and is a private cost. The second adds
$4,800,000 and is a societal cost. The amount reported for this category
would then become $12,900,000, and the total environmental cost would in-
crease to $26,900,000. Under a full-costing regime, the entire $6,900,000
should be included in the report. Often, however, only private costs will be in-
cluded.
17–6
1. Activity rates:
Packaging rate: $5,400,000/5,400,000 = $1.00 per pound
Energy rate: $1,440,000/1,800,000 = $0.80 per kilowatt-hour
Toxin release rate: $720,000/3,600,000 = $0.20 per pound
Pollution rate: $1,680,000/600,000 = $2.80 per machine hour
Unit cost:
Herbicide Insecticide
Packaging:
$1.00 × 3,600,000 $ 3,600,000
$1.00 × 1,800,000 $ 1,800,000
Energy:
$0.80 × 1,200,000 960,000
$0.80 × 600,000 480,000
Toxin releases:
$0.20 × 3,000,000 600,000
$0.20 × 600,000 120,000
Pollution control:
$2.80 × 480,000 1,344,000
$2.80 × 120,000 336,000
Total $ 6,504,000 $ 2,736,000
÷ 12,000,000 ÷ 30,000,000
Unit cost per pound $ 0.542 $ 0.0912
The herbicide has the highest environmental cost per unit. So, to the extent
that the per-unit environmental cost measures environmental damage, we can
say that this product causes more problems than the insecticide.
586
17–6 Concluded
3. These costs would increase the toxin release rate by $0.90 per pound
($3,240,000/3,600,000). This increase, in turn, would increase the amount as-
signed to each product: $2,700,000 to the herbicide and $540,000 to the insec-
ticide. Unit costs, then, would increase by $0.225 for the herbicide
($2,700,000/12,000,000) and $0.018 for the insecticide ($540,000/30,000,000). This
is a “full-costing” approach, which many feel ought to be the way environ-
mental costs are assigned. However, it is often difficult to estimate the so-
cietal costs, and many firms restrict their cost assignments to private costs.
17–7
587
17–7 Continued
Unit cost:
Herbicide Insecticide
Packaging and treatment:
$0.60 × 3,240,000 $ 1,944,000
$0.60 × 1,620,000 $ 972,000
Energy:
$0.80 × 800,000 640,000
$0.80 × 400,000 320,000
Toxin releases:
$0.10 × 1,500,000 150,000
$0.10 × 300,000 30,000
Pollution control:
$2.80 × 480,000 1,344,000
$2.80 × 120,000 336,000
Engineering:
$30 × 18,000 540,000
$30 × 6,000 180,000
Total $ 4,618,000 $ 1,838,000
÷ 12,000,000 ÷ 30,000,000
Unit cost per pound $ 0.3848** $ 0.0613**
**Rounded
2. Savings:
588
17–7 Concluded
3. Excessive energy and materials usage and releasing toxins are external fail-
ure activities; operating pollution control equipment is an internal failure ac-
tivity. Engineering is a prevention activity (added during the improvement
process).
17–8
1. Both use about the same quantity of primary raw materials; however, tallow is
a renewable resource, whereas petrochemical stocks are not. Thus, an envi-
ronmental advantage on this dimension belongs to tallow. Water usage,
though, offsets some of this advantage. Tallow requires a much heavier
usage of water (10 times the amount). Although water is renewable, it is also a
limited resource and has a number of competing uses. Energy usage is in fa-
vor of tallow, but only slightly (120 total kilowatt-hours versus 135 for petro-
chemicals). Emissions to the environment are more difficult to assess. Two
are in favor of petrochemicals and two in favor of tallow. There is insufficient
information to evaluate the relative damage caused by each type of contami-
nant. Thus, at this point, it is difficult to determine which of the two is more
environmentally friendly. One might try the tallow approach and argue that it
is more compatible with the concept of sustainable development. Using tal-
low may preserve more petrochemical stocks for future generations—why
use the petrochemical stock approach when it is unnecessary and it contri-
butes to the depletion of a scarce resource?
589
17–8 Continued
590
17–8 Concluded
3. Suppliers control production of the raw materials and the usage of water and
energy in their production. The producer controls the usage of the raw mate-
rials and packaging, energy associated with processing and transportation,
and the emission of the contaminants during production. The producer also
has the ability to influence the recyclability and disposability of the product.
There is no explicit information concerning packaging, product use and main-
tenance, recycling, and disposal. These factors are also significant issues.
