Cost Management and Impact on Productivity of Firm Essay

An endeavor is considered as one of instruments to supply benefit for local economic development. For case, companies create occupation chance, contribute revenue enhancements, supply installations and substructures to society and offer benefit to the investors in signifier of capital addition, dividend and involvement.

However, endeavors contribute negative impact on society which called outwardnesss. To exemplify this, pollution, waste, noise and favoritism are as illustrations. In order to forestall this impact on environment which will do high societal cost, a control is required.

A company is responsible to pull off its environment. A proper environmental quality direction requires comparatively high investing which called environmental cost. For case, a company invests on equipments which filter and dispose waste from mill.

Based on illustration above, an endeavor should be able to pull off environmental cost optimally and creates a quality environment which is free from pollution and at the same clip produces costumer value merchandises. Customer value could be created if the company provides competitory monetary value and keep the quality which meets client satisfaction. To obtain optimal net income with certain quality require optimal merchandise costs. One of these is environmental cost.

The environmental cost will increase merchandise cost and besides impact on productiveness and profitableness of the company. Environmental cost is environmental direction activity cost which has strategic place in cost construction. Therefore, this outgo should be good managed so that the company could be able to better its productiveness and profitableness.

There are four chief jobs and inquiries to discourse in this essay, they are:

What is environmental cost construct?

What is the impact of environmental cost on productiveness?

What is the impact of environmental cost on profitableness?

How to analyse environmental activity cost direction?

Environmental Cost Concept

Definition of Environmental Quality Cost

An Enterprise in one side should bring forth client valued merchandise which satisfy client demand. On another manus, a company is responsible for the environment harm which caused by its concern activities. The responsible of an endeavor to bring forth client valued merchandise and at the same clip keep the environment called Eco-efficiency.

Eco-efficiency is achieved by the bringing of competitively-price goods and services that satisfy human demands and convey quality of life, while increasingly cut downing ecological impact and resource strength throughout the life-cycle to level at least in line with the Earth estimated transporting capacity. In short, it is concerned with making more value with less impact.[ 1 ]

Eco-efficiency basically maintains that organisations can bring forth more utile goods and services while at the same time cut downing negative environmental impacts, resource ingestion, and costs.[ 2 ]

In pattern, eco-efficiency is achieved through the chase of three aims: A

Increasing merchandise or service value ;

Optimizing the usage of resources ; and,

Reducing environmental impact.[ 3 ]

ISO 14001 defines the environment as milieus in which an organisation operates, including air, H2O, land, natural resources, vegetations, zoologies, worlds and their interrelatedness.[ 4 ]This means that environment is ecosystem where the company operates and interacts to each other.

An endeavor has an duty to make a quality environment. A quality merchandise is that a merchandise which complies its specification and meets client satisfaction. This merchandise quality in relation with environmental quality means that environmental quality fulfills ecosystem outlook where the company operates. The demand from the ecosystem is that merchandises and services which produced by an endeavor will non destruct environing environment. This means that an endeavor obligates to minimise environmental harm or highly 0 harm to environment or implements entire environmental quality.

Damage is defined as direct debasement of the environment, such as the emanation of the solid, liquid or gaseous residues into the environment ( e.g. H2O taint and air pollution ) or indirect debasement such as unneeded use of stuffs and energy ( Hansen and Mowen, 2005 ) .

In order to make environmental quality, a company invests comparatively high which called environmental costs. Environmental costs are that are incurred because hapless environmental quality exists or because hapless environmental quality may be. Thus environmental costs are associated with creative activity, sensing, redress and bar of environmental debasement ( Hansen and Mowen, 2005 ) .

Hence, environmental costs are costs which are incurred to execute ecosystem necessity in company environments. To exemplify this, an endeavor expends money to retrieve air, H2O, and dirt pollution and natural resources affected by company waste which impact on environing biotic life, such as human, vegetations and zoologies.

Categorization of Environmental Costss

Based on definition of environmental costs above, categorization of environmental costs is the same as categorization of quality costs. Environmental costs can be classified in four classs: bar costs, sensing costs, internal failure costs, and external failure costs ( Hansen and Mowen, 2005 ) .

Prevention Cost

Environmental bar costs are the costs of activities carried out to forestall the production of taint and/or waste that could damage to the environment ( Hansen and Mowen, 2005 ) . This means that environmental costs are incurred to avoid the creative activity of pollution by peculiar bar activities, such as: evaluating and choosing providers, measuring and keeping of equipments and/or machinery to command taint, procedure and merchandise designing to minimise or extinguish waste, developing work force, analyzing of environmental impact, environmental hazard auditing, environmental research, developing environmental direction system and attesting ISO 14001.

