Material Flow Cost aCCounting

(MFCa)
A guideline for SMes

The SwitchMed programme is

funded by the European Union
This document has been produced without formal United Nations editing. This publication has been
produced within the framework of the SwitchMed initiative with the assistance of the European
Union. The contents of this publication are the sole responsibility of the United Nations Industrial
Development Organization (UNIDO) and can in no way be taken to reflect the views of the European
Union. The mention of firm names or commercial products does not constitute an endorsement by
UNIDO. The opinions, figures and estimates set forth are the responsibility of the authors and there-
fore should not be considered as reflecting the views or carrying the endorsement of UNIDO.

SwitchMed is funded by the European Union and is coordinated by UNIDO and collaboratively imple-
mented with the UN Environment Economy Division, the United Nations Environment Programme
Mediterranean Action Plan (UN Environment/MAP), and the Regional Activity Centre for Sustainable
Consumption and Production (SCP/RAC).

© 2019 United Nations Industrial Development Organization - All rights reserved

Artwork: © 2018 - Maria Prieto Barea

Images: © 2018 - UNIDO, iStock

For more information, please contact:

Ms. Carolina Gonzalez Mueller

Department of Environment
Tel: (+431) 26026 3814
United Nations Industrial Development Organization
Vienna International Centre
PO Box 300, A-1400 Vienna, Austria
[email protected]
www.unido.org
 

The SwitchMed programme is

funded by the European Union
 1

TABLE OF CONTENTS

List of tables
List of figures

ACKNOWLEDGEMENTS 3
INTRODUCTION 4
1. GETTING STARTED 6
1.1 What is MFCA and what is it good for? 6
1.2 Introduction to Financial and Cost Accounting Terminology 9
2. STEP BY STEP ASSESSMENT APPROACH 14
2.1 General Outline of the MFCA Assessment 14
2.2 Guidance in the Use of the MFCA Excel Tool 16
2.3 Input-Output Analysis of Material Flows in Physical Terms 19
2.3.1. The physical Mass Balance 19
2.3.2. Guidance on the Mass Balance 22
2.3.3. Guidance on Data Gathering 26
2.3.4. What might constitute NPOs? 28
2.4 Process Flow Charts 30
2.5 Annual NPO Costs at the Company Level 34
2.5.1. Materials and Energy Costs of Non-Product Output 35
2.5.2. Waste Management/End of Pipe Costs 36
2.5.3. MFCA System Costs 36
2.5.4. Environment related Earnings 37
2.5.5. Total annual NPO Costs 37
2.5.6. Presentation to Top Management 38
2.6 MFCA - Distribution of company-wide NPO Costs to Cost Centers or Production Steps 39
2.7 Recommendations for improving Information Systems 41
2.8 Application for Investment Appraisal of RECP Technologies 45
3. CASE STUDIES 47
3.1 Aiguebelle, Morocco 47
3.2 Al-Hay Hamoud Habiba & Sons, Jordan 50
3.3 Pates Warda, Tunisia 51
3.4 Al-Ghrawi, Lebanon 54
APPENDIX A EMA - DISTRIBUTION OF NPO COSTS TO ENVIRONMENTAL MEDIA 56
APPENDIX B REFERENCES 58
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LIST OF TABLES

Table 1: Relation between Financial Accounting and Cost Accounting 10

Table 2: Relationship between Cost Category, Cost Center and Cost Carrier Accounting 12

Table 3: Environmental Costs hidden in Overhead Accounts 12

Table 4: Environmental Costs attributed to Cost Centers and Products 13

Table 5: Input and Output Types 19

Table 6: Pulp and Paper Company – Example of Mass Balance and Worksheet 1 23

Table 7: Data Sources for the Mass Balance 26

Table 8: Materials Inputs, Product Outputs and Non Product Ouptputs 28

Table 9: Estimating NPO percentages 30

Table 10: MFCA Worksheet 2: Process Flow Chart for a Bakery 32

Table 11: Pulp and Paper Company – Process Flow Chart Worksheet 2 33

Table 12: NPO Cost Categories 35

Table 13: Pulp and Paper Company - Total NPO Costs in Worksheet 4 38

Table 14: Pulp and Paper Company - Breakdown of NPO Costs by Cost Centers in Worksheet 3 40

Table 15: Aiguebelle NPO break down 48

Table 16: Aiguebelle focus areas highlighted in green 48

Table 17: Aiguebelle monthly data monitoring 49

Table 18: Al-Grahwi, NPO breakdown without and including shadow water prices 54

Table 19: Al-Ghrawi, processes with high NPO share 55

Table 20: Al-Ghrawi, priority flows and focus areas 55

Table 21: Environment related Costs by environmental Media at SCA Laakirchen 57

LIST OF FIGURES

Figure 1: Process Flow Charts: Opening of the Black Box 31

Figure 2: Aiguebelle loss statistics 49

Figure 3: Pates Warda, NPO costs break down 52

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ACKNOWLEDGEMENTS
This manual was authored by Christine Jasch, senior environmental economist with contributions
from Roberta De Palma, Chief Technical Advisor at UNIDO and Vladimir Dobes and Rachid Nafti,
senior experts on resource efficiency.

