Investigating environmental issues involving the Polaroid Company


We, Giang, Brailovski, & Steinberg Consultants, have finalized this analytical report in order to properly examine the environmental issues at hand involving the Polaroid Company. This report examines Polaroid's current management of their environmental responsibilities and costs.

In order to properly address the situation, our consultants have analyzed Polaroid in an environmental setting and have investigated their current practices of TUWR and EARS. While our findings suggest that the company's current programs have drastically improved their environmental cost capabilities, we believe that they contain various flaws and have therefore determined that adjustments should be implemented. Our firm has come up with two alternatives in order to help Polaroid manage their environmental responsibilities and costs in a more productive manner. The suggested alternatives will allow for reduced pollution as well as lower overall costs, which will then lead to greater relationships with environment and government bodies. Additionally, our proposed alternatives may in fact lead to greater revenue for the company and the increased reliability of financial statement figures; these results can be accomplished through changes in Polaroid's current cost allocation methods.

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The first alternative that our firm suggests involves budgeting total pollution and environmental costs and then allocating them to individual firm divisions in order to provide a target pollution cap for managers. This pollution cap will be maintained through management targets, limiting total environmental pollution. This alternative completely changes the cost allocation methods currently performed by EARS.

The second alternative involves comparing the contribution margin of the division with the waste liability generated by its operations. From this comparison, the efficiency of the waste reduction program and the profitability of each division can be analyzed. This analysis can lead to the determination of whether to eliminate divisions that are using more Class I-IV chemical wastes if the costs of reducing waste are higher than the operating margin of the division.

Finally, assuming that the managing of costs will continue to grow and become a critical factor relating to business sustainability, our consultants have come up with important recommendations that will help Polaroid to perform under a more productive environmental approach. Our recommendations provide insight into why the first alternative is more practical for Polaroid and we also help to demonstrate how this alternative can be implemented immediately.

We hope that the report that follows aids you in making your decisions.


Current Situation Facing Polaroid

It is important to analyze the current situation facing businesses regarding environmental cost management before examining how Polaroid is and should behave in accordance. In the mid-1980s, the US started implementing a forced cleanup for companies who committed environmental damage and these costs would greatly impact the companies' liabilities. Today, in 1993, more and more traded companies are being identified as potentially responsible parties (PRPs) and the number is assumed to grow. Countries other than the US are now proposing regulations that allege that companies are responsible for consumer disposal of their products after use; this is referred to as the "take back" principle. In addition, ISO 9000 is a voluntary certification but is increasingly being demanded in Europe. The US is also doing their part in getting companies to remediate their hazardous waste and this responsibility has stemmed from the RCRA and the CERCLA. CERCLA is a US law that is very undefined as it can hold anyone responsible for the cleanup that can be of any size and any cost. The preceding procedures clearly indicate the growing importance of managing environmental costs as they can lead to serious long-term liabilities if not properly accounted for.

Polaroid has been named a PRP on several Superfund sites which will lead to cleanup costs in the tens of millions of dollars per site. Also, Polaroid is an international company therefore maybe having to comply with the take back principle in certain countries. It can be assumed that the US may take on similar measures as well therefore leading to Polaroid being liable to even more environmental costs. Since 1988, Polaroid has been consistently liable and has been advised by the EPA that they must help to recover multiple sites. It is clear that in order for Polaroid to reduce the liabilities that may arise, proper environmental responsibility and cost management are critical.

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Background of TUWR and EARS

In the past few years, Polaroid has been severely criticized by different organizations due to its production of substantial amounts of toxic wastes. In 1987, Polaroid was targeted by Greenpeace as being the worst toxic polluter of Boston Harbor. To counter this undesirable publicity, the company took a new approach in controlling its waste: Polaroid's managers began by setting the aggressive target of a 10% waste reduction per unit per year to counter waste liability and please the public opinion. This radical reduction was made possible by implementing the TUWR program that was managed by the Environmental Accounting and Reporting System (EARS).

How does TUWR help waste reduction?

The Toxic Use and Waste Reduction Program is a voluntary effort made by Polaroid to efficiently reduce waste generated by the production facilities. It is based on three premises: 1) reduce waste at source, rather than at the "end of pipe", 2) set a series of targets for waste reduction, and 3) maintain open communications with, and educate local communities and environmental groups.

This program is a great incentive for the company's division managers to reach important goals in reducing the pollution created by the company's production. Polaroid set a principal goal where the use of waste per unit of production has to be reduced at the source by 10% per year from 1988 and ending in 1993. It also added a corollary goal where it will emphasize the increase in recycling of some materials in the process of production.

How does EARS help waste reduction?

The Environmental Accounting and Reporting System supports the TUWR in its function of reducing waste, by dividing the waste use rate between five different categories of materials. This reporting system can categorize up to 1,700 chemicals of which Polaroid uses about 800 at any given time.