Detection Cost

Environmental sensing costs are the costs of activities executed to find if merchandises, procedures, and other activities within the house are in conformity with appropriate environmental criterions ( Hansen and Mowen, 2005 ) . This means that the disbursals are incurred in order to observe any activities which related to concern actions comply with environmental criterions. There are some environmental criterions of the houses: authorities ordinances, voluntary criterion ( ISO 14001 ) and internal company ordinances. Activities related to environmental sensing within the houses are scrutinizing environmental activities, inspecting merchandises and procedures, developing environmental public presentation steps, proving for taint, verifying supplier environmental public presentation, mensurating taint degree ( Hansen and Mowen, 2005 ) .

Internal Failure Cost

Environmental internal failure costs are the costs of activities performed because contaminations and waste have been produced but non discharged into the environment. Therefore, internal failure costs are incurred to extinguish and pull off contaminations or waste one time produced ( Hansen and Mowen, 2005 ) . This means that internal failure costs are incurred in order to minimise or to extinguish contaminations and waste which produced to avoid environmental harm. These disbursals are to guarantee that contaminations and waste will non be disposed into the environment or to minimise taint degree non transcend environmental criterions. Activities related to environmental internal failure are runing pollution control equipment, handling and disposing of toxic waste, keeping pollution equipment, licensing installations for bring forthing contaminations and recycling bit ( Hansen and Mowen, 2005 ) .

External Failure Cost

Environmental external failure costs are the costs of activities performed after dispatching contaminations and waste into the environment. External failure costs can be subdivided into realized and unfulfilled classs ( Hansen and Mowen, 2005 ) .

Realized external failure costs are those incurred and paid for by the house. For case, costs to clean a lake and dirt which has been polluted, personal accident claim and doomed of gross revenues due to bad environmental repute.

Unrealized external failure ( social ) costs are caused by the house but are incurred and paid for by parties outside the house. These costs are divided into 2: environmental debasement costs and the costs related to negative impact on society belongings or public assistance. For case, costs for medical intervention because of air pollution, occupation chance lost due to pollution and ecosystem harm because of disposing solid waste.

Environmental Cost Report

In order to better environmental public presentation and to command environmental costs, a house requires environmental costs information. This information could be found in environmental cost study. A good first measure is a study that inside informations the environments by class. Reporting environmental costs by class reveals two of import results: ( 1 ) the impact of environmental costs on steadfast profitableness and ( 2 ) the comparative sums expended in each class ( Hansen and Mowen, 2005 ) .

Table 2.1. Sample of environmental Cost study by class

Beginning: Hansen and Mowen, 2005

From table above we can see that impact of environmental costs on profitableness. Environmental costs could decrease profitableness every bit much as $ 3,000,000 with following interrupt down based on class: bar costs $ 280,000, sensing costs $ 320,000, internal failure costs $ 600,000 and external failure costs $ 1,800,000.

Entire sum expended for environmental cost is 15 % of entire operational costs with following interrupt down based on class: bar costs is 1.4 % , sensing costs is 1.6 % , internal failure costs is 3 % and external failure costs is 9 % . From each class we can see that internal failure costs is the highest per centum of the entire cost at 9 % .

Delegating Environmental Cost

From environmental cost study as shown on table 2.1 above we can happen each person cost based on class which assign into a merchandise. In order to delegate environmental cost to merchandise cost, a director should ab initio make up one’s mind whether delegating full environmental costs or merely private cost. Full environmental costing is the assignment of all environmental costs both private and social, to merchandise ( Hansen and Mowen, 2005 ) .

There are 2 methods of delegating environmental cost to merchandise: ( 1 ) Functional-based environmental costs assignment, and ( 2 ) activity-based environmental costs assignment.

Functional-based environmental cost assignment

Calculation of cost functional-based will delegate environmental costs to unit merchandise and will use hours of work force and machine. This attack could be applied on homogeny merchandise. However, the houses which have assortment of merchandise, functional-based assignment would impact cost deformation.

For case, a steadfast produces two types of glass, glass A and glass B for 50,000 sheets each. Each type requires half and hr of machine hr. Producing this glasses merchandise will lend Cd emanation, accordingly, the house need licence from the authorities which cost $ 300,000. The licence must be renewed every 3 old ages. If the emanation degree exceeds a criterion permitted, the house so will be fined. Every 3 months the houses would be inspected. On norm, the house is charged $ 50,000 yearly for mulct. How much environmental cost would be assigned for each glass per twelvemonth?

