v>EPA
United States
Environmental Protection
Agency
Office of Pollution Prevention
and Toxics (MC 7409)
Washington, D.C. 20460
EPA 742-R-95-005
September 1995
Environmental Cost
Accounting for Capital
Budgeting:
A Benchmark Survey of
Management Accountants
Environmental
Accounting
Project
USEPA
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OMB #2070 0138
Prepared for:
Pollution Prevention Division
Office of Pollution Prevention and Toxics
Office of Prevention, Pesticides, and Toxic Substances
U.S. Environmental Protection Agency
By:
Tellus Institute
Allen L. White, Ph.D.
Deborah E. Savage, Ph.D.
Julia Brody, Ph.D.
Dmitri Cavander
Lori Lach
September 1995
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ACKNOWLEDGEMENTS
This study was funded under Cooperative Agreement # 821580-01 between the Tellus
Institute and the U.S. Environmental Protection Agency (EPA).
The study was made possible by EPA's Environmental Accounting Project, a component of
its Design for the Environment program. The Environmental Accounting Project works to
encourage and motivate businesses to understand the full spectrum of environmental costs, and to
incorporate those costs into decision-making. For information on this project, its publications and
its activities, please contact the Pollution Prevention Information Clearinghouse at (202) 260-1023.
We gratefully acknowledge the management and technical support of Marty Spitzer of the
EPA Administrator's Pollution Prevention Policy Staff, who served as EPA's Project Manager for
most of this study. Holly Elwood and Susan McLaughlin of the Environmental Accounting Project
guided the report through its final stages. The study was made possible by Social Science Research
Funds from EPA's Office of Research and Development. In addition, under the guidance of Harriet
Tregoning, the Waste Policy Branch of EPA's Office of Policy, Planning, and Evaluation provided
funding for the Sujperfund portion of the study. We received extremely valuable review of the
survey instrument and sample design from Carl Koch and Jim Daley, also of EPA's Office of Policy,
Planning, and Evaluation.
Julian Freedman, Director of Research at the Institute of Management Accountants (IMA),
arranged for IMA collaboration on this project, including access to IMA membership lists and
permission for mention of IMA in our advance communications with survey respondents. This
assistance is but one example of his continuing efforts to bring environmental accounting issues to
the attention of the profession.
Review of early drafts of the survey instrument was coordinated and/or provided by George
Nagle and Allan Rosenfeld of Bristol-Myers Squibb, Scott Noesen of Dow Chemical, Walter
Dickerson of Polaroid Corporation, and Tom Klammer of the University of North Texas. We
appreciate the time and insights of these individuals in helping to revise and streamline the survey
questionnaire. We also thank Daryl Ditz of the World Resources Institute, Marc Epstein of the
Stanford Graduate School of Business, and George Nagle for their comments on the draft final
report.
A special thanks for the early inspiration for Tellus Institute's work in environmental
accounting, dating to 1989, is due to Dick MacLean, now with Arizona Public Service Company,
and Matt Polsky, of the New Jersey Department of Environmental Protection, Division of Science
and Research.
Finally, we appreciate the cooperation of all survey respondents for their participation in this
study. In times of burgeoning information requests to the business community, it is easy to ignore
yet another mailing asking for time and data. For those management accountants who saw value in
the survey and responded to our inquiry with care and precision, we appreciate your collaboration.
Any errors in analysis and interpretation of data remain the sole responsibility of the authors.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY
INTRODUCTION 1
THE MANAGEMENT ACCOUNTANT PERSPECTIVE 4
RESEARCH DESIGN 5
RESPONDENT PROFILE * 8
CAPITAL BUDGETING PROCESS -. 12
TRENDS IN CAPITAL BUDGETING 17
TRACKING ENVIRONMENTAL COSTS 18
THE COST INVENTORY . , 20
How WIDE is THE NET? 20
ARE ENVIRONMENTAL COSTS QUANTIFIED? 25
SUPERFUND LIABILITY: MAJOR OR MINOR PLAYER? 28
COST ALLOCATION 33
FINANCIAL INDICATORS: THE BOTTOM LINE , 39
CONCLUSIONS 47
REFERENCES
APPENDIX A ADVANCE AND FOLLOW UP LETTERS TO SURVEY RESPONDENTS
APPENDIX B SURVEY QUESTIONNAIRE
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TABLES AND FIGURES
TABLES
Table 1. Contacts with survey sample 5
Table 2. Follow-up results 6
Table 3. Terms firms use to categorize capital projects 14
Table 4. Who develops cost estimates for environmental projects? 17
Table 5. Costs normally considered in financial analysis 23
Table 6. Cost items for which specific values are calculated 27
Table 7. Initial assignment of costs 35
FIGURES
Figure 1. Respondent's product line (by SIC code)... .8
Figure 2. Respondent's position at firm 9
Figure 3. Number of employees worldwide 9
Figure 4. Most recent annual sales 10
Figure 5. Annual corporate budget 11
Figure 6. Level at which capital budgeting occurs 12
Figure 7. Limit on discretionary capital spending 13
Figure 8. Who makes initial decision to place an environmental project 15
Figure 9. Level at which environmental costs tracked 19
Figure 10. Level at which environmental costs tracked 19
Figure 11. Cost boundaries... 21
Figure 12. How Superfund is handled 30
Figure 13. Factors accounted for by liability assessment method 31
Figure 14. Basis for allocating costs to product/processes from overhead 37
Figure 15. Sources of cost information when assigning costs to products/processes 38
Figure 16. Financial indicators used for screening projects 40
Figure 17. Financial indicators used for full project justification 41
Figure 18. Payback period used, payback users only 42
Figure 19. IRR required for approval, IRR users only 43
Figure 20. Time horizon for NPV, NPV users only 44
Figure 21. IRR tune horizon used, IRR users only 44
Figure 22. Approval thresholds for environmental projects 45
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A Benchmark Survey of Management Accountants
nvironmental cost accounting the identification, compilation, analysis, use, and reporting
of environmental cost information has emerged as one of the foremost items on the
agenda of business in the 1990s. The reasons for this phenomenon are many and varied, and
originate both within and outside the firm.
For internal decision-making, environmental costs impinge upon many facets of business
operations. For legal staff, meeting the Securities and Exchange Commission (SEC)
requirements for disclosure of environmental liabilities (most notably remediation costs)
demands regular and systematic appraisal of the anticipated costs "reasonably likely to have a
material effect" on the financial condition of the firm. For the accounting staff, compliance with
Financial Accounting Standard (FAS) No. 5 on contingency costs creates the same need for
tracking and reporting environmental liabilities that affect the balance sheet of the firm. And for
financial staff responsible for monitoring and maximizing the value of the firm, disclosure of any
kind of environmental information pollution levels or their cost repercussions may influence
the stock market's perception of the firm's value.
Though the formal requirements of the SEC and Financial Accounting Standards Board
(FASB) have attracted much attention, they are by no means the only reason for firms to put in
place workable environmental costing systems. For product managers, properly inventoried and
allocated environmental costs may make the difference between a profitable and unprofitable
product line. For the environmental or production engineer, a rigorous accounting of
environmental compliance costs is integral to identifying and prioritizing process improvements.
For the plant manager facing an increasingly competitive domestic and global marketplace of
products with low profit margins, effective control of environmental costs may be critical to
ensuring long-term viability. And, at the highest management level, the chief executive
committed to continuous improvement should have a working knowledge of environmental costs
to benchmark a firm's performance against its competitors and industry as a whole.
On the external front, pressures are mounting to encourage or require tracking and
disclosure of various types of environmental costs. The debate over how to improve national
income accounts to account for use and depletion of natural assets has spilled into the corporate
arena in the form of pronouncements on "full-cost accounting" (FCA). Though definitions vary,
the vision is common ~ creating accounting systems that will allow both firms and their
stakeholders (investors, customers, environmental organizations, host communities) a clear
perspective on the total environmental effects of a company or facility. The emergence of life-
cycle analysis, including its monetary component life-cycle costing (or "impact valuation"), ic a
reflection of this movement toward greater public accountability of the environmental
consequences of product manufacture, use, and disposal. Though few firms have yet to take
steps in the direction of reporting such cost information, pressures to do so will continue to grow
as part of the broader movement toward higher standards for corporate environmental
management systems, public accountability, and accounting.
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Environmental Cost Accounting for Capital Budgeting
PURPOSE AND
The purpose of this study is to benchmark current corporate environmental cost
accounting practices as they are applied to the capital budgeting decisions in U.S. manufacturing
firms. It seeks to provide business managers and government agencies with an understanding of
how firms are integrating environmental cost considerations into decisions about environmental
investments. Such an understanding can assist firms in comparing their practices with industry
averages and hi prioritizing improvements. For government agencies, a profile of environmental
accounting in relation to environmental investments can help target technical assistance and
policy initiatives as well pinpoint those areas of cost accounting where innovation is most visible
or, alternatively, most lagging.
In this study, "environmental investments" is broadly defined, encompassing any capital
project compliance or non-compliance -- that has as a major (though not necessarily exclusive)
objective the control, reduction, or prevention of pollution. Though all types of investments and
other business decisions certainly stand to benefit from improved environmental accounting, a
focus on environmental investments offers the most accessible "window" into current corporate
practices. This is the case because most corporate environmental accounting innovations thus far
have been linked to, and driven by, decisions surrounding environmental projects. Thus, the
study findings are confined to one application of environmental cost accounting as an internal
decision support tool. The costs of interest are all those which are "internal" (versus external or
social) in nature, that is, costs that are material to the firm's decisions about if, when, and how
much of its capital resources ought to be allocated to specific environmental investments.
The survey targeted corporate management accountants in U.S. industrial firms based on
the judgment that the accounting function hi business, if properly informed and mobilized, can
play a key role in advancing environmental accounting practices in business organizations. This
is not to say that management accountants currently play such a catalyst role. Indeed, to date,
environmental staff probably have been the prune movers in rethinking how accounting systems
can better serve the firms' long-range environmental management objectives. At the same time,
the accounting profession remains dominated by financial accountants whose responsibility is
largely information-gathering to support external reporting to shareholders and regulators.
Advances in the management accounting community have occurred, but progress has been
slower in revamping cost accounting systems to provide relevant information to modern business
decision-making. Nonetheless, besides being an excellent source of benchmarking information
for the business and government audiences, the opportunity is at hand to activate the
management accountant profession in support of improved environmental accounting.
The survey sample was selected from a list of approximately 5,000 members of the
Institute of Management Accountants (IMA) using two criteria: (1) employment in the
manufacturing sector (SICs 20-39) and (2) self-identification as responsible for planning and
budget or cost functions within their respective firms.
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A Benchmark Survey of Management Accountants
Of the estimated 787 eligible respondents, we received 149 completed questionnaires, a
response rate of 19%. Though the survey sample was randomly drawn, respondents were
decidedly weighted toward larger firms. Forty-two percent have 5000 employees or more
worldwide, whereas only 8% have fewer than 200 employees. Moreover, 49% report annual
worldwide sales of over $500 million and only 3% report sales under $10 million.
How do firms structure and manage their capital budgeting processes, specifically with
respect to environmental projects? Are such projects given special treatment in the form of
earmarked funds or budget caps? What business functions regularly participate in the capital
budgeting process? Major findings from the survey indicate that:
The single most common structure, reported by 30% of all respondents, is
budgeting at three business levels -- plant, division, and corporate. Corporate only,
division only, and plant only represented 17%, 16%, and 16%, respectively.
Discretionary spending for capital projects is a feature often associated with firms
with multiple plants. In total, 72% of respondents report some level of
discretionary spending allowed at individual facilities, ranging from $5000-
$100,000.
The vast majority of respondents (86%) report a single capital funding pool for all
capital projects, environmental or otherwise.
Product/operations, environmental, and finance/accounting personnel are the most
routine contributors to costing environmental projects, followed by consultants and
purchasing staff.
Moving from questions of capital budgeting in general to the question of environmental
costing practices:
71% of respondents reported that their company tracks some environmental costs on
a company-wide basis.
Among those who track environmental costs on a company-wide basis, 64%
reported tracking at plant level, 63% at the corporate level, and 44% at the
divisional level. These figures reflect multiple responses (i.e., tracking may be
occurring at more than one level within the firm).
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Environmental Cost Accounting for Capital Budgeting
IE COST INVENTORY* MOW wrai is THE
What internal costs are included in environmental project financial evaluation? And to
what extent are such costs quantified hi the project justification process, as opposed to handled in
qualitative fashion only?
Environmental costs most often considered hi project financial evaluation are those
that are the most tangible and quantifiable, for example: on-site air/wastewater/
hazardous waste testrng/monitoring, on-site wastewater pretreatment/treatment/
disposal, on-site hazardous waste pre-treatment/treatment/disposal, off-site hazard-
ous waste transport, and waste manifesting are considered by more than 60% of the
respondents.
Environmental costs least frequently considered in project financial evaluation
include: environmental fines and penalties, corporate image, insurance costs,
personal injury claims, marketable by-products, natural resources damage costs,
legal staff tune, and sales of environmentally friendly/green products. Based on
earlier studies, these are also the costs generally perceived as less tangible,
contingent, and difficult to quantify.
To what extent, then, are "considered" costs also quantified? Among those costs
normally considered in project financial evaluation, which are assigned a "specific dollar value"
for costs or savings?
In general, firms who consider a specific cost item are inclined to take the next step
and quantify such costs. For example, while only 55% report considering insurance
costs, 84% of those respondents quantify these costs. This pattern generally holds
true across all cost items.
For two-thirds of all environmental costs, 70% of firms who report they consider
such costs also quantify them during project financial evaluation.
0R
Among all environmental costs on the minds of corporate managers, one deserves special
attention Superfund liability. We asked respondents if and how Superfund liability affects
various aspects of internal management decision-making hi the area of capital budgeting.
