Natural Foods Merchandiser

Accounting for environmental costs

Despite the potential for significant financial gains when switching to more sustainable practices, most supply-chain managers currently do not focus on environmental concerns. According to the Environmental Protection Agency, one reason is that cost accounting systems typically hide “environmental costs.”

While raw-material and labor costs are directly allocated to the appropriate product or process, other costs are accumulated into overhead accounts. This approach can lead to inaccurate costing and ineffective decisions when significant costs—waste disposal, training expenses, environmental permitting fees and other environmental expenses—are not allocated to the responsible products and processes.

Many companies have tackled this issue by using environmental accounting techniques to substantially reduce supply-chain costs. These methods allow companies to systematically identify environmental costs throughout the supply chain, such as expenses associated with management of hazardous materials, which typically are not captured through conventional accounting methods. Once the costs (or potential benefits) have been identified, companies can analyze the cost drivers and evaluate alternative cost-reduction opportunities.

Source: EPA

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