BIAYA LINGKUNGAN

1. Recycle Corporation reported $7,000,000 in operating costs during its fiscal year ended December
31, 2007. As an environmentally aware corporation, Recycle desires to maintain low levels of
environmental costs. The goal is to reduce environmental costs to less than 10% of total operating
costs. Listed below are a number of environmental costs obtained by the controller, Nancy
Armstrong.

using materials and energy inefficiently $210,000

maintaining pollution equipment 140,000
evaluating and selecting pollution control equipment 210,000
inspecting products and processes 70,000
carrying out environmental studies 175,000
verifying supplier environmental performance 70,000

Required:

1) Prepare an environmental cost report by quality cost category. Include the cost of each
individual item, the total cost per category and percentage of operating costs per
category.
2) Did Recycle Corporation meet its objective of maintaining low environmental costs?

ANS:
1)
Recycle Corporation
Environmental Cost Report
For the year ended December 31, 2007

Costs Environmental Total % of Oper.

Costs Costs
Prevention Costs:
evaluating & selecting pollution control $210,000
equipment
carrying out environmental studies 175,000 $385,000 5.5
Detection Costs:
inspecting products & processes $70,000
verifying supplier environmental 70,000 140,000 2.0
performance
Internal Failure Costs:
maintaining pollution control $140,000 140,000 2.0
equipment
External Failure Costs:
using materials & energy inefficiently $210,000 $210,000 3.0
Total Environmental Costs $875,000 12.50
 2) No. Recycle Corporation wishes to have its environmental costs less than 10% of
operating costs.
2. At the beginning of the current year, KC Company initiated a program to improve its
environmental performance. At the end of the year, the environmental manager told the
executives that the company had made significant improvements in its environmental
performance, reducing the emission of contaminating residues of all types. The following
financial data were collected for last year and the current year (all changes in costs are a product
of environmental improvements):

Last Year Current Year

Sales $40,000,000 $40,000,000
Operating costs 20,000,000 20,000,000
Evaluating and
selecting suppliers -0- 1,200,000
Treating and disposing
of toxic materials 2,400,000 1,600,000
Inspecting processes
(environmental objective) 400,000 600,000
Land restoration (annual
fund contribution) 3,200,000 2,400,000
Maintaining pollution
control equipment 800,000 600,000
Testing for contaminants 300,000 200,000

Required:

a. Classify the costs as prevention, detection, internal failure, and external failure.
b. Prepare an environmental cost report for the most recent year, where costs are expressed
as a percentage of operating costs.

ANS:
a. Prevention costs:
Detection costs:
Internal failure costs:
External failure costs:
Evaluating and selecting suppliers
Inspecting processes and testing for contaminants
Treating and disposing of toxic materials and
maintaining pollution control equipment
Land restoration
 b. KC Company
Environmental Cost Report
For the Current Year

Percentage of
Environmental costs Operating Costs
Prevention costs:
Evaluating and
selecting suppliers $1,200,000 6.00%

Detection costs:
Inspecting processes $ 600,000
Testing for contaminants 200,000
$ 800,000 4.00

Internal failure costs:

Treating and disposing
of toxic materials $1,600,000
Maintaining pollution
control equipment 600,000
$2,200,000 11.00

External failure costs:

Land restoration $2,400,000 12.00

Total environmental costs $6,600,000 33.00%

3. At the beginning of the current year, Jones, Inc., initiated a program to improve its environmental
performance. At the end of the year, the following financial data were collected for last year and
the current year (all changes in costs are a product of environmental improvements):

Last Year Current Year

Sales $50,000,000 $50,000,000
Operating costs 25,000,000 25,000,000
Evaluating and
selecting suppliers -0- 1,000,000
Treating and disposing
of toxic materials 2,200,000 1,550,000
Inspecting processes
(environmental objective) 350,000 500,000
Land restoration (annual
fund contribution) 3,000,000 2,020,000
Maintaining pollution control
equipment 750,000 550,000
Testing for contaminants 250,000 180,000
Required:

a. Classify the costs as prevention, detection, internal failure, and external failure.

b. Prepare an environmental cost report for the most recent year, where costs are expressed
as a percentage of operating costs.

c. Comment on the distribution.

