TLA 10 - Environmental Cost Management

1. Firms are interested in environmental costing because the costs of complying with
environmental regulation have increased and because improving environmental performance
can reduce costs and provide a competitive advantage.

2. Ecoefficiency is the belief that organizations can produce more goods and services while
simultaneously reducing negative environmental consequences, resource consumption, and
costs.

3. The six incentives, or causes, for ecoefficiency are

(1) customers desire to buy clean goods,
(2) better employees and greater productivity,
(3) lower cost of capital and cheaper insurance,
(4) societal benefits and improved image,
(5) innovations and searches for new opportunities, and
(6) cost reductions and increased competitiveness.

4. An environmental cost is a cost incurred because poor environmental quality exists or may
exist.

5. The four categories of environmental costs are prevention, detection, internal failure, and
external failure.
Prevention costs are costs incurred to prevent degradation to the environment.
Detection costs are incurred to determine if the firm is complying with environmental standards.
Internal failure costs are costs incurred to prevent emission of contaminants to the environment
after they have been produced.
External failure costs are costs incurred after contaminants have been emitted to the
environment.

6. Realized external failure costs are environmental costs paid for by the firm. Unrealized or
societal costs are costs caused by the firm but paid for by third parties (members of society bear
these costs).
7. Full environmental costing means that all environmental costs are assigned to the product,
including societal costs. Full private costing means that only private costs are assigned to
products.

8. Functional-based costing must first isolate the environmental costs and assign them to an
environmental costing pool. Next, a pool rate is computed using direct labor hours or machine
hours (or some other unit-level driver). Finally, the rate is used to assign environmental costs to
products based on their usage of direct labor hours or machine hours. The approach breaks
down when there is product diversity because unit-level drivers would not likely reflect the
environmental resources being consumed by each product.

9. Activity-based costing first identifies environmental activities and determines the cost of each
activity. Next, activity rates are computed. Finally, environmental costs are assigned to each
product based on their consumption of individual environmental activities.

10. The environmental cost per unit of product signals two things. First, it indicates how much
opportunity exists for improving environmental and economic performance. Second, it is a
measure of the relative cleanliness of products. The “more dirty” products should receive
greater attention than the ones that are “more clean.”

11. Life-cycle assessment is an approach that identifies the environmental consequences of a

product through its entire life cycle and then searches for opportunities to obtain environmental
improvements.

12. The environmentally important life-cycle stages of a product are resource extraction, product
manufacture, product use, and recycling and disposal.

13. The three steps of life-cycle assessment are inventory analysis, impact analysis, and
improvement analysis. Inventory analysis specifies the materials and inputs needed and the
resulting environmental releases in the form of solid, liquid, and gaseous residues. Impact
analysis assesses the environmental effects of competing designs and provides a relative
ranking of those effects. Improvement analysis has the objective of reducing the environmental
impacts revealed by the inventory and impact steps.

14. Life-cycle costing improves life-cycle assessment by assigning economic consequences to

the environmental impacts identified in the inventory and impact steps. Assessing the financial
consequences allows competing designs to be compared on a common measure, allowing an
environmental ranking of competing designs.

15. The justification for adding an environmental perspective to the Balanced Scorecard is
based on the concept of ecoefficiency. If ecoefficiency is a valid concept, then adding an
environmental perspective is legitimate because improving environmental performance can be
the source of a competitive advantage.

16. The five core objectives of the environmental perspective are:

(1) to minimize the use of hazardous materials;
(2) to minimize the use of raw or virgin materials;
(3) to minimize energy requirements for production and use of the product;
(4) to minimize the release of solid, liquid, and gaseous residues; and
(5) to maximize opportunities to recycle.

17. Minimizing the use of raw materials is an environmental issue because many raw materials
are limited in quantity and are nonrenewable. For example, only a finite amount of petroleum
reserves exists. Thus, conserving their use ensures that future generations will have access to
them.

18. Possible measures for minimizing the release of residues include pounds of toxic materials,
cubic meters of effluents, tons of greenhouse gases produced, and percentage reduction of
packaging materials.

19. Agree. Assuming the concept of ecoefficiency is valid, then all environmental failure
activities should be classified as nonvalueadded. These activities represent the consequences
of inefficient production approaches, and adopting more efficient approaches can eliminate the
need for these types of activities.

20. Design for the environment means that efforts are made to design products and processes
to minimize environmental degradation. This approach covers the entire life cycle and affects
products, processes, materials, energy, and recycling.

21. The value of financial measures of environmental performance is easy to identify:

environmental improvements should produce significant and favorable financial consequences.
If ecoefficient decisions are being made, then environmental costs should decrease as
environmental performance improves. Examples of financial measures include hazardous
materials as a percentage of total materials cost, cost of energy usage (and the trend), total
internal failure costs, total external failure costs, prevention costs, and detection costs.