Question

Verde Company reported operating costs of $40,000,000 as of December 31, 20x5, with the following environmental costs:

Testing for contamination	$ 440,000
Inspecting products	760,000
Treating toxic waste	1,600,000
Obtaining ISO 14001 certification	880,000
Designing processes	720,000
Cleaning up oil spills	2,880,000
Maintaining pollution equipment	1,080,000
Cleaning up contaminated soil	4,120,000

Required:

1. Prepare an environmental cost report, classifying costs by quality category and expressing each as a percentage of total operating costs. Round percentages to two decimal places, if rounding is required. For example, 5.79% would be entered as "5.79".

Verde Company
Environmental Cost Report
For the Year Ended December 31, 20x5
	Environmental Cost	Total Environmental Cost	Percentage of Operating Costs
Prevention costs:
	$
		$	%
Detection costs:
	$
			%
Internal failure costs:
	$
			%
External failure costs:
	$
			%
Total quality costs		$	%

2. What if Verde deliberately did not include the cost of damaging the ecosystem because of solid waste disposal in its environmental cost report? What is the most likely reason?

Answer 1

	Environmental Cost ($) (A)	Total Environmental Cost (B)	Percentage of Operating Costs (B / 40,000,000)
Prevention costs:
Designing processes	720,000
		720,000	1.80
Detection costs:
Testing for contamination	440,000
Inspecting products	760,000
Obtaining ISO 14001 certification	880,000
Maintaining pollution equipment	1,080,000
		3,160,000	7.90
Internal failure costs:
Treating toxic waste	1,600,000
		1,600,000	4.00
External failure costs:
Cleaning up oil spills	2,880,000
Cleaning up contaminated soil	4,120,000
		7,000,000	17.50
Total quality costs	12,480,000	12,480,000

2. Not including the cost of solid waste disposal will reduce the amount of internal failure costs, thereby reducing the total environmental costs. It will also reduce the percentage of the environmental cost to total operating costs. But then this will lead to an incorrect environmental cost report, which may lead to penal consequences in the hands of the company (Verde).