True Product Costing-A True Economic Opportunity

Updated: Feb 13, 2020

What is true product cost? And can it create opportunities for our businesses, our communities and our planet?

Cost of product often equals to the cost of ingredients+ labour+ energy+ a portion of the fixed costs like administration and buildings. However this cost is not a “true” cost. A true product cost is when companies also calculate for the environmental and health damages created during the mining, production and disposal processes.

Currently, we-the taxpayer pick up this bill. And although it might sound strange, making the “true product costing” come true might actually be a huge economic and environmental opportunity for all of us.

In this article we consulted Prof. Sankar Sivarajah, who teaches students like me in the world’s first and only MBA focused on the Circular Economy at the School of Management, University of Bradford, UK. Circular Economy looks at how we can live better, utilising our resources more efficiently to benefit us, our environment and our economies. Let’s take the plastic industry as an example.

In General, companies look after shareholders, and shareholders are after profitability. For any plastic manufacturer in NZ, virgin raw materials are cheaper than recycled raw materials. Therefore most of the factories are using raw virgin materials. If they would use recycled material they would right now be at a cost disadvantage. It is hard to go first to recycled plastics with the potential consequences of loss of market share and investors.

But if the government actualise true product costing, then the situation would be different. All of the sudden using recycled materials is more interesting, as it would be a cost advantage for the shareholders. Then recycling would be actively pursued. Less natural resources would be used and less waste would be created.

We have summarised 4 opportunities that actualising true product costing would bring as below.

1. Opportunity for our economy to grow

True product costing adds the CO2 emissions occurred during transportation in its formula. Once it is put into practice, companies would need to reconsider importing products or setting up manufacture factories in a foreign country. This would encourage local companies and local manufactures to grow.

Companies would put a new focus on recycling technologies in order to reduce true product costing. As a result, there would be more companies entering the recycling market. This would in turn lower prices for recycling technologies and bring technical advancement for it too.

Banks release fundings to companies based on risk assessment. True product costing would make recycling business a necessity instead of a novelty. The risk would be reduced and companies would be able to access funding easier. This would allow more recycling companies to enter the market and develop new recycling technologies.

More companies in the market would also create more jobs in NZ. More jobs will lead to higher household incomes.

True product costing would have a positive effect on our environment. A green and clean New Zealand is vital to us for our tourism industry. As stated in Statistics New Zealand 2018, tourism in NZ contributed directly 6.1% of GDP in 2018 and a further 4.3% of GDP in supporting industries (1).

Implementing true product cost pricing would make many industries reconsider the relationship between waste and raw materials. This would assist the economy becoming more circular. A circular economy is estimated to bring a gain of NZ$8.8 Billion until 2030 in Auckland alone (2).