Among all respondents, only 32% indicated they consider Superfund in capital
environmental project evaluation.
Among those who do consider Superfund, 33% assign a specific dollar value, 23%
do not, and 44% combine qualitative and quantitative evaluation methods. This
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A Benchmark Survey of Management Accountants
suggests that somewhere between only 7-14% of all respondents regularly quantify
Superfund liability during project financial evaluation.
If liability is considered in any form, it generally appears after financial evaluation
is complete and a project is brought to upper management for final review and
approval.
For the few firms who consider a project's effect on hazardous waste ("Superfund")
liability in preparing an appropriations request for an environmental project, 74%
use an assessment method developed internally.
By a substantial margin, the most frequently cited hurdle (58%) to quantifying
liability is difficulty in estimating pliability costs will occur. Following this is the
difficulty in estimating the magnitude of costs (45%) and -when liability will occur
(29%).
Contrary to conventional wisdom that legal concerns play a key role in excluding
liability from investment decisions, remarkably few identified "If I quantify, I may
be subject to toxic torts" (5%) and "If I quantify, I have to disclose to the SEC"
(3%) as barriers to quantifying liability.
A total of 61% of survey respondents indicated that Superfund liability was either
very important (27%) or somewhat important (34%) in determining priorities for
environmental projects, suggesting that the general appreciation of liability
avoidance well exceeds concrete steps to quantify it.
When firms incur environmental costs, not all processes and products are equally
responsible for cost generation. Even in modest-sized manufacturing firms with two or three
production lines, the costs of licensing, monitoring, waste storage, emissions controls,
environmental staff time, off-site disposal, insurance, future regulatory compliance, and even
liability are not driven equally by each production line. Some process lines may be more
hazardous materials-intensive, generate more emissions per unit output, require more frequent
and intensive inspection and monitoring, and generate greater quantities of waste requiring off-
site disposal. Similarly, particular processes, or products, may cause a disproportionate share of
costs associated with training and reporting to government agencies, or give rise to risks that may
result in higher insurance costs or risks of future personal or property damages. In short, when it
comes to environmental costs, not all processes and products are created equal.
To obtain a glimpse of current practices, we asked respondents to describe their current
practices in cost allocation across a range of 17 environmental costs. For each cost item,
respondents were asked to check whether the initial cost assignment was: always to overhead,
usually to overhead, usually to product/process, or always to product/process.
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Environmental Cost Accounting for Capital Budgeting
For every cost item, "always to overhead" is the most frequent response. Virtually
all costs fall in the 55-75% response range; that is, well over half of respondents
report initially assigning environmental costs always to overhead accounts.
Costs most often initially assigned to overhead from licensmg/permittmg to
insurance costs are those most typically associated with central staff functions or
plant-, division-, or corporate-wide overhead costs, e.g., legal, environmental, and
training staff activities.
The pattern of diminishing frequency from overhead to product/process assignment
holds steadily for all entries, regardless of how tangible costs are.
58% of those who initially assign costs to an overhead account later reallocate to a
product or process. This translates into about 44% of all survey respondents.
Labor hours (55%) and production volume (53%) are by far the most common bases
for allocating overhead costs back to products/processes, followed by materials use
(27%) and square footage of facility space (24%).
Financial/accounting systems data, mentioned by 51% of respondents, is the most
frequent source of environmental cost information. This is followed by purchasing,
production/operation logs, engineering estimates, and materials tracking
information.
FINANCIAL
TUB
Improving the cost inventory and cost allocation methods are major steps toward greater
balance and rigor hi evaluating environmental projects. Two other variables that can play a
decisive role in determining whether projects survive the intense competition for scarce capital
resources are the choice of project financial indicators and the related issue of analysis time
horizons.
In addition to then- less tangible and contingent nature, many environmental costs and
savings materialize only hi the mid- and long-term. In contrast to costs of activities such as on-
site air and hazardous waste testing, monitoring, handling, and manifesting, other costs (or
savings/revenues) linked to corporate image, liability, and green product sales are by nature those
with longer-term time horizons. In the case of future compliance costs, the very term implies
costs that will materialize only some years into the future. Thus, if any of these costs form part
of the cost/benefit calculation of a proposed environmental project, an analytical method that is
insensitive to mid- and long-term cost and revenue streams will be incapable of capturing the
long-term profitability of the proposed project. Pollution prevention projects are especially
vulnerable to this shortcoming. This is the case because many rely on product redesign, process
modification, and materials substitution that may be capital intensive but yield attractive returns
beginning 3-5 years after the initial capital outlay.
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A Benchmark Survey of Management Accountants
74% of respondents indicated they perform "a less detailed/informal screening" of
environmental projects prior to a detailed financial analysis.
For those firms that perform informal screenings, Return on Investment (ROI)
(25%) and Payback (25%) are the most commonly used financial indicators. Eleven
percent of respondents report use of qualitative methods.
For full project justification, ROI at 24% is the leading quantitative indicator,
followed by Internal Rate of Return (IRR) at 18%. However, for 27% of
respondents, the single most frequent response to this question, is that their
"evaluation is qualitative only." This strikingly high figure may be explained by the
tendency of some respondents to interpret environmental projects as compliance-
driven or "must-do," thereby not warranting the resources to develop a full financial
evaluation.
Among all respondents, 56% indicate no "standard hurdle rate, or threshold" is
required before approving an environmental project. Moreover, 57% report equal
hurdle rates for environmental and non-environmental projects, 36% report that
hurdle rates are lower for environmental investments.
Among those respondents who use Payback at any stage of project justification, 1-2
years is by far the most common (50%) hurdle rate required for project approval.
For IRR users (48% of respondents), hurdle rates reported are 10-19%, followed by
20-30% (25% of respondents) and greater than 30% (18% of respondents).
Among the many internal business functions served by rigorous, disaggregated
environmental cost information, capital budgeting for environmental projects is one of the
principal beneficiaries. Accounting systems to identify, compile, analyze, and report
environmental cost information in a timely and rigorous fashion are a prerequisite to
understanding the sources and magnitude of environmental costs in the firm. Only if these costs
are understood can managers maintain a clear picture of the true costs of current production
processes and products. This, in turn, allows managers to direct attention to opportunities to
minimize compliance costs, .reduce operating costs, and fully mesh the environmental and
financial performance goals of the organization.
Concerning the key issues of environmental cost inventory and cost allocation methods,
the survey suggests that much work remains before business practices provide managers with a
comprehensive and transparent look at "true" costs of processes and products. While most firms
quantify the more obvious and measurable environmental costs, substantially fewer have
grappled with those that are less tangible, uncertain, and difficult to quantify. Estimates of
environmental costs in the range of 3%-20% of facility operational or product line costs as
reported by some companies may, after a closer look, be substantially understated.
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Environmental Cost Accounting for Capital Budgeting
Dealing systematically with these types of costs is not new to corporations. In the normal
course of business, managers regularly look into the future to forecast everything from the price
of oil to consumer demand for a new line of computers. Applying these approaches, including
those drawn from risk analysis, to estimate less tangible costs would represent a major step
toward characterizing current and future environmental costs.
Cost allocation, too, remains a major challenge. Most firms continue to place most
environmental costs initially into overhead accounts. Though some subsequently allocate these
costs to products or processes, the basis upon which these allocations are made are often ill-
conceived, that is, they bear little or no relationship to the activities which are responsible for
their creation. When proper allocation does not occur, managers receive distorted signals
regarding the true costs and benefits of retaining or changing processes and products. Moreover,
like incomplete cost inventories, misallocation of environmental costs stands in the way of
effective performance monitoring, product pricing, incentives and rewards systems, and other
activities essential to maintaining a competitive enterprise.
Upgrading the capital budgeting system through improved environmental accounting
systems is best viewed in the broader context of strategic planning. With multiple forces
working to fuse environmental and financial objectives of the firm, it is critical to exercise an
even hand in evaluating the returns to all capital investments, environmental or otherwise. When
cost inventory and cost allocation practices fail to provide a level playing field for all
investments, managers are left without the information they need to make optimal use of limited
resources. In particular, those environmental projects with strong pollution prevention content,
as well as those with side benefits unrelated to environmental improvement per se -- e.g., process
optimization and yield, market penetration, corporate image are particularly vulnerable to the
adverse effects of incomplete cost information.
While many social benefits may result from improved internal environmental accounting,
the case for such improvements may be made purely on the basis of the firm's self-interest. This
is the central message that public policymakers, professional associations, trade associations and
stakeholders should deliver to firms seeking to understand and apply environmental accounting
techniques to their capital budgeting processes.
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A Benchmark Survey of Management Accountants
nvironmental cost accounting the identification, compilation, analysis, use, and reporting
of environmental cost information has emerged as one of the foremost items on the
agenda of business in the 1990s. The reasons for this phenomenon are many and varied, and
originate both within and outside the firm.
For internal decision-making, environmental costs impinge upon many facets of business
operations. For legal staff, meeting the Securities and Exchange Commission (SEC)
requirements for disclosure of environmental liabilities (most notably remediation costs)
demands regular and systematic appraisal of the anticipated costs "reasonably likely to have a
material effect" on the financial condition of the firm (Edwards 1992). For the accounting staff,
compliance with Financial Accounting Standard (FAS) No. 5 on contingency costs creates the
same need for tracking and reporting environmental liabilities that affect the balance sheet of the
firm. And for financial staff responsible for monitoring and maximizing the value of the firm,
disclosure of any kind of environmental information pollution levels or their cost repercussions
may influence the stock market's perception of the firm's value (Freedman 1993).
Though the formal requirements of the SEC and Financial Accounting Standards Board
(FASB) have attracted much attention, they are by no means the only reason for firms to put in
place workable environmental costing systems (Ditz, Ranganathan and Banks 1995; Todd 1994).
For product managers, properly inventoried and allocated environmental costs may make the
difference between a profitable and unprofitable product line. For the environmental or
production engineer, a rigorous accounting of environmental compliance costs is integral to
identifying and prioritizing process improvements. For the plant manager facing an increasingly
competitive domestic and global marketplace of products with low profit margins, effective
control of environmental costs may be critical to ensuring long-term viability. For the personnel
officer seeking to create fair and effective employee incentive and reward programs,
environmental costs may be a key ingredient in measuring staff performance. And, at the highest
management level, the chief executive committed to continuous improvement should have a
working knowledge of environmental costs to benchmark a firm's performance against its
competitors and industry as a whole.
On the external front, pressures are mounting to encourage or require tracking and
disclosure of various types of environmental costs. The debate over how to modify national
income accounts to incorporate the use and depletion of natural assets (Repetto 1989) has spilled
into the corporate arena in the form of pronouncements about "full-cost accounting" (FCA)
(Popoff and Buzzelli 1993). Though definitions vary, the vision is common ~ creating
accounting systems that will allow both firms and their stakeholders (investors, customers,
environmental organizations, host communities) a clear perspective on the total environmental
effects of a company or facility. The emergence of life-cycle analysis, including its monetary
component, life-cycle costing (or "impact valuation"), is a reflection of this movement toward
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Environmental Cost Accounting for Capital Budgeting
RESPONDENT PROFILE
Higure 1 depicts the distribution of respondents by SIC code. Nearly half (48%) work for
firms in one of four equipment manufacturing sectors plus miscellaneous manufacturers.
We lumped these five SICs together to control the length of the questionnaire: industrial
equipment, electric equipment, transportation equipment, instruments and miscellaneous
manufacturing. The remainder are scattered across the other nine categories, with the heaviest
representation in chemicals and petroleum/coal (12%) and metals (12%). Those least represented
in the sample are printing (3%) and rubber/plastics (1%). The former is not surprising since
printing firms, though large in number, are generally small establishments of 30 employees or
less. These types of firms are unlikely to have a full-time accountant responsible for planning
and budgeting or cost functions; our survey sample, on the other hand, focuses on such
accountants.
Figure 1. Respondent's product line (by SIC code)
20,21: Food, Tobacco
8%
22,23: Textiles, Apparel
6%
35-39: Industrial/Electric/
Transportation Equipment,
Instruments, Miscellaneous
Manufacture
48%
24,25,26: Lumber, Furniture,
Paper
6%
27: Printing
3%
28,29: Chemicals, Petroleum/Coal
12%
30: Rubber/Plastics
1%
32: Stone/Clay/Glass
4%
33,34: Metals
12%
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A Benchmark Survey of Management Accountants
Respondents are located with almost equal frequency in corporate (32%), divisional
(31%) and individual plants (31%) (Figure 2). Slightly less than two-thirds (61%) are registrants
with the Securities and Exchange Commission (SEC). With respect to employees (Figure 3),
somewhat under half (42%) have over 5000 employees worldwide, while only 8% have fewer
than 200 employees. The remaining 50% are mid- to mid-large-size enterprises in the 200-999
range and 1000-5000 employee range.
Figure 2. Respondent's position at firm
Corporate
32%
Divisional
31%
Figure 3. Number of employees worldwide
24%
42%
26%
<200
200-999 1000-5000
No. of employees
>5000
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Environmental Cost Accounting for Capital Budgeting
Annual sales volume approximately mirrors the employment profile of the respondents
(Figure 4). Nearly half have annual worldwide sales greater than $500 million, while only 3%
report sales of under $10 million. Using 200 employees and $10 million annual sales as a
general rule for distinguishing small businesses from medium and larger enterprises, our sample
is clearly weighted toward the latter. This, again, is expected given our criteria for inclusion in
the sample. Professional management accountants with planning, budgeting, and cost
responsibilities are likely to be affiliated with larger corporate organizations with routinized
planning and budgeting cycles, multiple plants and divisions, and complex cost structures
requiring dedicated accounting staff for management and oversight. And, of course, they also are
likely to have the financial and human resources to devote to completion of a survey
questionnaire in comparison to the greater resource constraints facing smaller firms.
