This document discusses environmental cost management and eco-efficiency. It provides examples of how to calculate activity rates and assign environmental costs to products using activity-based costing. It shows how improving environmental performance through reducing materials usage and emissions can lower production costs. Tracking environmental costs can identify opportunities to lower costs while reducing impacts. Assigning full environmental costs provides the most complete picture, though firms often only report private costs.

1. 558811
CHAPTER 17
ENVIRONMENTAL COST MANAGEMENT
QUESTIONS FOR WRITING AND DISCUSSION
1. Firms are interested in environmental cost-
ing because the costs of complying with en-
vironmental regulation have increased and
because improving environmental perfor-
mance 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 environ-
mental consequences, resource consump-
tion, and costs.
3. The six incentives, or causes, for ecoeffi-
ciency 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 envi-
ronmental 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 environ-
mental 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 environ-
mental resources being consumed by each
product.
9. Activity-based costing first identifies envi-
ronmental activities and determines the cost
of each activity. Next, activity rates are com-
puted. Finally, environmental costs are
assigned to each product based on their
consumption of individual environmental ac-
tivities.
10. The environmental cost per unit of product
signals two things. First, it indicates how
much opportunity exists for improving envi-
ronmental and economic performance.
Second, it is a measure of the relative clean-
liness 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 en-
vironmental improvements.
12. The environmentally important life-cycle
stages of a product are resource extraction,
product manufacture, product use, and re-
cycling and disposal.
13. The three steps of life-cycle assessment are
inventory analysis, impact analysis, and im-
provement analysis. Inventory analysis spe-
cifies the materials and inputs needed and
the resulting environmental releases in the
form of solid, liquid, and gaseous residues.
Impact analysis assesses the envi-

2. 558822
ronmental effects of competing designs and
provides a relative ranking of those effects.
Improvement analysis has the objective of
reducing the environmental impacts re-
vealed by the inventory and impact steps.
14. Life-cycle costing improves life-cycle as-
sessment by assigning economic conse-
quences to the environmental impacts iden-
tified in the inventory and impact steps.
Assessing the financial consequences al-
lows competing designs to be compared on
a common measure, allowing an environ-
mental 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 perfor-
mance can be the source of a competitive ad-
vantage.
16. The five core objectives of the environmen-
tal perspective are: (1) to minimize the use
of hazardous materials; (2) to minimize the
use of raw or virgin materials; (3) to minim-
ize energy requirements for production and
use of the product; (4) to minimize the re-
lease 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 ma-
terials are limited in quantity and are nonre-
newable. For example, only a finite amount
of petroleum reserves exists. Thus, conserv-
ing their use ensures that future generations
will have access to them.
18. Possible measures for minimizing the re-
lease of residues include pounds of toxic
materials, cubic meters of effluents, tons of
greenhouse gases produced, and percen-
tage reduction of packaging materials.
19. Agree. Assuming the concept of ecoefficien-
cy is valid, then all environmental failure ac-
tivities should be classified as nonvalue-
added. These activities represent the con-
sequences of inefficient production ap-
proaches, 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 de-
gradation. This approach covers the entire
life cycle and affects products, processes,
materials, energy, and recycling.
21. The value of financial measures of environ-
mental performance is easy to identify: envi-
ronmental improvements should produce
significant and favorable financial conse-
quences. If ecoefficient decisions are being
made, then environmental costs should de-
crease as environmental performance im-
proves. Examples of financial measures in-
clude 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.

3. 558833
EXERCISES
17–1
1. d
2. e
3. d
4. a
5. e
6. c
7. b
8. e
9. a
10. e
11. d
12. b
17–2
1. The idea that economic efficiency is equivalent to pollution is a myth. Quite
the opposite appears to be true. Ecoefficiency means that more goods and
services can be produced while simultaneously reducing negative environ-
mental impacts. Ecological and economic performance can and should be
complementary. Several factors support this view. First, customers are de-
manding cleaner products. Second, better employees prefer to work for envi-
ronmentally clean firms. Third, environmentally responsible firms tend to cap-
ture external benefits such as lower cost of capital and lower insurance rates.
Fourth, improving environmental performance produces significant social
benefits and enhances the ability to sell products and services. Fifth, improv-
ing environmental performance awakens within managers a need to innovate.
Sixth, improving environmental performance reduces environmental costs
and may create a competitive advantage.
2. Sustainable development is development that meets the needs of the present
without compromising the ability of future generations to meet their needs.
To believe that the state has exclusive responsibility for solving environmen-
tal problems and fostering sustainable development ignores the role of ecoef-
ficiency. If improving environmental performance improves economic effi-
ciency, then firms have an incentive to solve environmental problems.
Ecoefficiency is compatible with, and supportive of, sustainable development.
Assuming that ecological and economic efficiency are compatible, then the
role of government is to encourage and foster the market forces that will lead
to improved environmental quality.

