Specialty Glass, Inc' Accounting and Hazardous Waste

1
Specialty Glass, Inc. Accounting and Hazardous
Waste

• Professor Doug Cerf
• Donald Bren Graduate School Environmental Science
  and Management
• ESM 284-Spring 2005

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Product Pricing Issues

• Are environmental costs properly considered in
  product costing?
• Costs related to past damage
• Current preventative costs
• Companies may become responsible in the future
  for operations that meet current minimum
  environmental standards
• Are we, or have we sold unprofitable products?

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Are environmental costs assigned to the correct
product?

• If costs (environmental) are included in overhead
• Allocate overhead to those products that cause
  the environmental costs
• Otherwise the products that cause (do not cause)
  the environmental costs will have
• Costs understated and profit overstated
• Costs overstated and profit understated
• Improper allocation could lead to improper
  emphasis of the products that cause environmental
  damage

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Specialty Glass

• Manufactured about 30 of the worlds supply of
  colored sheet glass for stained glass windows and
  lamps
• 12 million in annual sales
• Much larger than competitors
• Manufacture requires
• Large amounts of electricity
• High capital costs

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Discussion questions

• Specialty Glass includes the cost of waste
  disposal in overhead. Would Specialtys estimate
  of the true cost of producing different
  products change significantly if the costs were
  traced directly to the various colored glasses
  (products) according to the cost of disposing of
  the different ashes? Use a numeric example to
  demonstrate your conclusion.

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Question 1 comments

• In theory the distortion could be large
• In this case the direct disposal cost of the
  hazardous waste was nominal 32,500
• The actual long term disposal cost could be much
  larger

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Question 2

• Was Specialty Glass incurring other environmental
  costs? If so what were they? Would Specialtys
  estimate of the true cost of producing
  different products change significantly if the
  costs were traced directly to the various colored
  glasses (products) ?

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Other environmental costs not included in product
costs

• Liabilities from past events
• Legal liability from the impacts of cadmium laden
  smoke emitted
• Human health impacts
• Public and private property values
• Animal (livestock) health
• Cleanup of cadmium contaminated soil in the area
  near the plant
• Cleanup cost for hazardous waste sites that have
  previously accepted cadmium waste

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Other environmental costs not included in product
costs

• Liabilities from current events
• The billed cost of disposal ignores
• Accidents during transportation, handling and
  disposal
• Difficult to estimate especially for a small
  operation

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Other environmental costs not included in product
costs

• Liabilities from future events
• Only one facility in the US accepts cadmium
  contaminated ash
• The cost to dispose of future waste could sky
  rocket
• Retroactive impacts of new laws

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Question 3

• Specialty Glass was owned by one individual. The
  fact was reflected in the limited information
  available about different product costs, relative
  profitability, of the products and the company's
  business risks. If Specialty Glass were publicly
  traded or if the company wanted to undertake an
  IPO what financial and business risk disclosures
  would be requires?

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Question 3 comments

• Generally Accepted Accounting Principle
  disclosure in the annual report
• Accrue, disclose with estimate, disclose without
  estimate, do not disclose
• Auditor may issue a going concern assumption
• In absence of evidence to the contrary, it is
  assumed a business will continue to operate
  indefinitelyat least long enough to carry out
  existing, plans, commitments and contracts
• An auditor may turn down the engagement
• Security and Exchange Commission
• Management disclosure and analysis should
  properly explain the cadmium related risks

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Question 4

• What options did Specialty Glass have with
  respect to the environmental issues? What were
  the financial and strategic strengths and
  weaknesses of each of these options?

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Question 4 comments

• Do nothing, risk being closed
• Move out of the US
• Stop producing ruby red glass immediately
• Does not relieve them of liability related to
  past production
• Continue producing ruby red glass but include the
  cost of contamination in the price
• Unlikely risks mentioned in 2 will be
  internalized
• Apply for a treatment, storage and disposal
  permit to treat cadmium on site
• Receive cadmium from others
• Sell the company with proper disclosure

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Conclusion

• Risk is way too high compared to the reward
  (revenue, which is understated) from producing
  ruby red glass.
• Get out of the business of selling ruby red

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Environmental risks and liabilities impact on
product costs

• This case discusses assigning current
  environmental costs to the products that cause
  those costs
• What about the costs related to environmental
  risks and liabilities that are not measurable
• Should you get out of the business of making ruby
  red glass