Figure 4. Most recent annual sales
49
50 -
<$10 $10- $101-
million 100 $500
million million
Annual sales
>$500
million
10
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A Benchmark Survey of Management Accountants
Finally, annual corporate capital budgets track the pattern of company size reflected in
sales and employment levels (Figure 5). About half (51%) of the respondents report capital
budgets greater than $10 million, 89% over $1 million, and only 5% less than $.5 million. The
medium- and large-scale weighting of our sample is again evident.
Figure 5. Annual corporate budget
< $0.5 million
5% $0.5 - $1 million
6%
>$ 10 million
51%
$1 - $10 million
38%
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Environmental Cost Accounting for Capital Budgeting
CAPITAL BUDGETING PEOCEBS
ow do firms structure and manage their capital budgeting process, specifically with respect
to environmental projects? Are such projects given special treatment in the form of
earmarked funds or budget caps? What business functions regularly participate in the capital
budgeting process?
A look at the data (Figure 6) reveals that the single most common combination of
responses was budgeting at all three levels, a process described by 30% of all respondents.
Corporate only, division only, and plant only represented 17%, 16%, and 16% respectively.
Based on Tellus' experience working with firms during the last five years, the prevalence of this
tiered-type structure is typical of medium- to large-size firms, wherein initial project
identification and justification begins at the plant level, moves up to divisional or group review
(unless a project is small enough to qualify for discretionary spending at the facility level), and
finally is approved or rejected by corporate management. A number of respondents indicated
some variation on the category names, e.g., "departmental," "operating unit," and "branch."
Interestingly, only one respondent indicated budgeting by "product line." Among all
respondents, virtually all (95%) budget on a regular as opposed to an ad hoc basis, a finding
expected for a sample dominated by mid- to large-size manufacturers. Four of the five firms
whose budgeting is ad hoc fall within the lower half of firm sizes (p<.05)2 as measured by annual
sales.
Figure 6. Level at which capital budgeting occurs
Plant only
16%
Other Corp, div,
3% plant, other
3%
Division only
16%
Corporate only
17%
Corp, div, & plant
30%
Corporate & plant
6%
Division & plant
5%
Corporate & division
4%
1 Pearson chi square test were used for all statistical analyses atp < .05.
12
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A Benchmark Survey of Management Accountants
Discretionary spending for capital projects is a feature often associated with firms having
multiple plants. In these instances, plant managers are allowed to spend up to a predetermined
fixed amount for projects without the formal justification process and divisional or corporate
approval required for larger expenditures. When asked if such discretion exists, respondents
indicated a wide range of such caps (Figure 7). At the low end, 28% indicated no discretionary
spending whatsoever, or "no limit"; all expenditures, no matter how small, require upper
management approval. After this no-limit category, respondents reported in roughly equal
fractions (12%-18%) discretionary caps ranging from $5000 to over $100,000.3 Thus, in total,
72% report some level of discretionary spending allowed in their firms. As in the case of
budgeting cycle, and consistent with our expectations, it is the larger firms that give individual
plants greater independence in undertaking capital projects with upper management approval (p
<.05). For example, 80 percent of firms with annual sales under $10 million indicated no
allowance for discretionary spending, whereas only 13% of firms with sales greater than $500
million reported such a procedure.
35 T
Figure 7. Limit on discretionary capital spending
17
no limit
up to
$5000
up to
$10,000
up to
$50,000
up to
$100,000
other
Spending Limit
3One respondent reported that the discretionary cap depends on who is the highest ranking plant personnel. The
figure ranges from $25,000 for a "Director" to $250,000 for an Assistant Vice President and $500,000 for a Vice
President. Another respondent reported that the discretionary cap is variable and depends on plant size.
13
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Environmental Cost Accounting for Capital Budgeting
Firms use a wide range of categories to classify projects as they enter the budget cycle,
and category names may be critical (White, Becker, and Goldstein, 1991b). Those bearing an
"environmental" tag may be viewed as inherently non-value adding. These projects are seen as
necessary but unprofitable uses of capital and, perhaps, are subject to a lower hurdle rate, if any.
Alternatively, a project labeled "profit-adding" or "cost-saving" will be more welcome by
management in the course of project justification. It is sometimes the case that a project with
strong environmental content may be automatically labeled "environmental" and escape
systematic financial analysis even though it may, in fact, yield a competitive rate of return if
profitability analysis were performed.
Given a list of 14 project categories, respondents were asked which are used to classify
projects in their firms (Table 3). At the high end (60% or greater reporting the use of a category)
are "cost-saving," "environmental," "replacement," and "expansion." Among other potential
environmentally-related categories, about a third, 32%, use the term "compliance," 25% use
"waste treatment," 20% use "pollution prevention," and 17% use "waste reduction." Thus,
overall, "environmental" is by far the most common environmentally-related category, which
may be interpreted as an indication that most firms lump environmental projects of all types into
a single category. Insofar as this is the case, the tendency not to discriminate between different
types of environmental projects may cloak important contributions of pollution prevention (P2)
and waste reductions to non-environmental objectives such as overall yield enhancement and
product quality, as well as profit-adding and cost-saving.
Table 3. Terms firms use to categorize capital projects
Term
Cost saving
Environmental
Expansion of existing operations
Replacement
Maintenance
Expansion into new operations
Compliance
General/Administrative
Waste treatment
Pollution prevention
Profit adding
Waste reduction
Profit sustaining
Abandonment
Percent who use term
73
67
64
64
54
50
32
27
25
20
20
17
13
3
14
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A Benchmark Survey of Management Accountants
Which business functions tend to assign environmental projects to individual categories?
Among the eight choices available and allowing for one answer only (Figure 8), plant
environmental staff most often make this critical determination (29%), followed by plant
finance/accounting (12%) and corporate finance/accounting staff (12%). Among those who
responded "other," a variety of staff functions were named: engineering, plant engineering,
capital planning committee, division manager, consultants, product/process engineer, corporate
manufacturing, and president. Another 15% report using "no categories." Thus, after eliminating
"other" and "no categories," 55% of respondents indicate "plant environmental" and "plant
finance/accounting" as those responsible for project classification. The pivotal role of these staff
in project categorization should make the staff a prime target for initiatives -- originating either
internal or external to the firm to upgrade and refine the project classification process to avoid
the aforementioned pitfalls in financial analysis.
Figure S. Who makes the initial decision to place an
environmental project in a particular category?
Corporate
finance/accounting
12%
We do not use
categories
15%
Plant environmental
29%
Divisional
finance/accounting
6%
Plant
finance/accounting
12%
Corporate
environmental
6%
Divisional
environmental
8%
Are environmental projects, both compliance and non-compliance, accorded a separate
capital budget pool or, alternatively, do they compete with other contending projects for capital
resources? The vast majority of respondents (86%) report a single pool, whereas only 11%
report a separate pool for environmental projects and 3% for compliance projects. This is a
finding of substantial consequence for pollution prevention projects. It once again reinforces the
15
-------
Environmental Cost Accounting for Capital Budgeting
importance of rigorous cost analysis if P2 projects are to compete effectively, since special set-
aside funds are the decided exception and intense competition the rule. Though 94% report
annual environmental project expenditures have either "no set cap" or "vary from year to year,"
the general absence of earmarked funds implies an intense annual competition for capital
resources.
In the course of environmental project justification, many staff functions may contribute
to developing cost information for environmental projects (White, Becker, Goldstein 1991a and
1991b). These staff functions may include environmental, operations, accounting, financial,
purchasing, and facilities management. As the cost net extends to encompass less tangible
longer-term costs, savings, and revenues, other staff functions (e.g., legal and marketing)
increasingly become important sources of information. In fact, there is a direct correlation
between the rigor of cost analysis and the number of staff involved in identifying, compiling, and
analyzing cost information. The more numerous and less tangible project costs are -- a
characteristic typical of many P2 investments ~ the more different staff functions are required to
do the job right. For example, costs/savings associated with liability avoidance, future regulatory
compliance, compliance with future international environmental management systems standards,
and penetration of green product markets -- all may require input from staff not traditionally
involved in the project justification process.
When given seven typical sources of cost information and allowed multiple responses,
respondents most often cited product/operations, environmental, and finance/accounting staff as
routine contributors to costing environmental projects (Table 4). Over a third indicated
consultant (38%) and purchasing (36%) participation, followed by vendors (23%) and legal staff
(20%). "Others" included a strong showing by engineering/plant engineering (13 respondents)
plus an assortment of single mention of others, including: industrial engineering, facilities
engineering, corporate engineering, and maintenance. The strong showing of environmental and
production/operations is not surprising given the state-of-the-art of environmental project costing
in general, which heavily emphasizes conventional company costs. As awareness of less
tangible costs/savings increases, we are likely to see a more active role on the part of staff
functions such as legal and marketing. Finally, the appearance of vendors and consultants,
though not surprising, is a reminder that these parties should be included in any initiative aimed
at strengthening the costing methods used by manufacturing firms in evaluating environmental
projects.
16
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A Benchmark Survey of Management Accountants
Table 4. Who develops cost estimates for environmental projects?
Department
Routinely involved (%)
Production/Operations
Environmental
Finance/Accounting
Consultants
Purchasing
Vendors
Legal
Other
65
64
64
38
36
23
20
13
Trends in Capital Budgeting
Are capital budgeting practices in general changing in U.S. manufacturing firms? Are
such practices following the rapid pace of change in business organizations, change spurred by
such forces as merger and acquisition activity, new product development, and changing
environmental regulations? Are efforts to achieve environmental improvements affecting the
way firms manage their capital resources or, as some observers argue, are past practices and
traditional shareholder value drivers intact despite pressures to become increasingly "green"
(Walley and Whitehead 1994)?
When presented with eight potential changes to their firms' capital budgeting practices
during the last three years, the common answer (60%) was "no change." Raising the
discretionary cap on facility-level capital expenditures was a distant second at 17%, which may
reflect primarily an inflation adjustment and not a real dollar increase. Four options explicitly
related to environmental projects4 were each mentioned by no more than 7% of respondents.
Thus, a picture of essentially unchanging capital budgeting practices emerges, at least for the
changes identified in the survey instrument. Of course, this does not preclude the possibility that
firms are making changes unrelated to those that affect their handling of environmental projects.
Notwithstanding this possibility, it appears that capital budgeting practices, at least for
environmental projects, have remained relatively constant amidst downsizing, re-engineering,
and other trends and styles that are reshaping American manufacturing industry (Klammer 1994).
4 Whether the firm stopped or started classifying environmental projects separately from other capital projects, and
whether the firm stopped or started distinguishing environmental compliance from non-compliance projects.
17
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Environmental Cost Accounting for Capital Budgeting
Tracking Environmental Costs
Moving from questions of capital budgeting in general to the question of environmental
costing practices, our survey found 71% of respondents reporting that their company tracks
environmental costs on a company-wide basis. This is a surprising finding. In work with many
different firms during the last five years, Tellus Institute has found few instances -- certainly less
than the majority reported in this survey of accounting systems designed to tag or segregate
environmental costs on a routine basis. The survey finding may be attributable to one or a
combination of four explanations:
the respondents self-selected in favor of those management accountants whose firms are
more apt to practice advanced environmental accounting methods;
Tellus' earlier work (White, Becker and Goldstein 199la; White, Savage and Dierks 1995),
covering a diverse but small sample of firms, is not representative of company practices in
general;
"tracking environmental costs" may be defined more loosely by respondents than intended by
the question, thereby leading to an increased number of positive responses; and
"company-wide" may have been loosely defined by respondents.
The nature of the question allowed respondents to either choose an option ("no") that implied
their company did not track environmental costs at all or choose "company-wide" ("yes"). In
other words, "company-wide" was interpreted as "at all" or "at any level."
Figure 9 depicts the most common organizational level at which environmental costs are
tracked. Among those who track environmental costs company-wide, slightly under two-thirds
reported tracking at plant level and at the corporate level, and 44% at the divisional level. This
probably reflects the absence of divisions in many of the respondents' firms, as well as factors
related to the accounting structure. Figure 10 sheds further light on the tracking question. Here
we see the most common structure among those who track environmental costs is participation of
all three levels - plant, division, and corporate ~ followed closely by plant only and corporate
only. This response, as in the earlier "do you track" question, may also reflect varying
interpretations of "environmental costs." Those firms who report the involvement of all three
levels probably have in place the most systematic and tiered procedure for compiling and
reporting environmental costs originating at the plant level and moving up the corporate
hierarchy. For those in almost equal numbers who report plant-only and corporate-only tracking,
we suspect a less comprehensive and routinized tracking system. For example, plants may
compile relatively straight-forward costs like waste handling and disposal, whereas corporate
tracking may focus on Superfund liability.
18
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A Benchmark Survey of Management Accountants
Figure 9. Level at which environmental
costs tracked
(n=104, multiple answers accepted)
64%
63%
Corporate
Figure 10. Level at which environmental costs tracked
30% -r
28%
Level
19
-------
Environmental Cost Accounting for Capital Budgeting
THE COST INVEHTOHY
How Wide is the Net?
Definitions of environmental costs are subject to enormous variation (GEMI 1994, Fagg
et al 1993). Figure 11 presents a three-part, "nested" scheme for distinguishing different types of
costs (Shapiro, Savage, and White forthcoming). For most firms, current tracking practices
encompass only Box A (conventional costs) including items such as:
off-site waste disposal,
purchase and maintenance of air emissions control systems,
utilities costs,
and perhaps costs associated with permitting of air or wastewater discharges.
Beyond this conventional cost domain is Box B, encompassing a wide range of less-tangible
costs (and savings and revenue streams) such as:
liability,
future regulatory compliance,
enhanced position in "green" product markets,
and the economic consequences of changes in corporate image linked to
environmental performance.
