Pollution prevention projects are generally among the first to be eliminated in the capital budgeting process that uses traditional methods of economic analysis. Reasons for this, as cited in the literature, are as follows:
This paper discusses activity-based analysis as a method that can define overhead costs in a more appropriate and accurate manner. Activities are defined as discrete repetitive tasks performed directly in association with production or indirectly in support of the manufacturing process. A key requirement for performing this type of analysis is a thorough understanding of the production process, a lack of which forces aggregation of costs. The paper presents an organizational frame work for a better understanding of activities and their impacts.
At the bottom of the hierarchy are activities that are directly related to production, such as assembly and parts cleaning. Linked to this, at the next level, come production support activities, such as receipt and storage of materials. Next come administrative support activities, such as environmental compliance activities. Finally, at the top of the tier are strategic support activities, which are top management activities that support the production process. The paper stresses that support and indirect activities are greatly affected by pollution prevention projects. The analysis methodology consists often steps within four distinct phases.
|-Step I.||Define the boundaries of the production system to be evaluated. Activity-Based Data Collection Phase: Baseline Process|
|-Step II.||Develop a bill of activities (BOA) for the production system, classified in the hierarchical fashion described above.|
|-Step III.||Identify cost drivers for each activity in the BOA.|
|-Step IV.||Collect data for the baseline.|
|-Steps V through VII.||Perform Steps II to IV after the pollution prevention project is implemented (estimate if project has not been implemented).|
|-Step VIII.||Compare the two BOAs, identifying only those differences (costs/savings) resulting from the pollution prevention project. These differences can be due to the elimination or addition of activities, changes in frequency of activities, or differences in the types and costs of resources used for existing activities.|
|-Step IX.||Use information for a comprehensive economic analysis.|
|-Step X.||Perform sensitivity analysis.|
This methodology is tested at Calsonic Manufacturing Corporation for evaluating a pollution prevention project. The case study compared a chlorinated solvent degreasing system and an alternative aqueous wash system on a production system that manufactures radiators. The traditional economic analysis method is briefly described, and the results show an additional cost of the aqueous cleaning system of $7,750 per year. The activity-based analysis, on the other hand, shows that the aqueous cleaning system eliminated or reduced the frequency of many costly activities. This outcome did not show up in the traditional analysis. The conclusion showed annual savings of $68,300 as a result of using the aqueous cleaning system. Both results are based on NPV calculations (at i = 10%) using a 7-year depreciation schedule.
|Raw material acquisition||---|
The traditional method of analysis greatly simplifies the analysis procedure by lumping overhead costs into one category. However, this method often leads to misrepresenting the full range of costs and benefits associated with pollution prevention projects. The ABC analysis method attempts to overcome this problem by allocating costs toward individual activities performed in the organization associated (directly or indirectly) with the production process. Indirect costs (traditionally lumped in overhead accounts) are often greatly affected by pollution prevention projects, and this method makes them more visible. The case study demonstrated the wide difference in the results obtained using the traditional approach versus the activity-based analysis.
The paper does not discuss a methodology for estimating liability or less-tangible (internal) costs. Although it discusses a framework within which activities need to be identified, it does not discuss the level of breakdown of activities that is appropriate. It does not discuss external/social environmental impacts.
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