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True Product Costing-A True Economic Opportunity

Updated: Feb 13



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).



2. Opportunity for our environment to be protected

True product costing holds companies accountable for environmental impact. In order to cut down cost, companies would likely recycle more old products or use more sustainable materials. This would not only cut down on landfills, reduce pollution, but also protect natural resource and natural habitats.


3. Opportunity for our communities to thrive

True product costing also holds companies responsible for health damages they created. By putting true product costing in practice, companies and industries would more likely implement policies and procedures to ensure workers’ health and safety.

A high employment rate with low health related issues increases tax take and reduces expenses of our government. This would in turn benefit the communities as the government would be able to fund more public projects or give tax breaks to people in need.

4. Opportunity for our kids and theirs to live and play

Implementing true product costing would assist in creating a more sustainable way of living. This means that our children and theirs would have the resource as we do, not just for work but also for play. More local businesses will also increase their future career opportunities. Let’s give them that opportunity.



Other points that need to be investigated:

  • What about importing companies?

The environmental costs are not everywhere the same. In our opinion, every importer that cannot conclusively prove his use of recycled materials would also incur the same costs as a local manufacturer. In addiction to that, the true product costing for importers should also include the CO2 emissions for transport their product to NZ.

  • But what if even after calculating in true product cost for importers, imported goods are still cheaper?

The goal of true product costing is not to isolate us from other countries. Different countries have different economies and strengths and deliver important products for our societies. What is highly likely though, is that our local manufacturers will have a bigger incentive to use recycled raw materials instead of virgin raw materials. This will likely be sourced locally.

  • Where would we get the numbers for the environmental and health impact from?

Many of the environmental and health damage costs are already known as we’re already paying for them. However some cost would require an estimation. For example, the potential damage a newly opened mine might have.

  • Will implement true product costing not add lots of bureaucracy?

We would not think so. Part of the staff would come from existing staff, those who are currently monitoring waterways and soil. O n top of that, technology automation should be actively investigated.

  • And what with products that are having a positive environmental impact?

A potential solution would be for these companies to take the true product cost and subtract the value of the positive environmental /health impact they create. Though ways to calculate the value of the positive impact would need to be explored.

Conclusion

Implementing true product costing could create opportunities for our economy to grow; our environment to be protected; our communities to thrive and our children to live and play well. It also assists in building circular economy for our society.

True product costing is not about penalising anyone. True product costing is about everyone having a fair go. Everyone paying for damage created and everyone being rewarded for creating positive impacts.

Let’s make product costing TRUE.

To get in touch with our authors click the links below:

Michael Sauter, Managing Director of Circular Project

Prof. Sankar Sivarajah, Head of School of Management, University of Bradford, UK





REFERENCES:


1. Statistics New Zealand;

2. Tourism Satellite Account 20182. Sustainable Business Network NZ, Circular Economy Accelerator;

3. ‘The circular economy opportunity for Auckland’; accessed 01.01.2020; https://www.circulareconomy.org.nz/aucklands-circular-economy-opportunity

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