4. 558844
17–3
1. External failure costs for the environmental model are made up of two catego-
ries: those paid for by the firm and those paid for by a third party (society). In
the TQM model, all external failure costs are assumed to be paid for by the
firm.
2. The external failure cost curve is simply the horizontal axis because the firm
pays for nothing. The total cost curve is the control cost curve (the sum of
preventive and detection costs). The incentive is to degrade as much as poss-
ible to lower control costs. Thus, the optimal operating point from the firm’s
perspective is total pollution because all external failure costs are paid for by
someone else. Ecoefficiency has no meaning in this extreme case. The role of
government here is to convert the externalities to private costs. Regulation is
required to enable ecoefficiency—to make it an operable concept.
17–4
1. Prevention (SD)
2. Prevention (SD)
3. Internal failure (SD)
4. External failure (societal)
5. Detection (SD)
6. Prevention (SD)
7. Detection
8. External failure (societal)
9. Detection (SD)
10. External failure (societal)
11. Prevention (SD)
12. External failure (private)
13. Internal failure (SD)
14. Detection (SD)
15. Internal failure
16. Detection (SD)

5. 558855
17–5
1. Lemmons Pharmaceuticals
Environmental Cost Report
For the Year Ended December 31, 2008
Environmental Costs Percentage*
Prevention costs:
Environmental studies $ 240,000
Environmental training 150,000 $ 390,000 0.33%
Detection costs:
Testing for contamination $ 1,200,000
Measuring contamination levels 120,000 1,320,000 1.10
Internal failure:
Treating toxic waste $ 9,600,000
Operating equipment 1,970,000
Maintaining equipment 720,000 12,290,000 10.24
External failure:
Inefficient materials usage $ 2,400,000
Cleanup of soil 3,600,000 6,000,000 5.00
Totals $20,000,000 16.67%**
*Of operating costs ($120,000,000)
**Rounded
2. Relative percentages (rounded):
Prevention: 0.33% / 16.67% = 2.00%
Detection: 1.10% / 16.67% = 6.60%
Internal failure: 10.24% / 16.67% = 61.40%
External failure: 5.00% / 16.67% = 30.00%
This distribution reveals that the company is paying little attention to prevent-
ing and detecting environmental costs. To improve environmental perfor-
mance, much more needs to be invested in the prevention and detection cat-
egories.

6. 558866
17–5 Concluded
3. Both items should be added to the external failure category in the report. The
first item would add $2,100,000 and is a private cost. The second adds
$4,800,000 and is a societal cost. The amount reported for this category
would then become $12,900,000, and the total environmental cost would in-
crease to $26,900,000. Under a full-costing regime, the entire $6,900,000
should be included in the report. Often, however, only private costs will be in-
cluded.
17–6
1. Activity rates:
Packaging rate: $5,400,000/5,400,000 = $1.00 per pound
Energy rate: $1,440,000/1,800,000 = $0.80 per kilowatt-hour
Toxin release rate: $720,000/3,600,000 = $0.20 per pound
Pollution rate: $1,680,000/600,000 = $2.80 per machine hour
Unit cost:
Herbicide Insecticide
Packaging:
$1.00 × 3,600,000 $ 3,600,000
$1.00 × 1,800,000 $ 1,800,000
Energy:
$0.80 × 1,200,000 960,000
$0.80 × 600,000 480,000
Toxin releases:
$0.20 × 3,000,000 600,000
$0.20 × 600,000 120,000
Pollution control:
$2.80 × 480,000 1,344,000
$2.80 × 120,000 336,000
Total $ 6,504,000 $ 2,736,000
÷12,000,000 ÷ 30,000,000
Unit cost per pound $ 0.542 $ 0.0912
The herbicide has the highest environmental cost per unit. So, to the extent
that the per-unit environmental cost measures environmental damage, we can
say that this product causes more problems than the insecticide.