License cost per twelvemonth = $ 300,000/3 = $ 100,000. Therefore, entire environmental cost would be assigned to the merchandise = $ 100,000 + $ 50,000 = $ 150,000. Number of hours to bring forth 100,000 sheets ( 2 x 50,000 sheets ) = 0.5 hours x 100,000 sheets = 50,000 machine hours. Environmental cost per machine hr = $ 150,000 / 50,000 hours = $ 3 / machine hr. Environmental cost assigns to every merchandise as follow:

Glass A = 25,000 hours ten $ 3/hour = $ 75,000. Environmental cost per unit glass A = $ 75,000/50,000 sheets = $ 1.50 /sheet.

Glass B = 25,000 hours ten $ 3/hour = $ 75,000. Environmental cost per unit glass B = $ 75,000/50,000 sheets = $ 1.50 / sheet ( Hansen and Mowen, 2005 ) .

Activity-based environmental cost assignment

Activity-based costing ( ABC ) has facilitated environmental cost assignment to merchandise based on activity. This attack is utile to be applied by a house which produces assortment of merchandise. ABC ‘s attack assigns environmental cost to environmental activities and subsequently calculates degree or cost of activities. This cost is implemented to delegate costs of each activity to merchandises.

Impact Analysis of Environmental Activity Costs

Impact Analysis of Environmental Activity Costs on Productivity

Concept of Productivity

Environmental cost has indirect relationship with productiveness. Productivity is the ratio of end product to input[ 5 ]. Productivity is the ratio of results of a procedure divided by the sum of resources necessary to finish the procedure[ 6 ].

Based on theories above, this can be explained that productiveness is the ratio end product to input which applied to bring forth the end product. Hence, this could be formulated as follow:

This end product, which produces by organisation, would be goods or services. In fabricating company, input consists of direct stuff, direct labour, and mill ‘s operating expense.

For illustration, a company spends 10 yearss to bring forth 50 unit end product. 10 yearss are considered as input whereas 50 units as end product. Based on preparation above, productiveness can be calculated as follow:

A step of productiveness can be either an operational or a fiscal productiveness step ( Blocher, et Al ( 2005 ) . Therefore, to cipher productiveness based on the theory above, there are 2 steps ; operational productiveness step and fiscal productiveness step. Besides, there are another productiveness step based on engagement of input in productiveness computation, they are partial productiveness and entire productiveness.

Operational productiveness is ratio of end product units to input units ( Blocher, et Al ( 2005 ) . If both end product and input are measured in physical measures, so we have an operational productiveness step ( Blocher, et Al, 2005 ) . Operational productiveness means ratio end products and both inputs and end products are in physical measure.

Operational productiveness could be in partial which called productiveness operational partial. A partial productiveness measures the relationship between the end product and one or portion of the needed input resources used in bring forthing the end product ( Blocher, et Al, 2005 ) .

Productivity steps can be developed for each input individually or for all inputs jointly. Measuring productiveness for one input at a clip is called partial productiveness measuring ( Hansen and Mowen, 2005 ) . This means that partial productiveness is ratio end products to each portion of inputs which used to bring forth end product.

Based on definition of operational productiveness and partial productiveness, therefore, the definition of partial operational productiveness can be given. A partial productiveness reflects the transition ratio of an input or selected input resource to the end product attained. The numerator, the end product, is figure of units produced ; the dominator is the figure of units of input resources used ( Blocher, et Al, 2005 ) . Partial operational productiveness is productiveness which calculated to each input constituent to bring forth end product and both input and end product constituent in unit.

Productivity operational partial can be formulated as follow:

Fiscal productiveness is the ratio of end product to input with either the numerator or the dominator dollar sum ( Blocher, et Al, 2005 ) . If end product or input is expressed in dollars, so we have a fiscal productiveness step ( Hansen and Mowen, 2005 ) . Fiscal productiveness is ratio end product to input, either end product or input in dollar ( money ) . Fiscal productiveness can be divided into 2: partial fiscal productiveness and entire fiscal productiveness.

Partial fiscal productiveness is productiveness which calculated for each input constituent to bring forth end product, where either input or end product in dollar. Entire productiveness is the ratio of end product to the entire cost of all input resources used to bring forth the end product. Entire productiveness is a fiscal productiveness step ( Blocher, et Al, 2005 ) . This means that entire productiveness is called fiscal productiveness step which is ratio end product to all input resource costs used to bring forth end product.

Based on definition of entire fiscal productiveness, this can be formulated as follow:

End product can be figure of unit or figure of end product gross revenues whereas inputs are entire costs of all resources to bring forth the end product.

From chapter 2 we found that environmental cost assignment to merchandise can be implemented by utilizing functional- or activity-based attack. Environmental cost assignment will impact entire merchandise cost and entire cost per unit merchandise. Hence, Total cost of all input resources will raise and impact of increasing entire cost per unit end product.