The biodegradability of the surfactants, for example, is something that ought
to be explored.
17–9
591
17–9 Concluded
3. Ultimate disposal can affect the usage of land, energy, and material resources
and also has the potential of contaminating land, water, and air. Disposal by
recycling reduces the demand for primary resources. Disposal by safe incine-
ration (designed to avoid the release of damaging contaminants) can reduce
the demand for nonrenewable energy resources and replace some of the
energy used to produce the packaging. Using landfills to dispose of the prod-
uct ties up the land and creates potential contamination (e.g., methane gas re-
leased into the air by anaerobic decay of organic waste).
4. Possible reasons: (1) Rate of usage is greater than the rate of replacement, (2)
Resources are limited by alternative uses (e.g., national parks), and
(3) Resources are freed up for alternative uses.
17–10
592
17–11
2. The activities are all concerned with the learning and growth perspective. By
investing in an environmental management system (ISO 14001 registration)
and improving the environmental information system, the environmental in-
frastructure is enhanced. The cost of ISO 14001 is a prevention cost, and the
development of environmental measurements is a detection cost. Auditing
the report has to do with the quality of measurement and thus could be clas-
sified as a detection cost.
3.
30
Number of Registrations
24
25
20
15
15
9
10
5 3
0
2005 2006 2007 2008
Year
Registrations
593
17–11 Continued
Energy Consumption
3,050
3,000
3,000
2,950
2,950
2,900
BTUs
2,900
2,850
2,850
2,800
2,750
2005 2006 2007 2008
Year
Greenhouse Gases
41,000
40,000
40,000
39,000
39,000
38,000
38,000
Tons
37,000
36,000
36,000
35,000
34,000
2005 2006 2007 2008
Year
594
17–11 Concluded
BTUs are associated with the objective to minimize energy usage, and tons of
greenhouse gases are associated with the objective to minimize release of
contaminants. The number of facilities registered may be better classified
with the objective of increasing environmental capabilities and be located
within the learning and growth perspective. ISO 14001 is concerned with
putting into place an environmental management system and thus is con-
cerned with all core objectives.
17–12
1.
0.14
0.12
0.12
0.1
Costs/Sales
0.10
0.08
0.08 0.07
0.06
0.04
0.02
0.00
2005 2006 207 2008
Year
Costs/Sales
595
17–12 Concluded
2.
12,500
12,000
12,000 11,800
BTUs/Sales
11,500
11,000
10,545
10,364
10,500
10,000
9,500
2005 2006 2007 2008
Year
BTUs/Sales
Energy consumption has dropped from 12,000 BTUs per sales dollar to 10,364
BTUs per sales dollar, a 13.63 percent improvement [(12,000 – 10,364)/12,000].
This compares with a 5 percent improvement for the measure that is not nor-
malized. The 13.63 percent is a more meaningful measure because it reflects
the need to increase energy consumption as output increases.
596
PROBLEMS
17–13
1. Environmental benefits:
• Ozone-depleting substances: external failure
• Hazardous waste disposal: external failure
• Hazardous waste materials: internal failure
• Nonhazardous waste disposal: external failure
• Nonhazardous waste materials: internal failure
• Recycling materials: prevention
• Excessive energy usage: internal and external failure
• Excessive packaging: external failure
In all cases except for recycling, the underlying reduction activities should be
largely prevention with some detection requirements. This reveals the impor-
tance of prevention in the ecoefficiency model (remind students of the 1-10-
100 rule).
Environmental costs:
• Corporate level: prevention
• Auditor fees: prevention and detection
• Environmental engineering: a cost that likely would be split among ac-
tivities in four categories (using, for example, resource drivers)
• Professionals: all four categories
• Packaging: prevention
• Pollution controls, operations and maintenance: internal failure
• Pollution controls, depreciation: internal failure
• Attorney fees: external failure
• Settlements: external failure
• Waste disposal: external failure
• Environmental taxes: external failure
• Remediation, on-site: internal failure
• Remediation, off-site: external failure
597
17–13 Concluded
2.