7. 558877
17–6 Concluded
2. Excessive usage of materials and energy is classified as an external failure
cost (once too much is used, then customers and society bear the cost—the
effect has been “released” into the environment).
3. These costs would increase the toxin release rate by $0.90 per pound
($3,240,000/3,600,000). This increase, in turn, would increase the amount as-
signed to each product: $2,700,000 to the herbicide and $540,000 to the insec-
ticide. Unit costs, then, would increase by $0.225 for the herbicide
($2,700,000/12,000,000) and $0.018 for the insecticide ($540,000/30,000,000). This
is a “full-costing” approach, which many feel ought to be the way environ-
mental costs are assigned. However, it is often difficult to estimate the so-
cietal costs, and many firms restrict their cost assignments to private costs.
17–7
1. New activity rates:
Packaging rate: $2,430,000/4,860,000 = $0.50 per pound
Energy rate: $960,000/1,200,000 = $0.80 per kilowatt-hour
Toxin release rate: $180,000/1,800,000 = $0.10 per pound
Pollution rate: $1,680,000/600,000 = $2.80 per machine hour
Engineering rate: $720,000/24,000 = $30 per engineering hour
Treatment rate: $486,000/4,860,000 = $0.10 per pound
Note: Since pounds of packaging is the driver for both packaging and pack-
aging treatment, the rates could be combined. The treatment rate could be
part of the packaging rate (giving a total rate of $0.60 per pound). The
4,860,000 pounds used for the rate is 90% of the original 5,400,000 pounds.

8. 558888
17–7 Continued
Unit cost:
Herbicide Insecticide
Packaging and treatment:
$0.60 × 3,240,000 $ 1,944,000
$0.60 × 1,620,000 $ 972,000
Energy:
$0.80 × 800,000 640,000
$0.80 × 400,000 320,000
Toxin releases:
$0.10 × 1,500,000 150,000
$0.10 × 300,000 30,000
Pollution control:
$2.80 × 480,000 1,344,000
$2.80 × 120,000 336,000
Engineering:
$30 × 18,000 540,000
$30 × 6,000 180,000
Total $ 4,618,000 $ 1,838,000
÷12,000,000 ÷ 30,000,000
Unit cost per pound $ 0.3848** $ 0.0613**
**Rounded
2. Savings:
Herbicide Insecticide Total
Before* $ 6,504,000 $ 2,736,000 $9,240,000
After 4,618,000 1,838,000 6,456,000
Total savings $ 1,886,000 $ 898,000 $2,784,000
Pounds ÷12,000,000 ÷ 30,000,000
Unit savings $ 0.1572** $ 0.0299**
*See the solution to Exercise 17-6.
**Rounded
This illustrates that improving environmental performance can improve eco-
nomic efficiency, consistent with the claims of ecoefficiency.

9. 558899
17–7 Concluded
3. Excessive energy and materials usage and releasing toxins are external fail-
ure activities; operating pollution control equipment is an internal failure ac-
tivity. Engineering is a prevention activity (added during the improvement
process).
4. The environmental improvements have reduced total and per-unit operating
costs for each product. This now makes price reductions possible, reducing
customer sacrifice and potentially creating a competitive advantage. The re-
duced environmental damage may also increase product and company im-
ages, with the potential of attracting more customers. Other possible benefits
that may contribute to a competitive advantage include a lower cost of capital
and lower insurance costs.
17–8
1. Both use about the same quantity of primary raw materials; however, tallow is
a renewable resource, whereas petrochemical stocks are not. Thus, an envi-
ronmental advantage on this dimension belongs to tallow. Water usage,
though, offsets some of this advantage. Tallow requires a much heavier
usage of water (10 times the amount). Although water is renewable, it is also a
limited resource and has a number of competing uses. Energy usage is in fa-
vor of tallow, but only slightly (120 total kilowatt-hours versus 135 for petro-
chemicals). Emissions to the environment are more difficult to assess. Two
are in favor of petrochemicals and two in favor of tallow. There is insufficient
information to evaluate the relative damage caused by each type of contami-
nant. Thus, at this point, it is difficult to determine which of the two is more
environmentally friendly. One might try the tallow approach and argue that it
is more compatible with the concept of sustainable development. Using tal-
low may preserve more petrochemical stocks for future generations—why
use the petrochemical stock approach when it is unnecessary and it contri-
butes to the depletion of a scarce resource?

