expenditures. it iscritical because these costs have thepotential of being very large.

For example, The

WallStreet Journal reported that the government forins dealingwith disposal of dirty cleaning rags at
Bemhardt FurnitureCompany in Lenoir, N.C., created a pile 62" tall. Moreover, Alex Bernhardt, the
company's president, says thathis company "could easily spend twice as much on(environmental)
compliance in the next five years as ontainR&D and new machinery and equipment" combinedoniagent
Liability Costs. These costs can includebotii (a) penalties and fines for noncompliance and (b)legal claims,
awards, and settlements for remedial actionspersonal injuries, and property damage for future
routineand accidental environmental concerns. Often these costsmust be estimated, and companies
must be careful not tounderestimate these amounts or the likelihood of theiroccurring. All companies
that generate and release hazardous waste and materials have future contingent liabilitycosts, so when
estimating these costs, they must acceptthat environmental regulations will tend to
convergescrehardtestimupward, causing contingent liability costs to increase.Less Tangible Costs. By
reducing or eliminatingpollution and responding to consumer demands for environmenially friendly
products, a company can realize costsavings (less tangible costs) through increased revenues
ordecreased expenses due to improved consumer satisfac-tion, employee relations, and corporate
image. Given thegrowing legislative and regulatory pressure and increasingconsumer awareness,
progressive companies are alteringthe way they design, make, and market their products.soproducts can
be used longer and reused, either in part orIf a company makes ecological and economicjoint objectives
its less tangible costs, at least, par-tially can offset its contingent liability costs. As Exxon'sexperience in
Alaska demonstrated, however, an acciden-tal release can override many corporate efforts in the
areaABCseen iernmerlow-vohazardoresultof less tangible costs.erience in Alaska demonstrated,
however, antal release can override many corporate éfforts in the aof less tangible costs.ABC AND
ENVIRONMENTAL EXPENDITURESActivity-based costing techniques can provide the meansidentify cost-
bearing activities effectively and to allo-te costs to individual products. The basic premise ofBC is to cost
activities, not products. Costs are allocatedproducts on the basis of the individual product'seemand for
those activities. The allocation bases-costárivers -are the quantification of activities performed.The
merging of life-cycle costing and ABC is not aevolutionary concept. Consideration of all costs, from
thepases to product maturity, can allow for thee een rip 汀 teat or better design methods, production
methoologies, marketing strategies, and disposal options.Environmental expenditures must be a major
part of thosecust considerations.Traditionally, ABC allocates activities among unit-evcl, batch-level,
product-sustaining, and facility-sustaining activities. Unit-Jevel activities are performed on indi-vidual
units, batch-level activities allow batches of units tobeprocessed, product-sustaining activities provide
thecapacity to produce a particular product, and facility-sus-taining activities sustain a manufacturing
facility's generalmanufacturing capacity. Environmental expenditures canoccur in any of those
levels.Consequently, the four levels of environmental costsfor full costing should be identified and
included in theappropriate cost acivity level. For example, isopropýalcohol left over from the production
of computer monitorscreens would be a unit-level activity cost. That samealcohol can be used as a
solvent to clean casts for steelproducts, making it a batch-level activity cost. Manyregulatory and
governmental compliance costs would beproduct-sustaining activity cests, such as the costs associ-ated
with the reporing of cleaning rag disposal at Bern-hardt Furniture Company. Future contingent cleanup
costsat waste sites, product-sustaiting activities, also should beestimated for a complete full costing
analysis. Finally, airpollution devices installed on manufacturing facilities cre-ate significant facility-
sustaining activity costs.ABC AND LIFE-CYCLE COSTING:AN ILLUSTRATIONThe use of ABC in a life-cycle
costing analysis can beseen in the case of a bypotheical manufacturing company,Ready Manufacturing,
with two of its products, Product Aand Product B.produced through a single production nProduct A is a
high-volume item that isuse of ABC in a life-cycle costing analysis cen in the case of a hypotheical
manufacturing companyeady Manufacturing, with two of its products, Productand Product B. Product A
is a high-volume item that isproduced through a single production process that doesnot generate any
hazardous waste and requires no governmental and regulatory compliance costs. Product B is alow-
volume item that generates sufficient quantities ofhazardous waste in the production process to
qualifyReady Manufacturing as large-quantity producer. As aresult, Ready manufacturing is subject to
numerous envi-ronmental regulations and reporting requirements-- Annual sales of Product A and B are
200,000 and50,000 units, respectively. Both products require threedirect labor hours for completion,
causing the company tooperate 750,000 direct labor hours per year (250,000 unitsof product o three
direct labor hours per product). At arate of $20 per direct labor hour, the cost of direct laborfor products
A and B is S60 per product. Direct materialscosts are $100 for Produ:t A and S80 for ProductBAs
presented in Table 1, Ready Manufacturing'soverhead costs total S17,250,000. Although the
sameamount of direct labor hours is required for each product(three hours), Product B requires more
machine setupsand more quality inspections than Product A because ofits design complexity. Morecver.
