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Environment Cost Management

CHAPTER. Environment Cost Management. Objectives. 1. Discuss the importance of measuring environment costs. 2. Explain how environmental costs are assigned to products and processes. 3. Describe the life-cycle cost assessment model.

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Environment Cost Management

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  1. CHAPTER Environment Cost Management

  2. Objectives 1. Discuss the importance of measuring environment costs. 2. Explain how environmental 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. After studying this chapter, you should be able to:

  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.

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

  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

  6. Causes and Incentives for Ecoefficiency

  7. Customer Demand For Cleaner Products Cost Reduction and Competitive Advantage Better Employees and Greater Productivity Innovations and New Opportunities Lower Cost of Capital and Lower Insurance Significant Special Benefits Leading to Improved Image ECOEFFICENCY

  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.

  9. Classification of Environmental Costs by Activity • 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 Prevention Activities

  10. Detection Activities Auditing environmental activities Inspecting products and processes Developing environmental performance measures Testing for contamination Verifying supplier environmental performance Measuring contamination levels Classification of Environmental Costs by Activity

  11. Internal Failure Activities Operating pollution control equipment Treating and disposing of toxic waste Maintaining pollution equipment Licensing facilities for producing contaminants Recycle scrap Classification of Environmental Costs by Activity

  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)

  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

  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%

  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

  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

  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.

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

  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.

  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

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

  22. Life-cycle assessmentidentifies the environmental consequences of a product through its entire life cycle, and then searches for opportunities to obtain environmental improvements.

  23. Life-cycle costassessmentassigns costs and benefits to the environmentalconsequences andimprovements.

  24. Controlled by Supplier Production Controlled by Manufacturer Packaging Product Use and Maintenance Recycling Disposal Controlled by Customer Product-Life Cycle Stages Raw Materials

  25. Assessment Stages • Inventory analysis • Impact analysis • Improvement analysis

  26. Inventory Analysis • Inventory analysisspecifies the types and quantities of materials and energy inputs needed and the resulting environmental releases in the form of solid, liquid, and gaseous residues.

  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

  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

  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

  30. Impact Analysis • Impact analysisassesses the environmental effects of competing designs and provides a relative ranking of those effects.

  31. Improvement Analysis • Improvement analysishas the objective of reducing the environmental impacts revealed by the inventory and impact steps.

  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

  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

  34. Environmental Cost Trend Graph Environmental Costs/Sales 1 2 3 4 5 6 7 8 Periods

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

  36. Hazardous Waste Pie Chart Treated 15.0% Incinerated 35.0% Recycled 5.0% Landfilled 25.0% Deep-well injected 20.0% Incinerated Treated Recycled Landfilled Deep-well injected

  37. Chapter Twelve The End

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