Justifying Environmental Cost Allocation in
a Multiple Product Firm: A Case Study
Collins C. Ngwakwe
This case study examines the effect of environmental cost allocation
on production cost and the outcome for environmental management
decisions. Using a revised cost allocation - referred to in this paper as
environmental cost allocation - the paper contrasts overhead allocation
between traditional cost allocation and environmental cost allocation.
In addition, production cost derived from the traditional allocation of
waste cost is compared with the revised environmental cost allocation.
Findings indicate that a revised environmental cost allocation discloses
more accurate overhead cost and hence production cost; and that man-
agement is motivated to make informed environmental management
decisions if a product related environmental cost is made to reflect in
the production cost of the polluting product. The paper highlights the
practical significance of objective environmental cost allocation on cor-
porate waste management, which thus creates a valuable awareness on
the part of the management and accountants of firms in developing
countries for the need to fine-tune the dominant traditional costing
system. It also suggests avenues for further research to examine the im-
pact of costing systems on environmental investments.
Key Words: management decision, environmental management,
environmental cost allocation, waste cost allocation
jEL Classification: mu, M41.
Introduction
This paper examines the effect of environmental cost allocation on pro-
duction costs, and its implication for environmental management de-
cisions. Trends in globalisation have brought evolving challenges to ac-
counting, and management accounting has a crucial role as the corpo-
rate cost information provider. There must be accurate cost informa-
tion to meet growing demands for corporate environmental responsibil-
ity such as in waste management. This may not be possible without a
good cost allocation system in place. However, there is still noticeable
apathy and complacency on the part of some accountants and man-
Collins C. Ngwakwe is a Senior Lecturer at the Commerce Faculty,
University of Cape Town, South Africa.
Managing Global Transitions 7 (4): 403-420
agers, mostly in developing countries, regarding environmental cost allo-
cation. Hence, most companies in developing countries (such as the cos-
metic industry used in this case study) have continued to apportion their
waste costs from the traditional overhead basis, with the tendency that
product-specific environmental costs are obscured. This obscurity thus
stifles managerial decision and possible innovation toward more envi-
ronmentally friendly manufacturing with potential cost savings (see e. g.
us epa 1995; Roberts 1995; Rogers and Kristof 2003; Burnett, Hansen,
and Quintane 2007; Burnett and Hansen 2008).
Hence the paper tries to answer two major questions:
•	Could environmental cost allocation affect production cost?
•	What is the potential effect of environmental cost allocation on en-
vironmental management decision?
Whilst renowned authorities such as Crowther (2004), ifac (2005)
and Bebbington et al. (2001) have commonly theorised that environmen-
tal cost allocation affects product costs based on research conducted in
the Western world and other developed nations, little is known about
the implication of environmental cost allocation in companies located
in a developing country such as Nigeria. Hence, to investigate the appli-
cability of this theory in a developing country, the hypothesis is stated as
follows:
hi Environmental cost allocation results in differential product costs.
H0 Environmental cost allocation does not impact a difference in product
costs.
The objective of this paper, therefore, is to show the effect of envi-
ronmental cost allocation on production cost and the latent implica-
tion for environmental management decisions. The scope of the study
is limited to Wonder Beauty Care (wbc) - a multiple product cosmetic
firm in Nigeria where the case study was done; it is further limited to
proper allocation of direct waste cost from the overhead costs of Won-
der Beauty Care Company. This paper is significant, given the growing
pressure for corporate sustainability in which accounting has come un-
der intense criticism for not playing a satisfactory role as the informa-
tion house of the firm (see e. g. fsn 2006; Chwastiak 2001; Catchpowle,
Cooper, and Wright 2004). This paper is also significant considering that
accounting research from developing countries focuses more on finan-
cial accounting (see Hopper et al. 2008). Little attention has been given
to management accounting research in countries in Africa, resulting in a
dearth of environmental management accounting research in the sub-
Saharan African countries such as Nigeria. While contemporary con-
cepts such as environmental cost allocation may seem ubiquitous in the
Western World, in Africa the environmental costing phenomenon is still
nascent, and sounds absurd and unimportant to managers and accoun-
tants in Nigeria. Hence, the paper applies this concept, which has already
gained impetus in the West, to create awareness for companies in Nigeria
to appreciate the strategic implication embedded in environmental cost
allocation, which is still unknown to them and about which they appear
apathetic.