10. 559900
17–8 Continued
2. Environmental impact cost:
Petrochemical Tallow
Raw materials:
$0.40 × 990 $ 396
$0.60 × 935 $ 561
Water:
$0.50 × 56 28
$0.50 × 560 280
Energy:
$1.20 × 135 162
$1.20 × 120 144
Contaminants:
Air:
$500 × 9* 4,500
$500 × 9* 4,500
Liquid:
$60 × 7** 420
$60 × 5 300
Solid:
$20 × 87 1,740
$20 × 176 3,520
Cost per 1,000 kg $ 7,246 $ 9,305
*45/5 =9
**If dumped, the cost doubles. The lowest cost is assumed.
The petrochemical approach has the lowest environmental cost per unit. Us-
ing cost as a summary index, the petrochemical approach should be chosen.
Cost is limited as a summary measure because it often reflects only private
costs. In this case, more than private costs should be reflected. For example,
there is no indication that societal costs are reflected in the costs of contami-
nants. Further, there is a societal benefit from using tallow instead of petro-
chemicals because it is a renewable resource. This also is not reflected in the
summary cost measure. Estimating these two effects and including them
would strengthen the measure.

11. 559911
17–8 Concluded
3. Suppliers control production of the raw materials and the usage of water and
energy in their production. The producer controls the usage of the raw mate-
rials and packaging, energy associated with processing and transportation,
and the emission of the contaminants during production. The producer also
has the ability to influence the recyclability and disposability of the product.
There is no explicit information concerning packaging, product use and main-
tenance, recycling, and disposal. These factors are also significant issues.
The biodegradability of the surfactants, for example, is something that ought
to be explored.
17–9
1. Pounds demanded = 375,000,000/5 = 75,000,000.
Thus, the demand for paperboard is reduced 300,000,000 pounds. At $0.75
per pound, this saves the company $225,000,000 per year.
Recycling saves 75,000,000 × 0.90 = 67,500,000 pounds. Thus, 67,500,000
pounds of landfill are avoided per year. When the recycling pounds are added
to the reduction in demand, the total amount is 367,500,000 pounds. If one
tree is equivalent to 300 pounds of paperboard, then 367,500,000/300 =
1,225,000 trees are saved.
2. Savings from weight reduction:
In total: 0.5 × 250,000,000 = 125,000,000 ounces saved or
125,000,000/16 = 7,812,500 pounds of packaging materials saved
In dollars: At $0.025 per ounce, $3,125,000 per year is saved in packaging
costs.
Seal reduction savings:
Per package: 0.05 × 2 = 0.1 ounces
In total: 0.10 × 250,000,000 = 25,000,000 ounces saved or
25,000,000/16 = 1,562,500 pounds
In dollars: $0.025 × 25,000,000 = $625,000 per year

12. 559922
17–9 Concluded
3. Ultimate disposal can affect the usage of land, energy, and material resources
and also has the potential of contaminating land, water, and air. Disposal by
recycling reduces the demand for primary resources. Disposal by safe incine-
ration (designed to avoid the release of damaging contaminants) can reduce
the demand for nonrenewable energy resources and replace some of the
energy used to produce the packaging. Using landfills to dispose of the prod-
uct ties up the land and creates potential contamination (e.g., methane gas re-
leased into the air by anaerobic decay of organic waste).
4. Possible reasons: (1) Rate of usage is greater than the rate of replacement, (2)
Resources are limited by alternative uses (e.g., national parks), and
(3) Resources are freed up for alternative uses.
17–10
a. Minimize release of residues
b. Minimize hazardous materials
c. Maximize opportunities to recycle
d. Minimize energy requirements
e. Minimize raw or virgin materials
f. Minimize release of residues
g. Maximize opportunities to recycle
h. Minimize release of residues
i. Minimize hazardous materials
j. Minimize raw or virgin materials
k. Minimize release of solid residues (also raw materials)
l. Minimize release of residues
m. Maximize opportunities to recycle

13. 559933
17–11
1. Ecoefficiency maintains that pollution equals productive inefficiency. Thus,
improving environmental performance should increase productive efficiency.
Increasing productive efficiency may create a competitive advantage. A pers-
pective is justified if it is the source of a competitive advantage.
2. The activities are all concerned with the learning and growth perspective. By
investing in an environmental management system (ISO 14001 registration)
and improving the environmental information system, the environmental in-
frastructure is enhanced. The cost of ISO 14001 is a prevention cost, and the
development of environmental measurements is a detection cost. Auditing
the report has to do with the quality of measurement and thus could be clas-
sified as a detection cost.
3.
ISO 14001 Registrations
3
9
15
24
0
5
10
15
20
25
30
2005 2006 2007 2008
Year
NumberofRegistrations
Registrations

