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Free «Integrating Environmental Factors into Life Cycle Costing» Essay Sample

In the manufacture of products environmental factors should be integrated into life cycle costing in the process of manufacturing a product.  These two factors should go hand in hand in the current trends of products design and manufacture. Life cycle costing as indicated by Hargroves & Smith (2005) adds an economic viewpoint to life cycle assessment. They continue to say that in a recycling oriented society like Japan, it is important to manufacture products a considering not only internal costs but also the costs of exploiting natural resources (Hargroves & Smith, 2005. As a result information can be gathered about up and downstream activities and so life cycle costing is facilitated by the MOE and METI systems of environmental accounting (Hargroves & Smith, 2005).

Environmental corporate performance evaluation is used to integrate environmental factors information with performance evaluation systems (Hargroves & Smith, 2005). This means that putting environmental factors into life cycle costing systems form the basis of business which is thought to be the most effective method of promoting environmental management. Hargroves & Smith indicated that “comprehensive survey can be used by companies to examine many aspects including corporate disclosure practices in relation to environmental costs and benefits, how and to what extent the life cycle costing influences environmental accounting practice” (2005, p. 148).

Environmental accounting practices influences corporate attitudes to introducing environmental accounting, the usefulness for companies, how companies account for investment costs and depreciation (Hargroves & Smith, 2005). Life cycle costing also influences employment costs, research and development costs and environmental conservation effects and costs reduction. Hargroves & Smith (2005) indicated that “under conventional financial accounting rules, when companies invest in environmental impact reduction, corporate costs increase but the benefits of environmental activities are not clearly visible” (p. 150). They also noted that it is hard to obtain a picture of the effectiveness of life cycle costing activities.

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In most developed countries corporate environmental accounting information provides a useful basis for stakeholder comparison of profitability, liquidity or growth rates among companies (Hargroves & Smith, 2005). On the other hand Hargroves & Smith noted that “many companies measure environmental costs and benefits using trial and error method and caution should be exercised when undertaking comparison and analysis” (p. 150)

Pham (2001) says that “due to ever increasing concerns in environmental protection in the recent years, countries have been faced with worldwide challenges in the aspect of incorporating and environmental concept with the life cycle costing of product development and manufacturing technologies” (p.169). According to Pham (2001) some of the leading manufactures have realized the importance of reducing potential environmental impacts of their products and enthusiastically participated in or supported environmental programs. As a result we can therefore say that for the sake of environment, industries should strive for extracting maximal value from given resources and reducing industrial wastes generated in the manufacturing processes (Pham, 2001).

In many companies especially the small ones, life cycle costing involves design and manufacturing which have lagged behind with regard to integrating environmental factors into product design and development stages (Pham, 2001). This has been attributed by the fact that it is currently the customer, rather than the manufacturer who has to deal with the disposal of retired products.  In order to achieve a better integration of life cycle costing and environmental factors manufacturers should not only strive to achieve high quality and low cost products in order to be competitive in the market but ensure that environmental problems are reduced (Pham, 2001). According to Pham (2001) the direct cost of handling hazardous waste in the United States alone is approximately six billion US dollars per year.

Therefore the approach of integrating life cycle costing and related environmental factors will ensure environment friendly design and manufacturing is very important. Pham says that technology should be used in the new millennium in order for economic to be consistent with the goal of environmental preservation and enhancement (2001). Pham (2001) mentioned that “manufacturers should note the ultimate goal in life cycle costing should be to minimize a societal loss that includes a loss to the customer, the producer and at the same time a loss to the environment” (p. 170). 

Hitchens, Clausen & Fichter (1999) indicated that full cost accounting essentially entails collecting and considering all costs associated with the manufacturing process of a product. The importance of this is to have an understanding and knowledge of allocating its internal environmental costs and to define, quantify, monetize the external environmental impacts of the manufacturing activities and also integrate environmental impact and cost information into planning and decision making (Hitchens, Clausen & Fichter, 1999).

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Life cycle costing can be promoted within organizations as a tool for factoring internal and external environmental costs into the decision making process when producing a product (Hitchens, Clausen & Fichter, 1999). The importance of this also lies within the financial evaluation, socio-economic analysis and risk assessment that take into account other factors like price, reliability, customer service and risks. Hitchens, Clausen & Fichter (1999) indicated that “effective integration of economic, environmental and social factors in life cycle costing is critical in cost saving through waste reduction and pollution prevention initiatives” (p. 213). It is also important in early identification and avoidance of future environmental costs and liabilities, ensuring improved environmental performance and competitiveness (Hitchens, Clausen & Fichter, 1999).     

Internal environmental costs should be included life cycle costing of a product is considered as costs of meeting environmental regulations or corporate environmental standards. Hitchens, Clausen & Fichter (1999) says that “these costs include operating, maintaining and depreciation costs of emissions control equipment, premium paid for use of low sulfur coal as fuel and on purchase of other environmentally friendly products” (p. 213). Besides these there are other less tangible costs such as costs of contingent liability or production loss from station de-rating due to exceeding regulatory limits that should also be included in this category. Hitchens, Clausen & Fichter (1999) says that “these life cycle costs are often identified, allocated, or reported separately within the traditional accounting systems” (p. 213).

