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Hammer, B. and C. H. Stinson. 1995. Managerial accounting and environmental compliance costs. Journal of Cost Management (Summer): 4-10.

Summary by Anthony Cunha
Master of Accountancy Program
University of South Florida, Summer 2002

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Environmental costs incurred and avoided have grown significantly over time. Some companies are no longer able to apply environmental cost to general overhead as they used to. In the past, environmental cost were accumulated for the company as a whole and then placed in the general overhead account and allocated to products with a general cost driver. As environmental costs have risen, many companies now find it necessary to accurately allocate environmental cost to the products that caused them.

Reasons For Improving Cost Allocation Of Environmental Cost

As companies feel pressure from consumers and competitors to lower cost while maintaining profits they have found a greater need to accurately allocate environmental cost. There also has been a growing need to trace compliance cost that governmental regulations have caused. These costs, including such items as permit fees, compliance and filing cost, training of personal, and others has been so large in recent years that they can make up a significant cost in some industries. As these environmental and compliance cost rise comparative to other cost, accurate assignment of them will become even more important.

Identifying Cost That Can Be Avoided

The authors state that one of the most important things that accountants can do when working with environmental cost is to identify and distinguish between preventable environmental cost and unavoidable environmental cost. By identifying preventable environmental cost, companies are more likely to adopt measures that would reduce pollution levels when they also can be seen to cut cost. Companies need to take into consideration if the cost benefits of tracing environmental cost outweigh the actual cost.

Regulatory Requirements

Another reason for the growing need for accurate accounting of environmental cost is due to state and federal regulations. The Environmental Protection Agency (EPA) draft guidelines on waste minimization programs propose that all hazardous waste generators should charge “fully loaded” waste management cost to departments and managers. This would include cost such as liability, compliance and oversight. Some states require that companies prepare plans that compare current cost with those of pollution reducing alternatives. The state of Washington requires that companies describe the accounting system they use to record cost that are related to hazardous material use and hazardous waste generation.

The authors state that most of the cost that companies incur related to environmental issues are related to either state or federal regulation compliance cost. The Occupational Safety and Health Act (OSHA) for instance requires that companies give right to know training to workers on the handling of chemicals. There also are many more examples of governmental acts and agencies that require information or accounting information on various aspects of waste handling, chemical handling, or other environmental issues. Some of the larger cost are often traced to actual activities, but many other costs such as compliance and oversight cost are often assigned to general overhead and then allocated with a generic driver across the complete plant, process, or company. These costs can be accurately allocated though if the cost drivers used have a reliable correlation with the action that caused the incurrence of the cost in first place.

Hazardous Substance used in Production

The authors talk also about the high compliance cost that are incurred when hazardous materials are used in a products manufacturing process. Because of this companies often compare the cost of current processes and pollution-preventing alternatives. When companies start to make these comparisons they must determine first what the relationship is between the hazardous material used and the costs that are associated with them. Then they need to determine if the costs can be avoided by alternative pollution-preventing processes. Some costs such as filing and record keeping are incurred if any hazardous materials are used. Other costs such as worker training, oversight cost, inspection, and right to know cost can be reduced as material usage is reduced. If a company actually produces hazardous waste another cost is produced. This cost is often a step function based on the volume of materials produced that triggers different levels of Resource Conservation and Recovery Act (RCRA) compliance. Plants that are considered “small-quantity generators” (less than 100 kilograms per month) are exempt from RCRA reporting. Those that produce more are faced with increasing reporting requirements, while those that are considered “treatment, storage, and disposal” (TSD) face the most extreme reporting requirements.

Managing Environmental Cost

When companies have a centralized management system they often find it easier to collect and analyze environmental cost. When they have decentralized management though, they need to be sure to align middle management goals in relation to environmental cost with those of senior management. One way that some companies address this situation is by the creation of an across the company environmental committee to oversee the complete company environmental planning process. Also many companies find that they must align management compensation and evaluation with the end goals of the company regarding both environmental affairs and other issues. Also companies need to be careful that the evaluation process does not promote inappropriate behavior. One Seattle area company planned to start tracing waste disposal fees to specific processes rather than aggregating them. They became worried though that supervisors may begin to report only a portion of the actual waste produced and then illegally dump the remaining waste in an attempt to keep cost under control. Because of situations like this companies need to be sure that evaluation and compensation promote proper accounting and compliance. Also, new U.S. Sentencing Commission proposed guidelines would allow for sentences of officers of corporations convicted of federal environmental offences to get reduced sentences if an environmental compliance program was already in effect.


By modifying both the accounting of environmental cost to better trace cost to the processes that cause them and proper management incentives can lead companies to better manage and control cost associated with environmental compliance and waste management.


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