ENVIRONMENTAL COST MANAGEMENT

KELOMPOK 1 :

Hilmy Fauzan

Novia Kumala Sari

Try Susanti

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Measuring Environmental Costs

Why environmental costs need to be measured ??

1. Environmental regulations have improved significantly,
even is expected to be tighter again.
2. Successful resolution of environmental issues becomes
an increasingly competitive
To understand the two main reasons, we need to
.
understand the concept which is called ecoefiency.

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The benefits of ecoefficiency
 Essentially maintain that organizations can produce more
useful goods and services while simultaneously reducing
negative environmental impacts, resources consumption , and
cost.
 This concept contains three important messages.
1. Improvements in ecological and economic performance can
and should be complementary.
2. Improvement of environmental performance should no longer
be treated only as charity and charity, but as a competition.
3. Ekoefiensi is a complementary and supportive development

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 Cause and Incentive For Ecoefficiency

Cost reduction and

Costumer demand Better employee and
competitive
for cleaner product greater productivity
advantage

Ecoefficiency

Inovation and new Significant social Lower cost of capital

opportunities benefits leading to and lower insurance
improved image
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 ENVIRONMENTAL QUALITY COST
MODEL
 Environmental costs are costs incurred due to poor
environmental quality that may occur. Therefore,
environmental costs relate to the creation, detection, repair
and prevention of environmental degradation
 Environmental costs can be classified into four categories:
1. Prevention Cost
2. Detection Cost
3. Internal Failure Cost
4. Eksternal Failure Cost

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ENVIROMENTAL PREVENTION COST
 Is the costs for the activities undertaken to prevent the
production of waste and or waste that can cause
environmental damage.
 Examples of preventive activities are: supplier evaluation
and delivery; evaluation and selection of tools to control
pollution, process design and products to reduce or
eliminate waste train employees, study environmental
impacts, environmental risk audits, conduct environmental
research, develop environmental management systems,
product recycling.

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 ENVIROMENTAL DETECTION COST
 Is the costs for the activities undertaken to determine whether the
products, processes, and other activities in the company have met the
applicable standards or not. The environmental standards and procedures
followed by the company are defined in three ways(1) government
regulations, (2) ISO 14001 standards developed by the International
Standard Organization, (3) environmental policies developed by
management.
 Examples of detection activities are: environmental activity audits,
product and process checks (environmentally friendly), development of
environmental performance measures, pollution testing, environmental
performance verification from suppliers, and pollution level
measurements.
 Ford Motor Company, for example, has made a commitment to improve
its environmental performance. As part of this overall commitment, Ford
has resolved to obtain ISO 14001 certification in all of its plants
throughout the world
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ENVIROMENTAL INTERNAL FAILURE COST
 Is the costs for the activities carried out due to the
production of waste and waste, but not disposed of into
the outside environment. The cost of internal failure
occurs to eliminate and treat waste and waste when it is
produced.
 Examples of internal failure activities are: operation of
equipment to reduce or eliminate pollution, toxic waste
disposal and treatment, maintenance of pollution
equipment, license facilities for waste production, and
recycling of materials

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ENVIROMENTAL EXSTERNAL FAILURE COST

 Are the costs for the activities undertaken after removing

waste or waste into the environment. The cost of
external failure is divided into two more :
a. The cost of the realized external failure is the cost
experienced and paid by the company. Ex: cleaning of
polluted lakes, clearing of spilled oil, cleaning of
contaminated soi
b. Costs of unrealized external failure or social costs are
costs incurred by the company but experienced and paid
by parties outside the company. Ex : Medical treatment
due to polluted air (individual welfare) that bears the
polluted population or Loss of employment due to
pollution (individual welfare)

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Environmental Cost Report

 Environmental cost reports reveal

 1) the impact of environmental costs on firm profitability
 2) relative amounts expended in each category.

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Enviromental Financial Report
 in a given period, there are three types of environmental
benefits:
1. Income, referring to revenue flowing to the
organization due to environmental actions such as
recycling paper, finding new applications for non-
hazardous waste
2. Avoidance of costs (walk savings), referring to the
running savings generated in previous years.
3. Current savings, referring to the reduction of
environmental costs achieved in the year

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ENVIRONMENTAL FINANCIAL REPORT

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Reducing Environmental Costs
 Investing more in prevention & detection activities will
reduce environmental failure costs.