14. 559944
17–11 Continued
Energy Consumption
2,950
2,900
2,850
3,000
2,750
2,800
2,850
2,900
2,950
3,000
3,050
2005 2006 2007 2008
Year
BTUs
BTU (in billions)
Greenhouse Gases
39,000
38,000
36,000
40,000
34,000
35,000
36,000
37,000
38,000
39,000
40,000
41,000
2005 2006 2007 2008
Year
Tons
Gases (in tons)

15. 559955
17–11 Concluded
Henderson has made significant progress on all three dimensions. Eighty
percent of the facilities are ISO 14001 registered, energy consumption has
dropped by 5 percent over the four-year period, and greenhouse gases have
declined by 10 percent over the four years. The company has not registered
all 30 facilities by 2008 as planned (only 80 percent were registered). Whether
the other outcomes are in line with the targets set by the company for the
four-year period is unknown, since no targets are given.
BTUs are associated with the objective to minimize energy usage, and tons of
greenhouse gases are associated with the objective to minimize release of
contaminants. The number of facilities registered may be better classified
with the objective of increasing environmental capabilities and be located
within the learning and growth perspective. ISO 14001 is concerned with
putting into place an environmental management system and thus is con-
cerned with all core objectives.
17–12
1.
Cost Trend as a Percentage of Sales
0.12
0.1
0.08
0.07
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
2005 2006 207 2008
Year
Costs/Sales
Costs/Sales
There appears to be a favorable trade-off between prevention and detection
activities and failure activities. Ecoefficiency seems to be working.

16. 559966
17–12 Concluded
2.
Normalized Energy Consumption
12,000
11,800
10,545
10,364
9,500
10,000
10,500
11,000
11,500
12,000
12,500
2005 2006 2007 2008
Year
BTUs/Sales
BTUs/Sales
Energy consumption has dropped from 12,000 BTUs per sales dollar to 10,364
BTUs per sales dollar, a 13.63 percent improvement [(12,000 – 10,364)/12,000].
This compares with a 5 percent improvement for the measure that is not nor-
malized. The 13.63 percent is a more meaningful measure because it reflects
the need to increase energy consumption as output increases.

17. 559977
PROBLEMS
17–13
1. Environmental benefits:
• Ozone-depleting substances: external failure
• Hazardous waste disposal: external failure
• Hazardous waste materials: internal failure
• Nonhazardous waste disposal: external failure
• Nonhazardous waste materials: internal failure
• Recycling materials: prevention
• Excessive energy usage: internal and external failure
• Excessive packaging: external failure
In all cases except for recycling, the underlying reduction activities should be
largely prevention with some detection requirements. This reveals the impor-
tance of prevention in the ecoefficiency model (remind students of the 1-10-
100 rule).
Environmental costs:
• Corporate level: prevention
• Auditor fees: prevention and detection
• Environmental engineering: a cost that likely would be split among ac-
tivities in four categories (using, for example, resource drivers)
• Professionals: all four categories
• Packaging: prevention
• Pollution controls, operations and maintenance: internal failure
• Pollution controls, depreciation: internal failure
• Attorney fees: external failure
• Settlements: external failure
• Waste disposal: external failure
• Environmental taxes: external failure
• Remediation, on-site: internal failure
• Remediation, off-site: external failure

18. 559988
17–13 Concluded
2.
• Ozone-depleting substances: pounds (tons) released; objective: minim-
ize release of residues
• Hazardous waste disposal: tons of residues landfilled; objective: minim-
ize hazardous waste
• Hazardous waste materials: pounds (tons) produced; objective: minim-
ize hazardous waste
• Nonhazardous waste disposal: tons sent to landfills; objective: minim-
ize raw materials
• Nonhazardous waste materials: Pounds of waste/pounds of materials
issued; objective: minimize raw materials
• Recycling materials: pounds of materials recycled; objective: maximize
opportunities to recycle
• Energy usage: kilowatts, BTUs; objective: minimize energy consumption
• Packaging: pounds of packaging; objective(s): minimize raw materials
and minimize residues
Note: Packaging actually affects several objectives. By reducing the weight of
packaging, less materials are used, and raw materials are minimized. By re-
ducing the weight, less landfill is required, reducing the solid waste. Increas-
ing the recyclability also reduces solid waste and demand for raw materials.
Finally, if the packaging can be incinerated, it may produce energy and re-
duce the use of nonrenewable energy sources.
3. Investing in prevention and detection activities should decrease the costs of
failure activities. Furthermore, if ecoefficiency is a true concept, then the re-
ductions in failure costs should exceed the costs of prevention. That is, it is
more efficient to be environmentally responsible.