This program's functions help waste reduction by accurately measuring waste generated by the production. It measures the use of toxics and other sources of waste per unit of production. Therefore, EARS is able to accurately calculate the usage of waste without the data being distorted by fluctuation of the production. As was said earlier, the EARS system was created to drastically manage Polaroid's waste. For this reason, a corporate index was created to follow the improvement or degradation of the waste management. Polaroid uses the fiscal year of 1988 as the base year of the index and therefore all the subsequent years are compared to this one. For example, as the index of 1988 is 1.00 all the latter improvement of the waste reduction will be seen as a percentage of this index. If in 1992, the waste was reduced to 85 pound per unit, the index for 1992 will show 0.85 with a reduction of waste of 15%. To determine this performance, the system divides the amount of waste generated by the amount of production over the same period of time. This way, the per-unit waste generated can be easily followed and a reduction is therefore more accurately controlled.

Environmental Impacts Associated with the New Program

The TUWR has not only reduced toxic waste from Polaroid's operations, it has enabled cost savings through reduced material wastage, improved yields, and reduced spending on compliance. Indeed, the Toxic Use and Waste Reduction Divisional Indices for 1992 show a clear improvement in the reduction of waste. Compared to the base year of 1988 that shows an index of 1.00 the average of all divisions index for I-IV categories shows a 0.68 and the index for category V shows a 0.67. These averaged indexes clearly show that firm waste has diminished considerably since TUWR and EARS have been in place.

This improvement clearly affected the environment surrounding Polaroid's production points. In addition, TUWR is helping the company to determine where materials are used and where wastes are generated, how wastes are managed within the company, and what happens to waste that leaves the company. All these actions are leading Polaroid to meet its own expectations and also the new government policies.

Finally, based on the Worldwide Waste Management table of 1992, recycling at Polaroid improved considerably for Categories I-V, from 16.22% to 20.28%, and for Category V, from 0.82% to 1.86%. These recycling statistics are directly impacting the use of new material and are therefore helping the environment.

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How the Waste Materials are Used and Accounted for Within Polaroid's Current Management Accounting System

Polaroid produces management accounts on a divisional basis. These accounts contain the quantity of material used and the quantity of products that have been produced. Furthermore, the quantity of material used (waste generated) is divided by the output to find the EARS index mentioned above. These divisional indexes are taken together to create a more global index called, the Corporate Index. This index is calculated in the same way as the Divisional index where the wastes of categories I-IV for all divisions are divided by total output and category V of all divisions is divided by total output. To ensure that each division gets the proper share of its waste, a weighted average of waste used is calculated.

Suggested Changes to the Management Accounting System

The Limitations of EARS and TUWR

Despite of the benefits that TUWR and EARS bring to Polaroid, they also have their limitations. For example, these programs measure the level of toxic waste per unit of production, and aim to reduce pollution by reducing waste per unit. However, as Polaroid's unit sales increase, the overall level of toxic waste may still increase in spite of a decrease in per unit level of toxic waste. A higher overall level of toxic waste leads to higher overall environmental costs incurred by Polaroid on cleaning up costs, concurrently leading to a bad reputation amongst environment and government bodies. It also leads to a bad reputation amongst consumers, affecting the potential profitability of Polaroid. Furthermore, using TUWR does not allow a proper cost-allocation technique to environmental costs; leading to over-reliance on minimal cost estimation techniques. This gives an estimated but unnecessarily accurate measure of overall environmental costs for the firm's own management accounting uses as well as for financial reporting purposes. This leads to inefficiency in Polaroid's cost accounting measures, and inaccurately represented data on the firm's financial statements. This does not fulfill the IFRS and US GAAP criteria of having confirmatory value. This issue will be further addressed below, under Alternative 1: Budgeting and Allocation of Pollution and its Costs.

Additionally, we think that another measure could be taken in order to ensure the profitability of the company's individual divisions. By comparing the contribution margin of the division and the waste liability generated by its operations, we can analyze the efficiency of the waste reduction program and the profitability of each division. This alternative will be also presented later, under Alternative 2: Addition to the Current System.

Alternative 1: Budgeting and Allocation of Pollution and its Costs

To create more effective methods of cost accounting and to maintain low environmental costs and pollution, Polaroid could budget total units of production per division for each period (year/quarter), total percentage of environmental cost allocation per division, and budgeted total pollution output from the firm. From there, it can allocate levels of pollution and environmental costs per unit of good, while limiting overall pollution and environmental costs.