This manual could not have been developed without the work and experience shared by those who
contributed to and participated in carrying out implementation of UNIDO TEST programmes,
especially the pilot MED TEST I project in Egypt, Morocco and Tunisia and the MED TEST II
project funded by the EU under the SwitchMed initiative. The authors would like to thank to MFCA
experts who directly contributed to development of this manual – Ahmed Tawfik from Egypt,
Waleed Altellawi from Jordan, Hahan Khanafei and Maya Trad from Lebanon, Mehdi Berrada
Rekhami from Morocco and Walid Amor from Tunisia. This document was kindly reviewed from a
technical perspective by Edward Clarence-Smith, Green Industry expert.

Special thanks go to UNIDO Environment Department colleagues: Carolina Gonzalez Mueller,

SwitchMed project manager; Vladimir Anastasov project coordinator; and Michael Barla communi-
cation manager; for their continuous support.
4

INTRODUCTION

Preventive industrial environmental management is a well-known concept for aligning two seemingly
competing goals: economic growth and environmental protection. At the core of preventive strategies
there are win-win solutions for a better management of resources like material and energy.

Several proven tools can be used for assisting companies to integrate environmental management into
their business operations, such as Resource Efficient and Cleaner Production Assessment (RECPA),
Environmental Management Systems (EMS) and Energy Management Systems (EnMS), Life Cycle
Assessment and Eco-design, Corporate Social Responsibility (CSR), Environmental and Material Flow
Cost Accounting (EMA and MFCA), etc. However, stand-alone implementation of individual tools,
although effective in identifying particular improvements, can easily lead to sub-optimal solutions
and as a result the company may have difficulties in maintaining the desired complex changes in their
strategies or systems as well as their alignment to the desired outputs of sustainable production. Ef-
fective integration of some of these tools into one package can significantly accelerate organizational
changes in the direction of sustainability, taking advantage of the complementarity and the synergies
that the combined use of specific tools can provide.

In 2000, UNIDO developed just such an integrated approach named “Transfer of Environmentally
Sound Technology” (TEST), which consist of a set of preventive environmental tools (mainly RECPA,
EMS and MFCA), whose elements are applied in a customized way based on an enterprise’s needs.
The implementation of TEST is done at the different levels of a company:

1. At the process level: the approach gives priority to the preventive approach of Resource Efficient
and Cleaner Production (RECP) based on the adoption of pollution prevention techniques in
the production process. It considers the transfer of additional technologies for pollution control
(end-of-pipe) only after the feasible RECP solutions have been explored. This leads to the transfer
of procedures, techniques and technologies that are focused on simultaneously optimizing both
environmental and financial performances.

2. At the management system level: the TEST approach establishes information systems on rel-
evant material, energy and related financial flows necessary for linking together the strategic and
operational levels within an enterprise. This is done by applying the basic elements of an EMS and
directly linking MFCA to the company’s existing financial information systems.

3. At the strategic level: by leading a company towards the adoption of sustainable enterprise strat-
egies the TEST approach embeds environmental management within the broader strategy of
corporate social responsibility (CSR).

This document illustrates the concept and methodology of MFCA, which is one of the tools used in
TEST. It is used to support and sustain the implementation of the other tools used in TEST, e.g. REC-
PA and EMS. MFCA reveals the hidden costs of production inefficiencies and losses, by putting in
place an information system to track and monitor the non-product output (NPO) costs as well as other
environmental costs. Thus, companies can identify the focus areas to be addressed, including essential
material/energy flows, and determine what improvements and saving opportunities exist in those areas.
The MFCA’s information system enables an effective monitoring of the improved environmental and
economic performance arising from implementation of RECP programmes, which is essential to dem-
onstrate their impact on medium to long-term decisions, thus promoting their continuous application.
 5

This document proposes a simplified step-by-step approach for SMEs to introduce MFCA into their
operations. The approach proposed is based on ISO 14051 for Material Flow Cost Accounting. The
environmental cost categories used in the MFCA tool are consistent with the definitions used by sta-
tistical agencies, UN DSD and IFAC.