19. 559999
17–14
1. 2006 2007 2008
Environmental benefits:
Ozone-depleting substances,
cost reductions $960,000 $1,600,000 $2,560,000
Environmental costs:
Engineering design 1,280,000 640,000 80,000
2. In 2006, the cost reductions were less than the design cost. However, in the
following year, the cost reduction achieved matched the design cost, and the
reductions achieved in the prior year are costs avoided in 2007 as well. Thus,
the total savings are $1,600,000, the sum of last year’s ($960,000) plus this
year’s ($640,000). In 2006, the design costs are $80,000, and the pollution
costs are reduced by an additional $960,000. Thus, the total savings per year now
amount to $2,560,000 (the sum of the current-year savings plus the costs
avoided from improvements of prior years). How much is an annuity of
$2,560,000 worth? Certainly more than the $2,160,000 paid for engineering
design activity in 2005, 2006, 2007, and 2008! This seems to support ecoeffi-
ciency: improving environmental performance improves economic efficiency.

20. 660000
17–15
1. Avade Company
Environmental Financial Statement
For the Year Ended December 31, 2008
Environmental benefits:
Income:
Recycling income........................................................... $ 200,000
Increased sales .............................................................. 1,600,000
Current savings:
Cost reductions, hazardous waste............................... 800,000
Cost reductions, contaminant releases....................... 1,200,000
Cost reductions, scrap production .............................. 200,000
Cost reductions, pollution equipment ......................... 640,000
Energy conservation savings ....................................... 144,000
Remediation savings ..................................................... 880,000
Reduced insurance and finance costs......................... 640,000
Ongoing savings:
Cost reductions, hazardous waste............................... 400,000
Cost reductions, contaminant releases....................... 800,000
Cost reductions, scrap production .............................. 200,000
Cost reductions, pollution equipment ......................... 400,000
Energy conservation savings ....................................... 144,000
Remediation savings ..................................................... 800,000
Total benefits ............................................................ $9,048,000

21. 660011
17–15 Concluded
Environmental costs:
Prevention:
Designing processes and products $ 800,000
Training employees 320,000
Detection:
Measuring contaminant releases 560,000
Inspecting processes 640,000
Internal failure:
Producing scrap 1,000,000
Operating pollution equipment 1,040,000
External failure:
Disposing of hazardous waste 400,000
Releasing air contaminants 2,000,000
Using energy 1,152,000
Remediation 1,520,000
Total costs $9,432,000
2. The total environmental costs in 2006 were $14,280,000. The total costs in
2008 were $9,432,000, a significant decrease. Adding to this the fact that sales
increased because of an improved environmental image, financing and insur-
ance costs decreased, and recycling income increased, then there is strong
evidence of increased efficiency. Moreover, the ratio of benefits to costs in
2006 is approaching one. Thus, ecoefficiency is working, and the firm is
strengthening its competitive position.
17–16
1. Activity rates:
Hazardous waste: $2,400,000/2,400 = $1,000 per ton
Measurement: $120,000/60,000 = $2 per transaction
Contaminants: $6,000,000/3,000 = $2,000 per ton
Scrap: $2,100,000/600,000 = $3.50 per pound
Equipment: $3,120,000/6,240,000 = $0.51 per hour
Designing: $600,000/24,000 = $25 per hour
Energy: $2,160,000/21,600,000 = $0.10 per BTU
Training: $120,000/1,200 = $100 per hour
Remediation: $4,800,000/240,000 = $20 per hour

22. 660022
17–16 Continued
Unit cost calculation (2006):
Luxury Model Standard Model
Hazardous waste:
$1,000 × 240 $ 240,000
$1,000 × 2,160 $ 2,160,000
Measurement:
$2 × 12,000 24,000
$2 × 48,000 96,000
Contaminants:
$2,000 × 300 600,000
$2,000 × 2,700 5,400,000
Scrap:
$3.50 × 300,000 1,050,000
$3.50 × 300,000 1,050,000
Equipment:
$0.50 × 1,440,000 720,000
$0.50 × 4,800,000 2,400,000
Designing:
$25 × 18,000 450,000
$25 × 6,000 150,000
Energy:
$0.10 × 7,200,000 720,000
$0.10 × 14,400,000 1,440,000
Training:
$100 × 600 60,000
$100 × 600 60,000
Remediation:
$20 × 60,000 1,200,000
$20 × 180,000 3,600,000
Total cost $5,064,000 $ 16,356,000
Units ÷ 2,400,000 ÷ 3,600,000
Unit cost $ 2.11 $ 4.54*
*Rounded
The unit cost information provides an index of the environmental perfor-
mance of each product. It thus can serve as a benchmark for evaluating sub-
sequent efforts to improve environmental performance. The unit environmen-
tal cost also provides some indication as to where environmental
improvement activities should be focused.