The paper is organised as follows: section two discusses the justifica-
tion for environmental cost allocation. Section three presents the case
study and methodology; section four discusses the data analysis, while
section five outlines the findings, and section six draws conclusions.
Justifying Environmental Cost Allocation
Environmental costs are the many different types of costs which organi-
sations incur to manage pollution or maintain cleaner production; they
also include costs to comply with environmental standards, including
voluntary costs expended to enhance corporate health and safety, com-
munity relations and general corporate social responsibility. Some au-
thors have attempted to classify environmental costs, for instance, the In-
stitute of Chartered Accountants in Australia (icaa) (2003) classifies en-
vironmental costs as: hidden, contingent, image/relationship and inter-
nal/external. Furthermore, the United Nations Division for Sustainable
Development (undsd) (2001) classifies environmental costs as: waste
and emission treatment, prevention and environmental management,
material purchase value of non-product output, and processing of non-
product output. Other generic classifications come from ifac (2005),
which follows closely the undsd classification above. However, environ-
mental costs differ between firms according to how each firm intends to
classify and use them. Nevertheless, the crux of the matter is the ability of
management to recognise the existence of such costs and to apply them
appropriately in decision making, but it is difficult to recognise and ap-
ply environmental costs if the cost allocation system does not make them
visible.
Environmental cost allocation is therefore significant considering that
corporate environmental sustainability is no longer driven by regulation
and compliance; it is now a matter of risks and opportunities such that
proactive corporations should re-strategise their business operations to
minimize risk and take advantage of the opportunities. Such strategy
should start from the accounting department to provide relevant envi-
ronmental cost information for informed management decisions for re-
ducing corporate environmental impacts - a sub-goal in the millennium
development goals (mdgs).
Proper allocation of environmental costs would supply pertinent in-
formation needed to make decisions in compliance with evolving en-
vironmental regulations. Emerging environmental regulatory schemes
such as corporate sustainability oecd (2000), extended producer re-
sponsibility oecd (1996), the International Standard Organisation's
(iso) sustainability certifications (iso 14000s), the Kyoto Protocol and
green house gas (ghg) trading schemes add green responsibility to the
cost and management accounting system to supply pertinent cost in-
formation to aid corporate environmental management decisions. This
increase in environmental concern has spurred the International Feder-
ation of Accountants' comments (ifac 2005,3):
Environmental issues - along with the related costs, revenues
and benefits - are of increasing concern to many countries
around the world. But there is a growing consensus that con-
ventional accounting practices simply do not provide adequate
information for environmental management purposes.
The traditional overhead costing system pays less attention to the
identity of cost items in overhead, Myerson (1995), hence a major por-
tion of environmental-related costs are found hidden in the traditional
overhead accounts (White and Savage 1995; White, Becker, and Savage
1993; Joshi, Krishnan, and Lave 2001). If, therefore, such environmental
costs are allocated incorrectly, products would not get their due share, us
epa (1995). Many companies in the developed nations understand this
more; for instance, according to Jean (1995), East Peoria, Illinois Plant - a
famous us company - no longer dumps waste disposal cost into an over-
head account. Such recognition of environmental costs results not only
in pollution prevention, but could add revenue to the polluting depart-
ment (Rogers and Kristof 2003; Burnett, Hansen, and Quintana 2007;
Burnett and Hansen 2008). Furthermore, the traditional manufacturing
system was direct cost prone, but modern manufacturing technology is
dominated by overhead costs occupying a significant portion of manu-
facturing costs (Cooper 1989; Booth and Giacobbe 1997). A substantial
amount of environmental costs are hidden within these new forms of
overhead costs, neglect of which would result in cost information distor-
tion (see e. g. Joshi, Krishnan, and Lave 2001).
Furthermore, environmental costs deserve proper attention because
many internal and external stakeholders are showing increasing interest
in the environmental performance of organizations, particularly private
sector companies (icaew 2004). Internal stakeholders include employ-
ees affected by pollution in the work environment. External stakehold-
ers include local communities affected by corporate wastes and emis-
sions, environmental activist groups, government regulators, sharehold-
ers, investors, customers, suppliers and others (ifac 2005). In addition,
there are growing supply chain pressures from large companies requiring
their suppliers to be compliant with environmental management systems
(ems) standard of the International Standard Organization (iso 1996).
