The FUNdamentals of Full Cost Accounting

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1 The FUNdamentals of Full Cost Accounting Featuring your friend and mine, that financial whiz of waste Alan Green shade! Test your skill on the Total Your Trash Quiz! and Don t miss the harrowing saga taking place at the Yourtown Landfill

2 The Fun Starts Here! Hi! We re from the Florida Department of Environmental Protection (DEP), and we re here to help you. Yes, really, please read on! We at DEP have resolved to do all we can to explain full cost accounting to local government solid waste managers. As a first step, this booklet will help explain the objectives and benefits of using full cost accounting for your solid waste collection, recycling, and disposal operations. Full cost accounting is a systematic approach for identifying, summing, and reporting the costs incurred to provide solid waste management services to a community. In addition to obvious and direct costs, full cost accounting aims to include hidden as well as overhead costs involved in solid waste management programs. Find out how your system scores when you Total Your Trash! Use the score sheets throughout the booklet to note the costs you consider to be part of the full cost of solid waste management in your community - and identify the ones you might have overlooked! Simply check off the costs you currently include and add them up for each quiz, giving yourself one point per item. Although we can t promise hours of unparalleled delight, we at least hope to convince you that full cost accounting will so greatly benefit you and your community that you will give it a try. What benefits, you ask? Well, there are many. Full cost accounting leads to more efficient management of costs and resources, and it gives you ammunition 1

3 for those political battles that seem to come with the territory of managing solid waste programs. Using full cost accounting data provided by local governments throughout the state, DEP will prepare and issue an annual comprehensive report. Using the report, you will see what other communities pay for solid waste management - and maybe pickup some tips on how to cut costs. While there is no guarantee that one local government will reduce its costs by adapting the strategies used in another community, the use of full cost accounting can provide useful information for solid waste managers and their communities to support sound management and planning. Local governments will not be ranked, and the report will not be a report card on how communities run their solid waste management systems. Like you, we realize that cost is one of many factors that determine the effectiveness of a solid waste management system, and that one system can t be considered better or worse than another simply because one community has higher costs than another. 2 The Total Your Trash Quiz in the pages of this booklet will help you evaluate your current knowledge of full cost accounting and assist you in identifying costs you might have overlooked in determining the full cost of solid waste management. We realize that not all the items listed will apply to every local government. Give the quiz a try anyway and relate the items listed to the solid waste management services you provide. Quiz 1 Up-Front Costs The initial investments and expenses necessary to manage solid waste. Check off the costs you include in calculating the up-front costs of solid waste management. Planning Land Acquisition Permitting Building Construction and Modification (4) Your Total Items Included for Up-Front Costs

4 What Is Full Cost Accounting? First of all, relax - full cost accounting is not rocket science. It s really just the application of basic cost accounting principles that can be highly beneficial to you as a solid waste manager. Full cost accounting provides you with a valuable tool for understanding and reporting your community s solid waste management costs. For a variety of reasons, most communities and their citizens do not know the real cost of managing solid waste, making it more difficult to reach good decisions about solid waste management options. Full cost accounting is not the same as cash flow or general fund accounting, which is the most common method of government accounting used today. In this system, outlays are recorded when cash is actually paid out for goods and services. However, for activities such as solid waste management, which often are funded through user fees based on cost, cash flow accounting gives a distorted picture of actual costs. As you are probably aware, not all solid waste management costs result from current outlays of funds - past and future capital outlays also contribute significantly to the overall cost of managing solid waste in your community. Cash flow accounting systems do not include up-front or back-end costs, such as those for land acquisition and long-term care. Those systems also do not take into account hidden costs, such as those for resources donated for recycling programs that do not result in cash outlays. All local governments can implement full cost accounting, regardless of how they structure their programs and keep their books. Full cost accounting uses generally accepted accounting principles to quantify all direct and indirect costs, as well as hidden costs. 3

5 Even when efforts are made to identify the costs of managing solid wastes, it is easy to overlook costs that are lumped into overhead or indirect accounts and should be recognized as direct costs. Some costs that often are not included in establishing a rate structure for solid waste fees are land acquisition costs, planning Operating Costs The everyday expenses of managing solid waste. Check off those operating costs you include in calculating the full cost of solid waste management. Personnel Wages, Salaries, and Benefits Building and Vehicle Maintenance Supplies Insurance Power and Fuel Rent and Leases Contract Services (including the cost of negotiating and administering contracts) Depreciation Debt Service Public Education and Outreach Quiz 2 Unexpected Costs (such as providing bottled water to citizens whose wells are found to be contaminated from landfill leachate) Indirect or Overhead Costs ((such as services provided by other departments or time on solid waste issues spent by the mayor, county administrator, and other elected officials) Hidden Costs (such as donated supplies or services) - (13) Your Total Items Included for Operating Costs 4

6 and permitting expenses, costs of closure and long-term care, the cost of support services provided by other local government departments, costs for negotiating and administering contracts, and an array of social and environmental costs that can be difficult to quantify. Full cost accounting also allows you to spread (depreciate of amortize) significant capital outlays over the active life of the facility. It is important to recoup those costs from tipping fees while the facility is open. Back-End Costs Quiz 3 The expenses of properly closing down solid waste management facilities at the end of their useful lives, as well as the costs of post-employment health and retirement benefits for current solid waste employees. Because cash outlays for backend costs are not made until after the useful life of the facility has ended, those costs are said to be accruing during the active life of the facility. Site closure Building and Equipment Decommissioning Long-Term Care - Retirement and Health Benefits for Employees (4) Your Total Items Included for Back-End Costs 5

