,, ChaPter 14 auafity and Environmental Cost Management

14. Products are inspected to ensure that the gaseous emissions produced during opera-tion 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.

523

1A,-9,Environmental Cost Report . , ,

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

2010

Setding personal injury claims' Treating and disposing of toxic waste

Cleanup of chemically contaminated soilInspecting products and processesOperating pollution control equipment

$r,200,0004,900,0001,900,000

600,000840,000

120,00060,00075,000

Licensing facilities for producing conraminanrs 360,000\:-'v Evaluating and selecting suppliersDeveloping performance measuresRecycling products

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 envi-

ronmental cost category. Comment on what this distribution communicates to amanager.

Repo rti n g_lqqia I Costs 14-10Refer to Exercise 14-9. Suppose that the newly hired environmental manager examines t 0 4the report and makes the following comment: "This report understates the total environ-

, tental costs. It fails to consider the costs we are imposing on the local community. Forexample, we have polluted the river and lake so much that swimming and fishing are nolonger possible. I have heard rumblings from the local citizens, and I'll bet that we willbe facing a big cleanup bill in a fbw years."

Subsequent to the comment, environmental engineering estimated that cleanup costsfor the river and lake will cost $3,000,000, assuming the cleanup efforts are requiredwithin five years. To pay for the cleanup, annual contributions of $525,000 will beinvested with the expectation that the fund will grow ro $3,000,000 by the end of thefifth year. Assume also that the loss of recreational opportunities is costing the local com-munity $I,200,000 per year.

Required:I. How would this information alter the report in Exercise 14-912. Curent financial reporting standards require that contingent liabilities be disclosed

if certain conditions are met. Thus, it is possible that Hender may need to disclosethe $3,000,000 cleanup liability. Yet thc opportunity cost for the recreationalopportunities need not be disclosed to outside parties. Should Hender voluntarilydisclose this costf Is it likely that it would?