Best method to account for environmental \"externalities?

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  • #3045
    Anonymous
    Inactive

    I’m in charge of assessing the costs of our manufacturing process as it is now – which has various regulatory requirements, and reporting, fees, etc… versus a new proposed process that creates no waste that is hazardous, instead can be reused within the process itself. What method can I use to account for the costs that are traditionally put into “overhead” or “operational” categories, but that would be eliminated from the ledger with this new process?

    #3046
    Gene Hubbard
    Participant

    Ok, so a traditional analysis would account for the purchase, operating and maintenance costs, along with training, and any specialty materials used as adjuncts in the new process, compared to the existing process. However as you mentioned this new process would eliminate the need for certain reporting requirements and waste. These are not currently directly attributed to the existing cost of production for the parts on this line. You will need to pull them out of the overhead category of the accounts, and also estimate teh labor hours of supervising the haz waste, paperwork time of maintaining compliance logs, the training costs to keep staff up to date on the applicable regulations and practices, as well as any fees or taxes applied to the wastes from the current process. Now you can make a better comparison. If the new equipment is not a direct capital purchase, but instead some kind of operating lease, or rent-to-own, then those payments would need to taken year by year into the future (5 to 7 years usually for an operating lease) So you would be comparing 7 years of current production process, with 7 years of the proposed new process. You total each and see where they stand. If you want to get fancy, you can use a Net Present Value formula to convert all those “in the future” payments into a “today’s” value. Good luck! Let us know how it turns out.

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