This document includes several case studies from the MED TEST UNIDO project1 as well as the re-
sults from a ficticious pulp and paper company in a country in transition. A separate MFCA excel file
for data assessment and recording is also part of the training material.

Target group of this manual are beside external providers of technical assistance both financial staff
and the technical staff members of the company who should be working together. MFCA enables
them to find common language to explore company RECP opportunities.

This manual is based on MFCA principles but does not seek to guide a company to full imple-
mentation of the MFCA standard, as this would not be feasible for most SMEs.

1
The MED TEST programme is an initiative of UNIDO for promoting sustainable production in the southern Mediterran-
ean Region. The MED TEST programme was first launched in 2009 with a pilot phase supported by the Global Environ-
ment Facility (GEF) and the Italian Government in Egypt, Tunisia and Morocco. In 2014 the MED TEST programme was
extended to other countries (Algeria, Israel, Jordan, Lebanon and Palestine) and incorporated within the Switch-Med initia-
tive funded by the European Union (www.switchmed.eu ).
6

1. GETTING STARTED

1.1 WHAT IS MFCA AND WHAT IS IT GOOD FOR?

The ISO standard on Material Flow Cost Accounting, ISO 14051, 2011, defines MFCA as “a tool for
quantifying the flow and stock of materials in processes or production lines in both physical and mon-
etary units”. It is used as a tool to improve material productivity by reducing the relative consumption
of materials, energy and water. As such, MFCA is regarded as an effective means by which companies
can simultaneously seek both environmental as well as financial benefits. In MFCA, the flow of ma-
terials used in a company as well as the amounts in inventory (stock) are measured in physical units of
weight (kg or tonnes) and subsequently evaluated in monetary units, which are based on the manufac-
turing costs incurred.

ENVIRONMENTAL MANAGEMENT ACCOUNTING

MFCA evolved from Environmental Management Accounting (EMA). EMA is defined as the iden-
tification, collection, analysis and use of two types of information for internal decision-making:

• physical information on the use, flows and destinies of energy, water and materials
(including wastes) and

• monetary information on environment-related costs, earnings and savings

As such, both tools are based on the assessment of a material flow balance, also known as mass
balance or input output balance in volumes terms. The development of these balances is an im-
portant part of the TEST approach.

Where the two tools differ is the system boundaries which they may use. The boundary for an
EMA is generally the system boundary of the company. The boundary for an MFCA, on the other
hand, is generally within the organization’s boundary; it could be a process, a department, a unit.
Since analysis at this level is more useful for the generation of RECP options, TEST projects rely
primarily on MFCA. However, the starting point is normally an EMA: at the beginning of TEST
projects most data is available in companies only for this system boundary. This is especially true
for small and medium-sized enterprises (SMEs), which normally do not have a cost accounting
system established and may only annually assess the losses of materials and products in stock
management. Therefore, in this manual and TEST, both approaches are combined by first doing
the input/output balance in physical terms on the system boundary of the company, then cal-
culating the costs for non product output and consequently distributing these costs to the main
production steps or cost centres.
 7

To assess costs correctly, a company should collect both monetary and non-monetary data on materi-
als use, personnel hours and other cost drivers. MFCA used in the context of TEST places particular
emphasis on materials and related costs because of the environmental impacts of the use of energy,
water, materials, waste generation and related emissions. These factors, together with the material
purchase costs, are the prominent cost drivers in many companies, especially in countries with low
enforcement of legal compliance and relatively low labour costs.

The underlying assumption of the MFCA approach and especially the physical mass balance is that
all purchased materials must leave the company either as product or waste and emissions. Waste, dis-
charges, and emissions are thus a sign of inefficient production because they have been purchased and
paid for, they have often been processed to some degree in the company’s operations, but they have
not been turned into a marketable product. Instead, they have become non-product outputs (NPOs),
often requiring specialized management to minimize their environmental impacts. Thus, in addition
to being responsible for a certain portion of the company’s overall purchase and production costs,
NPOs add an extra cost for their correct treatment and disposal.

A prerequisite for a proper implementation of MFCA is that a company has internal information
systems (accounting and management systems) which clearly define and systematically record ma-
terial flows, which then would allow it to calculate and demonstrate all these costs. However, many
companies do not have such information systems in place and use their accounting system only for
external reporting to tax authorities and not for internal process and production monitoring. Some of
the biggest challenges are a number of current accounting practices in use such as:

• Inadequate links between accounting and production departments;

• Unintentional hiding of environment-related cost information in overhead accounts;

• I nadequate tracking of information on materials use, flows, fates, resource efficiency and costs;
and

• Lack of some environment-related information in the accounting records.

