Total Cost Accounting A Leading
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Transcript Total Cost Accounting A Leading
Economics of Sustainability
When money speaks, nobody
cares for the grammar!
Economics of Sustainability Efforts
Detailed financial / profitability analysis of
sustainability projects necessary to get top
management commitment
Translate the project outcomes in $ and ¢
Available Tools:
Environmental Management Accounting or Total Cost
Accounting
Traditional Profitability Analyses: Payback Period, Net
Present Worth, Internal Rate of Returns
Environmental Management
Accounting (EMA)
Combination of life cycle analysis
and activity based costing approaches
Identify total (internal) costs associated with
environmental activities
Make apparent the financial burden
created by material, energy, inventory and
other operational inefficiencies
Provide additional inputs for business decisions
Based on “true” operational costs
Current ENV Cost Situation
Most ENV/OEHS costs often treated as
fixed and unavoidable
ENV costs not directly allocated to activity
or process generating wastes and
emissions
Do You Know All Your ENV Costs ?
50 to 70 % of ENV costs for a typical
facility are HIDDEN in general overhead
accounts
Administration
Legal
Facilities
Maintenance
Transportation
The Significance of ENV Costs
What gets measured gets managed
Simply quantifying costs will lead to questions
Potentially identify savings
Distinction between some “environmental” and
“operating” costs may not be obvious
But costs are costs and need to be managed
Total Environmental Cost
Components
Conventional (or Direct)
Costs
Potentially Hidden (or
Indirect) Costs
Opportunity Costs (or
Production-related costs)
Contingent (or Future) Costs
Intangible (or Less Real)
Costs
Direct Costs
Storage,handling, and disposal of
residuals
Pollution control equipment costs
Onsite and offsite
Capital costs
Operation and maintenance
Required Permits
Applications
and fees
Potentially Hidden Costs
Waste packaging and shipping
Insurance Premiums
Monitoring, recordkeeping, and
reporting
Facility audits
Qualifying contractors
Potentially Hidden Costs (Cont’d.)
Training and meetings
Environmental data management
Equipment and product labeling
Legal support
Lost Opportunity Costs
Operational shutdowns
Loss of operating flexibility
Loss of raw materials
Unrealized product revenue
Unrealized new product ideas
May be more significant than other costs
Contingent Costs
Future compliance
costs
Future liability
costs
Future remediation
costs
Unexpected
shutdown costs
Property damage
Personal injury
damage
Natural resource
damage
Intangible Costs
Corporate image
Working conditions
Employee morale
Relationship with
customers and suppliers
Relationship with investors
& shareholders
Relationship with
regulators
Cost Data Gathering
Identify and define environmental categories and activities
relevant to your operations
Initially focus on tangible costs
Let’s Begin With ABC.....
Activity Based Costing
Create a “cost” pool for each “activity” or
transaction that can be identified as a cost
driver
Gather data relating to activity centers
and cost drivers (i.e.,true reasons for
costs)
More complex operations will have more
cost drivers
Traditional Cost Accounting System
Modified Cost Accounting System
Profitability Analysis
CP
Costs incurred
Benefits obtained
• Simple payback;
• Net Present Value;
• Internal Rate of Return
Profitability Analysis
Simple Payback Period
Simplest method of profitability analysis
Payback Period (yrs): (Total Investment) / (Total
Annual Savings)
There are two main problems with the payback
period method:
It ignores any benefits that occur after the payback
period, and so does not measure profitability
It ignores the time value of money
Net Present Value
Takes into account time value of money
PV: Present Value
FV: Future Value = Net Savings – (Investments + Operational Costs)
i: Rate of interest in the market
n: No. of years
Internal Rate of Return
Often used in capital budgeting
It is the interest rate that makes net
present value of all cash flow equal zero.
Essentially, this is the return that a
company would earn if it expanded or
invested in itself, rather than investing
that money elsewhere.
Example:
Recycling Project in Paper Industry
Capital Costs
Saveall Equipment =
$345,985
Saveall and White Water
Pump Materials = $374,822
Piping, Electrical, Instruments
and Structural Installation =
$397,148
Engineering = $211,046
Contingency = $140,403
Equipment Life = 15 years
Borrowing Rate of Interest =
15%
Total = $1,469,404
Annual Savings* = $350,670
Profitability Indicators
Simple Payback period 4.19
years
Net Present Value: Years 1-15
= $359,544
Internal Rate of Return: Years
1-15 = 21%
*Annual operating cash flow before
interest and taxes
Thank You Very Much!
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