Environmental cost

Environmental cost is a core part of managerial accounting. Environmental costs are the indirect costs include the full range of costs throughout the life-cycle of a product. Environmental costs are the costs that are incurred so that a company's activities do not damage the environment or that any such damage is put right.

Environmental costs are done for internal and external working of an organization. There are ways by which the environment costs, losses and benefits may be unrecorded in traditional accounting systems. By distinguishing the internal costs, those that are borne by the organization and external costs, those which are passed on the environment or the society e.g. environment cost or health costs.  

Internal environmental costs of the firm comprise of direct costs, indirect costs, and contingent costs. The costs include remediation or restoration costs, waste management costs or other compliance and environmental management costs. Internal costs is estimated and allocated using the standard costing models that are available to the firm. Direct costs are traced to a particular product, site, and pollution prevention program (for e.g., waste management or remediation costs). Indirect costs include costs such as environmental training, R&D, record keeping and reporting are allocated to cost centers such as products and departments or activities.

External costs are defined as the costs of environmental damage external to the firm. These costs are “monetized” (i.e., their monetary equivalent values can be assessed) by economic methods that determine the maximum amount that people would be willing to pay to avoid the damage, or the minimum amount of compensation, that they would accept to incur it.

Full environmental costs = (internal + external costs)

Internal costs are calculated as

Direct + indirect + contingent

External costs are calculated as:

Costs of external environmental and health damage

Questions

• What is environmental cost?
• What is the environmental cost comprised of? Give the formula to calculate it.