But an effective environmental management system cannot be achieved
without recognising the relevant environmental costs attached to firm
products. This is important since proper environmental cost allocation
engenders cleaner manufacturing innovation, which, in addition to pol-
lution reduction, also results in cost savings (see e. g. Rogers and Kristof
2003; Burnett, Hansen, and Quintana 2007). The need for modernizing
the traditional costing also arises due to increasing regulations which
have caused the internalisation of environmental costs that were previ-
ously regarded as externalities; this is also highlighted by (ifac 2005,11):
For example, in countries with strong environmental regula-
tory regimes, new regulations have led to the internalization
of a wide variety of additional environment-related costs. Or-
ganizations have seen costs of environmental compliance rise,
including costs for required pollution and control equipment,
pollution monitoring and emission fees and regulatory paper-
work and reporting.
Internalisation of some previous external costs due to environmental
pressure means that the costing system should track, classify and allocate
these costs equitably for accountability and possible innovation. ifac
(2005, 26) further highlights that:
Several limitations of conventional management accounting
systems and practices can make it difficult to effectively collect
and evaluate environment-related data. These limitations can
lead to management decision making being based on missing,
inaccurate or misinterpreted information. As a result, man-
agers may well misunderstand the negative financial conse-
quences of poor environmental performance and the potential
costs and benefits of improved environmental performance.
A common method that hides environmental costs is to combine them
with the overhead pool rather than use direct allocation to the prod-
uct that is solely responsible for it. The inclusion of most environmental
costs such as waste cost in overhead therefore stifles possible efforts to
reduce such costs through preventive environmental management, be-
cause traditional overhead accounts shield the polluting products. In
considering this ifac (2005, 27) comments:
The use of overhead accounts for environment-related costs
can also be problematic when overhead costs are later allocated
back to cost centres for pricing and other purposes. An exam-
ple would be hazardous waste disposal costs, which might be
quite high for a product line that uses hazardous materials and
quite low for another that does not. In this case, the allocation
of hazardous waste disposal costs on the basis of production
volume would be inaccurate, as would be product pricing and
other decisions based on that information.
The plant-wide method of allocating some product-specific environ-
mental costs in a multiple product firm, such as presented in this study,
distorts the real cost of production in all the products, and the polluting
product is protected under this traditional scheme because its pollution
cost is apportioned to other products. There is, therefore, no incentive
for the management of the polluting department to embark on cost re-
duction through pollution reduction, because it lacks the pertinent cost
information. In line with this, fsn (2006,1) adds:
Conventional management accounting has been criticised for
ignoring the separate identification, classification, measure-
ment and reporting of environmental information, especially
direct and indirect environmental costs. Here, environmental
costs such as energy, water and waste disposal are often not
traced to specific production processes and are 'lumped in'
with general business overheads and allocated to cost objects.
Activity based costing (abc) has been introduced to remedy the asym-
metry in overhead cost allocation of some environmental costs; this is a
method that uses cost drivers to allocate indirect environmental costs
(Cooper and Kaplan 1992). However, where some environmental costs -
such as the waste water cost (the focus of this case study) - are directly
traceable to a product, such waste costs should be treated outside the tra-
ditional overhead by direct allocation. The treatment of waste costs out-
side of overhead conforms to the polluter pays principle of oecd (1972).
Thus, with the direct environmental cost allocation approach, product-
specific environmental costs previously concealed in overhead accounts
are singled out and allocated to products that cause them (Rebecca 1992).
In addition to the preceding discussions, this case study is also an-
chored on three principles: the polluter pays principle oecd (1972), Ex-
tended Producer Responsibility (epr) oecd (1996), and the responsibil-
ity accounting theory. The Polluter Pays Principle (ppp) is an oecd envi-
ronmental policy guide which requires that the costs of pollution should
be wholly born by those who cause it (oecd 1972). Adherence to this
has also been seen as a tool to promote efficiency, justice and harmony
(Bugge 1996). 'epr is an emerging strategy being used to promote the
integration of environmental costs associated with products throughout
their life cycles into the market price of the products ...' (oecd 1996,
8). ppp and epr are similar, in that they seek to promote efficiency, eq-
uity, and justice toward economic, social and environmental sustainabil-
ity, and accounting is widely viewed as the epitome of these character-
istics, hence the present stage in the interface between accounting and
environment (see e. g. oecd 1999; ifac 2005).
