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Cost Accounting- Environmental Costs

*Please Note* All information is given. All sub-questions are given. Please start with answering a.

If you wish to help me with b, Exibit 3 is provided below.

9. Jay Thomas runs an automobile service station. The station is housed in facilities leased for $5,800 per month which includes rent on equipment and service bays used for oil changes, tire changes, and weather checks. Approximately 25% of the rent is attributable to service bays and 75% is to gasoline sales. Jay employs 6 employees who are paid on average $8 per hour. Jay realizes that many hazardous substances are handled on a daily basis in his station. He would like to determine the environmental cost associated with each type of service. He needs to know whether his charges are sufficient to cover those environmental costs, or whether the cost is such that the service should be discontinued. Jay has analyzed each ser- vice he provides and assembled the following information. Oil Changes. A complete oil change generally takes a half an hour to perform. For each vehicle, the filter must be replaced, and the old oil drained and placed in a waste oil storage tank. Jay's cost for new filters averages $1.35 each. Most vehicles require 5 quarts of oil at $0.50 per quart. In addition, the oil storage tank, purchased at a cost of $3,500, holds 400 gallons of used oil. Each oil change adds 1.25 gallons of fluid to the tank. Jay estimates that the use of the oil storage tank costs $0.10 per oil change. A local waste hauler empties and disposes of the oil in the tank at a charge of $10 per month. About 10 minutes of each oil change is spent complying with EPA guidelines for oil and filter disposal. The EPA requires Jay to charge and show on the sales ticket) a $1.50 fee for oil and filter disposal. In the past Jay has shown this on the sales ticket, but has discounted his charge an equal amount. This practice is commonly followed by his competitors. Tire Installation. It takes approximately one hour to install 4 new tires. Normally, Jay sells and installs 30 sets of new tires per month. Old tires are placed in a designated area for scrap tires. This area occupies 1/10 of the work bay area. Removal of scrap tires must be done by a registered disposer of scrap tires, who charges $1.00 per tire. Jay passes this cost to his customers. Weather Checks. In the spring, air conditioning and coolant checks become a staple part of Jay's business. A weather check requires 1.5 hours to complete. Freon and coolants, drained during weather checks, are both considered hazardous substances. However, Jay is able to recycle these substances through individual filtration systems. The filtration sys- tems were purchased for a cost of $3,850 each. Jay estimates that the cost of these systems is $1.50 per weather check. The filters in the coolant tank must be replaced once a month; this costs Jay $30. The freon system stores freon until the tank is full and then compresses the freon to remove excess water. This drying process reduces the liquid by 50%. Jay performs the drying process 5 times per year. Each drying uses 2 filters which cost $15 each. The recy- Measuring and Managing Environmental Costs cled freon is stored in another container and used to fill vehicles as needed. The storage tanks for coolants and freon occupy 5% of the work bay areas. Other Training and certification for the handling of hazardous substances is required for all new employees. This is generally accomplished in a 6-hour course offered locally by a national automotive chain. Cost for the course is $100. Jay has an employee turnover rate that requires him to hire around 6 new employees each year. Usually 4 of these have previ- ous experience and certification and do not require the EPA training. Additional information about Jay's sales is provided below. Budgeted Revenue Oil changes320 per month @ $12.95 $4,144.00 Tire changes30 per month @ $19.95 598.50 Tire sales 10,350.00 Weather checks15 per month @ 44.95 674.25 Gasoline sales and other services 12,450.00 Total revenues $28,216.75 Required: a. Compute the total cost per month for each type of service: oil changes, tire changes and weather checks. b. Develop an environmental cost analysis similar to Exhibit 3 of the module classifying the costs from requirement (a) as environmental or nonenvironmental. c. Calculate the amount Jay spends for prevention, assessment, control and failure costs. d. Are there any services Jay should consider discontinuing? Exhibit 3 Prestige Paints Inc.-Purchasing Department Activity Analysis 1. The department employs 8 purchasing agents with average salary and benefits of $30,000 each, and a manager with a salary and benefits of $48,000. 2. The department requires 20 hours of training per agent each year in hazardous materials record-keeping procedures. 3. One of the 8 agents, with an annual salary of $30,000, spends half of her time interacting with warehouse personnel to advise and document appropriate handling of hazardous materials upon receipt. The rest of her time is spent processing purchase orders. 4. The department is expected to place 4,000 purchase orders this year. 5. Hazardous materials require 30 steps in the approval process prior to purchase; nonhazardous require 5 steps. Last year 40% of all purchased items were hazardous. This year's percentage is expected to be similar. (The total number of steps in the approval process will be used to assign salaries of agents to hazardous and nonhazardous materials.) 6. The manager of the purchasing department estimates that 25% of his time is spent in interacting with risk-management personnel, studying regulations and solving problems workers encounter in purchasing hazardous materials. 7. The company paid a $20,000 fine last year because a hazardous material was stored in an improper container by the purchasing department. 8. Purchases of hazardous materials require approximately the same supplies and materials as do nonhazardous materials. (Actually, it was a little more, but the accountant did not feel the difference was worth tracking.) 9. Facilities costs will be assigned to hazardous materials based on the percent of salaries associated with handling hazardous materials. 10. During the past year the purchasing department hired an outside R&D consultant to study ways in which environmentally benign materials could replace hazardous materials. The study cost $15,000. 