Probably more than any other less-tangible cost, especially in relationship to SEC requirements
and financial reporting in general, liability has been the subject of substantial discussion within
and outside the accounting profession (Canadian Institute of Chartered Accountants 1993;
Surma and Vondra 1992; Newell, Kreuze, and Newell 1990). Also included in Box B are
changes in stock value linked to environmental performance, an elusive yet potentially
significant less-tangible item of special interest for publicly traded firms (Cohen 1995).
Together, Boxes A and B comprise the internal domain, the collection of costs for which firms
are accountable (or otherwise experience) under current and foreseeable regulatory and market
conditions.
20
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A Benchmark Survey of Management Accountants
Figure 11. Cost Boundaries
K"« '-4$f-*£ r
, VaS*:
Less Tangible, Hidden,
Indirect Company Costs
Conventional Company Costs
CA 3-
^*f/^ *
^ ^.ji
-*y» > .
Internal Cost Domain
External Cost Domain
Full
Total Company Costs
rife-Cycle Costs
Box C comprises external costs, or "externalities" in the language of economics. These
costs entail those for which the firm is not accountable or are not of material economic
consequence to the firm under current and foreseeable regulatory and market conditions. Box C
may include, for example, adverse health effects for air emissions that result even if such
emissions are within compliance levels; damages to buildings or crops resulting from SO2
emissions; and irreversible damage to ecosystems or species owing to mining or forestry
activities. A few firms have taken the first step toward developing accounting systems that track
and, in some instances, report the physical and economic magnitudes of these external costs
(Boone 1995, Elkington 1991). Certainly the pronouncements of business leaders suggest that
the future may see further corporate initiatives to track and report these costs as part of the
general movement toward enlightened public accountability (Popoff and Buzzelli 1993; Andraca
and McCready 1994).
With continuously evolving U.S. environmental regulations and public expectations and
with emerging international environmental management systems standards, the boundaries
depicted in Figure 11 are anything but static. Costs in Box C today may well be in Box B
tomorrow. In the same vein, the less tangible nature of Box B costs such as liability and
21
-------
Environmental Cost Accounting for Capital Budgeting
corporate image will change as more rigorous measurement techniques are developed to quantify
such costs. For now, however, putting in place systems to more effectively track Box A and Box
B costs is the nearer-term, high-payoff challenge facing most firms.
Within this conceptual framework, what internal (Box A and Box B) costs are included in
environmental project financial evaluation as reported by the management accountants in our
sample? And to what extent are such costs quantified in the project justification process, as
opposed to handled in qualitative fashion only?
The first of these questions, the inclusiveness of the cost inventory, is reported in Table 5.
This table presents the percent of respondents who "normally" consider 28 different types of
costs (or savings or revenues) in preparing financial justification for environmental projects. This
cost inventory includes items ranging from the conventional, tangible, and measurable e.g.,
production efficiency/yield, energy, water, hazardous waste pre-treatment/treatment/disposal to
those which, in the eyes of most corporations today, would be regarded as less conventional, less
tangible, and less measurable (White, Becker, and Savage 1993).
22
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A Benchmark Survey of Management Accountants
Table 5. Costs normally considered in financial analysis
Cost Item
Percent who
consider
Energy costs
Licensuig/permitting
;,"*> X-Tfl;
Production efficiency/yield
On-site hazardous waste handling (storage, labelling)
Employee safety/health compensation claims
Manifesting for off-site hazardous waste transport
Future regulatory compliance costs
Insurance costs
Personal injury claims
Frequency of plant shutdown
Property damage
Air pollutant emission credits (SOx, NOx)
Natural resource damage
Sales of environmentally friendly/green products
Note that this list is neither exhaustive of all cost items that ought to be considered in
project justification, nor are the listed items pre-defined as "environmental." In fact, there is no
single standardized list of "environmental costs" to which all firms adhere, nor is there likely to
be one in the foreseeable future (Ditz, Ranganathan, and Banks 1995). Because environmental
costs are simply those incurred in meeting the environmental objectives of the firm, and such
objectives vary across firms and even within firms at different points in time, developing a
standardized list is infeasible. Moreover, devoting substantial energy to defining what is and is
-------
Environmental Cost Accounting for Capital Budgeting
not an. "environmental" cost diverts attention from the fundamental challenge: enlarging the cost
inventory to ensure that all costs, environmental and non-environmental, are properly accounted
for in the capital budgeting process. Toward this end, Table 5 is empirically-based, containing
cost items which are (a) associated with environmental projects and (b) frequently, in Tellus'
experience, wholly or partially absent in appropriation requests for capital funds. For this reason,
many conventional cost items such as equipment, direct labor, and raw material inputs do not
appear on our list.
Scanning Table 5 reveals, aside from a few surprises, an ordering of cost items one might
expect given the state-of-the-art of environmental accounting. The highest percent responses are
generally costs which are front-line (often on-site) waste management costs that motivate
environmental project proposals in the first place: on-site air/wastewater/hazardous waste
testing/monitoring, on-site wastewater pre-treatment/treatment/disposal, on-site hazardous waste
pre-treatment/treatment/disposal, off-site hazardous waste transport, and waste manifesting. By
and large, they fall within Box A of Figure 11. All are considered by 60+ percent of the
respondents.
Also included in the upper half (over 59% or greater) of responses are energy and water
costs. Though normally classified as standard utility costs, they nonetheless are subject to
change insofar as environmental projects directly or indirectly alter the water and energy
requirements of a new production process. In the same vein, production efficiency/yield, which
is normally considered by about three-quarters of respondents, is usually not viewed as an
environmental cost per se. Nonetheless, product yield, for example, in the chemical and
petroleum industry is often a concurrent beneficiary of projects whose principle aim is emissions
reductions through process modifications or simply housekeeping measures.
One unexpected finding is the appearance of future regulatory compliance costs in the
upper half of Table 5. Though marginally falling into the upper half (59% report that it is
normally considered), even this modest showing suggests that a significant number of firms
increasingly are looking for ways to avoid future compliance costs in addition to controlling or
eliminating current regulatory pressures. Such behavior - reflecting a desire to get off the
"regulatory treadmill" ~ may portend a future of greater visibility for prevention-oriented
projects in the capital budgeting process.
At the lower half of the response list (57% or less) are costs that most firms would view
as less tangible, though by no means less significant, contributors to the future stream of costs
and savings associated with environmental projects. In this category fall such costs as
environmental fines and penalties, corporate image, insurance costs, personal injury claims at the
higher end of the response ranking; and marketable by-products, natural resources damage costs,
legal staff tune, and sales of environmentally friendly/green products at the lower end of the
response ranking. Not surprisingly, many of these costs are of a contingent, or probabilistic,
nature. That is, whether and when they materialize, and what their costs to the firm will be, all
are subject to substantial uncertainty. Nonetheless, acute events (e.g., fire, spill, or explosion)
owing to the use or manufacture of hazardous materials do occur, and projects that reduce or
eliminate the probability of such accidents are rightfully credited with an avoided cost. A recent
24
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A Benchmark Survey of Management Accountants
example of the financial benefits of such risk reduction is demonstrated in an accelerated
corporate-wide phase-out of PCBs by a large manufacturer (White, Savage, and Dierks 1995). In
this instance, a project which languished in the capital budgeting process was given new life and
approved by upper management when the appropriations request incorporated explicit,
quantitative, and monetized estimates of avoided risks of a PCS spill, fire, and plant shut-down.
Still, the responses in Table 5 suggest that as a group, such contingent costs have yet to be
routinely included into the capital budgeting process for at least 40%, and as much as 69% (in the
case of natural resource damages), of the firms represented by the respondents.
Other less tangible costs also are subject to omission by many firms. Corporate image,
undoubtedly one of the most difficult to measure among all less-tangible costs, is normally
considered by 55% of respondents, a surprisingly high response (even if limited to a qualitative
consideration) given the elusive nature of image effects. At 40%, air emission credits, a
relatively new development spurred by the Clean Air Act Amendments of 1990, may simply be
outside the realm of possibilities for a majority of the respondents. Sales of environmentally
friendly/green products, at 25% the lowest response of all items, also may be applicable only to a
small fraction of firms in the consumer product business. In contrast to primary or intermediate
industries (e.g., petroleum, most chemicals, metals), consumer products manufacturers are more
sensitive to attaining a "green" product image that may be enhanced through certain
environmental investments.
Finally, insurance costs, reporting to government agencies, environmental staff labor
time, and legal staff labor time are all cost items that traditionally fall within the centralized
administrative functions of the firm. Their relatively high rate of omission from the capital
budgeting process may be linked to the tendency to pool such costs in overhead categories (as we
discuss in the next section), thereby disconnecting such costs from the processes and sources that
generate them in the first place. Of course, for some environmental projects, managers may
correctly view such costs as fixed - that is, invariant with respect to a proposed environmental
project. Legal and environmental staff costs, for example, may not decline to any significant
degree as a result of a proposed environmental project; most of their environmentally-related
functions -litigation, reporting, manifesting ~ will continue in essentially the same fashion as
before the project is implemented. However, firms should be cautious of making these
assumptions before such pooled costs are properly disaggregated. This will enable firms to
clearly understand what exactly these costs are, what portion is fixed and what portion is variable
and, finally, which costs are controllable and which are not (Ditz, Ranganathan, and Banks
1995).
Are Environmental Costs Quantified?
Considering environmental costs in the capital budgeting process is an important, but
only a first, step in bringing rigor and comprehensiveness to the financial evaluation of
environmental projects. Monetization of such costs estimating specific dollar values ~ is the
25
-------
Environmental Cost Accounting for Capital Budgeting
second and ultimate measure of how far firms are in realizing the full benefits of a complete cost
inventory, one which encompasses both tangible and less tangible internal costs as depicted in
Box A and Box B of Figure 11. To what extent, then, are "considered" costs also quantified?
Among those costs normally considered in project financial evaluation, which are assigned a
"specific dollar value" for costs or savings? Table 6 reports responses to this question. Note that
the percentages in Table 6 reflect responses provided by a subset of the total survey sample (i.e.,
those who answered "Yes" to the question of whether they consider a specific cost item at all in
preparing environmental project financial evaluation).
26
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A Benchmark Survey of Management Accountants
Table 6. Cost items for which specific values are calculated
among those who "consider" each cost
Cost Item
Percent who
calculate
Energy costs
92
>i ,i*< , ,i
llfll^^ iiit-V
Marketable by-products
^^^c^^^g^^^^^^^^^^r^r^ * "T^W*^ xi-L^ T T '^i^- =* ^^* Tr^iw^^f!^^^
8js|ji$§^
On-site air/wastewater/hazardous waste testing/monitoring
Insurance costs
On-site air emission controls
{>.; ,; , -Y>
^_-iiS:, '-
84
Environmental staff labor time
Itegai staftiajb|ptiim& v^^^
Off-site hazardous waste transport
^
On-site hazardous waste handling (storage, labellhig)
Sales of environmentally friendly/green products
f*EE&₯?;S?vI3niIiiIZi^S,TiS^1S₯Tr^-3S^SlAZi'^R
Manifesting for off-site hazardous waste transport
Employee safety/health compensation claims
Staff training for environmental compliance
8igK^«Rssc5ya5at^
Natural resource damage
Corporate image effects
84
85
sl
1
79
_»,
77
75
73
r^pp^^y??
71
"63"
26
Several findings in Table 6 are noteworthy. First, percentages are higher than in Table 5.
This suggests that those who consider a particular cost item are inclined to take the next step and
quantify such costs. For example., in the case of marketable by-products, only 36% consider the
cost, but a full 89% of these respondents report quantifying this same item. Similarly, whereas
only 55% report considering insurance costs, 84% of those quantify these costs. This pattern
holds generally true across all cost items. The median value in Table 6 is 76.5%, well above the
27
-------
Environmental Cost Accounting for Capital Budgeting
58% in Table 5. Indeed, for more than two-thirds of all cost items in Table 6, greater than 70%
of respondents who report considering such costs also quantify them. Moreover, for one-third of
these costs, over 80% report quantification. One not surprising exception is the first item in
Table 6, corporate image: 55% consider this cost while only 26% quantify it, less than half the
percentage of the second least-quantified item (reporting to government agencies). Image value
is among those less tangibles for which quantification techniques are essentially non-existent.
Notwithstanding this exception, the overall message of Table 6 is clear more than conventional
wisdom may suggest, many firms are finding ways to quantify costs, even costs usually regarded
as less tangible and difficult to monetize. Further understanding of how this occurs, though
outside the scope of this survey, is a valuable direction for future research.
Superfund Liability: Major or Minor Player?
Among all environmental costs on the minds of corporate managers, one deserves special
attention: Superfund liability the cost of remediating contaminated sites, which faces
companies who are identified under the law as "potentially responsible parties." With the strict,
joint, and several liability standard of the Superfund law, firms that contributed wastes to any
listed federal Superfund site may be responsible for a small or large fraction of the costs of
remediation as a result of the negotiation process. How such costs are handled for purposes of
SEC filings and for financial reporting in general has been the subject of voluminous discussion
(CICA 1993; Crough, Cahan, and Leonard 1992; Edwards 1992; Newell, Kreuze, and Newell
1990; Price Waterhouse 1994).
In this survey, our interest in Superfund liability is of a different nature. In contrast to
issues of financial accounting and external reporting, we queried respondents as to if and how
Superfund liability affects various aspects of internal management decision-making in the area of
capital budgeting. These questions are of interest for policy as well as benchmarking purposes.
They are also of direct interest to EPA as the agency considers ongoing and future options for
restructuring Superfund programs to serve the multiple objectives of expediting the remediation
of hazardous sites, equitably sharing the cost of such remediation, and creating the incentives to
avoid future waste disposal practices that threaten human health and the environment.