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8 Why Should You Implement Full Cost Accounting? A lthough it should not be your primary reason for implementing full cost accounting, the law in Florida requires that you determine and report full costs. In 1989, the Florida Legislature passed a law that requires local governments to report to the state and to the citizens in your community the full cost of solid waste management operations. Remediation Costs at Inactive Sites Quiz 4 The current cost of cleaning up contamination of soil, groundwater, and surface water caused by inactive facilities such as closed landfills. Investigation, Containment, and Cleanup of Known Releases - Closure and Long-Term Care at Inactive Sites (2) Your Total Items Included for Remediation Costs at Inactive Sites 8

9 A more compelling reason is self-defense. Garbage, as you are probably aware from personal experience, can be a highly political issue. Many state and local officials can attest to intense citizen interest in municipal solid waste management. Full cost accounting can help you make your case to the citizens and elected officials by providing you with sound, objective financial data to backup your decisions and recommendations. Determining what solid waste management really costs can help you. Accommodate the peaks and valleys in cash expenditures Explain costs to citizens more clearly Adopt a more businesslike approach to managing solid waste Develop a stronger position in negotiating with vendors Determine an appropriate mix of solid waste services Compare your costs with those of other communities Fine-tune your programs to increase cost-effectiveness Develop a sound system of user fees and charges to recover all the costs of managing solid waste Contingent Costs Future remediation and liability costs that may or may not be incurred. (Insurance premiums sometimes can be substituted for liability estimates.) Remediation Costs (undiscovered or future releases of contaminants to the environment) Liability Costs (property damage, personal injury, or damage to natural resources) Quiz 5 - (2) Your Total Items Included for Contingent Costs 9

10 Total Your Trash - Extra Credit Quizzes I t is difficult to quantify environmental and social costs. Currently, there is no widely accepted methodology for calculating those costs. However, if you are somehow factoring them in, check off the appropriate categories for extra credit. Extra Credit Quiz 1 Environmental Costs Environmental costs include the costs of the resources used, pollution created, and waste generated in providing solid waste management services. Upstream and downstream environmental effects commonly are termed externalities by economists. For example, the manufacture and transport of solid waste management equipment and vehicles can entail upstream environmental effects before such equipment is used, such as depletion of nonrenewable mineral resources, air and water pollution, and generation of waste. - Environmental Degradation Upstream Effects Downstream Effects (3) Your Total Items Included for Environmental Costs FOR ROCKET SCIENTISTS ONLY! Extra Credit Quiz 2 Social Costs Social costs include the adverse effects of solid waste management operations on people, their property, and their welfare that cannot be compensated through the legal system. For example, limitation of future land use, noise, odor, and traffic. Further, environmental justice issues can arise if such burdens fall disproportionately on certain social groups. - Effects on Property Values Image of the Community Aesthetic Effects Quality of Life (4) Your Total Items Included for Social Costs 10

11 Total Your Trash... The Final Score Quiz 1: Up-Front Costs Quiz 2: Operating Costs Quiz 3: Back-End Costs Quiz 4: Remediation Costs at Inactive Sites Quiz 5: Contingent Costs Extra Credit Quiz 1: Environmental Costs Extra Credit Quiz 2: Social Costs Total (possible high score, 32) Review the quizzes to find out how you can improve your score by including the missing cost elements in your full cost accounting system. Rank your score on the Greenshade Scale of Fiscal Responsibility! 11

12 Getting Started Congratulations! By reading this booklet and taking the full cost accounting quiz, you have already started. Take the next step by ordering a copy of Florida s user-friendly Full Cost Accounting Workbook for your accounting staff. Make sure your financial folks add any cost areas that you were unable to check off on the quiz. By taking the quiz, you may have discovered that you already are the Alan Greenshade of Garbage and currently track most of your costs. For you, implementing full cost accounting will be a snap and probably will require only minor adjustments to your current cost accounting system. On the other hand, you may have found that you really can t identify several of your solid waste management costs; some important factors are being left out of your calculations. The workbook will, however, show you how to calculate those costs and build them into an integrated full cost accounting system. Although using full cost accounting actually is pretty easy, some effort may be required to establish the procedures for collecting and quantifying the cost data you will need. However, the payback on this investment is a more cost-effective and efficient waste management system. By calculating the amount you actually spend each year to manage solid waste, you will be able to establish an appropriate fee structure to recover the full cost of managing solid waste during the active life of your facility. And, once you ve gone through the process of identifying data sources and developing a reporting procedure, preparing next year s full cost accounting report will be a breeze! 12

13 For Even More Fun... To obtain a copy of Florida s new Full Cost Accounting Workbook, please clip the order form below and mail to DEP. YES! Please send me a copy of Florida s new Full Cost Accounting Workbook Name: Title: Organization: Address: Phone No: ( ) Mail to: Florida Department of Environmental Protection Full Cost Accounting Program Solid Waste Section MS Blair Stone Rd. Tallahassee, FL Prepared in cooperation with: Florida Associations of Counties Florida League of Cities Recycle Florida Today SWANA Florida Sunshine Chapter