• Ozone-depleting substances: pounds (tons) released; objective: minim-
ize release of residues
• Hazardous waste disposal: tons of residues landfilled; objective: minim-
ize hazardous waste
• Hazardous waste materials: pounds (tons) produced; objective: minim-
ize hazardous waste
• Nonhazardous waste disposal: tons sent to landfills; objective: minim-
ize raw materials
• Nonhazardous waste materials: Pounds of waste/pounds of materials
issued; objective: minimize raw materials
• Recycling materials: pounds of materials recycled; objective: maximize
opportunities to recycle
• Energy usage: kilowatts, BTUs; objective: minimize energy consumption
• Packaging: pounds of packaging; objective(s): minimize raw materials
and minimize residues
598
17–14
2. In 2006, the cost reductions were less than the design cost. However, in the
following year, the cost reduction achieved matched the design cost, and the
reductions achieved in the prior year are costs avoided in 2007 as well. Thus,
the total savings are $1,600,000, the sum of last year’s ($960,000) plus this
year’s ($640,000). In 2006, the design costs are $80,000, and the pollution
costs are reduced by an additional $960,000. Thus, the total savings per year now
amount to $2,560,000 (the sum of the current-year savings plus the costs
avoided from improvements of prior years). How much is an annuity of
$2,560,000 worth? Certainly more than the $2,160,000 paid for engineering
design activity in 2005, 2006, 2007, and 2008! This seems to support ecoeffi-
ciency: improving environmental performance improves economic efficiency.
599
17–15
1. Avade Company
Environmental Financial Statement
For the Year Ended December 31, 2008
Environmental benefits:
Income:
Recycling income ........................................................... $ 200,000
Increased sales .............................................................. 1,600,000
Current savings:
Cost reductions, hazardous waste ............................... 800,000
Cost reductions, contaminant releases ....................... 1,200,000
Cost reductions, scrap production .............................. 200,000
Cost reductions, pollution equipment ......................... 640,000
Energy conservation savings ....................................... 144,000
Remediation savings ..................................................... 880,000
Reduced insurance and finance costs ......................... 640,000
Ongoing savings:
Cost reductions, hazardous waste ............................... 400,000
Cost reductions, contaminant releases ....................... 800,000
Cost reductions, scrap production .............................. 200,000
Cost reductions, pollution equipment ......................... 400,000
Energy conservation savings ....................................... 144,000
Remediation savings ..................................................... 800,000
Total benefits ............................................................ $9,048,000
600
17–15 Concluded
Environmental costs:
Prevention:
Designing processes and products $ 800,000
Training employees 320,000
Detection:
Measuring contaminant releases 560,000
Inspecting processes 640,000
Internal failure:
Producing scrap 1,000,000
Operating pollution equipment 1,040,000
External failure:
Disposing of hazardous waste 400,000
Releasing air contaminants 2,000,000
Using energy 1,152,000
Remediation 1,520,000
Total costs $9,432,000
2. The total environmental costs in 2006 were $14,280,000. The total costs in
2008 were $9,432,000, a significant decrease. Adding to this the fact that sales
increased because of an improved environmental image, financing and insur-
ance costs decreased, and recycling income increased, then there is strong
evidence of increased efficiency. Moreover, the ratio of benefits to costs in
2006 is approaching one. Thus, ecoefficiency is working, and the firm is
strengthening its competitive position.
17–16
1. Activity rates:
Hazardous waste: $2,400,000/2,400 = $1,000 per ton
Measurement: $120,000/60,000 = $2 per transaction
Contaminants: $6,000,000/3,000 = $2,000 per ton
Scrap: $2,100,000/600,000 = $3.50 per pound
Equipment: $3,120,000/6,240,000 = $0.51 per hour
Designing: $600,000/24,000 = $25 per hour
Energy: $2,160,000/21,600,000 = $0.10 per BTU
Training: $120,000/1,200 = $100 per hour
Remediation: $4,800,000/240,000 = $20 per hour
601
17–16 Continued
602
17–16 Continued
603
17–16 Concluded
17–17
1. i 8. j
2. d 9. c
3. m 10. n
4. a 11. f
5. k 12. h
6. e 13. g
7. b 14. l
604
17–18
1. The basic issue is which material should be used. Presumably, the functional-
ity of the two designs is similar (for example, durability is not an issue). The
weight of the polymer product is much less than the steel product and, there-
fore, uses less raw materials. This advantage, however, is counterbalanced
by the very high recyclable advantage of steel. Only 0.5 pound appears to be
lost, while almost all the polymer material is lost (through incineration). While
incineration provides an energy source, it also uses up a nonrenewable raw
material. Steel recycling keeps most of the nonrenewable raw material in play.
