Creaci

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Cleaner Production A tool for Green
Competitiveness in the Turkish Industry
Ch 4. ECONOMIC ASPECTS OF CP
Middle East Technical University Department of
Environmental Engineering Workshop Series 31
March-2 April 2008 Ankara, Turkey
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Objectives

• Review some environmental accounting aspects
  required to better understand the environmental
  costs involved in a company and that are often
  included in the overall costs
• Criteria for assessing to a specific activity
  and/or product, the part corresponding to costs
  that are common to various activities
• Criteria of financial analysis that can be used
  to determine the feasibility of CP options and to
  evidence that CP provides
• financial advantages
• environmental benefits

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Environmental Accounting

• A process for identifying, gathering and
  evaluating environmental information, that offers
  objective support to management and
  decision-making when assessing the improvement
  made in the current management and in the
  planning and implementation of new environmental
  measures.
• Eco-efficiency in production means taking into
  consideration the environmental and financial
  aspects during evaluation and decision-making.
• In order to prove the benefits of CP , the first
  step is to adopt and environmental accounting
  system.

A cost analysis system
The accountant is said to be the person who can
do most for prevention and for CP to succeed
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When Should an Environmental Accounting System be
Implemented?

• It is not always necessary to make an additional
  accounting effort. For many SMEs, the traditional
  system may be enough if
• They manufacture few different products
• They use labour-intensive processes
• The direct costs are a major part of the total
  costs
• They make minimal product or process changes.
• It would be advisable to introduce a additional
  system aside from the traditional one, if
• The indirect costs are a major part of the total
  cost of manufacture
• The environmental costs are significant within
  the indirect costs
• A wide variety of products are manufactured in
  irregular amounts
• Material requirements (particularly toxic),
  energy, labour, time the equipment is in use,
  etc. are very different from one product to
  another
• The customers' requirements concerning quality,
  controls, service, etc. are very different from
  one customer to another.

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Inventory of costs in CP Projects
Investments
Operating costs

• Materials
• Personnel
• Auxiliary services
• Waste managements
• Legal requirements
• Insurances
• Liabilities

• Equipment
• Materials
• General services
• Preparation
• Contingencies
• Construct./Assembly
• Engineering
• Starting up
• Training
• Permits
• Working capital
• Recovery

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How to Introduce Environmental Accounting in an
SME

• Step by step progress can be made, starting in a
  limited way (costs and profits that are better
  known)
• The final goal may be to achieve
• a total integration system of environmental costs
  in the budgets and in the analytical accounting
  information
• a complete design of the cost allocation system
  to processes and products

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What Costs can be Identified as Environmental
Costs?

• Classification of cost (Traditional accounting
  system)
• Direct expenses in materials and personnel
• Indirect production costs
• Sales costs
• Overall and administrative costs
• Research and development.

Environmental costs as general costs
Costs that are not attributed to a specific
system, process , product or installation
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What Costs can be Identified as Environmental
Costs?
General cost classification according to its
characteristics and evidence

• They are all difficult to identify
• Previous research and development, engineering
  purchases, design, works permit, preparation of
  site.
• Regulatory inspections, waste management,
  equipment for personnel protection.
• Voluntary audits, supplier qualifications,
  relations with the community, insurances,
  feasibility studies.
• Remote closing the activity, selling inventoried
  material, landfill control after closing.

