A note on an environmental cost report and its 4 cost categories: for advanced management accounting students
In the
subject of advanced management accounting, I learned that an environmental cost
report includes the following 4 cost categories: environmental prevention
costs, environmental detection costs, environmental internal failure costs and
environmental external failure costs. Please provide 4 examples on each of the
4 cost categories, and explain why the examples are considered as belonging to
their respective cost categories.
Environmental
costs are classified by when they occur relative to pollution: before
waste is created (prevention), while checking compliance (detection), after
waste is created but before release (internal failure), and after release into
the environment (external failure).
Environmental prevention costs
These are costs
incurred before contaminants or waste are produced, to avoid
environmental damage in the first place.
|
Example |
Why it belongs here |
|
Designing a
product to use fewer hazardous materials |
The design
change prevents waste and pollution from being created during production. |
|
Selecting
suppliers based on their environmental standards |
Choosing cleaner
suppliers prevents environmentally harmful inputs from entering the company’s
operations. |
|
Training
employees on waste reduction and safe chemical handling |
Training changes
employee behaviour so that less waste, spillage, or contamination is
generated. |
|
Installing
energy-efficient production equipment during process redesign |
More efficient
equipment reduces energy use and emissions before the production process
creates pollution. |
Environmental detection costs
These are costs
incurred to measure, inspect, audit, or test whether products,
processes, and activities comply with environmental regulations or voluntary
standards. They identify potential problems but do not themselves remove the
pollution.
|
Example |
Why it belongs here |
|
Testing factory
wastewater for chemical contaminants |
Testing
determines whether the wastewater meets permitted standards; it detects a
possible non-compliance. |
|
Inspecting
production processes for emissions or leaks |
Inspection
checks whether operations are complying with environmental requirements
before any problem is released. |
|
Conducting an
internal environmental audit |
The audit
evaluates whether the company’s activities meet legal and voluntary
environmental standards. |
|
Measuring
air-emission levels at a plant boundary |
Measurement
establishes the extent of pollution and whether it exceeds permitted limits. |
Environmental internal failure costs
These are costs
incurred after waste or contaminants have been produced but before they are
discharged into the external environment. The company must contain, treat,
recycle, or otherwise manage the waste internally.
|
Example |
Why it belongs here |
|
Treating toxic
wastewater on site before discharge |
The wastewater
has already been generated, but treatment prevents it from being released
untreated. |
|
Operating
pollution-control equipment, such as scrubbers or filters |
The equipment
captures or reduces pollutants produced by operations before they leave the
factory. |
|
Recycling
production scrap and defective materials |
The scrap
already exists, but recycling keeps it from becoming external waste. |
|
Maintaining
pollution-control equipment |
Maintenance is
needed so the equipment can continue to prevent contaminants from being
discharged. |
Environmental external failure costs
These are costs
incurred after contaminants or waste have been discharged into the
environment. They include cleanup, restoration, legal liability, compensation,
and reputational or sales losses.
|
Example |
Why it belongs here |
|
Cleaning up an
oil spill in a river |
The pollution
has already escaped into the environment, so the company must remediate it
externally. |
|
Restoring
contaminated soil at a former factory site |
The
contamination has already occurred and the company must repair the
environmental damage. |
|
Paying fines or
compensation for environmental damage |
These costs
arise after a discharge or breach has caused harm, rather than preventing or
detecting it. |
|
Losing sales
because customers perceive the company as environmentally irresponsible |
This is an
external consequence of pollution that has already occurred; it affects the
company’s relationship with the market. |
Quick distinction
|
Category |
Timing |
Core question |
|||
|
Category |
Timing |
Core question |
|||
|
Prevention |
Before waste is
created |
“How do we stop
pollution from arising?” |
|||
|
Detection |
During
operations |
“Are we
complying with environmental standards?” |
|||
|
Internal failure |
After waste is
created, before release |
“How do we
handle waste before it leaves the company?” |
|||
|
External failure |
After release |
“How do we deal
with pollution that has already escaped?” |
|||
A useful exam rule
is: prevention avoids creation; detection checks compliance; internal
failure handles waste before release; external failure responds after release.