The preceding discussion is encapsulated in the responsibility ac-
counting theory which is simply put as: managers should not be judged
based on costs and revenues outside their control, but should be answer-
able to costs and revenues within their control (Horngren and Sundem
1995; Kaplan and Atkinson 1990). If managers are aware of the pollution
costs inherent in their products through the costing system, such man-
agers are motivated to take preventive measures to control pollution.
For instance waste cost in this study is discovered to be subject to the
influence of the Weavon product, the manager of the Weavon Depart-
ment should therefore be held accountable to it. The following section
discusses the case study.
The Case Study and Methodology
Data for this research are drawn from a case study conducted in Wonder
Beauty Care Limited in Nigeria. The data were collected over a twelve
month period - between January 2007 and December 2007. The com-
pany has four major products under separate departments that report
performance separately: Soap, Cream, Weavon, and Perfect Finish. The
existing cost accounting system in the company uses the volume of pro-
duction to allocate all overhead costs to different products. Major atten-
tion was given to the effect of volume based allocation of waste water
disposal cost on the four products' production cost with particular at-
tention on the Weavon department. The Weavon department produces
assorted artificial hair for women. The department uses silk and cotton
for its production. The production of Weavon requires several steps in
washing the raw cotton and silky materials. Hence, it uses large quanti-
ties of water and the waste water is allowed to escape to a nearby river via
the public drainage system. The other three departments have a central
pit that collects their waste water which is bought weekly by a chemical
company. Hence, it was discovered that the Weavon department was re-
sponsible for the heavy discharge of waste water. The company pays the
local council a standard fee of N150,000 (Nigerian Naira) monthly for
discharge of waste water into the river in addition to fines accruing from
regular drainage blockage caused by fragments of cotton and silk.
The traditional overhead allocation system includes the waste water
cost, and apportions it along with other overheads on the basis of vol-
ume of production. This method inflates the production cost of other
products, while the Weavon department is heavily shielded because it
produces the least number of products. This misallocation may have af-
fected the performance of the other products for several years.
The methodological approach is a comparative design and analysis be-
tween the traditional overhead allocation (which included waste water
cost) and a revised overhead allocation which separates the waste water
cost from other overheads. Using a revised cost allocation, the waste wa-
ter cost is thus separated from the overhead pool for the twelve month
period and the other overhead is reallocated, with the waste water cost
assigned wholly to the Weavon department outside of overhead alloca-
tion. This resulted in reduced production costs for the other three de-
partments while the production cost of Weavon increased commensu-
rate with its real operation costs.
Furthermore a paired sample t-test of difference is applied to check for
possible difference in means between the overhead costs arising from the
two waste cost allocation approaches for the Weavon department. A sep-
arate test for mean difference is conducted for the Weavon product, and
another test is conducted for all the products put together. The separate
test for Weavon is important for gauging the likely impact on its product
cost, considering that it is solely responsible for the waste cost. Hence
the cost comparison on the Weavon product is imperative for ascertain-
ing the degree of impact on its product cost. It is on this basis that the
research hypothesis which is supported by Crowther (2004), ifac (2005)
and Bebbington et al. (2001) is tested and is restated here as:
H1 Environmental cost allocation results in differential product costs,
h 0 Environmental cost allocation does not impact a difference in product
costs,
and tested at a Hypothesized mean difference as: H0: P = 0 (see table 8).
Analysis of Data
The overhead cost data were collected over a twelve month period, and
for clearer information, waste water cost was kept separately within over-
head. Table 1 presents the total monthly overhead from January to De-
cember 2007 (which includes waste water cost traceable to the Weavon
product) and the monthly allocation of overhead costs to products un-
der the traditional overhead allocation. According to the accountant the
allocation is based on volume of production per month. On average the
Weavon department has a lower volume of production; this accounts for
it having the lowest share of total overhead costs. Table 2 presents a sep-
arate picture of overhead and waste water costs, with waste water cost
separated from the overhead account. With this separation table 3 reap-
portions the other overhead costs (excluding the waste water cost) to the
four products based on the existing volume based allocation. In table 4,
the total waste cost of n 2,270,000 (from table 2) is added to its share of
other overheads n 760,000 (from table 3); thus a comparison is made be-
tween the overheads of the Weavon product before and after the revised
allocation, showing a difference of N1,937,000 (see table 4).
