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Environment Environment Cost Cost

ManagementManagement

CHAPTERCHAPTER

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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.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

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Ecoefficiency essentially maintains that organizations

can produce more useful goods and services while simultaneously reducing negative environmental

impacts, resource consumption, and costs.

The Benefits of Ecoefficiency

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Incentives and causes for increased efficiency:

1) Customers are demanding products that are environmental friendly

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Incentives and causes for increased efficiency:

1) Customers are demanding products that are environmental friendly

2) Employees prefer to work for environmentally respective firms

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Causes and Incentives for Ecoefficiency

Causes and Incentives for Ecoefficiency

12 -7 Customer DemandCustomer DemandFor Cleaner ProductsFor Cleaner Products

Cost Reduction and Cost Reduction and Competitive Competitive AdvantageAdvantage

Lower Cost of Lower Cost of Capital and Lower Capital and Lower

InsuranceInsurance

Innovations and Innovations and New OpportunitiesNew Opportunities

Better Employees Better Employees and Greater and Greater ProductivityProductivity

ECOEFFICENCYECOEFFICENCY

Significant Special Benefits Significant Special Benefits Leading to Improved ImageLeading to Improved Image

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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.

Environmental costs can be classified in four categories: prevention costs, detection costs, internal

failure costs, and external failure costs.

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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

Classification of Environmental Costs by Activity

Prevention ActivitiesPrevention Activities

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Classification of Environmental Costs by Activity

Auditing environmental activities

Inspecting products and processes

Developing environmental performance measures

Testing for contamination

Verifying supplier environmental performance

Measuring contamination levels

Detection ActivitiesDetection Activities

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Classification of Environmental Costs by Activity

Operating pollution control equipment

Treating and disposing of toxic waste

Maintaining pollution equipment

Licensing facilities for producing contaminants

Recycle scrap

Internal Failure ActivitiesInternal Failure Activities

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Classification of Environmental Costs by Activity

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)

External Failure ActivitiesExternal Failure Activities

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Numade CorporationNumade CorporationEnvironmental Cost ReportEnvironmental Cost Report

For the Year Ended December 31, 2004For the Year Ended December 31, 2004 Percentage ofPercentage ofEnvironmental Costs Operating CostsEnvironmental Costs Operating Costs

Prevention costs:Training employees $ 60,000Designing products 180,000Selecting equipment 40,000 $280,000 1.40%

Detection costs:Inspecting processes $240,000Developing measures 80,000 320,000 1.60

ContinuedContinuedContinuedContinued

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Internal failure costs:Operating pollution equipment $400,000Maintaining pollution equipment 200,000 $ 600,000 3.00%

External failure costs:Cleaning up lake $900,000Restoring land 500,000Incurring property damage claim 400,000 1,800,000 9.00

Totals $3,000,000 15.00%

Percentage ofPercentage ofEnvironmental Costs Operating CostsEnvironmental Costs Operating Costs

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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

Numade CorporationNumade CorporationEnvironmental Financial StatementEnvironmental Financial Statement

For the Year Ended December 31, 2004For the Year Ended December 31, 2004

ContinuedContinuedContinuedContinued

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Numade CorporationNumade CorporationEnvironmental Financial StatementEnvironmental Financial Statement

For the Year Ended December 31, 2004For the Year Ended December 31, 2004Environmental costs:

Prevention costs$ 280,000

Detection costs320,000

Internal failure costs600,000

External failure costs100,000

Packaging cost reductions 1,800,000

Total environmental costs$1,150,000

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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.

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Full environmental costing is the

assignment of all environmental costs,

both private and societal, to products.

Full environmental costing is the

assignment of all environmental costs,

both private and societal, to products.

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Full private costing is the assignment of

only private cost to individual

products.

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.

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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

ABC Environmental CostingABC Environmental CostingABC Environmental CostingABC Environmental Costing

Activities Cleanser A Cleanser B

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Product stewardship is the practice of designing,

manufacturing, maintaining, and

recycling products to minimize adverse

environmental impacts.

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Life-cycle assessment identifies the

environmental consequences of a product

through its entire life cycle, and then searches

for opportunities to obtain environmental improvements.

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Life-cycle cost assessment assigns costs

and benefits to the environmental

consequences and improvements.

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RawRawMaterialsMaterials

PackagingPackaging

DisposalDisposalRecyclingRecycling

Controlledby Supplier

Controlled byManufacturer

ProductionProduction

Controlled by Customer

ProductProductUse and Use and

MaintenanceMaintenance

Product-Life Cycle Stages

Product-Life Cycle Stages

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Inventory analysis

Impact analysis

Improvement analysis

Assessment StagesAssessment Stages

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Inventory analysis specifies the types and quantities of materials and energy inputs needed and the resulting environmental releases in the form of solid, liquid, and gaseous residues.

Inventory AnalysisInventory Analysis

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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

PAPER CUP POLYFORM CUPPAPER CUP POLYFORM CUP

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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

PAPER CUP POLYFORM CUPPAPER CUP POLYFORM CUP

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PAPER CUP POLYFORM CUPPAPER CUP POLYFORM CUP

Material usage $0.010 $0.004

Utilities 0.012 0.003

Contaminant-relatedresources 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

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Impact analysis assesses the environmental effects of competing designs and provides a relative ranking of those effects.

Impact AnalysisImpact Analysis

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Improvement analysis has the objective of reducing the environmental impacts revealed by the inventory and impact steps.

Improvement AnalysisImprovement Analysis

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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

Environmental PerspectiveEnvironmental PerspectiveEnvironmental PerspectiveEnvironmental Perspective

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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

NONVALUE-ADDED YEARENVIRONMENTAL ACTIVITY 2004 2003

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Environmental Cost Trend Graph

1 2 3 4 5 6 7 8

Environmental Costs/Sales

Periods

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0

20

40

60

80

100

2001 2002 2003 2004

Pounds emitted

Bar Graph for Trend Analysis

CFC Emissions

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Hazardous Waste Pie Chart

Incinerated

Deep-well injected

LandfilledRecycledTreated

Incinerated 35.0%

Deep-well injected 20.0%

Landfilled 25.0%

Recycled 5.0%

Treated 15.0%

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The EndThe EndThe EndThe End

Chapter TwelveChapter Twelve

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