Charge The Environment

 Products and processes are a source of environmental costs. The
process that produces the product can create a solid, liquid, and gas
residue which furthermore has the potential to degrade the
environment. Thus, the residue is the cause of the cost of failure of
the internal and external environment.
 The product itself can be a source of environmental costs. After
selling the product,its use and disposal by customers may result in
environmental degradation.

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ENVIRONMENTAL product cost
The environmental costs of production processes, marketing, and
product delivery and post-purchase environmental costs caused by the
use and disposal of products are examples of environmental product
costs
Full environmental costing assigns both private & societal costs to
products. Private costs are caused by internal processes.

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Functional-Based Enviromental Cost
Assignment
 Using the environmental cost definitions and classification
framework just developed, environmental costs must first
be separated into an environmental cost pool. Once
separated into their own pool, functional-based costing
would assign these costs to individual products using unit-
level drivers such as direct labor hours and machine
hours.
 This approach may work well for a homogeneous product
setting however, Thamus, a multiple-product firm with
product diversity, discovered that a functional-based
assignment can produce cost distortions.

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 Functional-Based Enviromental Cost
Assignment
 Among the products that Thamus produces are two types of glass: Type A and
Type B. There are 50,000 sheets of each type produced, and each sheet of glass
requiresone-halfof a machine hour. Thamus initially used machine hours to assign
environmental costs to products. In producing glass products, cadmium emissions
occur. To produce cadmium emissions, a special government permit must be
purchased that costs $300,000.The permit must be renewed every three years.
Thus, the permit cost is $100,000 per year. The permit authorizes a certain level
of cadmium emissions. If emissions exceed the allowed level, a fine is imposed.
There is one unannounced inspection each quarter. The firm averages $50,000
per year in fines.Thus, the annual cost of cadmium emissions is $150,000
($100,000+$50,000).The environmental cost per machine hour is $3
($150,000/50,000 machine hours). Use of this rate produces an environmental
cost per unit of $1.50 for each product($3 X 1/2 machine hour)

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Activity-Based Enviromental Cost
Assignment
 Activity-based calculations charge a fee to the activity
environment and then calculate the activity rate / rate.
This level used to charge the environmental costs to the
product based on use of activity. For companies that
produce diverse product, activity-based approach is more
appropriate to use.

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LIFE-CYCLE ASSESSMENT:

 Life cycle assessment is a means to improve product improvement.

Product loading is the practice of designing, processing, and recycling
products to minimize harm to the environment.
The life cycle assessment identifies the environmental influences of a
product throughout its life cycle and then seeks opportunities for
environmental improvement

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ASSESSMENT STAGES

 3 formal stages
 Inventory analysis
 Types, quantities inputs needed
 Environmental releases
 Impact analysis
 Effects of competing designs
 Relative ranking of effects
 Improvement analysis
 Objective: to reduce environmental impacts

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 Strategy Based Environmental
Responsibilty Accounting

The performance of continuous improvement for environmental

control is probably a balanced scored perspective and can be a
source of competitive advantage
the scorecard balance framework provides integrated goals and
measures to achieve environmental performance improvement
goals

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ENVIRONMENTAL PERSPECTIVE

 5 objectives for environmental perspective

 Minimize use of raw or virgin materials
 Minimize use of hazardous materials
 Minimize energy requirements for production, use of product
 Minimize release of solid, liquid, gaseous residues
 Maximize opportunities to recycle

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The role activity of management
 Analysis of environmental activities is critical for a sound
environmental control system

 Design for the environment : this special design

approach is called design for the environment. It touches
product, processes ,materials ,energy , and recycling .
 Financial measure : environmental improvements ought
to produce significant and beneficial financial
concequences. This means that the firm has achieved a
favorable trade-off among failure activities and prevention
activities.

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Are environmental activities
non-value-added?

Because environmental pollution

is equivalent to economic
inefficiency, all failure activities
are non-value-added.
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ENVIRONMENTAL COST TREND
GRAPH
Costs as a
percentage of sales
trend downward
over time.
%

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 BAR GRAPH FOR TRENDS
Emissions trend
downward over
time.

%
HAZARDOUS WASTE PIE CHART

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