23. 660033
17–16 Continued
2. 2006 unit cost for the three relevant items:
Luxury Model Standard Model
Hazardous waste:
$1,000 × 240 $ 240,000
$1,000 × 2,160 $ 2,160,000
Contaminants:
$2,000 × 300 600,000
$2,000 × 2,700 5,400,000
Equipment:
$0.50 × 1,440,000 720,000
$0.50 × 4,800,000 2,400,000
Total $1,560,000 $ 9,960,000
Units ÷ 2,400,000 ÷ 3,600,000
Unit cost $ 0.65 $ 2.77*
2008 unit cost for the three relevant items:
Luxury Model Standard Model
Hazardous waste:
$1,000 × 120 $ 120,000
$1,000 × 480 $ 480,000
Contaminants:
$2,000 × 150 300,000
$2,000 × 1,350 2,700,000
Equipment:
$0.50 × 720,000 360,000
$0.50 × 2,400,000 1,200,000
Total $ 780,000 $ 4,380,000
Units ÷ 2,400,000 ÷ 3,600,000
Unit cost $ 0.33* $ 1.22*
Note: The activity rates are calculated using 2008 costs and assuming activity
output remains the same (e.g., $600,000/600 = $1,000 per ton for hazardous
waste).
*Rounded

24. 660044
17–16 Concluded
The unit cost reductions:
Luxury Model: $0.65 – $0.33 = $0.32 per unit or $768,000 in total
Standard Model: $2.77 – $1.22 = $1.55 per unit or $5,580,00 in total
Both products appear to be cleaner than before the changes. The design de-
cision cost an extra $3,000,000 in 2007 and an extra $600,000 in 2008. Thus,
$3,600,000 was spent to produce an annual savings of $6,348,000. Of the
costs for the new processes, only $200,000 appears to be a recurring ex-
pense. Furthermore, the raw materials cost is reduced as well (how much is
not given). It appears to be an economically justifiable decision.
17–17
1. i
2. d
3. m
4. a
5. k
6. e
7. b
8. j
9. c
10. n
11. f
12. h
13. g
14. l

25. 660055
17–18
1. The basic issue is which material should be used. Presumably, the functional-
ity of the two designs is similar (for example, durability is not an issue). The
weight of the polymer product is much less than the steel product and, there-
fore, uses less raw materials. This advantage, however, is counterbalanced
by the very high recyclable advantage of steel. Only 0.5 pound appears to be
lost, while almost all the polymer material is lost (through incineration). While
incineration provides an energy source, it also uses up a nonrenewable raw
material. Steel recycling keeps most of the nonrenewable raw material in play.
The polymer design, though, does have a product use advantage. It causes
less petroleum to be consumed per year than the steel product. It also uses
less energy in the production stage. But whether this all offsets the recyclable
advantage is unclear. The residue picture is also unclear. The polymer pro-
duces more gaseous residues but less solid residues. It would be interesting
to know which of the two has the most environmental impact. For example, if
the gaseous is more serious, then the contamination advantage could flow to
the steel product. Other information that might be useful is the energy used to
produce the raw materials.

26. 660066
17–18 Continued
2. Life-cycle cost:
Polymer Galvanized Steel
Materials:
$30 × 9 $270.00
$15 × 20 $300.00
Energy:
Production:
$0.50 × 135* 67.50
$0.50 × 200* 100.00
Product use:
$0.70 × 66 46.20
$0.70 × 110 77.00
Contaminants:
Gaseous:
$100 × 0.4 40.00
$100 × 0.2 20.00
Solid:
$40 × 0.6 24.00
$50 × 2.0 100.00
Incineration benefit (2.00) —
Recycling benefit — (20.00)
Total $445.70 $577.00
*Pounds × Kilowatt-hours per pound
Strengths: This approach provides a single summary measure of the envi-
ronmental effects. It values potential trade-offs. For example, cost may act as
a surrogate for the relative importance of contaminants. If so, then the solid
contaminants appear to weigh more than the gaseous.
Weaknesses: It is sometimes difficult to estimate the value or cost of certain
items. For example, the recycling benefit of $20 may understate the impor-
tance of this variable. Furthermore, the incineration benefit does not consider
the permanent loss of a nonrenewable resource. In fairness, it should be men-
tioned that these problems are more significant when the cost difference be-
tween the two is small, which is not the case in this example.