This lack of proper information often leads companies to make distorted investment decisions. Spe-
cifically, companies often do not realize that the actual costs to them of the waste and pollution they
generate – the full NPO costs - include not only disposal fees, treatment and equipment costs, but also
those related to the inefficient use of materials purchased and used in processes that end up as waste
and emissions, instead of products. This “hidden” portion of NPO costs can be on average one order
of magnitude higher than the costs for disposal and emissions treatment. Several case studies have
shown that the costs of waste disposal and emission treatment are typically 1-20% of total NPO costs,
while the purchase costs of the wasted materials represent 40-90% of total NPO costs, depending on
the business sector examined. The result of this is that companies do not recognize, and by far, the
full value to them of environmental protection projects aimed at preventing or reducing emissions
and wastes at source by more efficient use of materials and aimed at shifting to the use of less harmful
materials, and therefore they fail to implement such projects.

Although actual NPO costs are rarely tracked by companies’ accounting systems, they can be calcu-
lated or well enough estimated with the assistance and cooperation of accounting and production
managers, as will be illustrated in this manual. The results of the MFCA assessment can be used to
guide a company towards the choice of an optimal menu of RECP options which not only prevent, or
at least minimize, the production of wastes and emissions, but also maximize the financial benefits by
reducing, and in some cases totally eliminating, the related purchase costs, operational costs (energy,
labour, and equipment), and disposal or treatment costs.
8

MFCA is especially useful in countries where the costs for environmental protection are negligible,
which is often the case in developing and transitional economies, either because there is a lack of
environmental legislation and regulation or because these are not properly enforced. But the other
portion of the NPO costs – the costs of inefficient use of materials and energy – are still very signifi-
cant in these countries.

In summary, MFCA is good for:

• Making all environment-related costs and benefits visible.

• Helping to raise environmental awareness in the “core” of a company’s business, by providing data
to formulate targets and programs for integrated environmental prevention, and by giving line
managers and project managers an additional point of view – the environmental impacts, costs
and benefits of their decisions – in their decision-making.

• Providing data and information for the annual report (e.g. non-financial information in the Direc-
tor’s report); MFCA tells the “environmental story” of costs.

• Giving the possibility to communicate the progressive shift: from emissions control to integrated
prevention processes to integrated prevention products.

• Providing arguments as to why RECP pays; MFCA provides the information needed to convince
the financial department to invest in RECP technologies and in the human resources for environ-
mental management.

• Possibly helping management to identify environmental risks and to adopt measures to reduce
them and the associated costs (e.g., insurance).

SOME DEFINITIONS:

Environmental costs are all internal and external costs related to environmental protection and
to the use of natural resources. MFCA only deals with a company’s internal costs, not the external
costs to society.

MFCA is a tool for quantifying the flows and stocks of materials in processes or production lines
in both physical and monetary units (ISO 14051). Like EMA, it involves the identification, collec-
tion, analysis and use of two types of information for internal decision making:

• physical information on the use, flows and destinies of energy, water and materials
(including wastes) and

• monetary information on environment-related costs, earnings and savings [UN DSD, 2001].

Non Product Outputs (NPOs) are all physical material outputs generated for a defined system
boundary, except those embedded in intended products. In other words, NPOs include all inputs
(materials, water and energy) that have not been transfered into a product output. When calculat-
ing NPO costs, not only disposal fees are calculated, but in addition the wasted material pur-
chased value and the production costs of waste and emissions are included. NPOs include inputs
that end up as air emissions, wastewater and solid waste, even if these material outputs can be
reworked, recycled or reused internally, or have market value. By-products can be considered as
either NPO or products, at the discretion of the company. Typically, when sold, they are con-
sidered a product. When they have to be disposed off at costs or zero costs, they are considered
waste. (Similar to “material loss“ as defined in ISO 14051).
 9

1.2 INTRODUCTION TO FINANCIAL AND COST ACCOUNTING

TERMINOLOGY

The MFCA tool is very much based on standard accounting practices and requires the involvement of
staff from the company’s accounting department, therefore this section gives an overview of account-
ing practices and explanations of key terms for non-accountant readers.

