Problem:
ENVIRONMENTAL COSTS
At the beginning of 2007, Greener Company initiated a program to improve its environmental performance. Efforts were made to reduce the production and emission of contaminating gaseous, solid, and liquid residues. By the end of the year, in an executive meeting, the environmental manager indicated that the company had made significant improvement in its environmental performance, reducing the emission of contaminating residues of all types. The president of the company was pleased with the reported success but wanted an assessment of the financial consequences of the environmental improvements. To satisfy this request, the following financial data were collected for 2006 and 2007 (all changes in cost are a product of environmental improvements):
|
|
2006
|
2007
|
|
Sales
|
$60,000,000
|
$60,000,000
|
|
Evaluating and selecting suppliers
|
0
|
1,800,000
|
|
Treating and disposing of toxic materials
|
3,600,000
|
2,400,000
|
|
Inspecting processes (environmental objective)
|
600,000
|
900,000
|
|
Land restoration (annual fund contribution)
|
4,800,000
|
3,600,000
|
|
Maintaining pollution equipment
|
1,200,000
|
900,000
|
|
Testing for contaminants
|
450,000
|
300,000
|
Required:
1. Classify the costs as prevention, detection, internal failure, or external failure.
2. Prepare an environmental cost report for the most recent year, where costs are expressed as a percentage of sales (instead of operating costs).