Questions:
ASSIGNMENT OF ENVIRONMENTAL COSTS
The following environmental cost reports for 2005, 2006, and 2007 are for the Communications Products Division of Kartel, a telecommunications company. In 2005, Kartel committed itself to a continuous environmental improvement program, which was implemented throughout the company.
|
Environmental Activity
|
2005
|
2006
|
2007
|
|
Disposing hazardous waste
|
$200,000
|
$150,000
|
$ 50,000
|
|
Measuring contaminant releases
|
10,000
|
100,000
|
70,000
|
|
Releasing air contaminants
|
500,000
|
400,000
|
250,000
|
|
Producing scrap (nonhazardous)
|
175,000
|
150,000
|
125,000
|
|
Operating pollution equipment
|
260,000
|
200,000
|
130,000
|
|
Designing processes and products
|
50,000
|
300,000
|
100,000
|
|
Using energy
|
180,000
|
162,000
|
144,000
|
|
Training employees (environmental)
|
10,000
|
20,000
|
40,000
|
|
Remediation (cleanup)
|
400,000
|
300,000
|
190,000
|
|
Inspecting processes
|
0
|
100,000
|
80,000
|
At the beginning of 2007, Kartel began a new program of recycling nonhazardous scrap. The effort produced recycling income totaling $25,000. The marketing vice president and the environmental manager estimated that sales revenue had increased by $200,000 per year since 2005 because of an improved public image relative to environmental performance. The company's finance department also estimated that Kartel saved $80,000 in 2007 because of reduced finance and insurance costs, all attributable to improved environmental performance. All reductions in environmental costs from 2005 to 2007 are attributable to improvement efforts. Furthermore, any reductions represent ongoing savings.
In 2005, Jack Carter, president of Kartel, requested that environmental costs be assigned to the two major products produced by the company. He felt that knowledge of the environmental product costs would help guide the design decisions that would be necessary to improve environmental performance. The products represent two different models of a cellular phone (Model XA2 and Model KZ3). The models use different processes and materials. To assign the costs, the following data were gathered for 2005:
|
Activity
|
Model XA2
|
Model KZ3
|
|
Disposing hazardous waste (tons)
|
20
|
180
|
|
Measuring contaminant releases (transactions)
|
1,000
|
4,000
|
|
Releasing air contaminants (tons)
|
25
|
225
|
|
Producing scrap (pounds of scrap)
|
25,000
|
25,000
|
|
Operating pollution equipment (hours)
|
120,000
|
400,000
|
|
Designing processes and products (hours)
|
1,500
|
500
|
|
Using energy (BTUs)
|
600,000
|
1,200,000
|
|
Training employees (hours)
|
50
|
50
|
|
Remediation (labor hours)
|
5,000
|
15,000
|
During 2005, Kartel's division produced 200,000 units of Model XA2 and 300,000 units of Model KZ3.
Required:
1. Using the activity data, calculate the environmental cost per unit for each model. How will this information be useful?
2. Upon examining the cost data produced in Requirement 1, an environmental engineer made the following suggestions: (1) substitute a new plastic for a material that appeared to be the source of much of the hazardous waste (the new material actually cost less than the contaminating material it would replace) and (2) redesign the processes to reduce the amount of air contaminants produced.
As a result of the first suggestion, by 2007, the amount of hazardous waste produced had diminished to 50 tons, 10 tons for Model XA2 and 40 tons forModel KZ3. The second suggestion reduced the contaminants released by 50 percent by 2007 (15 tons for Model XA2 and 110 tons for Model KZ3). The need for pollution equipment also diminished, and the hours required for operating this equipment for Model XA2 and Model KZ3 were reduced to 60,000 and200,000, respectively. Calculate the unit cost reductions for the two models associated with the actions and outcomes described (assume the same production as in 2005). Do you think the efforts to reduce the environmental cost per unit were economically justified? Explain.