,,

ChaPter

14

auafity and Environmental Cost Management

523

14. Products are inspected to ensure that the gaseous emissions produced during operation follow legal and company guidelines. 15. The company incurs cost to operate pollution control equipment. 16. An internal audit is conducted to verift that environmental policies are being
followed.

Environmental Cost

Report

1A,-9, .,,

At the end of 2010, Hender Chemicals began to implement an environmental quality irO management program. fu a first step, it identified the following costs in its accounting
records as environmentally related for the year just ended:

2010

'

\:-'v

Setding personal injury claims $r,200,000 Treating and disposing of toxic waste 4,900,000 Cleanup of chemically contaminated soil 1,900,000 Inspecting products and processes 600,000 Operating pollution control equipment 840,000 Licensing facilities for producing conraminanrs 360,000 Evaluating and selecting suppliers 120,000 Developing performance measures 60,000 Recycling products 75,000

Required:
1. Prepare an environmental cost report by category. Assume that total operating costs are $60,000,000. 2. Create a pie chart to illustrate the relative distribution percentages for each environmental cost category. Comment on what this distribution communicates to a
manager.

Repo rti n g_lqqia I Costs

14-10

Refer to Exercise 14-9. Suppose that the newly hired environmental manager examines t04 the report and makes the following comment: "This report understates the total environtental costs. It fails to consider the costs we are imposing on the local community. For example, we have polluted the river and lake so much that swimming and fishing are no longer possible. I have heard rumblings from the local citizens, and I'll bet that we will be facing a big cleanup bill in a fbw years." Subsequent to the comment, environmental engineering estimated that cleanup costs for the river and lake will cost $3,000,000, assuming the cleanup efforts are required within five years. To pay for the cleanup, annual contributions of $525,000 will be invested with the expectation that the fund will grow ro $3,000,000 by the end of the fifth year. Assume also that the loss of recreational opportunities is costing the local com-

munity $I,200,000 per year.

Required:
this information alter the report in Exercise 14-91 2. Curent financial reporting standards require that contingent liabilities be disclosed if certain conditions are met. Thus, it is possible that Hender may need to disclose the $3,000,000 cleanup liability. Yet thc opportunity cost for the recreational opportunities need not be disclosed to outside parties. Should Hender voluntarily disclose this costf Is it likely that it would?

I. How would