The survey intentionally used the phrase "hazardous waste ('Superfund') liability"
instead of "Superfund" alone to help respondents quickly identify the kind of liability in which
we were interested. However, for some in the business community, "Superfund" has evolved
into a generic term to encompass a wide range of costs associated with mismanaging waste, e.g.,
administrative fines, penalties for corrective actions at waste sites imposed by states, and
violations of federal "RCRA" (waste transport and facility) regulations. Thus, while our survey
sought to elicit corporate perspectives and practices specific to Superfund liability, the survey
respondents may well have considered other waste-related liability as well in responding to
questions.
28
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A Benchmark Survey of Management Accountants
It is reasonable to speculate that after more than a decade the threat of Superfund costs
may be spurring environmental investments which eliminate the waste streams that eventually
lead to Superfund clean-up costs for generating firms. Whether the threat is a strong or weak
incentive (or no incentive at all) undoubtedly is firm-rspecific. Those firms involved as
potentially responsible parties (PRPs) in multiple sites already may have taken action to avoid
future liability burden. This may occur in the form of:
1. regular certification and monitoring of waste disposal vendors,
2. maintaining contractor-owned but dedicated disposal facilities,
3. gradually moving all waste treatment and disposal to on-site systems,
4. redesigning processes and materials that generate the hazardous waste stream in the first
place.
In some instances, incremental waste volumes shipped to a site that already is Superfund-listed
does not necessarily lead to incremental liability exposure under the strict, joint, and several
liability standard of Superfund. Liability exposure will depend as much on which firms are PRPs
and how "deep" their pockets are as it does on the volume and hazard of the wastes disposed by
any individual firm. Recent initiatives to change Superfund's strict, joint, and several liability
standard may alter the way liability burdens are spread among PRPs (Sussman 1994).
Keeping these variables in mind, we asked respondents if they consider "a project's effect
on hazardous waste (Superfund) liability in preparing an appropriations request for
environmental projects." Among all respondents, only 32%, or slightly less than one-third,
indicated they do consider Superfund. A "No" response to this question does not preclude the
possibility that Superfund is acting as a driver to improved corporate environmental management
practices overall, e.g., improved materials accounting, record-keeping, monitoring, and
manifesting. Superfund liability may also affect the degree of scrutiny firms apply in selecting
waste transport and disposal vendors, since mismanagement by vendors can result in penalties
for the waste generator. Nonetheless, the low "Yes" response rate does suggest that Superfund
liability, in comparison to other items in the firms' cost inventory, has yet to enter the capital
budgeting decisions of most firms surveyed.
Because liability is one of a family of contingent costs which, as earlier discussed, is
subject to the vagaries of many variables (e.g., future waste volumes and composition, the quality
of on-site waste treatment, the distance to and site of disposal facilities, and even the number and
economic resources of PRPs), firms are understandably reluctant to place a dollar value on future
Superfund liabilities. Reinforcing this view is the belief that quantification itself may subject the
firm to higher penalties in the event that it becomes a PRP. Some managers fear that
quantification of liabilities is, in effect, an admission of known (and, by implication, preventable)
risks which in future may be held against the firm in the course of litigation.
How, then, is liability handled among firms that do consider it in the project financial
evaluation process? Figure 12 shows a mix of responses, split between qualitatively only (33%),
specific dollar value (23%), and a combination of qualitative and quantitative (44%). Focusing
29
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Environmental Cost Accounting for Capital Budgeting
on the second category, and remembering that Figure 12 reflects the practices of only those
respondents who consider liability (1/3 of all respondents), then only about 7% of all survey
respondents regularly quantify liability during project financial evaluation. Even if we assume
half of the "mixed" responses (.5 x 44%) regularly quantify, the figure rises to 14% of all survey
respondents. Thus, it appears that liability quantification remains a practice of few mid- and
large-size firms in the U.S. manufacturing sector.
Figure 12. How Superfund is handled
n = 50
Qualitatively only
33%
Both qualitative
and quantitative
44%
Specific $ value
23%
Whether quantified or not, the firms that consider liability in any form report a variety of
approaches and staff responsibilities. The most common situation (42%) among the three
specific options given in the survey is consideration by financial or legal staff when reviewing
appropriations requests prepared by environmental or other staff. This suggests that if liability is
considered in any form, it appears after financial evaluation is complete and a project is brought
to upper management for final review and approval. At this juncture, liability benefits of a
project may be handled in a side bar, discussed as a less tangible or contextual variable in a
column of the appropriations request typically labeled "other considerations" or "non-
quantifiable issues." In fewer instances, liability is left to the individual preparer's judgment
(22%) or, alternatively, this same individual follows guidelines from financial or legal staff
(26%). That only a quarter of all respondents report the latter is consistent with earlier findings
that most firms ~ owing to either legal concerns or skepticism about quantifiability ~ remain
hesitant to systematize their consideration of liability in project financial evaluation. For the few
who do, the most common (74%) approach is a method developed internally. For the remainder,
the EPA Pollution Prevention Benefits Manual (U.S. EPA 1989) is a distant second.
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A Benchmark Survey of Management Accountants
Many variables form part of the liability equation, but a few dominate the methods used
by those respondents who consider liability in any form. Figure 13 shows that waste volume,
waste toxicity, and waste form (solid, liquid, gaseous) are the three most frequent variables,
followed by treatment technology, transport mode, and compliance status of receiving facility.
These variables comprise the core considerations in the engineering approach to liability
estimation, in which risk is assumed to be driven principally by the hazard level of the material,
transport mode, and receiving facility (MacLean 1987, General Electric Corporation 1987,
Aldrich 1994). An alternative approach adopts an actuarial perspective in which risks are based
on the frequency of past incidents and legal verdicts in cases roughly analogous to the conditions
under consideration, i.e., similar chemical composition and volumes, similar waste treatment
methods, and similar type and size of manufacturing firm (White, Savage, and Dierks 1995).
Both approaches have their strengths and limitations. From the responses in this survey, it
appears that the engineering approach remains dominant.
Figure 13. Factors accounted for by Superfund liability assessment method
(n=50, multiple answers accepted)
90%
Method
From the perspective of all respondents, including those that do not currently consider
liability in the project evaluation process, what stands in the way of quantifying liability in the
future? By a substantial margin, the most frequently cited hurdle (58%) is difficulty in
estimating if liability costs will occur. Following this is the difficulty in estimating the
magnitude of costs (45%) and when liability will occur (29%). Contrary to conventional
wisdom, remarkably few identified "If I quantify, I may be subject to toxic torts" (5%) and "If I
31
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Environmental Cost Accounting for Capital Budgeting
quantify, I have to disclose to the SEC" (3%). The conventional wisdom holds that legal
repercussions are a significant barrier to disclosure. Our findings suggest, however, that this is
not the case: methodological barriers are a far greater impediment to calculating liability.
The "when" of liability estimation is a particularly critical variable of financial evaluation
owing to the powerful effects of discounting and the time value of money. A liability cost
incurred in year 5 of a project's life has a dramatically greater impact on project profitability than
a cost incurred in year 10. Of course, all three barriers estimation of if, at what magnitude, and
when liability costs will materialize ~ lie at the heart of any risk analysis. The perception that
these are the key barriers may be related to the unfamiliarity of the management accounting
community with the techniques of risk analysis as well as the reluctance to deal with expected
values (rather than the customary solid and certain costs) in managing the firms' economic
resources. This suggests an opportunity and need to bring risk analysis techniques to the
attention of the accounting community to strengthen its capacity to handle key less tangible
costs.
What does the future hold for incorporating Superfund liability in the capital budgeting
process? A total of 61% of all survey respondents indicated that Superfund liability was either
very important (27%) or somewhat important (34%) in determining priorities for environmental
projects. This is almost double the number who currently consider liability in developing project
appropriation requests. The results suggest that the general appreciation of liability avoidance as
an environmental project benefit far exceed concrete steps to formally bring this cost into the
project evaluation process, a situation undoubtedly linked to the methodological issues
mentioned earlier. When asked if they have plans in the next two years to consider liability in
the budgeting process, only 23% of those who currently do not consider this cost item plan to
change practices during this time frame. This suggests that relatively few respondents are poised
to dramatically depart from current practices.
32
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A Benchmark Survey of Management Accountants
Coax ALLOCATION
hen firms incur environmental costs that they do not link to processes and products,
managers are deprived of a clear picture of where and how costs are generated. Even in
modest-sized manufacturing firms with two or three production lines, the costs of licensing,
monitoring, waste storage, emissions controls, environmental staff time, off-site disposal,
insurance, future regulatory compliance, and even liability are not driven equally by each
production line. Some process lines may be more hazardous materials-intensive, generate more
emissions per unit output, require more frequent and intensive inspection and monitoring, and
generate greater quantities of waste requiring off-site disposal. Similarly, particular processes, or
products, may cause a disproportionate share of costs associated with training and reporting to
government agencies, or give rise to risks which may result in higher insurance costs or risks of
future personal or property damages. In short, when it comes to environmental costs, not all
processes and products are created equal.
Numerous observers have recognized the complexity, consequences, and necessity of
rationalizing accounting systems to ensure proper allocation to the sources within the firm that
are responsible for such costs (Johnson and Kaplan 1991, Cooper et al. 1992, Todd 1994, Ness
and Cucuzza 1995). Understanding cost drivers and allocating costs accordingly is the
conceptual cornerstone of activity-based costing (ABC). ABC has evolved rapidly since
emerging as a new management tool in the 198.0's. It is an approach to cost management that
moves management focus beyond the traditional emphasis of short-term planning, control and
decision-making, and product costing to a more integrated, strategic, competition-sensitive way
of looking at internal costs structures. It is especially germane to environmental costs because of
the diffuse, long-term, and less tangible nature of so many environmental costs, all attributes that
make allocation particularly challenging from an accounting perspective.
In its first generation, ABC helped redefine cost drivers to move beyond factors such as
simple volume measures to include "transaction" cost drivers such as setups, work orders,
product lines, and others with a non-linear relationship to output levels (Mecimore and Bell
1995). At the same time, first-generation ABC articulated the critical difference between value-
added and nonvalue-added components, thereby directing management attention to eliminating
those steps in the production process that added nothing to product value yet consumed the firm's
resources.
In rapid succession, second-generation ABC defined process-related costs - those linked
to but distinct from the narrow confines of production (e.g., distribution, selling, and various
subcomponents of administrative expenses, such as procurement of people, supplies, and
equipment). Ignoring these costs is incompatible with the modern concept of continuous
improvement since such improvement requires an integrated and encompassing perspective of
stages in the product cycle and the cost implications of each stage.
33
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Environmental Cost Accounting for Capital Budgeting
Most recent, third-generation ABC enlarges the scope of costs to focus on the business
unit (versus only the cost center), the firm's activities (versus only products and processes),
internal and external costs (versus only manufacturing, administrative, and selling), and "value
chain costing" (versus only product costing and process-costing). Through this enlarged vision
of where and how costs are created, it enables managers to think and act strategically, and to
attend to activities upstream and downstream of the immediate production process.
While improved allocation cannot help but rationalize management decisions, it is neither
without cost itself nor without consequences for product line and facility managers. The value
of disaggregating cost information must always be weighted against the benefits of doing so.
Setting up and maintaining the accounting infrastructure to collect, analyze, and report on a
continuing basis highly disaggregated information requires staff hours to both operate the system
and digest its outputs. Though modern information technology allows for such intricate cost
accounting systems, and even the co-existence of two systems (for internal and external
reporting), start-up costs can be high even if amortized over many years of decision-making.
In addition to resource requirements, another organizational barrier to ABC is
noteworthy. Improved allocation may be good news to some managers struggling to justify
facility expansion when pooled savings or revenue streams (environmental or otherwise) are
removed from overhead and applied to specific processes and products. However, the converse
also is true. New allocation methods may be unwelcome news to product or facility managers
whose operations appeared to be profitable under the old overhead allocation methods but who
are suddenly tagged with formerly pooled costs. Temporary protection against penalizing such
managers is essential to building staff investment in the accounting methods while avoiding the
dispiriting effects of winners abruptly becoming losers.
The allocation challenge is further complicated by the recognition that even processes and
products may not provide an adequate basis for allocating costs. Instead, it is "activities" of the
firm - introducing a new product line, set-up time, distribution, marketing - that are the true
cost drivers (Cooper 1989; Cooper and Kaplan 1991; Cooper et al. 1992). In any case, the
challenge is certainly not confined to environmental costs; misallocation of any type of cost
distorts the information which management depends on to conduct a host of essential and routine
business functions. These functions include: pricing products, determining product mix,
evaluating opportunities for cost control, rewarding plant managers for efficiency gains, and
justifying plans for capacity expansion.
Environmental costs are just one target for correcting typical allocation practices.
However, because they traditionally are lumped into overhead/administrative accounts, and
because of their often less tangible and difficult-to-quantify nature, environmental costs are
particularly susceptible to disconnection from the products, processes, or activities responsible
for their creation. Yet, learning from recent studies, misallocating costs that may represent as
much as 20% of the controllable operating costs of a facility cannot help but have adverse
consequences for management of many business decisions (Ditz, Ranganathan, and Banks 1995).
34
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A Benchmark Survey of Management Accountants
To obtain a glimpse of current practices, we asked respondents to describe their current
cost allocation across a range of 17 environmental costs (Table 7). These were selected from the
earlier cost inventory list based on experience in assessing the capital budgeting procedures in a
wide variety of firms (Tellus Institute 1993). For each cost, one of four responses was possible,
ranging from allocating "always to overhead" to "always to product/process," with the latter
representing the practice most consistent with the objective of linking costs to sources.