External environmental factors should be considered in life cycle costing. These according to Hitchens, Clausen & Fichter (1999) entails costs related to impacts on human health and the environment which may result from the production or use of a product which are not reflected in its costs or price. An example of external environmental cost factors can be human health effects associated with air emissions from fossil fired in electricity generating stations (Hitchens, Clausen & Fichter, 1999). Manufacturers should be keen to accomplish eco-efficiency which is a process of continuously adding value to the product while constantly reducing resource use and generation of waste throughout kits life cycle. Hitchens, Clausen & Fichter (1999) says that in order to accomplish eco-efficiency, it is essential to know the resource input and output and their associated costs.

This therefore requires taking into account all environmental activities and operating equipment required to meet or exceed environmental activities and corporate standards during the manufacturing process (Hitchens, Clausen & Fichter, 1999). On the other hand internal environmental costs and liabilities form a significant portion of the utility’s total costs. Hitchens, Clausen & Fichter continue to say that it is important to know exactly which activities can be used to better manage environmental costs and liabilities and it requires searching innovative ways of achieving the same or better environmental performance at reduced cost through better planning and more efficient processes with minimum waste generation.

 
 
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Giudice, Rosa & Risitano (2006) say that by including the costs of the entire life cycle among the parameters of the decision making process it is possible to achieve a design that is effective in terms of environmental cost feasibility. Giudice, Rosa & Risitano (2006) also indicated that where environmental performance becomes one of the factors in play. In this context the environmental performance of a product must be evaluated over its life cycle hence is influenced by the interaction between the actors involved. In their further studies Giudice, Rosa & Risitano (2006) noted that some inescapable prerequisites for an economic analysis of products that also takes into account of environmental performance. The life cycle cost analysis like environmental impact analysis has to be extended to cover the entire life cycle from conception and design to retirement and disposal. Giudice, Rosa & Risitano (2006) also mentioned that “in its most complete form it also requires the difficult assessment of the environmental costs borne by all the subjects involved in the life cycle including society as a whole” (p.113).

The life cycle costing approach to products design means analyzing each step of the product for ways of reducing, reusing and recycling to minimize all environmental impacts (Dorf, 2001). The life cycle costing requires a full environmental audit of all environmental impacts associated with the manufacture of a particular product. Dorf (2001) found out that “this should involve full life cycle of acquisition of the required raw materials, through production, to final disposal of the product, packaging and other by products” (p. 213). The costing should be derived from upstream factors such as pollution or environmental depletion caused by mining raw materials, refining or manufacturing by the supplier and transport. Dorf (2001) says that life cycle costing should include downstream factors which include among others distribution and disposal of the product and packaging after customer use. Low cost factors such as water use, energy use and clean air can be considered also when integrating environmental factors with life cycle costing of the manufacture of a product (Dorf, 2001).

When companies adopt a life cycle costing approach and then integrates it with environmental factors this results in financial gains for the company by shedding costs and gaining from recycling (Dorf, 2001).  Dorf thus indicated that because the relationship between among business processes are complex, life cycle analysis requires a sophisticated understanding of material flows, resource reuse and product substitution while at the same time putting into consideration environment friendly designs (2001). Life cycle costing while seen as a tool to assist in creating environment friendly products it is less attractive to environmentalists. This according to Dorf (2001) is because environmentalists believe that the costs of environmental protection are easier to quantify and express in dollars than the benefits of environmental protection (p. 213).

It is important to note that the environmental impact of many products can be assessed using life cycle cost analysis method. This is because according to Capehart (2007) it considers “the impact of a product on the environment during its entire life cycle from production to disposal” (p. 798). The life cycle costing approach uses environmental indicators such as carbon dioxide emissions indicating climate change and sulfur dioxide emissions indicating acidification potential.  Capehart (2007) thus says the greater the effectiveness of the integrating life cycle costing to environmental factors the grater the positive impact on the environment. Life cycle cost analysis and assessment are two of the principle factors guiding the process of product development while at the same time ensuring that they meet industrial environment regulations (Giudice, Rosa & Risitano, 2006). On entering the market Giudice, Rosa & Risitano (2006) says that a product manufactured through processes of transforming the resources employed must have increased in value such that it can be produced and commercialized.

Based on the fact that the manufacturer directly acquires the necessary raw materials, energy resources and workforce on the open market and the transforms those to usable products life cycle costing should not negate all these factors and their associated impacts to the environment (Giudice, Rosa & Risitano, 2006). Besides this factor Giudice, Rosa & Risitano (2006) mentioned that the life cycle costing process should also be able to evaluate the costs of development, production and distribution and compare them with the market value of the product in order to be able to quantify its economic and environment validity. 

Hundal (2002) says that as humankind is always growing critical natural resources will be expanded to support this population and companies will generate enormous waste streams. This implies that manufactures should find efficient ways to maximize life cycle costing of manufactured products and take into account environmental conservation and regulation factors. Hundal (2002) summarizes that life cycle costing should entail measures for   design for environment which on the other hand will contribute toward minimizing the costs associated with unfriendly environments.

In conclusion, when life cycle costing is integrated in the manufacture of products it implies that designers and engineers have examined their products for environmental soundness, which includes an environmental snapshot across the entire product life cycle (Hundal, 2002). The traditional product life cycle should change to ensure that a design for environment infrastructure in put in place. This is because design for environment stems for more serious concerns than just reducing costs and minimizing waste.

   

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