With the data collected on the direct material and direct labour cost of
the four products, an attempt is made to estimate the impact of the above
overhead reallocation on the production cost of the products. Table 5
shows production costs under the traditional overhead costs; it shows
that the Weavon department has the lowest cost of production despite
its responsibility for waste disposal cost - an indication that Weavon's
production cost is grossly understated. This case exemplifies the danger
inherent in placing environmental costs in the overhead. It also shows
that other products unduly receive a portion of waste costs that should
not ordinarily have formed part of their production cost. Further to this,
table 6 presents a different production cost using the overhead cost de-
rived from the revised overhead cost allocation. Apart from the Perfect
Finish product which has had high costs, the Weavon department's cost
table 1 Total overhead allocated to divisions on traditional cost allocations, based
on % volume of units produced (percentages indicate the proportion of units
produced monthly)
Month	Soap		Cream		Weavon		Perfect Finish		Total*
	(1)	(2)	(1)	(2)	(1)	(2)	(1)	(2)	
January	96	16	162	27	102	17	240	40	600
February	130	20	156	24	117	18	247	38	650
March	124	20	124	20	62	10	310	50	620
April	120	20	120	20	90	15	270	45	600
May	130	20	143	22	130	20	247	38	650
June	120	20	144	24	108	18	228	38	600
July	145	25	116	20	87	15	232	40	580
August	126	18	175	25	105	15	294	42	700
September	154	25	123	20	92	15	246	40	615
October	170	25	170	25	68	10	272	40	680
November	121	20	139	23	73	12	272	45	605
December	130	22	165	28	59	10	236	40	590
Total	1566		1737		1093		3094		7490
notes Column headings are as follows: (1) allocated overhead based on % volume
production, (2) % volume of production. * Total overheads including waste costs. Data
from wbc, January to December 2007.
table 2 Separation of waste water disposal cost from overhead account
	J	F	M	a	M	J	J	a	s	o	n	D	Total
(1)	180	200	210	190	220	180	160	180	180	200	210	160	2270
(2)	420	450	410	410	430	420	420	520	435	480	395	430	5220
notes Row headings are as follows: (1) waste water disposal costs (in n'ooo), (2) other
overheads (in n'ooo). Data from wbc, Januaryto December 2007.
of production increased more than the Soap and Cream products. Ta-
ble 6 shows the real cost of production if an objective allocation is used,
while table 7 presents a comparative table with percentages computed to
show the degree of difference in total production cost between the two
methods. The Weavon department shows a huge difference of 46 per-
cent. This informs the degree of distortion which traditional overhead
allocation could cause if used for certain environmental costs.
In order to substantiate the difference in costs arising from realloca-
tion, a t-test of paired two samples for means is presented in table 8. The
table 3 Revised overhead allocation: Other overheads reallocated based on %
volume of production
Month	Soap		Cream		Weavon		Perfect Finish		Total*
	(1)	(2)	(1)	(2)	(1)	(2)	(1)	(2)	
January	67	16	114	27	71	17	168	40	420
February	90	20	108	24	81	18	171	38	450
March	82	20	82	20	41	10	205	50	410
April	82	20	82	20	62	15	184	45	410
May	86	20	95	22	86	20	163	38	430
June	84	20	101	24	75	18	160	38	420
July	105	25	84	20	63	15	168	40	420
August	94	18	130	25	78	15	218	42	520
September	109	25	87	20	65	15	174	40	435
October	120	25	120	25	48	10	192	40	480
November	79	20	91	23	47	12	178	45	395
December	95	22	120	28	43	10	172	40	430
Total	1093		1214		760		2153		5220
notes Column headings are as follows: (1) allocated overhead based on % volume
production, (1) % volume of production. * Total overheads including waste costs. Com-
puted from tables 1 and 2.
test sought for a possible difference between the means of the separate
results. The case study hypothesis which is stated as: environmental cost
allocation does not impact a difference in product costs, is thus tested at a
hypothesised mean difference of zero: H0: P = 0 (see table 8).
Table 8 (left column) tests the mean difference for all the products.