Table 7. Initial assignment of costs
Always to Usually to Usually to Always to
overhead overhead product/ product/
process process
On-site air/wastewater/hazardous waste testing
and monitoring
58
23
12
On-site wastewater pre-
treatment/treatment/disposal
On-site hazardous waste handling (e.g. storage,
labelling)
lvfeijife$ti%fot:o'ff-site hazardous* waste . -^
" * "
'" ""55--^* - ' 22 ""
18
Off-site hazardous waste transport
Off-site wastewater/haz., waste pre-
trpatment/treatnient -"
Energy costs
Water costs
Licensing/permitting
58
29"~ l^r" J 9
>,,"'" ^^ j,. '
28 "" ^O"
"28, '"x;'l4
Environmental penalties/fines
Staff training fojpenvironmentSl compliance^""'
Environmental staff labor time
Legal'starHabortTme - * , > _-
^ /££* .j " r *_, r ^ " ^^ v«s /
60
^- *rslr *
'^. '^^!*-
'^67"
68
-74
22
29*
-5^-
-27"
26
5
"f fi"-1
j
" 12
23
8
-
-','" f* ~ -vv" - /y-;': ' V"U°" - «*" ' - '? %' 0?** ,Sf^?'.>
rf^^A'^.'^Kf^i^^*^^
8 2
"o ^ *T ' *' ~'WH3"|
^ * ^ _
A number of findings in Table 7 are noteworthy. First, for every cost item, "always to
overhead" is the most frequent response. Virtually all costs fall in the 55-75% response range,
35
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Environmental Cost Accounting for Capital Budgeting
with the notable exceptions of energy and water costs. That these should be allocated with
slightly greater frequency to products or processes is not surprising: relative to other cost items,
they are more measurable and physically traceable to processes that are energy and water
consumers. But at 44% for energy and 51% for water, the difference is small and certainly falls
well short of consistent allocation to processes and products.
Second, those costs with the highest column 1 percentages -- from licensing/permitting to
insurance costs are those most typically associated with central staff functions or plant-,
division-, or corporate-wide overhead costs. Legal, environmental, and training staff, for
example, typically charge their time to general accounts which bear no relationship to the
processes, products, or activities which require their services.
Third, the pattern of highest to lowest percentages across rows holds for all costs in Table
7, with the sole exception of energy showing a slightly higher percentage response in column 3
versus column 2. Thus, while there may be as much as 20% difference in column 1 figures, the
pattern of diminishing frequency from overhead to product/process allocation holds steadily for
all entries, regardless of how tangible they happen to be. This finding comports with earlier
anecdotal evidence gathered in case studies of corporate environmental cost management, which
suggests that environmental costs, at least in the initial stage of accounting, are pooled into
overhead accounts (Ditz, Ranganathan, and Banks 1995).
For some firms, initial allocation to overhead is not the last step in the accounting
process. When asked "if some or all costs are initially assigned to an overhead account, do you
later reallocate to a product or process," 58% of the sample answered "Yes." Thus, for roughly
70-80% of respondents (depending on the specific cost item) who "always" or "usually" first
allocate to overhead, well over half then proceed to move such costs to products or processes
using some type of allocation formula. Taking 75% as the average of those who always or
initially allocate, and multiplying that figure times the 58% who subsequently shift costs to
products or processes, we find that about 44% of all respondents follow this two-step procedure.
Allocation requires some driver, or basis, for partitioning costs across processes and
products whether it occurs initially (as in the case of 15-20% of respondents) or in a second step
(as it does for 44%). Figure 14 shows the range of such cost drivers when firms were given five
choices and asked to identify the two most commonly used. Labor hours (55%) and production
volume (53%) are by far the most common, followed by materials use (27%) and square footage
of facility space (24%). An assortment of "other" drivers were mentioned, including:
machine/equipment hours, engineering estimates, the speed with which products flow through
the facility, head count, number of set-ups, and tons made. One respondent noted that "each
overhead account has its own unique driver that is used to allocate costs," and another answered
that the driver "depends upon the origin of the cost and the relationship to a product line activity,
and could be any or a combination of the above."
36
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A Benchmark Survey of Management Accountants
60%
Figure 14. Basis for allocating costs to
product/processes from overhead
(n=88, two answers accepted)
o%
Basis
Finally, Figure 15 provides some insight into the sources of cost information used to
make allocation choices. With each respondent allowed to name up to three sources,
financial/accounting systems data is the most frequent source (mentioned by 51% of
respondents), followed by purchasing, production/operation logs, engineering estimates, and
materials tracking, all with scores of at least 20%. This diversity of sources reaffirms what is
increasingly evident in environmental accounting case studies: essential environmental cost
information is spread through multiple staff functions, and modifying accounting systems to
better track and allocate such costs necessitates a cross-functional approach to ensure
completeness and compatibility of information. It is fair to say that as firms move toward greater
coverage in their environmental cost inventory and better assignment of costs to processes and
products, more and more staff functions are inevitably drawn into the environmental accounting
process.
37
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Environmental Cost Accounting for Capital Budgeting
Figure 15. Sources of Cost Information
When Assigning Costs to Products/Processes
(n=88, three answers accepted)
60%
P*
0%
Information sources
38
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A Benchmark Survey of Management Accountants
INDICATORS:; THE BOTTOM LINE
H mproving cost inventory and cost allocation methods are major steps toward improving the
I evaluation of environmental projects in the capital budgeting process. However, there
remain two other variables that play a decisive role in determining whether projects survive the
intense competition for scarce capital resources: the choice of project financial indicators and the
related issue of time horizons.
In addition to their less tangible and contingent nature, many environmental costs and
savings materialize only in the mid- and long-term. In contrast to costs of activities such as on-
site air and hazardous waste testing, monitoring, handling, and manifesting, other costs (or
savings/revenues) linked to corporate image, liability, and green product sales are by nature those
with longer-term time horizons. In the case of future compliance costs, its very definition
implies a cost that will materialize only some years into the future. Thus, if any of these costs
form part of the cost/benefit calculation of a proposed environmental project, an analytical
method that is insensitive to mid- and long-term cost and revenue streams will be incapable of
capturing the long-term profitability of a proposed project. Pollution prevention projects are
especially vulnerable to this shortcoming because many rely on product redesign, process
modification, and materials substitutions that may be capital intensive but yield attractive returns
beginning 3-5 years after the initial capital outlay.
To take stock of current practices, we asked respondents a series of questions regarding
their current selection and application of profitability indicators for evaluating environmental
projects. Seventy-four percent of respondents indicated they perform "a less detailed/informal
screening" of environmental projects prior to a detailed financial analysis. This common practice
allows firms a quick glimpse of a project's economics before committing the resources required
for a full financial evaluation. If a project appears profitable at this juncture, many firms do not
conduct a more in-depth evaluation. If a project does not appear profitable after the first quick
screening, then expanding the cost inventory and more rigorously allocating costs to depict the
true costs of a current practice may make the difference in illustrating the benefits of an
alternative practice. This tier-type approach ~ beginning with conventional, tangible costs and
then moving, as necessary, to less tangibles, was first advocated in EPA's Pollution Prevention
Benefits Manual (U.S. EPA 1989). Of course, an enlarged cost inventory may reveal hidden
costs as well as savings, thereby making a project less, rather than more, profitable.
For those firms performing any initial screenings, Figure 16 shows that Return on
Investment (ROI, 36%) and Payback (34%) are the most commonly used financial indicators.
These are followed by Internal Rate of Return (IRR) and Net Present Value (NPV), both at 23%.
Interestingly, 16% of respondents report use of qualitative methods only. ROI, IRR, and NPV
fall into the category of discounted cash flow methods, which take into account the time value of
money. They usually, though not necessarily, cover a time horizon longer than the 1-2 year
period typical of Payback analysis, which does not incorporate discounting methods. Many
firms may look at ROI, IRR, or NPV over a relatively short horizon, say five years or less. In
39
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Environmental Cost Accounting for Capital Budgeting
these cases, excluding the long term costs and benefits of a P2 project (e.g., omission of the
expected value for the avoided liability in Year 8, or anticipated compliance costs in Year 6) may
bias the profitability analysis to the disadvantage of the proposed P2 project. In any case, over
half of those firms who do screen use some form of discounted cash flow method.
Figure 16. Financial indicators used for screening projects
(n=102, multiple answers accepted)
Indicator
40
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A Benchmark Survey of Management Accountants
Turning to the full project justification, a somewhat different pattern emerges (Figure 17).
Once again ROI is the leading quantitative indicator, followed by IRR at 18%. However, for
27% of respondents, the single most frequent response reported in Figure 17 is that their
"evaluation is qualitative only." This strikingly high figure is nearly twice as high as the
comparable figure for the project screening phase.
Figure 17. Financial indicators used for full project justification
Profitability index
NPV 2%
10%
None, qual. only
28%
Payback
12%
How might one explain this finding? While we cannot be certain from the survey data, a
clue may reside in a follow-up question as well as in side comments from a handful of
respondents who noted (unsolicited) that environmental projects are "legally required,"
"mandated" and "required." When asked if the preferred financial indicator is used for
"regulatory compliance projects as well as non-compliance, or discretionary, projects," 44%
responded "No." This suggests that some, perhaps most, who report qualitative evaluation
during full project evaluation are those who lump all environmental projects into the "must-do"
category. This, more often than not, unfortunately leads to the concurrent and often erroneous
conclusion that systematic financial analysis of environmental projects is not necessary and may
be a waste of the firm's resources.
The choice of hurdle rates the threshold economic return to gain project approval
offers still another perspective on how environmental projects are handled vis a vis other projects
which enter the capital budgeting process. Among all respondents, 56% indicate no "standard
hurdle rate, or. threshold" is required before approving an environmental project. This suggests
that a slight majority of firms exercise discretion in reviewing the profitability of projects,
perhaps taking into account the less tangible benefits that, in their view, are not amenable to
quantification.
41
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Environmental Cost Accounting for Capital Budgeting
Among those respondents who use Payback at any stage of project justification, 1-2 years
is by far the most common (50%) hurdle rate required for project approval (Figure 18). Only 8%
report payback periods of greater than 4 years. Limiting the analysis to this time frame
introduces a substantial probability of omitting outyear benefits common to many P2 projects.
For IRR users (Figure 19), hurdle rates are defined in percentage terms. Here the most frequent
range is 10-19% (48% of respondents), followed by 20-30% (25%) and greater than 30% (18%).
Figure 18. Payback period used, payback users only
(n=72)
1
60%
50%
40%
30% -
f> 20% +
10% --
Greater
than 4
years
Payback period
42
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A Benchmark Survey of Management Accountants
Figure 19. IRR required for approval, IRR users only
g
o
o.
&
60% T
50% --
40% --
30% --
20% -
10% -
0%
48%
10%
25%
18%
Less
than
10%
10-
19%
Greater
than
30%
IRR required
Time horizon also may play a decisive role in the environmental project approval process.
For those who use NPV, or normalized NPV, 47% use a 6-10 year time horizon and another 6%
use 10 years or greater (Figure 20). For IRR users, the comparable figures are 49% and 3%
(Figure 21). Thus, consistent with the underlying differences between Payback versus NPV and
IRR, those who use discounted cash flow methods are markedly more inclined to take a long-
term view of the economics of their environmental investments.
43
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Environmental Cost Accounting for Capital Budgeting
Figure 20. Time horizon for NPV, NPV users only
(n=51)
47%
47%
Time horizon
Figure 21. ERR time horizon used, IRR users only
(n=65)
48%
49%
&
a
a,
I
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A Benchmark Survey of Management Accountants
Finally, we queried respondents as to whether hurdle rates for environmental projects
differ from those applied to non-environmental projects (Figure 22). Again, the earlier bias
toward special treatment of environmental projects becomes evident. While a majority (57%)
report equal hurdle rates, a notable 36% report that hurdle rates are lower for environmental
investments. These respondents undoubtedly include a range of perspectives, from those who
use no threshold whatsoever (the "must-do" viewpoint) to those who exercise discretion owing to
the knowing exclusion of, but appreciation for, the less tangible costs associated with
environmental projects.
Figure 22. Approval thresholds for environmental
projects compared to non-environmental projects
Higher for
environmental
projects
7%
Lower for
environmental
projects
36%
Same for
environmental
projects
57%
How persistent this
practice has been over time must
remain conjecture since we do
not enjoy the benefit of an
earlier survey against which to
benchmark our findings. The
reported different hurdle rates
stand in contrast to the finding,
discussed earlier, that the vast
majority of firms (86%) do not
maintain separate budget pools
earmarked for environmental
projects. Some recent evidence
suggests that environmental
issues increasingly will blend
into the more general practices
and trends that continue to
redefine corporate organizational and competitive strategy (e.g., re-engineering, total quality
management, product stewardship). The meshing of overall corporate strategy with
environmental performance certainly bodes well for P2 projects. Projects that focus on upstream
processes and materials (as P2 normally does) often simultaneously increase efficiency and
enhance systems performance, while reducing pollution. These joint results render moot the
traditional distinctions between environmental and non-environmental projects.
Equal treatment is rational management provided that cost inventory and cost allocation
methods are systematic, rigorous, and applied equally across all types of projects, and financial
analysis provides a clear picture of true profitability. The evidence collected in this survey
suggests that many firms still are inclined to quickly dismiss environmental projects as "must-
do" mandates, subjecting them to perfunctory or no systematic profitability assessment. In so
doing, opportunities often are lost for discerning between alternative methods for achieving
environmental compliance. While barriers to P2 persist, regulations increasingly allow
flexibility hi meeting standards. Simple distinctions between compliance and non-compliance
projects increasingly are obsolete; multiple options for achieving compliance include P2
approaches, which, if thoughtfully conceived, promise to make positive contributions to broader
45
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Environmental Cost Accounting for Capital Budgeting
corporate strategic objectives. It is these dual and commingled benefits that may elude those
firms who are too quick to pigeonhole all environmental projects as capital drains with negative
rates of return.
Whether a single budget pool and uniform hurdle rates for all projects are becoming the
norm in U.S. manufacturing firms (not just relatively larger ones which dominate our sample)
can only be answered in future studies.
46
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A Benchmark Survey of Management Accountants
mong the many internal business functions served by environmental cost information,
capital budgeting for environmental projects is one of the principal beneficiaries.
