Using Material Flow Cost Accounting for reducing Carbon Footprints produced by Companies

CO2 emissions, as one of the leading causes of Climate Change, have become a relevant topic for businesses, as sustainable development has become an increasingly important issue for companies today. Therefore, firms must prioritize effective environmental management and deal with society’s growing interest in corporate environmental impact. 

What is Material Flow Cost Accounting?

Material Flow Cost Accounting is a method that helps to identify opportunities to improve material consumption. The MFCA plays an essential role in every business as it calculates the material used or wasted during the process of production. It helps the companies in achieving potential growth along the sustainable goals. MFCA has been deduced as very helpful in increasing the revenues for a company and improving decision-making by calculating the efficiency levels for them.

The Material Flow Cost Accounting approach being a part of Environmental Management Assessment, not only supports promotion accounting systems that target a low-carbon economy but also provides transparency and information for making decisions about the environmental impacts of the company and offers several other benefits like better coordination and communication regarding energy usage in the organization.

This model can also be used to ensure sustainability as it is a tool that traces and quantifies the stocks and flows of materials within a particular organization in physical units, as well as in terms of the associated costs. The primary function of MFCA is to join physical and monetary data. It measures material consumption, waste output, and energy.

What distinguishes MFCA from other cost accounting methods?

What distinguishes MFCA from other cost accounting methods is how it allocates cost to the “Intended Output,” the product, and the “Unintended Output,” which is the waste produced during production processes. This makes the material costs highly transparent, and the mishaps in energy and material costing are disclosed. Are traditional accounting methods still better than MFCA? Let’s look into real business to see that!

As part of the farming sector, the wine industry has a tight relationship with the environment; the carbon footprint assessment and labeling are one of the most important. Furthermore, customers are gradually incorporating environmental friendliness as a decisive criterion when selecting their wine in the marketplace. Many wineries are devoting efforts to more eco-efficient production, necessitating the development of a system to measure and solve potential problems. 

Let’s consider a case study about a significant winery firm in Spain. The following are the value chain activities of the company: 

PHASES OF THE PROJECT

The project was divided into six phases, adopting a cash flow monitoring, accounting, and reporting system based on the MFCA technique as the end product.

(i) Examine energy consumption and corresponding CO2 emissions in all processes related to the product, in the manufacturing process, and the supply chain, using a Life Cycle Analysis technique.

(ii) Obtaining the volume of emissions per unit relevant to each final product unit by linking and compounding aggregate CO2 emissions corresponding to the final output.

(iii) Design an online interactive program that integrates all aspects of the supply and production chains and allows for real-time CO2 emissions accounting and analysis.

(iv) Implementation of the system, which includes

(1) technical employees from the corporation

(2) cooperative farmers, and

(3) representatives from the rest of the supply chain.

(v) Seamless incorporation of the application with the company’s integrated management and accounting system, allowing for automated CO2 emissions connection with other systems such as financial reporting, product cards, supplier cards, and so on.

(vi) Results are reported through communication and business information systems. 

The work done in stages one and two allowed the company’s whole value chain to be visualized in terms of CO2 emissions and energy consumption, indicating any key processes that needed to be monitored, and that would result in more CO2 being added to the final CF of the output. Deficiencies and exceptional levels of consumption were also detected in some of the process equipment and machinery, indicating that it should be repaired or replaced to save excessive energy expenses and carbon emissions. Phases 3 and 4 resulted in the accurate monitoring and accounting of energy usage and CO2 emissions throughout the manufacturing process, thanks to ad-hoc online software. The findings obtained in terms of total carbon emissions and unitary carbon emissions after phases 5 and 6 at the end of the study demonstrated a considerable reduction. The results also showed that the glass manufacturing process produces a large number of CO2 emissions, which can vary significantly between glass varieties with little or no price difference. 

OUTCOMES

The project’s outcomes may be examined from various angles and viewpoints, including environmental and management problems, the manufacturing process and supply chain, and the connection between internal and external stakeholders. After two years of data and various studies, it became apparent that the supply chain significantly influences the product unitary cash flow. Although the firm was previously aware of areas for improvement in its transportation and distribution efforts, seeing how vital some specific goods were to the cash flow provided a fresh approach to the supply chain and a new perspective on procurement design. 

From a relational standpoint, an unintended consequence of the project, which was not anticipated in its initial design, was a significant increase in communication and efficiency between the corporation and its suppliers, particularly cooperative farmers. After getting involved in the project, most of these farmers considered the application extremely useful. They were more dedicated to decreasing their personal and the company’s energy use and participating in further environmental activities. 

The primary goal of the case study was to review the process’s results and determine whether an MFCA system for energy usage and carbon emissions may help a company reduce its environmental and energy expenditures. The company hopes to obtain an international reputation and a competitive advantage in the most ecologically sensitive markets in the long run. The ability to track carbon emissions per product during the manufacturing process opens up a world of possibilities for reducing carbon footprints, compensating for carbon emissions, developing a near-zero emissions line of products, and so on. The winery can now report the carbon impact of each product, as well as project results and future predictions. From an accounting standpoint, the novel axis of these three visions incorporated in the idea of Material Flow Cost Accounting adds to both managerial decision-making and accountability efforts that the organization may implement. 

WAY FORWARD

The MFCA model can be used to ensure sustainability as it is a tool that traces and quantifies the stocks and flows of materials within a certain organization in physical units, as well as in terms of the associated costs. The MFCA model suggests that costs associated with production from the agricultural stage to the final consumption stage should be considered, taking into consideration a company’s consumption and waste quantities. National and international policies should be oriented toward material waste indicator enhancement, highlighting their role in the identification of the most promising strategies to address social, financial, and environmental goals. Then, companies should be encouraged to construct their own so-called “material waste index”, which currently represents one of the most promising macro-indicators to compare the sustainability target achievement levels among companies over time.