Waste Cost Management System Best Way to Go Beyond Compliance

by Matt Barcaskey, Pollution Prevention Engineer

The most productive means of gaining the support needed for environmental improvement efforts is via economic justification. Attempting to extend environmental initiatives beyond regulatory requirements without economic justification will not only fail, but it will also make it more difficult for future efforts in the organization to be successful. Companies should not over-emphasize recycling and by-product recovery efforts. While these initiatives are important, showing economic viability can be difficult due to material handling costs and degraded material values. Where should companies initially focus their environmental improvement efforts? Source reduction, of course.

But, then the question becomes, "How do we get to source reduction as our first means of action." The answer lies in the fundamental cost management of the operation. Any other effort to change a manufacturing process within an organization usually requires financial justification, and beyond compliance environmental initiatives should be treated likewise. To evaluate source reduction as a process / cost optimization project, we need to initiate our efforts with an understanding of the cost implications. Manufacturers have cost management systems within their accounting system to support decision making. These cost management systems supply the financial data necessary to evaluate profitability, process improvement, capacity utilization, product lines, and other business management decisions. Those charged with environmental responsibility need access to this financial data as well. This can be accomplished through a cost management system directed at waste.

A waste cost management system can be set up as a simple extension of the managerial accounting system. The primary objective is to provide the necessary financial data to support environmental improvement. Early assessment work led us to put an increased emphasis on the collection and analysis of cost data to reduce waste. The full costing of waste is necessary to reveal the true economic impact of waste on industry and determine the benefits of source reduction. P²AD has developed a guide for implementing a waste cost management system to assist industry. The P²AD guide was developed based on a pilot project at Southwire Company located in Carrollton, Georgia. The guide will be printed and made available for distribution in early 1999.

The process of developing a waste cost management system begins with a multimedia identification of all wastes generated at a facility. Collecting waste data involves gathering information such as quantities, regulatory implications, manner of generation, and methods of disposal. This is the first step shown in Figure 1. Next, the wastestreams are attributed to the specific products, processes, and/or departments that are responsible for generating them. Linking the wastes in this manner will provide a "road map" allocating cost information. The information regarding handling, storage, regulatory implications, and disposal is now used to identify activities related to waste. Gathering this information is the key to identifying the hidden or indirect costs of waste.

At this point, we are ready to begin the costing process. The cost information will generally fall into two categories: direct costs and indirect costs. The direct costs are easily traced to specific wastes and may be the material value, conversion cost, or disposal cost. The indirect costs are not easily attributed to specific wastes. These are the costs of the activities resulting from waste being generated. This cost information is typically captured in the overhead accounts of a managerial accounting system.

After cost information is generated for the waste related activities, it needs to be allocated among the specific wastes responsible for causing each activity. To illustrate how the costs are determined and how activity costs are allocated to a wastestream, we will consider an example from the Southwire project.

The wastestream to be considered is waste ink from a printing line that is drummed and disposed of as a hazardous material. There were ten drums generated, containing on average 430 pounds of ink and thinner. The fee paid for disposal was $50 per drum. Physically processing a drum requires the involvement of a line operator, area supervisor, forklift driver, and the environmental engineer. Additionally, any generation of hazardous waste results in a number of other activities. These activities, that are mandated by state and federal regulations, include waste characterizations and profiles, manifesting, fees, biennial reporting, EPCRA reporting, and inspections.

What is the cost of a drum of ink waste? The first obvious cost is the fee of $50 per drum for disposal. Another cost that is easily obtained on a per drum basis is that of the lost materials. Each drum contained ink and thinner that went unused. Based on the purchase prices, the cost of material per drum was estimated to be $819. Thus, we have a direct cost per drum of $869.

Now we must consider the indirect costs of the people involved whose time is captured in overhead accounts and allocate these costs to our drum of waste ink. Each drum generated caused a variety of handling activities. Based on our interviews with operating personnel, the following six activities were associated with handling:

1. Supervisor stages and labels drum for collection.

2. Operator fills and secures drum.

3. Forklift driver transfers drum from accumulation point to designated storage point.

4. Environmental engineer arranges for disposal.

5. Environmental engineer supervises pick-up of drum.

6. Environmental engineer processes paperwork returned from contractor.

Based on our interviews and cost collection activities, we estimated the time involved in these activities, the type of personnel resources needed, and the per hour cost of using these resources. The cost of handling a drum was estimated as $47.

Although hazardous waste was generated at the plant, many activities associated with hazardous waste management were carried out by the corporate environmental staff. Extensive interviews were conducted with this staff to estimate the time and cost that could be attributed to hazardous waste management. Based on their responses and accounting data, the corporate staff's cost was estimated to be $51,300 for the year for this plant. Now we have a total cost of these activities for all of the hazardous waste generated, but we want to know how much can be attributed to our drum of waste ink. To find this out, we simply take the number of drums of waste ink divided by the total number of hazardous waste drums generated during the year (139 drums), and multiply this ratio by the total cost. Thus, the corporate hazardous waste management cost was estimated to be $369 per drum. Adding these indirect costs to the disposal cost, material cost, and hazardous waste tax of $16 per drum gave the full cost of a drum of waste ink as $1,301. This completes the process of full costing a waste.

The final step in the process is to allocate the full waste cost to specific products or processes. To do this we need to recall the information that linked each waste with a product or process. In our example, the ink waste could have come from one of two types of printing lines. Knowing the number of drums generated from each printer allowed the cost to be allocated by process. Further allocation of the cost to specific products was not possible with the level of data on hand. However, if the volume of each product run on the printing line in addition to the amount of waste ink was known, then allocation by product would be possible.

It is important to note that when one is developing a waste cost management system it is very unlikely that you will have all of the desired information readily available. Compromises need to be made between the amount of effort needed to collect the data and the benefit of having the additional information. In many cases, it will suffice to make estimates for cost allocation.

This type of project will provide many new insights related to the financial and environmental performance of a facility. Besides providing more accurate data for evaluating pollution prevention projects, a waste cost management system will raise environmental awareness in financial terms and provide information for product decisions, performance measurements, cost comparisons, and goal setting.