Product B is produced insmaller lots, thus causing it to require a relatively largnumber of production
orders as compared to Product AThe bill of materials indicates that Products A and Bmposed of six and
four subcomponents, respectivHEAD COSTS (CATEGORIZED BY ACTIVITIES)ActivityUnit-level:Overhead
CostsMachine costsEnergy$2,400,0001,000,000posal of hazardous waste400000 3,800,000Material
movementsSupport servicesDisposal of hazardous
waste1,200,0001,450,0001,800,000300,000vironmental reporting requirements 200,000
4,950,000Product-level:R&D and parts maintenanceEnvironmental reporting
requirementsEnvironmental inspectionsWaste treatment costs on siteLandfill disposal
costs2,110,000200,000500,0001,000,000800.000 4,610,000Facility-level:Plant maintenanceBuildings
and groundsHeating and lightingEnvironmental standards2,000,0001,000,000600,000290,000
3890.000$17.250.000Total Overhead CostsTABLE 2. COST DRIVERS AND OVERHEADRATES FOR READY
MANUFACTURING'STABLE 2. COST DRIVERS AND OVERHEADRATES FOR READY
MANUFACTURING'SOVERHEAD COSTSCost Drivers by ActivityCost DrivedesUnit-level:Machine
costsEncrgyDisposal of hazardous wasteMachine hours usedMachine hours usedProduct B
exclusivelyoftiyeBatch-level:InspectionMaterial.movementsSupport servicesDisposal of hazardous
wasteEnvironmental reportingNumber of quality inspectionsNumber of production ordersNumber of
machine setupsProduct B exclusivelyProduct B exclusivelyndrequirementsProduct-level:R&D and parts
maintenanceEnvironmental reportingNumber of subcomponentsProduct B exclusivelyrequirements
王 :nvironmental inspectionsProduct B exclusivelyWaste treatnent costs on site Product B
exclusivelyProduct B exclusivelydfiil disposal costscau% value added% value added% value added% value
addedBuilcings and groundsHeating anr lightingofCost Number Rate per Eventof Erents$2,400,000
20,000 $120/machine hr.$2,400,000 20,000 $50/machine hr.Machine costsrgymeniatenal
movementsSupport services1,200,0001,450,0001,800,0001,5002,500
$480/inspection$2,900/order$1,200/setup500Product-level:$211,000/subcomponentR&D and
parts$2,110,00010Ready Manufacturing has analyzed its operations anddetermined that activities act as
cost drivers in the incur-rence of overhead costs as presented in Table 2. The unit-batch-, and product-
level environmental expenditures arerelated to Product B exclusively and, as such, should beallocated
entirely to Product B. That is, no cost driverother than Product B itself, is appropriate. The facilitylevel
environmental standards expenditures are assumedto relate to pollution control equipment installed on
themanufacturing facility's stacks. The stacks vent the entirefactory operation, so they relate equally to
Products A andB. Those costs then are allocated to products on the samebasis as the remaining facility-
level activity costs-on apercent value-added basis.Table 3 shows the total costs for Products A and BThe
allocation of environmental costs, other than facility-level environmental expenditures, partially causes
ProductB's overhead costs to exceed those of Product A. Environ-mental costs are allocated to the
product(s) causing thoseexpenditures. Given the significance of environmentalcosts ($3,690,000, or 21%
of the total manufacturingoverhead costs for Ready Manufacturing) it is imperativethat those costs be
identified and allocated to productsproperly.The importance of using ABC to allocate costs toproducts is
illustrated in Table 4, which presents the prod-n uct costs for Ready Manufacturing using the
traditionaldirect labor hours method. The manufacturing cost perunit for Products A and B are $229 and
$209, respec-r Ready Manufacturing using the traditilabor hours method. The manufacturing cost perB
are $229 and $209, respectively. Product A, with direct labor hours as an allocationbase, received 68%
more overhead cost than under ABC($69.00 compared to $41.09),. Conversely, Product B wasallocated
62% fewer overhead costs using direct laborhours as the allocation base ($69.00 compared to180.65).
With direct labor hours, Product A is assigned agreater cost per unit ($229) than is Product B ($209)ABC
produces an opposite effect, with the cost/unit forunit for Products A andProduct A at $201.09 and
Product B at $320.65.Environmental costs related to certain products cancause the traditional direct
labor hours cost allocationmethod to produce faulty product costs. In fact, product-specific
environmental costs for many companies mayrequire the use of ABC costing to a greater extent than
deodifferences in volume, machine setups, production ordersquality inspections, and number of
subcomponentsThe total manufacturing costs per unit of $201.09 forProduct A and $320.65 for Product
B were obtained frominformation contained in the historical-cost-based generalledger system. Life-cycle
costing, particularly for envirorn-mental expenditures, requires that all costs (past, present,and future)
be included in the product's profitabilityanalysis. That is, while the manufacturing costs computedin
Table 3 are useful for financial statement preparationand current operating performance measures, a
bettermeasure of long-term product performance also shouldinclude future environmental
expenditures. In particular