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What Costs can be Identified as Environmental
Costs?
General cost classification according to its
characteristics and evidence

• Can arise or not in the future, can be described
  in a probabilistic way
• penalties
• remedy for polluted land
• damage to property
• legal fees
• environmental damage

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What Costs can be Identified as Environmental
Costs?
General cost classification according to its
characteristics and evidence

• Aimed at affecting awareness of customers and the
  general public
• business image
• human relations
• relations with the community
• relations with investors

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What Costs can be Identified as Environmental
Costs?
Table 4.3 Examples of Business Environmental Costs Table 4.3 Examples of Business Environmental Costs
Conventional costs Investments, raw materials, personnel, auxiliary services.
Potentially hidden costs Previous research and development, engineering purchases, design, works permit, preparation of site. Regulatory inspections, waste management, equipment for personnel protection. Voluntary audits, supplier qualifications, relations with the community, insurances, feasibility studies Remote closing the activity, selling inventoried material, landfill control after closing.
Contingent costs Penalties, remedy for polluted land, damage to property, legal fees, environmental damage.
Image costs Business image, human relations, relations with the community, relations with investors.
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What Costs can be Identified as Environmental
Costs?
Table 4.4 Examples of where to Find out Conventional and Hidden Costs Table 4.4 Examples of where to Find out Conventional and Hidden Costs Table 4.4 Examples of where to Find out Conventional and Hidden Costs Table 4.4 Examples of where to Find out Conventional and Hidden Costs
Origin of cost Requirements Sources of information Contact
Raw materials Use/production unit Cost per unit Production records Orders Production Mgr Purchase
Training personnel Persons/year Training period Training records Job sheets Training section Personnel Dept
Production Hours of personnel Time spent per machine Machine downtime Personnel records Production records Budgets operations Production Mgr Personnel Dept
Maintenance Hours of personnel Time spent per machine Personnel records Maintenance records Personnel Dept Production Mgr
Insurances Type, coverage Premiums Budgets Contract, invoices Legal office Administration Mgr
Water consumption Use/production unit Cost per unit Counters Invoices Production Mgr Administration
Steam use Use/production unit Cost per unit Counters Schedules Head of aux. service Planning
Waste disposal Type, quantity Cost per unit Declarations Contract, invoices Environment Dept. Administration
Water treatments Source, streams Consumptions Operation records Counters Orders Production Mgrs Purchasing
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Cost Allocation

• Allocation process Transferring environmental
  costs from the item of overall (or indirect)
  costs to direct costs
• The basis of cost allocation must be the
  identification of a cause-effect relation between
  the cost and the goal pursued with a specific
  activity
• Example cost of waste water treatment assigned
  by water consumption or COD load.

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Financial Analysis of CP Options
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Financial Analysis of CP Options
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Financial Analysis of CP Options

• Calculating the Profitability of a CP Option
  Implementation
• A company that uses a toxic category solvent is
  currently sending it for final disposal by
  incineration, with a total annual cost of
  207,400.
• There are two options
• The first option is to send the solvent to an
  external waste management firm for recycling,
  with an annual cost of 149,800.
• The second option is to purchase a destillation
  equipment for internal recycling. In this case,
• the investment required is of 76, 00 in
  equipment cost, 50,600 in additional equipment,
  plus 13,000 for the assembly.
• Starting up would be immediately after purchase.
  The equipment has a 5-year life.
• The operating costs plus the cost of waste
  disposal amount to 104,000 per year.
• The interest rate is stabilized at 5.5.
• Determine the economic interest of the options.
  Compare the profitability of the solutions
  proposed by applying various criteria.

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Financial Analysis of CP Options
Year 1 2 3 4 5 6 7 8 9 10
Total annual cost 103 Current situation 207.4 207.4 207.4 207.4 207.4 207.4 207.4 207.4 207.4 207.4
Option 1 Total annual cost 103 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8 149.8
Option 2 Total annual cost 103 244.4 104.4 104.4 104.4 104.4 244.4 104.4 104.4 104.4 104.4
Difference between Option 1 and 2 (94.6) 45.4 45.4 45.4 45.4 (94.6) 45.4 45.4 45.4 45.4

• Investment Payback Period (IPP) is of IPP 140/
  (207.4- 104.4) 1.36 years
• 16.3 months

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University of Girona
Maria Martin
Maria J. Martin
Facultat de Ciències. Campus Montilivi
s/n E17071- Girona (Spain) Telf 34 972 418
161 E-mail maria.martin_at_udg.edu