Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 42

Cost of Quality: Environmental Issues

Many companies have adapted the cost of quality framework to environmental issues. They assign costs to one of four categories: prevention (P), appraisal (A), internal failure (IF), and external failure (EF), where the categories refer to environmental activities and consequences of environmental failures. Classify the following costs incurred for environmental activities into the four categories.

a. Criminal penalties for illegal dumping.

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b. Cleanup of leaks and spills on the plant floor.

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c. Employee training: environmental policies.

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d. Lost sales from bad publicity after toxic spill.

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e. Fines for being out of compliance with environmental regulations.

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f. Maintenance of machinery that handles hazardous material.

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g. Monitoring costs of chemical processes.

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h. Design of processes to minimize leakage and waste.

Step 1 of 9

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Prevention costs

These costs are incurred to prevent the defects in the products or services like material inspection, process inspection, equipment inspection, training, product design and process control.

Appraisal costs

These costs are incurred to detect the defects in the products post production or identify the products not meeting the specifications like sampling at the end of process, testing on field etc.

Internal failure costs

These costs are incurred for correction or repair when any defect is found in the product before delivery to customer like material wasted, rework done to fix the problem, testing conducted post rectification etc.

External failure costs

These costs are incurred to fix the problems related to defective products, after delivery to customer like after warranty repairs, paying for product failure, trying to improve company image damaged due to faulty delivery, improving sales etc.