The result shows that traditional overhead cost has a mean of 624, while
the revised overhead cost has a mean of 435, and therefore is significant
at a t-critical of 2.07, which is greater than the hypothesised mean dif-
ference of zero (h0: P = 0). Lastly, table 8 (right column) presents a
separate test of difference for means for the Weavon product. Overhead
costs from traditional allocation show a mean of 91, whereas the over-
head costs from the revised allocation show a mean of 252. This is also
significant at a t-value of 2, which is greater than the hypothesised mean
difference of zero (h0: P = 0). Thus the hypothesis that environmental
cost allocation results in differential product costs is accepted and confirms
earlier assertions by Crowther (2004); ifac (2005) and Bebbington et al.
(2001).
table 4 Comparative table of weavon product: Overhead under the traditional
allocation less overhead after revised cost allocation (allocated overhead +
waste water cost)
Month	Overhead under traditional allocation	Overhead after revised allocation (ao + wwc = Total)		Difference
January	102	71 +180 =	251	149
February	117	81 + 200 =	281	164
March	62	41 + 210 =	251	189
April	90	62 + 190 =	252	162
May	130	86 + 220 =	306	176
June	108	75 + 180 =	255	147
July	87	63 + 160 =	223	136
August	105	78 + 180 =	258	153
September	92	65 + 180 =	245	153
October	68	48 + 200 =	248	180
November	73	47 + 210 =	257	184
December	59	43 + 160 =	203	144
Totals	1093	760 + 2270 =	= 3030	1937
notes Calculated from tables 1, 2 and 3, where: ao - allocated overhead (from table
3), wwc - waste water cost (from table 2), difference = (total overhead after allocation)
- (overhead under traditional allocation).
table 5 Production costs from traditional overhead allocation, in Nigerian Naira
(N'000)
Costs	Soap	Cream	Weavon	Perfect Finish	Total
Direct material	2800	2500	2000	3000	10300
Direct labour	1000	1100	800	1150	4050
Overhead	1566	1737	1093	3094	7490
Total	5366	5337	3893	7244	21840
notes Data from wbc, January to December 2007.
Findings
production cost
Findings from this study show a heavy distortion in production cost if
waste disposal cost is allocated using the traditional overhead alloca-
tion method. This distortion arises due to the fact that waste cost, which
should have been allocated entirely to the Weavon Department, is rather
table 6 Production costs from Revised overhead, in Nigerian Naira (N'000)
Costs	Soap Cream	Weavon	Perfect Finish Total
Direct material	2800 2500	2000	3000 10300
Direct labour	1000 1100	800	1150 4050
Overhead	1093 1214	760	2153 5220
Waste water cost	— —	2270	— 2270
Total	4893 4814	5830	6303 21840
notes Data from wbc, January to December 2007.			
table 7 Comparative production costs under traditional and revised overhead allocations			
Product	Traditional	Revised	Difference
Soap	5366	4893	473 (8.8%)
Cream	5337	4814	523 (9.8%)
Weavon	3983	5830	1847(46%)
Perfect fit	7244	6304	940 (13%)
notes Computed from tables 6 and 7.
apportioned to all the products using a volume based system, hence the
production cost of the other three departments - Soap, Cream, and Per-
fect Finish - is inflated above normal. On the other hand the production
cost of the Weavon department is grossly underestimated because other
products have shared the waste cost due to it. The revised cost allocation
discloses the true cost of production through the allocation of waste cost
to the Weavon Department. The allocation of waste cost to the Weavon
Department and subsequent reallocation of other overheads caused the
production cost of the Weavon Department to increase while the produc-
tion cost of other departments decreased equitably. The t-test for means
between the two overhead results in the Weavon Department disclosed a
reasonable difference.
management decision
The result of this case study which was presented to the management of
Wonder Beauty Care Limited stimulated interesting environmental man-
agement decisions. The first important decision was the creation of a
separate account out of overhead accounts for waste water costs relating
to the Weavon department. This is a vital step since any environmen-
tal management decision must start with accurate tracking of the rel-
table 8 Test of hypothesis
H1 Environmental cost allocation results in a difference in product costs, m: P + o.
ho Environmental cost allocation does not affect product cost, ho: P = o.
