Justifying Environmental Cost Allocation in a Multiple Product Firm: A Case Study

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 management 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 corporate 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 impact of costing systems on environmental investments.