The polymer design, though, does have a product use advantage. It causes
less petroleum to be consumed per year than the steel product. It also uses
less energy in the production stage. But whether this all offsets the recyclable
advantage is unclear. The residue picture is also unclear. The polymer pro-
duces more gaseous residues but less solid residues. It would be interesting
to know which of the two has the most environmental impact. For example, if
the gaseous is more serious, then the contamination advantage could flow to
the steel product. Other information that might be useful is the energy used to
produce the raw materials.
605
17–18 Continued
2. Life-cycle cost:
Polymer Galvanized Steel
Materials:
$30 × 9 $270.00
$15 × 20 $300.00
Energy:
Production:
$0.50 × 135* 67.50
$0.50 × 200* 100.00
Product use:
$0.70 × 66 46.20
$0.70 × 110 77.00
Contaminants:
Gaseous:
$100 × 0.4 40.00
$100 × 0.2 20.00
Solid:
$40 × 0.6 24.00
$50 × 2.0 100.00
Incineration benefit (2.00) —
Recycling benefit — (20.00)
Total $445.70 $577.00
*Pounds × Kilowatt-hours per pound
Strengths: This approach provides a single summary measure of the envi-
ronmental effects. It values potential trade-offs. For example, cost may act as
a surrogate for the relative importance of contaminants. If so, then the solid
contaminants appear to weigh more than the gaseous.
Weaknesses: It is sometimes difficult to estimate the value or cost of certain
items. For example, the recycling benefit of $20 may understate the impor-
tance of this variable. Furthermore, the incineration benefit does not consider
the permanent loss of a nonrenewable resource. In fairness, it should be men-
tioned that these problems are more significant when the cost difference be-
tween the two is small, which is not the case in this example.
606
17–18 Concluded
3. Although product-use effects and disposal are not included, they do have en-
vironmental effects caused by the company. Furthermore, some of these
costs, such as energy efficiency, are borne directly by the consumer. Reduc-
ing postpurchase costs decreases sacrifice for the customer and increases
customer value and therefore may be the source of a competitive advantage.
Customer demand for cleaner products may also be a good reason for paying
attention to these costs. Finally, the costs are a signal of economic inefficien-
cy and thus should prompt a search for more ecoefficiency.
4. Given the cost difference of $131.30 ($577.00 – $445.70), the polymer design
would be selected. The recyclable advantage is so understated that it would
overcome this difference. The favorable cost trade-off for the contaminants is
a significant factor in favor of the polymer unit.
17–19
607
17–19 Concluded
3.
Improve Increase
CUSTOMER
Image Market Share
LEARNING
AND Training Employee Hire
GROWTH Capabilities Engineers
608
17–20
1.
Hazardous Waste
60,000
50,000 48,000
50,000 46,000
Tons of Waste
40,000
40,000
30,000
20,000
10,000
0
2005 2006 2007 2008
Year
2.
4% 4%
20% 2%
Incinerated
Treated
Recycled
Landfilled
Injected
70%
609
17–20 Continued
9%
Incinerated
37% Treated
Recycled
37%
Landfilled
8% Injected
9%
In 2005, 90 percent of waste was disposed of using landfill and deep-well in-
jections. In 2006, this has dropped to 46 percent, a significant improvement.
3.
Liquid Residues
120
100
Tons of Sulfates
100 92
81
73
80
60
40
20
0
2005 2006 2007 2008
Year
610
17–20 Concluded
4. Cost in 2005:
Hazardous waste:
Incineration $70 × 2,000 = $ 140,000
Treated $100 × 2,000 = 200,000
Recycled $10 × 1,000 = (10,000)
Landfilled $50 × 35,000 = 1,750,000
Injection $60 × 10,000 = 600,000
$2,680,000
Liquid residues $4,000 × 100 = 400,000
Total cost $3,080,000
Cost in 2008:
Hazardous waste:
Incineration $70 × 15,000 = $1,050,000
Treated $100 × 3,000 = 300,000
Recycled $10 × 3,500 = (35,000)
Landfilled $50 × 15,000 = 750,000
Injection $60 × 3,500 = 210,000
$2,275,000
Liquid residues $4,000 × 73 = 292,000
Total cost $2,567,000
Environmental costs are reduced by $513,000 ($3,080,000 – $2,567,000). This
is a good reduction, but it may be even more than indicated. The reason: fu-
ture cleanup liabilities may also be reduced, and these savings are not fac-
tored into the analysis.
RESEARCH ASSIGNMENTS
17–21
17–22
611
612