ANS:
a. Prevention costs: Evaluating and selecting suppliers
Detection costs: Inspecting processes and testing for contaminants
Internal failure costs: Treating and disposing of toxic materials and
maintaining pollution control equipment
External failure costs: Land restoration

b. Jones, Inc.
Environmental Cost Report
For the Current Year

Percentage of
Environmental costs Operating Costs
Prevention costs:
Evaluating and
selecting suppliers $1,000,000 4.00%

Detection costs:
Inspecting processes $ 500,000
Testing for contaminants 180,000
$ 680,000 2.72

Internal failure costs:

Treating and disposing
of toxic materials $1,550,000
Maintaining pollution control
equipment 550,000
$2,100,000 8.40

External failure costs:

Land restoration $2,020,000 8.08

Total environmental costs $5,800,000 23.20%

 c. Over seventy percent of total environmental costs are caused by failure costs. There is room for
improvement by investing in more prevention and detection.

4. At the beginning of this year, Magma Company initiated a program to improve its environmental
performance. At the end of the year, the environmental manager told the executives that the
company had made significant improvements in its environmental performance, reducing the
emission of contaminating residues of all types. The following financial data were collected for
last year and the current year (all changes in costs are a product of environmental improvements):

Last Year Current Year

Sales $20,000,000 $20,000,000
Operating costs 8,000,000 8,000,000
Training employees -0- 800,000
Recycling scrap 2,000,000 700,000
Developing measures
(environmental objective) 150,000 300,000
Property damage claim 2,000,000 1,000,000
Operating pollution control
equipment 750,000 500,000
Testing for contaminants 300,000 200,000

Required:

a. Classify the costs as prevention, detection, internal failure, and external failure.

b. Prepare an environmental cost report for the most recent year, where costs are expressed
as a percentage of operating costs.

ANS:
a. Prevention costs: Training employees
Detection costs: Developing measures and testing for contaminants
Internal failure costs: Recycling scrap and operating pollution control
equipment
External failure costs: Property damage claim
 b. Magma Company
Environmental Cost Report
For the Current Year

Percentage of
Environmental costs Operating Costs
Prevention costs:
Training employees $ 800,000 10.00%

Detection costs:
Developing measures $ 300,000
Testing for contaminants 200,000
$ 500,000 6.25

Internal failure costs:

Recycling scrap $ 700,000
Operating pollution control
equipment 500,000
$1,200,000 15.00
External failure costs:
Property damage claim $1,000,000 12.50
Total environmental costs $3,500,000 43.75%

5. Prose Company produces two types of gadgets: Century and Millennium. Prose recently received
significant criticism from environmental groups, local residents, and the federal government
concerning its environmental performance. Jill Johnson, president of Prose, wants to know how
the company's environmental activities affect the cost of each product. She believes that the main
source of the environmental problems lies with Century, but would like some evidence to support
(or refute) this belief. The controller has assembled the following data to help determine this:

Century Millennium
Number of units produced 500,000 1,000,000
Engineering hours
(process design) 750 2,500
Pounds of solid residues treated 15,000 5,000
Inspection hours (environmental) 6,000 3,000
Cleanup hours (local lake) 4,000 1,000

Additionally, the following environmental activity costs were reported:

Designing process $ 81,250

Treating residues 300,000
Inspecting processes 72,000
Cleaning up lake 100,000
 Required:

a. Calculate the environmental cost per unit for each product.

b. Based on the calculations in requirement a, which product appears to be the most
environmentally harmful?
c. Would life-cycle cost assessment provide stronger evidence for the environmental
suitability of each product? Explain.
d. Explain how a strategic-based responsibility accounting system can be used to help
improve Prose's performance.

ANS:
a. First, calculate activity rates:

Designing process $81,250/3,250 = $25 per engineering hour

Treating residues $300,000/20,000 = $15 per pound of residue
Inspecting processes $72,000/9,000 = $8 per inspection hour
Cleaning up lake $100,000/5,000 = $20 per cleanup hour

Second, assign environmental costs and calculate unit environmental costs:

Century Millennium
Designing process:
$25 750 $ 18,750
$25 2,500 $ 62,500
Treating residues:
$15 15,000 225,000
$15 5,000 75,000
Inspecting processes:
$ 8 6,000 48,000
$ 8 3,000 24,000
Cleaning up lake:
$20 4,000 80,000
$20 1,000 20,000
Total $371,750 $ 181,500

Divided by total units 500,000 1,000,000

Unit cost $0.7435 $0.1815

 b. As measured by the environmental cost per unit, Century appears to be the product
causing the most environmental damage, confirming the president's beliefs.
c. Life-cycle assessment has three steps: inventory analysis, impact analysis, and
improvement analysis. Of the three steps, the first two are concerned with identifying
the materials and energy requirements, environmental releases, and the environmental
effects of competing process and product designs (over the life cycle of the products).
Thus, a life-cycle assessment provides a more comprehensive analysis of environmental
effects than the environmental cost per unit (unless the cost per unit is a life-cycle
environmental cost per unit).
d. The environmental perspective can improve environmental performance by translating
an environmental improvement strategy into operational objectives, measures, targets,
and initiatives. For example, consider the five core environmental objectives. These
objectives, if followed, will reduce the amounts of materials and energy used (including
hazardous materials) and will also reduce residues released. Furthermore, the
environmental perspective is tied to the other four perspectives of the Balanced
Scorecard. Thus, it is explicitly recognized that improving environmental performance
means that capabilities, processes, customers, and financial consequences must be
considered.