Accounting systems to identify, compile, analyze, and report environmental cost information in a
timely and rigorous fashion is a prerequisite to understanding the sources and magnitude of
environmental costs in the firm. Only if these are understood can managers maintain a clear
picture of the true costs of current production processes and products. This, hi turn, allows
managers to direct attention to minimizhig compliance costs, reducing operating costs, and fully
meshing the environmental and financial performance goals of the organization.
With few exceptions, this survey of management accountants of U.S. manufacturers
confirms anecdotal evidence based on earlier case studies of capital budgeting for environmental
investments hi large and medium-size firms. Some key findings consistent with earlier studies
include:
The budgeting function normally is a tiered process, with participation of plant, division,
and corporate levels the single most common arrangement.
Discretionary spending of $100,000 or less on capital projects is allowed in virtually all
firms.
Environmental cost information is gathered by many staff functions located throughout
the firm; production/operations, environmental, and finance/purchasing are the most
frequent contributors.
Tangible, quantifiable environmental costs are normally considered by well over half of
all firms; less tangible, more difficult to quantify environmental costs are less often
normally considered in the capital budgeting process.
Costs that are considered at all are generally quantified; the more tangible and
quantifiable they are, the more often they are monetized in project evaluation.
Only a third of respondents consider the effect of a proposed environmental project on the
firm's Superfund liability exposure, and only 7-14% regularly quantify such costs.
Initial allocation to overhead accounts is the most common practice for a majority of
firms for virtually all types of environmental costs; routine initial allocation to products
or processes is reported by under 10% of respondents for virtually all environmental
costs.
However, some unexpected findings also emerged from the survey:
47
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Environmental Cost Accounting for Capital Budgeting
Over eight out often respondents ~ 86% - report a single funding pool for all projects,
environmental or otherwise.
A majority of firms (71%) track environmental costs in some form at the corporate level.
Among the few firms that quantify liability, three quarters use methods developed
internally as opposed to those available through EPA or other public sources.
Concerning the key issues of environmental cost inventory and cost allocation methods,
the survey suggests that much work remains before business practices can provide managers with
a comprehensive and transparent look at "true" costs of processes and products. While most
firms quantify the more obvious and measurable environmental costs, substantially fewer have
grappled with those that are less tangible, uncertain, and difficult to quantify. Estimates of
environmental costs in the range of 3-20% of facility operational or product line costs as reported
in other studies may, after a closer look, be substantially understated when the less tangible costs
are added.
Dealing systematically with these types of costs is not new to corporations. In the normal
course of business, managers regularly look into the future to forecast everything from the price
of oil to consumer demand for a new line of computers. Applying these approaches, including
those drawn from risk analysis, to estimate less tangible costs would represent a major step
toward characterizing current and future environmental costs.
Cost allocation, too, remains a major challenge. Most firms continue to place most
environmental costs initially into overhead accounts. Though some subsequently allocate these
costs to products or processes, the basis upon which these allocations are made are often ill-
conceived. When proper allocation does not occur, managers receive distorted signals regarding
the true costs and benefits of retaining or changing processes and products. Moreover, like
incomplete cost inventories, misallocation of environmental costs stands in the way of effective
performance monitoring, product pricing, incentive and reward systems, and other activities
essential to maintaining a competitive enterprise.
Upgrading the capital budgeting system through improved environmental accounting
systems is best viewed in the broader context of strategic planning. With multiple forces
working to fuse environmental and financial objectives of the firm, it is critical to exercise an
even hand in evaluating the returns to all capital investments, environmental or otherwise. When
cost inventory and cost allocation practices fail to provide a level playing field for all
investments, managers are left without the information they need to make optimal use of limited
resources. In particular, those environmental projects with strong pollution prevention content,
as well as those with side benefits unrelated to environmental improvement per se ~ e.g. process
optimization and yield, market penetration, corporate image ~ are particularly vulnerable to the
adverse effects of incomplete cost information.
48
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A Benchmark Survey of Management Accountants
While many social benefits may result from improved internal environmental accounting,
the case for such improvements may be made purely on the basis of the firm's self-interest. This
is the central message that public policymakers, professional associations, trade associations and
stakeholders should deliver to firms seeking to understand and apply environmental accounting
techniques to their capital budgeting processes.
49
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REFERENCES
Aldrich, James R. 1994. "Expected Value Estimates of the Long-Term Liability from
Landfilling Hazardous Waste," Journal of Air & Waste Management. Vol. 44. June.
Andraca, Roberto de, and McCready, Ken F.. 1994. Internalizing Environmental Costs to
Promote Eco-Efflciency. Business Council for Sustainable Development, Geneva.
Bristol-Myers Squibb Company. 1994. "Business Environmental Cost Accounting Practices
Survey: Summary of Responses," Global Environmental Management Initiative Conference,
Environmental Cost Accounting Concurrent Session. Arlington, VA. March 16.
Boone, Corinne. 1995. "Full Cost Accounting at Ontario Hydro." Presentation to Corporate
Environmental Accounting Conference, Houston, TX. May.
CICA 1993. The Canadian Institute of Chartered Accountants. Environmental Costs and
Liabilities: Accounting and Financial Reporting Issues. Toronto, Ontario.
Cascio, Joe. 1994. "International Environmental Management Standards, ISO 9000's Tractable
Siblings," ATSM Standardization News. April.
CERES. 1995. Coalition for Environmental Responsible Economies. Annual Environmental
Report. Boston. Forthcoming.
Cohen, Mark A. 1995. "Environmental and Financial Performance: Are They Related?"
Investor Responsibility Research Center, Inc. April.
Cooper, Robin. 1989. "The Rise of Activity-Based Costing - Part Three: How many Cost
Drivers Do You Need, and How Do You Select Them?" Journal of Cost Management. 2(4).
Winter, pp 34-46.
Cooper, Robin and R.S. Kaplan. 1991. "Project Priorities from Activity-Based Costing,"
Harvard Business Review. May-June, pp. 130-135.
Cooper, Robin, Robert S. Kaplan, Lawrence Maisel, Eileen Morrissey, and Ronald M. Oehm.
1992. Implementing Activity-Based Cost Management: Moving from Analysis to Action.
Mpntvale, N.J.: Institute of Management Accountants.
Crough, Maureen M., J.N. Cahan and L.L. Leonard. 1992. "Environmental Regulatory
Requirements and Liabilities," Understanding Environmental Accounting and Disclosure Today.
Executive Enterprises Publications, Inc., New York, NY.
R-l
-------
Ditz, Daryl, Janet Ranganathan and R. Darryl Banks, eds. 1995. Green Ledgers: Case Studies of
Corporate Environmental Accounting. World Resources Institute. May.
Edwards, Paul N. 1992. "A Comparison of FASB and SEC Accounting and Disclosure
Requirements for Environmental Contingencies," Understanding Environmental Accounting and
Disclosure Today. Executive Enterprises, Inc. New York.
Elkington, J., and V. Jennings, "The Rise of the Environmental Audit, " Integrated
Environmental Management. No. 1, August 1991 (pp. 8-10).
Epstein, Marc J. 1995. Measuring Corporate Environmental Performance: Best Practices for
Costing and Managing Effective Environmental Strategy. Institute for Management Accountants
and Irwin Professional Publishing, Burr Ridge, IL.
Fagg, Brandon F., J.K. Smith, K.A. Weitz and J.L. Warren. 1993. Life-Cycle Cost Assessment
(LCCA). Preliminary Scoping Report prepared for: U.S. Department of Energy. October.
Freedman, Martin. 1993. "Accounting and the Reporting of Pollution Information," Advances in
Public Interest Accounting, Volume 5, pages 31-43.
Freeman, Harry, T. Harten, J. Springer, P. Randall, M.A. Curran, and K. Stone. 1992. "Industrial
Pollution Prevention: A Critical Review, J. Air Waste Management Assoc.
General Electric Corporation. 1987. Financial Analysis of Waste Management Alternatives.
General Electric Corp.
Global Environmental Management Initiative (GEMI). 1994. Finding Cost-Effective Pollution
Prevention Initiatives: Incorporating Environmental Costs into Business Decision Making.
Gray, R.H. 1993. Accounting for the Environment. Markus Weiner Publishing, Inc. New York.
Johnson, H. Thomas and R.S. Kaplan. 1991. Relevance Lost: The Rise and Fall of
Management Accounting. Boston: - Harvard Business Press.
Klammer, Thomas. 1994. Managing Strategic and Capital Investment Decisions: Going
Beyond the Numbers to Improve Decision Making. Institute of Management Accountants and
Irwin Professional Publishing, Burr Ridge, IL.
MacLean, Richard W. 1987. "Estimating Future Liability Costs for Waste Management
Options," Hazardous and Solid Waste Minimization: Corporate Systems & Strategies
Conference, Washington, DC. November 19-20.
Mecimore, Charles D. and A.T. Bell. 1995. "Are We Ready for Fourth-Generation ABC?"
Management Accounting. January.
R-2
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Ness, Joseph A. And T.G. Cucuzza. 1995. "Tapping the Full Potential of ABC," Harvard
Business Review. July-August, pp. 130-138.
Newell, Gale E., J.G. Kreuze and S.J. Newell. 1990. "Accounting for Hazardous Waste: Does
Your Firm Face Potential Environmental Liabilities?" Management Accounting. May, pp. 57-
61.
Popoff, Frank and D. Buzzelli. 1993. "Full Cost Accounting," Chemical and Engineering News.
Vol. 71, No. 2, pp. 8-10.
Price Waterhouse. 1992. Accounting for Environmental Compliance: Crossroad ofGAAP,
Engineering, and Government. Survey #2.
Price Waterhouse. 1994. Progress on the Environmental Challenge: A Survey of Corporate
America's Environmental Accounting and Management. New York.
Repetto, Robert. 1989. Wasting Assets: National Resources in the National Income Accounts.
World Resources Institute, Washington, DC.
Rubenstein, Daniel B. 1994. Environmental Accounting for the Sustainable Corporation:
Strategies and Techniques. Westport, Connecticut: Greenwood Press.
Savage, Deborah E. and Allen L. White. 1994-95. "New Applications of Total Cost
Assessment," Pollution Prevention Review. Winter.
Surma, John P. and A.A. Vondra. 1992. "Accounting for Environmental Costs: A Hazardous
Subject," Journal of Accountancy. March.
Sussman, Robert. 1994. "Quickly Fixing Superfund Matters Most." Environmental Forum.
11(4), p. 46. July-August.
Tellus Institute. 1993. P2/FINANCE User's Manual. Boston.
Todd, R. 1994. "Zero-Loss Environmental Accounting Systems," in B.R. Allenby and D.J.
Richards (eds), The Greening of Industrial Ecosystems. National Academy Press, Washington,
D.C. pp. 191-200.
U.S. EPA 1989. Pollution Prevention Benefits Manual. U.S. EPA, Prepared for Office of Solid
Waste and Office of Policy, Planning, and Evaluation. July.
U.S. EPA 1995. "An Introduction to Environmental Accounting as a Business Management
Tool: Key Concepts and Terms," Office of Pollution Prevention and Toxics, June. EPA 742-R-
95-001.
R-3
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INSTITUTE
for Resource and Environmental Strategies
OMB No.: 2070 - 0138
Expires: 12/31/95
$$t Accounting far Capital JE& ^
A National Survey of Management Accountants
Tellus Institute, a non-profit research organization, in association with the Institute of
Management Accountants' (IMA) Foundation for Applied Research and the U.S. Environmental
Protection Agency (EPA), is conducting a national survey of environmental cost accounting
practices in relation to capital budgeting. The purpose of the survey is to identify typical and
best practices in manufacturing firms to create a baseline for tracking change, and to inform IMA
and EPA in training and technical assistance programs.
Your name was chosen at random from the IMA membership list of "budgeting/planning" and
"cost accounting" job functions in U.S. manufacturing firms. You may recall our recent letter
regarding this project.
Please take the time to complete the questionnaire now and return it in the enclosed envelope.
All responses are strictly confidential and will be used for statistical purposes only. Thank you
in advance for your participation. The results of the survey will be available in mid-1995.
^aire Is-estiinsled t*> require & typical ^r«sjpo»cie»t" 1/2 &QUT to-
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For each of the following questions, please mark the appropriate box(es).
|1. BACKGROUND INFORMATION
Code
1) Please indicate your company's major product line. (Check one only)
i QSIC20, 21: Food, Tobacco
2 riSIC 22, 23: Textiles, Apparel
3 QSIC 24, 25, 26: Lumber, Furniture, Paper
4 CjSIC 27: Printing
s rjSIC 28, 29: Chemicals, Petroleum/Coal
e | | SIC 30: Rubber/Plastics
7 Li SIC 31: Leather
s LlJSIC 32: Stone/Clay/Glass
9 [IjSIC 33, 34: Metals
10 rnsiC 35, 36, 37, 38, 39: Industrial/Electric/Transportation Equipment, Instruments,
Misc. Manufacturing
2) Your position within the firm is at what level?
i | '[Corporate
2 | i Divisional
3 | | Plant
3) Is your firm a registrant with the Securities and Exchange Commission (SEC)?
Yes o ;I No
4) Number of employees worldwide:
1 Q < 200
, 2 Q200-999
3 | 11000-5000
4 | | > 5000
5) Most recent annual sales:
i
2 | j $10- 100 million
3 J3j$101 - $500 million
4 j j > $500 million
Page 1
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6) Average annual corporate-wide capital budget during the last three years:
| | < $0.5 million
Q$0.5-$1 million
I | $1-10 million
> $10 million
|2. CAPITAL BUDGETING PROCESS |
Please tell us about TYPICAL capita! budgeting practices for your company as a whole. In thinking about
budgeting for "environmental projects", please include both compliance (necessary to meet regulations)
and non-compliance (discretionary) projects.