This is a two - tailed test. From the table below, the t-critical is significant at above 2.0
which is greater than the hypothesized mean difference of zero: ho: P = o; hence H1:
P + 0 is correct and accepted. This substantiates the percentage analysis above, showing
that environmental cost allocation of waste cost causes a difference in the overhead costs
which impact a difference in product costs.
t-test of difference between the
means of traditional overhead
costs and revised overhead
costs for all the products
(data from tables 1 and 3)
t-test of difference between the
means of traditional overhead
costs and revised overhead
costs for Weavon only
(data from table 4)
Trad. oHc
Rev. oHc
Trad. oHc
Rev. oHc
Mean
Variance
Observations
Pooled variance
Hyp. mean diff.
df
t stat.
P(T < t) one-tail
t critical one-tail
P(T < t) two-tail
t critical two-tail
624.1666667
1412.878788
12
435.0833333
1181.901515
12
91.08333333
503.5378788
12
252.5
648.4545455
12
1297.390152
0
22
12.85859674
5.21359e-12
1.717144335
1.04272e-11
2.073873058
575.9962121
0
22
-16.47457372
3.66973e-14
1.717144335
7.33945e-14
2.073873058
notes Trad. oHc - traditional overhead costs; Rev. oHc - revised overhead costs.
evant costs. Management also decided to separate all environmental re-
lated costs from the overhead to enhance more objective and transparent
costing. In addition, management decided to decentralise all investments
and/or expenses relating to the environment to encourage accountabil-
ity and improved environmental performance evaluation, while at the
same time spurring departmental environmental initiatives and innova-
tion. Hence additional managerial autonomy, effort, and goal congru-
ence was put in place. These decisions contributed to stimulating efforts
by the manager of the Weavon department to acquire a water treatment
plant with potential for cost savings and improved revenue; including
a marketing synergy between the company and a nearby construction
company for the purchase of treated waste water.
This case suggests that proper environmental cost allocation results
in relevant environmental cost information which engenders environ-
mental management decisions. In addition, it points to potential bene-
fits in environmental investment. The resulting waste management deci-
sions also imply that the company would have a more friendly relation-
ship with its local community and the government, due to the pollution
control implicit in these innovative decisions. Hence the justification for
proper environmental cost allocation.
Conclusion
This paper examined the effect of environmental cost allocation on pro-
duction cost and the outcome for environmental management decisions.
The paper draws from a case study conducted in the Wonder Beauty
Care Company in Nigeria. Using a revised overhead cost allocation, a
contrast in overhead allocation between the traditional cost allocation
method and environmental cost allocation is established. This difference
is achieved by separating the waste water disposal cost and allocating it
directly to the Weavon department which is identified to be solely re-
sponsible for waste water cost. After this separation, the other products
are released from the waste water cost. This release of unrelated costs
caused a reduction in their allocated overheads. In contrast, the over-
head cost of the Weavon department increased. The paper evaluated the
effect of this difference on production cost, and findings show that the
production cost of the Weavon department is better reflected in the re-
vised waste cost allocation, whereas the production cost is grossly under-
stated in the traditional method. A paired sample t-test of difference is
used to ascertain if the difference in the overhead cost of the Weavon de-
partment resulting from the two methods is reasonable. Findings show a
reasonable difference in overhead costs under the traditional and revised
cost allocation. This implies that the traditional overhead allocation of
direct environmental costs is inappropriate and therefore demands at-
tention. This also points to the extent of cost information distortion in-
herent in the traditional overhead allocation method. The management
of wbc took vital environmental management decisions. It decided to
make a change in the costing system in order to enhance accurate track-
ing of environmental costs by keeping waste water costs separate from
overhead, and to account for all environmental related costs separately.
Management also decided to decentralise all environmental investments
and expenses in order to encourage environmental initiatives and inno-
vation. This finding indicates that environmental cost allocation would
enhance the supply of pertinent cost information needed for environ-
mental management decisions. The practical implication is that man-
agement is motivated to make environmental related decisions if the rel-
evant environmental cost is made to reflect in the production cost of the
polluting product; but wrong environmental cost allocation obscures rel-
evant cost information and stifles environmental management decisions
needed for corporate sustainability. There is therefore the need for firms
to fine-tune their environmental cost allocation system. The paper opens
an avenue for further research to examine the impact of costing systems
on environmental investment and corporate sustainability.
Acknowledgments
The author acknowledges the constructive comments received from the
Management Accounting Research Group Conference (marg), Aston
Business School Birmingham in November 2008, where the first version of
this paper was presented. The constructive comments of my two anony-
mous reviewers provided the very pillar from which this final version drew
support.
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