By budgeting total pollution output by the firm, Polaroid can keep a cap on its overall pollution per time period, limiting total environmental pollution. Then, using historical data and experience (in cleaning up), it can allocate overall environmental costs for the company based on its pollution levels. These environmental costs and total pollution levels can then be allocated to individual divisions based on percentage allocation method, whereby the divisions' allocated costs are based on total percentage of firm's waste produced by the division. The individual divisions can then calculate the divisional pollution index and environmental costs per unit output of the division. From here, the divisions have a target pollution level per unit, as well as an overall target pollution and environmental costs level. Managers can then monitor these target pollution levels by using the TUWR to track pollution levels per unit, maintaining them at desirable levels. Finally, adjustments can subsequently be made to over/under allocated costs, allowing fair representation on financial statements and for management.

This alternative is beneficial to Polaroid because budgeting overall pollution output and environmental costs keep both overall pollution and cost exposure to the company low. This allows Polaroid to maintain good relationships with the environmental and government bodies, and creating low overall costs will also allow it to reduce environmental costs in a midst of increasingly stringent legislations. Furthermore, allocating divisional pollution indexes and environmental cost budgets to divisional managers gives them a target to work towards in keeping pollution levels low. This provides them with more motivation and freedom to think about generating higher revenues. As a result, the firm productivity would be higher. Additionally, Polaroid's presently contradictory credit system of rewarding high credits for both pollution reduction and profit generation could be eliminated, as managers are now given target pollution levels, and can more easily focus on revenue generation. This presents benefits to both Polaroid and its employees.

Simultaneously, by allocating costs using budgeted environmental costs, Polaroid has a clearer framework in accounting for costs. These costs are budgeted based on historical data and experience, and could be adjusted for over/under allocation. This allows for good cost accounting measures, providing a more accurate level of environmental costs accounted for. Subsequently, this allows Polaroid's management to not only manage its costs appropriately, but also to have reliable financial/statistical data to support its arguments with environmental agencies and other PRPs when allocating overall cleaning up costs of polluted grounds. This serves to lower Polaroid's costs over the foreseeable future. Not to forget, it also allows for more precise financial reporting standards; providing an accurate liability reporting on the financial statements, and keeping with IFRS and US GAAP's principle of providing verifiable and confirmatory values.

Alternative 2: Additions to the Current System

For Polaroid to reduce its overall negative environmental impact, it could also implement an alternative technique: the company can eliminate divisions that are using more Class I-IV chemical wastes if the costs of reducing waste are higher than the operating margin of the division. In this case, the TUWR is still used to calculate pollution costs per unit of output, which will then be used to obtain overall environmental costs per division. The rationale for such a method is that the amount of toxic waste and the costs needed to remove it are directly related to each other. Hence, if the costs of reducing waste are significantly higher than the operating margin of the division, this represents significantly high levels of toxic waste. Using operating margin as a benchmark can thus serve as a guideline to toxic waste management. In addition to maintaining low levels of pollution/toxic waste, it also raises long-term profitability of Polaroid. Therefore, this alternative allows Polaroid to maintain low environmental costs, create a potentially good rapport with environmental and government bodies, and increase company profitability.

On the other side, in larger divisions, the cost of reducing waste may be smaller than operating profit. However, its overall toxic waste levels and costs of reducing may still be substantial. This leads to high levels of environmental pollution caused by Polaroid, simultaneously causing high environmental costs for the firm. In addition, eliminating these corporate divisions may lead to removal of potentially profitable divisions of the firm that may yield high profits if environmental costs are better managed by other means. It also does not create accurate methods of accounting for environmental costs.

This addition has to be analyzed in depth by the accountants of the company before any implementation actions are taken.


While our findings suggest that Polaroid's current programs of TUWR and EARS have drastically improved their environmental cost capabilities, we believe that they contain various limitations and have therefore determined that adjustments should be implemented. While the TUWR program is proving to be very successful and encompasses the new environmental values of the company, EARS has some issues concerning its allocation of the waste liability per product.

Consequently, in order to better reduce overall pollution levels and ensure good accounting practices and firm profitability, two alternatives should be considered. Firstly, total pollution and environmental costs can be budgeted, and then allocated to individual firm divisions to provide a target pollution cap for managers. Alternatively, divisions with higher costs of reducing waste than the operating margin of the division could be eliminated. In Polaroid's case, the best solution is to apply the first alternative of budgeting pollution and environmental costs, then allocating it to the divisions. This is because this method is optimal in managing the firms' environmental costs; lowering overall pollution and total costs incurred to the firm. It also allows for best cost accounting and financial reporting measures, and establishes a good reputation for the firm. Additionally, it is a highly feasible, low cost method, which ensures low environmental costs for Polaroid despite changing legislations.

In order implement this new system immediately, Polaroid should first engage in regression and variance analysis on its product demand to forecast firm output. The company should then budget a limit on total pollution waste for the upcoming years and then allocate pollution levels and costs using a target divisional pollution index for individual divisions. Finally, it can then inform employees of the change in system, highlighting the change in the role of TUWR in tracking pollution levels. Implementing this measure correctly is crucial, and will provide Polaroid with unprecedented benefits.