6. Pensacal Company produces two types of widgets: Quality and Superior. Pensacal recently
received significant criticism from environmental groups, local residents, and the federal
government concerning its environmental performance. Will Wallace, president of Pensacal,
wants to know how the company's environmental activities affect the cost of each product. He
believes that the main source of the environmental problems lies with Quality, but would like
some evidence to support (or refute) this belief. The controller has assembled the following data
to help determine this:

Quality Superior
Number of units produced 100,000 800,000
Engineering hours
(process design) 1,000 2,000
Pounds of solid residues treated 4,000 1,000
Inspection hours (environmental) 5,000 2,000
Cleanup hours (local lake) 8,000 3,000

Additionally, the following environmental activity costs were reported:

Designing process $ 90,000

Treating residues 400,000
Inspecting processes 84,000
Cleaning up lake 110,000
 Required:

a. Calculate the environmental cost per unit for each product.

b. Based on the calculations in requirement a, which product appears to be the most
environmentally harmful?
c. Would life-cycle cost assessment provide stronger evidence for the environmental
suitability of each product? Explain.
d. Explain how a strategic-based responsibility accounting system can be used to help
improve Pensacal's performance.

ANS:
a. First, calculate activity rates:
Designing process $90,000/3,000 = $30 per engineering hour
Treating residues $400,000/5,000 = $80 per pound of residue
Inspecting processes $84,000/7,000 = $12 per inspection hour
Cleaning up lake $110,000/11,000 = $10 per cleanup hour

Second, assign environmental costs and calculate unit environmental costs:

Quality Superior
Designing process:
$30 1,000 $ 30,000
$30 2,000 $ 60,000
Treating residues:
$80 4,000 320,000
$80 1,000 80,000
Inspecting processes:
$12 5,000 60,000
$12 2,000 24,000
Cleaning up lake:
$10 8,000 80,000
$10 3,000 30,000
Total $490,000 $194,000

Divided by total units 100,000 800,000

Unit cost $4.90 $0.2425

 b. As measured by the environmental cost per unit, Quality appears to be the product causing the
most environmental damage, confirming the president's beliefs.
c. Life-cycle assessment has three steps: inventory analysis, impact analysis, and improvement
analysis. Of the three steps, the first two are concerned with identifying the materials and
energy requirements, environmental releases, and the environmental effects of competing
process and product designs (over the life cycle of the products). Thus, a life-cycle assessment
provides a more comprehensive analysis of environmental effects than the environmental cost
per unit (unless the cost per unit is a life-cycle environmental cost per unit).
d. The environmental perspective can improve environmental performance by translating an
environmental improvement strategy into operational objectives, measures, targets, and
initiatives. For example, consider the five core environmental objectives. These objectives, if
followed, will reduce the amounts of materials and energy used (including hazardous
materials) and will also reduce residues released. Furthermore, the environmental perspective
is tied to the other four perspectives of the Balanced Scorecard. Thus, it is explicitly
recognized that improving environmental performance means that capabilities, processes,
customers, and financial consequences must be considered.

7. Telecos, an international telecommunications company, embarked on an environmental

improvement program at the end of 2003. At the end of 2007, the controller had gathered the
following environmental data.

Year Tons of greenhouse Billions of British Pounds of

gas emissions Thermal Units (BTUs) nonhazardous waste
2004 56,000 5,000 3,000
2005 62,000 4,500 2,500
2006 63,000 4,300 2,000
2007 65,000 4,000 1,500

Required:
1) Identify to which core objectives each of the three measures relate.
2) Comment on the progress made on these three dimensions of environmental
improvement.

ANS:
1) Tons of greenhouse gas emissions relates to the core environmental objective of
minimizing the release of residues. BTUs relate to the core environmental objective of
minimizing energy requirements. Pounds of nonhazardous waste relates to the core
environmental objective of minimizing raw or virgin materials.

2) Telecos continues to increase the tons of greenhouse gas emissions. Emissions have
increased steadily each year with an overall increase of over 16%. The company has
performed better in the areas of minimizing energy requirements (BTUs). The use has
dropped 20% over the period analyzed. In addition, the company has improved in the
area of minimizing raw or virgin materials. Pounds of nonhazardous waste has
decreased by half in four years.