27. 660077
17–18 Concluded
3. Although product-use effects and disposal are not included, they do have en-
vironmental effects caused by the company. Furthermore, some of these
costs, such as energy efficiency, are borne directly by the consumer. Reduc-
ing postpurchase costs decreases sacrifice for the customer and increases
customer value and therefore may be the source of a competitive advantage.
Customer demand for cleaner products may also be a good reason for paying
attention to these costs. Finally, the costs are a signal of economic inefficien-
cy and thus should prompt a search for more ecoefficiency.
4. Given the cost difference of $131.30 ($577.00 – $445.70), the polymer design
would be selected. The recyclable advantage is so understated that it would
overcome this difference. The favorable cost trade-off for the contaminants is
a significant factor in favor of the polymer unit.
17–19
1. Ecoefficiency maintains that improving environmental performance will im-
prove economic efficiency. Thus, the environmental dimension is a potential
source of a competitive advantage, and it can be logically included as a pers-
pective of the Balanced Scorecard.
2. IF environmental engineers are hired and IF employees receive environmental
training, THEN employee environmental capabilities will increase; IF em-
ployee environmental capabilities increase, THEN the manufacturing process
and products will improve and a packaging improvement process can be
created; IF packaging improvement occurs and processes and products are
improved, THEN packaging materials will be reduced and residue releases
will decrease; IF packaging materials are reduced and residue releases de-
crease, THEN environmental performance will improve; IF environmental per-
formance improves, THEN environmental costs are reduced and environmen-
tal certification is achieved; IF environmental costs are decreased, THEN
profits increase; IF environmental certification is achieved, THEN the product
and company images improve; IF image improves, THEN market share will in-
crease; IF market share increases, THEN revenues will increase; and IF reve-
nues increase, THEN profits will increase.

28. 660088
17–19 Concluded
3.
FINANCIAL
CUSTOMER
ENVIRONMENT
PROCESSES
LEARNING
AND
GROWTH
Increase
Revenues
Increase
Profits
Decrease
Costs
Increase
Market Share
Improve
Image
Reduce
Packaging
Environ.
Performance
Reduce
Residues
Packaging
Process
Improve
Processes
Improve
Products
Hire
Engineers
Employee
Capabilities
Training

29. 660099
17–20
1.
Hazardous Waste
50,000 48,000 46,000
40,000
0
10,000
20,000
30,000
40,000
50,000
60,000
2005 2006 2007 2008
Year
TonsofWaste
2.
2005: Hazardous Waste
4% 4%
2%
70%
20%
Incinerated
Treated
Recycled
Landfilled
Injected

30. 661100
17–20 Continued
2008: Hazardous Waste
37%
8%
9%
37%
9%
Incinerated
Treated
Recycled
Landfilled
Injected
In 2005, 90 percent of waste was disposed of using landfill and deep-well in-
jections. In 2006, this has dropped to 46 percent, a significant improvement.
3.
Liquid Residues
100
92
81
73
0
20
40
60
80
100
120
2005 2006 2007 2008
Year
TonsofSulfates

31. 661111
17–20 Concluded
4. Cost in 2005:
Hazardous waste:
Incineration $70 × 2,000 = $ 140,000
Treated $100 × 2,000 = 200,000
Recycled $10 × 1,000 = (10,000)
Landfilled $50 × 35,000 = 1,750,000
Injection $60 × 10,000 = 600,000
$2,680,000
Liquid residues $4,000 × 100 = 400,000
Total cost $3,080,000
Cost in 2008:
Hazardous waste:
Incineration $70 × 15,000 = $1,050,000
Treated $100 × 3,000 = 300,000
Recycled $10 × 3,500 = (35,000)
Landfilled $50 × 15,000 = 750,000
Injection $60 × 3,500 = 210,000
$2,275,000
Liquid residues $4,000 × 73 = 292,000
Total cost $2,567,000
Environmental costs are reduced by $513,000 ($3,080,000 – $2,567,000). This
is a good reduction, but it may be even more than indicated. The reason: fu-
ture cleanup liabilities may also be reduced, and these savings are not fac-
tored into the analysis.
RESEARCH ASSIGNMENTS
17–21
Answers will vary.
17–22
Answers will vary.

32. 661122