7) At what level does capital budgeting occur in your firm? (Check all applicable)
i
bi
[Corporate
f I Division
i i Plant
Q Other (specify)
8) Is your firm on a regular (e.g. annual, semi-annual) or ad hoc, irregular budgeting cycle?
i QjRegular (e.g. annual, semi-annual)
2 j | Ad hoc / Irregular
9) In many firms, individual plants have the authority to make discretionary capital
expenditures up to a specified dollar limit. What, if any, is the usual limit on
discretionary capital spending for plants in your firm?
i j | No limit - all expenditures require divisional or corporate approval
j [3Up to $5,000
3 n up to $10,000
4 | | Up to $50,000
% Q Up to $100,000
« d Other
10) Does your firm use any of. the following terms to categorize capital projects?
(Check all applicable)
bl
el
dl
1
II
s'
hi
11
jl
u
II
ml
nl
I j General/Administrative
I [Abandonment
I | Prof it adding
rn Cost saving
Q Expansion of existing operations
Q Expansion into new operations
Q Profit sustaining
f [Maintenance
j | Replacement
I | Environmental
[ | Compliance
Q]Waste reduction
Q Pollution prevention
QWaste treatment
Page 2
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11) Who normally makes the INITIAL decision to place an environmental project in a
particular category? (Check one only)
1 j~~| Corporate finance/accounting
2 j | Divisional finance/accounting
3 | [ Plant finance/accounting
4 | | Corporate environmental
5 rn Divisional environmental
e I i Plant environmental
7 Fj We do not use categories
s PI Other
12) Is there normally a single budget pool for all capital projects, or do environmental projects
(compliance and non-compliance) have a separate pool? (Check one only)
i r"1 One budget pool for all capital projects
2 I j Separate budget pool for all environmental projects
3 rj Separate budget pool for compliance projects
13) Which of the following best describes the typical annual spending on environmental
projects within your firm? (Check one only)
i j | No set cap
2 | | Cap on total amount
3 LjCap on % of total annual corporate capital budget
4 | | Varies from year to year
14) For each job function below, please indicate if individuals are ROUTINELY involved
in developing cost estimates for environmental projects. (Check all applicable)
»i | 1 Environmental
hi |~~] Finance/Accounting
ci [~~| Production/Operations
di | | Purchasing
«i | j Legal
fi FJ Vendors
si rn Consultants
HI rn Other (please specify)
Page 3
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15} Have any of the following changes occurred in your capital budgeting process in the last
three years? (Check all applicable)
.1 Q]Raised the cap on discretionary capital expenditures at the facility level
M [^Lowered the cap on discretionary capital expenditures at the facility level
ci Q]New project categories have been created
d, [^Stopped classifying environmental projects separately from other capital projects
Q^Began classifying environmental projects separately from other capital projects
Q]stopped distinguishing environmental compliance from environmental non-compliance projects
8i [^Began distinguishing environmental compliance from environmental non-compliance projects
M ["""[No changes in the last three years.
16) Does your company track environmental costs company-wide?
j I No
Yes
17)
At what level are environmental costs tracked? (Check all applicable)
.1 | | Plant M Q Divisional d ' (Corporate
|3. COST INVENTORY
J
Environmental projects have many direct and indirect effects on a facility's operations. The next set of
questions looks at different dollar costs, savings, and revenue effects that may appear in a project financial
analysis. Again, we are interested in learning about TYPICAL practices for the firm AS A WHOLE, rather
than practices specific to an individual plant.
Please indicate rf the following costs, savings, or revenue effects are NORMALLY considered for inclusion
In the financial analysis of a proposed environmental project. If an 'item is normally considered, please tell us
if you calculate a SPECIFIC DOLLAR VALUE for costs or savings to include in the project
financial analysis. {Check all applicable)
Normally considered?
Calculate specific $ value?
18) On-site air/wastewater/hazardous waste
testing/monitoring
19) On-site air emission controls
20) On-site wastewater pre-treatment/
treatment/disposal
21) On-site hazardous waste pre-treatment/
treatment/disposal
No i| | Yes
No i| | Yes
bo [H No i I I Yes
j | No 1 1 | Yes
No
bO
bO
Yes
No i|I Yes
No 1!I Yes
No i| I Yes
Page 4
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22) On-site hazardous waste handling
(e.g. storage, labelling)
23) Manifesting for off-site hazardous
waste transport
24) Off-site hazardous waste transport
25) Off-site wastewater/haz. waste
pre-treatment/treatment
26) Energy Costs
27) Water Costs
28) Licensing/permitting
29) Reporting to government agencies
30) Environmental penalties/fines
31) Staff training for environmental
compliance
Normally considered?
ao| I No i.| | Yes
ao 1 j No 11 j Yes
,o| i No if j Yes
i ! No i: | Yes
ao: ' No 1 . Yes
i No 11 | Yes
No 1 i ; Yes
ao
No 1 j _ i Yes
ao i i No 1' i Yes
i! | No 11 | Yes
Calculate specific $ value?
bo| | No i j 1 Yes
No i| | Yes
bO'No
i Yes
bo r_: No 11 i Yes
bo . ! No 11 j Yes
j No i|| Yes
j | No 11 j Yes
11 I No 11 I Yes
bo, j No 1 j j Yes
>| : No i| | Yes
32) Environmental staff labor time
33) Legal staff labor time
34) Insurance costs
35) Production efficiency / yield
No i| | Yes
No i| | Yes
NO
Yes
No i|~~1 Yes
1 : ^
No i|j Yes
bo i I No 11 | Yes
No i| | Yes
bo Q No i| | Yes
Page 5
-------
Normally considered?
Calculate specific $ value?
36) Frequency of plant shutdown
37) Marketable by-products
38)
39)
40)
41)
Sales of environmentally friendly/
green products
Corporate image effects
No i[| Yes
No i| | Yes
ao | | No i i~~i Yes
,i I No ii ; Yes
Air pollutant emission credits (SOx, NOx) ao I ; No i j ; Yes
Employee safety/health compensation
claims
ao I j No 11 I Yes
No i| I Yes
>rn No i| i Yes
> j 1 No 1 j j Yes
>[U No i| | Yes
bO!
j No i|| Yes
bo i | No i ! Yes
42) Future regulatory compliance costs
43) Natural resource damage
44) Personal injury claims
45) Property damage
11 | No i. I Yes
No 11 1 Yes
aO|
LJ No i| i Yes
aO
L] No i| Yes
bo:
; NO
i No
boj ; No
bo| i No
Yes
Yes
| j Yes
Yes
The next few questions concern if, and how, hazardous or toxic waste ("Superfund") liability enters
your environmental project financial analysis and justification process.
46) Do you consider a project's effect on hazardous waste ("Superfund") liability
in preparing an appropriations request for environmental projects?
1 j '.Yes
i
47) *-> Is such an effect assigned a specific $ value,
or handled only on a qualitative basis?
1 j i Specific $ value
z | | Qualitative only
3 [H Both
oj~l No
Skip to question #51 .
Page 6
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48) Which best describes your approach to considering liability? (Check one only)
H]Left to individual's judgement in preparing appropriations request
T^] Individual who prepares appropriations request follows specific guidelines from
financial or legal staff
I | Financial or legal staff consider liability when reviewing appropriations request
prepared by environmental or other staff.
Q Other (please specify)
49) Which liability assessment method do you use? (Check all applicable)
ai ' |A method developed internally
ti j j EPA Pollution Prevention Benefits Manual method
ci Qj General Electric (GE) method
di LJ Other (please specify)
50) Indicate which factors your liability assessment method accounts for. (Check all applicable)
/aste volume
bi Q Waste toxicity
ci QUWaste form (i.e. solid, liquid, etc.)
di Q Transport mode to waste management facility
ei [^Transport distance to waste management facility
ii Q Treatment technology
9i j | Compliance status of receiving facility
hi i | Performance history of receiving facility
n | | Liability history of your firm
n ! I Liability history of managing similar wastes
ki ~] Timing of potential liability
51) What do you consider to be the TWO most important barriers to quantifying Superfund liability?
(Check two only)
ai
bl
ci
di
e1
f1
!~~| Difficulty in estimating IF liability costs will occur
r^j Difficulty in estimating WHEN liability costs will occur
Q Difficulty in estimating magnitude of costs
| I If I quantify, I have to disclose to the SEC
| | If I quantify, I may be subject to toxic tort lawsuits
Qj other (please specify)
Page?
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52) How important is the consideration of Superfund liability to your firm in determining priorities
for environmental projects?
i 1 | Very important
Somewhat important
s j | Not important
53) If liability currently is NOT considered by your firm in capital budgeting for
environmental projects, do you expect to do so within the next two years?
Yes
2 n NO
3 : | Not applicable; we already consider liability
|4. COST ALLOCATION |
The next few questions relate to typical cost allocation practices in your firm. Please indicate whether
INITIAL assignment of each of the following cost items is to an overhead account, or, alternatively, directly
to a product, production unit, or process. (Check one answer for each cost item.)
INITIAL ASSIGNMENT IS ...
Cost item '
Always to
overhead
54) On-site air/wastewater/hazardous waste
testing and monitoring Qj
55) On-site air emission controls |~i~j
56) On-site wastewater pre-treatment/treatment/
disposal fTl
57) On-site haz. waste pre-treatment/treatment/
disposal | i |
58) On-site hazardous waste handling (e.g. storage,
labelling) QJ
59) Manifesting for off-site hazardous waste transport QJ
60) Off-site hazardous waste transport [JJ
61) Off-site wastewater/haz. waste pre-treatment/
treatment [JJ
62) Energy Costs IT]
63) Water Costs [TJ
64) Licensing/permitting [TJ
65) Reporting to government agencies [TJ
66) Environmental penalties/fines [JJ
67) Staff training for environmental compliance QJ
68) Environmental staff labor time [TJ
69) Legal staff labor time QJ
70) Insurance costs QJ
Usually to
overhead
Usually to Always to
' product/process product/process
| 2 |
CU
I 2 I
G3
I 4|
Page 8
-------
71) If some or all costs are initially assigned to an OVERHEAD ACCOUNT, do you later reallocate to a
product or process?
il I Yes
No
(Go to question 74}
72) In cases where you initially assign costs to an OVERHEAD ACCOUNT, what are the TWO most
common cost drivers, or bases, for later allocating those costs to products/processes? (Check two)
ai I j Labor hours
bi L] Material use
d i [Square footage of facility space
di j | Production volume
ei Fj Other (please specify)
n I !Not applicable - we do not allocate any costs to overhead
73) In cases where you initially assign costs directly to a PRODUCT OR PROCESS, what are the
THREE most common sources of cost information? (Check up to three)
ai j i Purchasing data
bi L] Materials tracking system data
ci PI Production/operation logs
01 LD Financial accounting system data
ei [""I Product shipment manifest data
n rj Waste shipment manifest data
ai [~~l Engineer estimate
M rj Vendor estimate
n [~1 Other (please specify)
| "I Not applicable - no costs are allocated
|5. FINANCIAL INDICATORS AND TIME HORIZONS
Finally, we have a few questions on the financial indicators and time horizons you use in evaluating
environmental projects.
74) Prior to a detailed financial analysis of an environmental project, does your firm
typically perform a less detailed/informal screening of a project's profitability?
Yes
2 i I Sometimes
Continue to Question #75
Continue to Question #75
Skip to question #76.
Page 9
-------
75) What financial indicator is most commonly used in determining if a project
passes the initial screening test?
r~1 Payback
Q] Return on Investment (ROD
QNet Present Value (NPV)
Q Normalized Net Present Value (Profitability Index)
Q Internal Rate of Return (IRR)
Q] Return on Total Assets (ROTA)
Q Other (please specify)
QNone, the evaluation is qualitative only
76) For the complete environmental project analysis and project justification, is there a
standard hurdle rate, or threshold, required for project approval?
\ j jYes
o : !No
77) For the full environmental project justification, what financial indicator is most
commonly used? (Check one only)
[ j Payback
Fj Return on Investment (ROD
[3 Net Present Value (NPV)
[^Normalized Net Present Value (Profitability Index)
rU'nternal Rate of Return (IRR)
Q Return on Total Assets (ROTA)
(please specify)
a jT^None, the evaluation is qualitative only
78) Is this financial indicator applied to regulatory COMPLIANCE projects as well as
NON-COMPLIANCE, or discretionary, projects?
o QNo
79) If you use payback at any stage of environmental project justification, what is the
payback time period normally required for approval?
i QjLess than 1 year
2 j j 1-2 years
3 j 1 3 - 4 years
« Qj Greater than 4 years
do not use payback
Page 10
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80) If you use Net Present Value (NPV), or normalized NPV, what is the time horizon typically used
for calculating the NPV or Normalized NPV for an environmental project?
1 f~n 1-5 years
2 LD 6 - 10 years
3 f~~| Greater than 10 years
4 Q We do not use NPV or normalized NPV
81) If you yse Internal Rate of Return (IRR), what is the IRR normally required for approval of environmental
projects?
i rntess than 10%
2 rj10-19%
3 LH20-30%
4 | ! Greater than 30%
s We do not use IRR
82) If you use Internal Rate of Return (IRR), what is the time horizon typically used for environmental
projects?
1 I j 1-5 years
2 Qj6'- 10 years
3 j 1 Greater than 10 years
4 r^jWe do not use IRR
83) In general, how do the hurdle rates (i.e. threshold for approval) for environmental
projects compare to those for non-environmental projects?
i
2
3
Q Hurdle rates are higher for environmental projects
I | Hurdle rates are the same for environmental projects
L] Hurdle rates are lower for environmental projects
84) In the remaining space, please add any comments you wish regarding the current
or anticipated capital budgeting practices of your firm in relation to environmental
projects.
Page 11
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Thank you for your participation. Please return your questionnaire in the enclosed, stamped envelope to:
Tellus Institute
11 Arlington St.
Boston, MA 02116-3411
Attention: EPA Survey
Page 12
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