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AMA Lecture 9

This document discusses environmental cost management and accounting. It defines key terms like ecoefficiency, sustainable development, and environmental quality cost model. It explains that environmental costs include detection costs to ensure compliance, external failure costs for contaminants released into the environment, and prevention costs to reduce failures. An environmental cost report reveals these costs' impact on profits and amounts spent in each category. Full environmental costing assigns private and societal costs to products using approaches like activity-based costing. Life-cycle assessment identifies environmental impacts throughout a product's life cycle to find improvements.

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Mohammed Fouad
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27 views

AMA Lecture 9

This document discusses environmental cost management and accounting. It defines key terms like ecoefficiency, sustainable development, and environmental quality cost model. It explains that environmental costs include detection costs to ensure compliance, external failure costs for contaminants released into the environment, and prevention costs to reduce failures. An environmental cost report reveals these costs' impact on profits and amounts spent in each category. Full environmental costing assigns private and societal costs to products using approaches like activity-based costing. Life-cycle assessment identifies environmental impacts throughout a product's life cycle to find improvements.

Uploaded by

Mohammed Fouad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MANAGEMENT

ACCOUNTING

Lecture 9

ENVIRONMENTAL COST MANAGEMENT

Dr. Abdullah Hamoud


Main source: Hansen & Mowen (2007). Managerial Accounting (8th ed.). Thomson.
Why is it important to
measure environmental
costs?

Awareness of environmental costs


is important because
environmental regulations &
fines have increased.

2
ECOEFFICIENCY: Definition

Maintains that producing more


useful goods, services is
consistent with reducing
negative environmental impacts.

3
SUSTAINABLE DEVELOPMENT:
Definition

Is development that meets needs


of present without
compromising ability of future
generations to meet their own
needs.

4
ECOEFFICIENCY
Many things
provide causes &
incentives that
foster ecoefficiency.

5
ENVIRONMENTAL QUALITY
COST MODEL

Looks at costs and their impact for damage


done to the environment. In addition to
direct costs, there are costs to preventing
environmental degradation.

6
ENVIRONMENTAL DETECTION
COSTS
Are costs to determine compliance with
appropriate environmental standards
including:
Regulatory government laws
Voluntary standards (ISO 14001)
Management’s environmental policies

7
What are environmental
external failure costs?

Environmental external failure


costs are costs of activities
performed after discharging
contaminants & waste into the
environment.

8
What information does an
environmental cost report
provide?

Environmental cost reports reveal


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

9
10
11
ENVIRONMENTAL COST
REPORT External
failure
costs are
the largest
costs.

12
Can environmental failure
costs be reduced?

Yes! Investing more in prevention


& detection activities will
reduce environmental failure
costs.

13
ENVIRONMENTAL FINANCIAL
STATEMENT Investments in
environmental
benefits
partially offset
environmental
costs.

14
ASSIGNING ENVIRONMENTAL
COSTS
Product costs
Packaging
Products themselves
Process costs
Solid, liquid, gaseous residues

15
ENVIRONMENTAL COSTING:
Definition

Full environmental costing


assigns both private & societal
costs to products. Private costs
are caused by internal processes.

16
THAMUS, INC.: Background
Two approaches can be used to assign
environmental costs to products:
functional-based or activity-based costing.
Environmental costs, often hidden in
overhead are separated out to assign to
products. Functional-based costing may
work well for homogeneous products, but
Thamus is a diversified, multi-product
firm.
17
FORMULA: Cadmium Example
Costs are assigned proportionately when
multiple products are produced.

External failure cost:

= Total failure cost ÷ Units produced


= $150,000 / 20,000 = $7.50 per unit

18
LIFE-CYCLE ASSESSMENT:
Definition

Identifies environmental
consequences of a product
through its entire life cycle &
searches for improvements.

19
PRODUCT LIFE-CYCLE STAGES
Some costs are
controlled by the
supplier while
others are
controlled by
customers.

20
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

21
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

22
OBJECTIVES &
PERSPECTIVES Companies need
measures to
evaluate whether
objectives of the
environmental
perspective are
being met.

23

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