11. The plant operates on average 40 hours per week and 50 weeks per year or 2,000 hours per year. 9. Jay Thomas runs an automobile service station. The station is housed in facilities leased for $5,800 per month which includes rent on equipment and service bays used for oil changes, tire changes, and weather checks. Approximately 25% of the rent is attributable to service bays and 75% is to gasoline sales. Jay employs 6 employees who are paid on average $8 per hour. Jay realizes that many hazardous substances are handled on a daily basis in his station. He would like to determine the environmental cost associated with each type of service. He needs to know whether his charges are sufficient to cover those environmental costs, or whether the cost is such that the service should be discontinued. Jay has analyzed each ser- vice he provides and assembled the following information. Oil Changes. A complete oil change generally takes a half an hour to perform. For each vehicle, the filter must be replaced, and the old oil drained and placed in a waste oil storage tank. Jay's cost for new filters averages $1.35 each. Most vehicles require 5 quarts of oil at $0.50 per quart. In addition, the oil storage tank, purchased at a cost of $3,500, holds 400 gallons of used oil. Each oil change adds 1.25 gallons of fluid to the tank. Jay estimates that the use of the oil storage tank costs $0.10 per oil change. A local waste hauler empties and disposes of the oil in the tank at a charge of $10 per month. About 10 minutes of each oil change is spent complying with EPA guidelines for oil and filter disposal. The EPA requires Jay to charge and show on the sales ticket) a $1.50 fee for oil and filter disposal. In the past Jay has shown this on the sales ticket, but has discounted his charge an equal amount. This practice is commonly followed by his competitors. Tire Installation. It takes approximately one hour to install 4 new tires. Normally, Jay sells and installs 30 sets of new tires per month. Old tires are placed in a designated area for scrap tires. This area occupies 1/10 of the work bay area. Removal of scrap tires must be done by a registered disposer of scrap tires, who charges $1.00 per tire. Jay passes this cost to his customers. Weather Checks. In the spring, air conditioning and coolant checks become a staple part of Jay's business. A weather check requires 1.5 hours to complete. Freon and coolants, drained during weather checks, are both considered hazardous substances. However, Jay is able to recycle these substances through individual filtration systems. The filtration sys- tems were purchased for a cost of $3,850 each. Jay estimates that the cost of these systems is $1.50 per weather check. The filters in the coolant tank must be replaced once a month; this costs Jay $30. The freon system stores freon until the tank is full and then compresses the freon to remove excess water. This drying process reduces the liquid by 50%. Jay performs the drying process 5 times per year. Each drying uses 2 filters which cost $15 each. The recy- Measuring and Managing Environmental Costs cled freon is stored in another container and used to fill vehicles as needed. The storage tanks for coolants and freon occupy 5% of the work bay areas. Other Training and certification for the handling of hazardous substances is required for all new employees. This is generally accomplished in a 6-hour course offered locally by a national automotive chain. Cost for the course is $100. Jay has an employee turnover rate that requires him to hire around 6 new employees each year. Usually 4 of these have previ- ous experience and certification and do not require the EPA training. Additional information about Jay's sales is provided below. Budgeted Revenue Oil changes320 per month @ $12.95 $4,144.00 Tire changes30 per month @ $19.95 598.50 Tire sales 10,350.00 Weather checks15 per month @ 44.95 674.25 Gasoline sales and other services 12,450.00 Total revenues $28,216.75 Required: a. Compute the total cost per month for each type of service: oil changes, tire changes and weather checks. b. Develop an environmental cost analysis similar to Exhibit 3 of the module classifying the costs from requirement (a) as environmental or nonenvironmental. c. Calculate the amount Jay spends for prevention, assessment, control and failure costs. d. Are there any services Jay should consider discontinuing? Exhibit 3 Prestige Paints Inc.-Purchasing Department Activity Analysis 1. The department employs 8 purchasing agents with average salary and benefits of $30,000 each, and a manager with a salary and benefits of $48,000. 2. The department requires 20 hours of training per agent each year in hazardous materials record-keeping procedures. 3. One of the 8 agents, with an annual salary of $30,000, spends half of her time interacting with warehouse personnel to advise and document appropriate handling of hazardous materials upon receipt. The rest of her time is spent processing purchase orders. 4. The department is expected to place 4,000 purchase orders this year. 5. Hazardous materials require 30 steps in the approval process prior to purchase; nonhazardous require 5 steps. Last year 40% of all purchased items were hazardous. This year's percentage is expected to be similar. (The total number of steps in the approval process will be used to assign salaries of agents to hazardous and nonhazardous materials.) 6. The manager of the purchasing department estimates that 25% of his time is spent in interacting with risk-management personnel, studying regulations and solving problems workers encounter in purchasing hazardous materials. 7. The company paid a $20,000 fine last year because a hazardous material was stored in an improper container by the purchasing department. 8. Purchases of hazardous materials require approximately the same supplies and materials as do nonhazardous materials. (Actually, it was a little more, but the accountant did not feel the difference was worth tracking.) 9. Facilities costs will be assigned to hazardous materials based on the percent of salaries associated with handling hazardous materials. 10. During the past year the purchasing department hired an outside R&D consultant to study ways in which environmentally benign materials could replace hazardous materials. The study cost $15,000. 11. The plant operates on average 40 hours per week and 50 weeks per year or 2,000 hours per year

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