The Impact of Environmental Activity Cost on Productivity

We have discussed above that productiveness is a ratio end product which produced to all input resources. Assigning environmental cost to merchandise will increase entire merchandise cost ( input resource costs ) and entire cost per unit merchandise. Therefore, delegating environmental cost will impact on productiveness measuring for each merchandise. All input resource costs will lift whereas figure of end products is staying unchanged. Hence, productiveness step for each merchandise is decreased.

Impact Analysis of Environmental Activity Costs on Profitableness

Strategic Profitability Analysis

The intent of strategic profitableness analysis is to analyse the difference in runing income between two periods to measure successful execution of the house ‘s scheme. To ease the analysis, alterations in operating income are separated into effects of alterations in the gross revenues volume ( growing ) , selling monetary value and cost of input resources ( monetary value recovery ) , and productiveness ( Blocher, et Al, 2005 ) . So, the intent to analyse strategic profitableness is to analyse the difference operational net income between 2 periods to gauge a successful of house ‘s strategic execution. The analysis involves growing factor, price-recovery factor and productiveness factor analysis.

The growing factor measures the alteration in runing income attributable to alter in gross revenues measure. The analysis is similar to the analysis of measure ( efficiency ) discrepancy for direct stuffs ( direct labour ) discrepancy. As gross revenues measure alterations, both gross revenues grosss and operating costs alteration and the alteration in operating income is a consequence of the alterations in the gross revenues gross and operating costs. The net consequence of growing on the operating income is the combined growing consequence of gross revenues gross and operating costs ( Blocher, et Al, 2005 ) . The Growth factor is alterations of runing income properties which related to gross revenues measure alterations. These alterations involve gross revenues gross and operating costs alterations.

The price-recovery factor steps alterations in runing income attributable to alterations in the merchandising monetary value of merchandises and the costs of input resources. Similar to the growing factor, the price-recovery factor is determined individually for grosss and cost ( Blocher, et Al, 2005 ) .

One of the factors which determine deformation on operating income is productivity factor. Productivity factor can be formulated as follow:

The Impact Environmental Cost on Strategic Profitability

Delegating environmental cost to merchandise cost will increase merchandise cost both in entire or unit. The rise of this merchandise cost will impact on increasing of operational cost and at the same clip will cut down runing income of the period. Assigning environmental cost to merchandise cost besides affects runing income alterations between periods.

The alterations of runing income on the period would be more profitable if environmental cost which assigned to merchandise from old period is comparatively smaller.

Therefore, delegating environmental cost to merchandise cost from period to period is an object of strategic profitableness analysis. This will be as an object of growing factor analysis of cost consequence of growing and monetary value recovery factor of cost consequence of monetary value recovery and productiveness factor.

Environmental Activity Cost Management

Environmental disbursals are comparatively as a high investing, will impact to merchandise cost and profitableness signifier period to period. Therefore, environmental cost is strategic cost and this demand to pull off good in order to obtain more operating income. Hence, this will necessitate environmental activity analysis.

Environmental activity analysis has a intent to command environment. To make so, this needs to place environmental activities and cost appraisal which is as base to cipher activity-based environmental cost. Knowledge about environmental cost and merchandises and procedures related to this is a really of import thing to obtain in order to pull off this.

Subsequently, environmental activities which have been identified are categorized as a value-added activity and non value-added activity. Activities which considered non value-added activity could be eliminated if the house needs to run optimally and expeditiously.

This non value-added activity could be eliminated if the root cause is able to be identified. By extinguishing the non value-added activity, environmental activity costs and merchandise cost could be reduced and runing income will increase. Therefore, this will alter runing income bend into favourable and increase compared to old period.


A house has responsible non merely to client but besides to its environment. While bring forthing value added merchandise to client, the house at the same clip have to keep its environment and responsible to the harm caused by organisation activities. This duty is called eco-efficiency.

The aims of eco-efficiency can be defined into 3 intents ( 1 ) increasing merchandise or service value, ( 2 ) optimising the usage of resources, and ( 3 ) cut downing the environmental impact.

Environmental cost demand to delegate into merchandise costs, either full environmental costing or full private costing. This cost requires high investing and this will impact to merchandise cost.

Input resources costs will raise as environmental costs assigned into the entire merchandise cost while end product which produce remain comparatively changeless. Hence, productiveness of the merchandise will diminish. Furthermore, unit cost of the merchandise additions and affect to house ‘s profitableness. This should be manage carefully in order to offer client value added merchandise with competitory monetary value.