Conventional corporate monetary accounting is comprised of:

• Financial accounting (bookkeeping, balancing, consolidation, auditing of the financial statement

and reporting)

• Cost accounting (also called management accounting)

• Corporate statistics and indicators (past oriented)

• Budgeting (future oriented)

• Investment appraisal (future oriented)

Financial accounting is mainly designed to satisfy the information needs of external shareholders
and financial authorities. Both groups have a strong economic interest in standardized comparable
data and in receiving true and fair information about the actual financial performance of the company.
Therefore, financial accounting and reporting are covered in national laws and international account-
ing standards. They regulate how specific items should be treated, specifying, e.g., whether invest-
ments should be capitalized or expensed, under which circumstances provisions may be made for
future treatment liabilities, or when contingent liabilities should be disclosed. Imputed (calculatory)
approaches as used in cost accounting are not permissible.

Financial accounting deals with revenues and expenditures as shown in the profit and loss account
and with assets and liabilities as listed in the balance sheet. More detailed information is available
from the list of balances.

Bookkeeping, financial and cost accounting provide the data base for the other accounting infor-
mation systems.

Cost or management accounting constitutes the central tool for internal management decisions such
as product pricing and investment appraisal and is not regulated by law. This internal information sys-
tem deals with the following questions: What are the production costs for different products and what
should be the selling price of these products? For determining the inventories of finished goods and
work-in-progress for the balance sheet, cost accounting also needs to be done for financial reporting.
The main stakeholders in cost accounting are members of different management levels (e.g. executive,
site, product, and production managers). The costs related to environmental management (mostly hid-
den in general overhead costs) may be traced and allocated to products and cost centers.

Cost accounting is based on data obtained from financial accounting and from production planning
systems. Sometimes the values from financial accounting are adjusted for cost accounting purposes,
following the system of transition from expenditure to costs. However, most SMEs use the same
figures with only minor adjustments, if they have a cost accounting system at all.

Typically, SMEs do not have a separate cost accounting system. Instead, they make their internal deci-
sions based on calculations which are made with financial accounting data from bookkeeping. For all
companies, annual data must be available for the system boundary of the whole company (“company
system boundary”) based on financial accounting requirements.
10

Therefore, the starting point for an MFCA assessment is the list of accounts of the trial balance of the
previous business year. As all companies have to pay taxes, the list of accounts is the only mandatory
information system, and is therefore available in companies of all sizes throughout the world. An-
other reason for starting with the system boundary of the company is that much information is only
collected for this system boundary. In addition, this information is often only collected annually. For
instance, the changes in stock may only be recorded annually. Also, waste volumes and other environ-
mental performance indicators, almost always recorded at the company system boundary, are often
not monitored monthly, but only annually in some companies.

In cost accounting, the terms costs and earnings are related to the terms revenues and expenditures
in financial accounting. There is no equivalent to financial accounting’s balance sheet.

The various expenditure items in financial accounting correspond to the categories of costs used in
cost accounting. Costs are allocated to the relevant cost centers (in-house production processes) and
cost carriers/objects (products). Because the system boundary differs, the level of cost details is differ-
ent between financial accounting and cost accounting. For financial accounting, the system boundary
is the legal entity (the whole company) and therefore expenditures mostly deal with the company as
a black box, sometimes aggregating over several production sites. Cost accounting, on the other hand,
drills down inside the company and traces the costs to the specific production steps (related to cost
centers) and to the products which generated those costs.

FINANCIAL ACCOUNTING COST ACCOUNTING

Balance sheet No equivalent

Assets No equivalent

Liabilities No equivalent

Profit and loss account Cost statement

Expenditures Costs
Expenditure items Cost categories
Revenues Earnings
Cost calculation
No equivalent

No equivalent Cost centers

Calculation of production expenditure Cost carriers/objects (products)

Table 1: Relation between Financial Accounting and Cost Accounting

The MFCA assessment should be based on expenditures from the profit and loss account and/or on
cost accounting and stock management information, depending on the structure of internal informa-
tion systems. It is the task of the company’s controller or financial manager to define the most appro-
priate database for the mass balance of the organization.

SOME IMPORTANT TERMS TO DISTINGUISH:

Costs Centers are those parts of the company that are organized as independent clearinghouses;
they should be connected to production processes. Maximum consistency between cost centers and
process-oriented material flow analyses is the prerequisite for good data. Cost centers generate costs,
are responsible for costs, or are attributed costs, e.g. for production and administration.
 11

Overhead Costs are costs that cannot be directly attributed to cost centers and cost carriers (true
overhead) or costs that are not directly attributed for reasons of economic efficiency (untrue over-
head), e.g. administrative costs, insurance, advertising costs. Many environmental costs are considered
overhead costs, and for the most part fall into the category of untrue overhead. There are a number of
methods to allocate overhead to cost centers and cost carriers.

Cost Carriers or Objects are products and services produced either for the market or for internal
needs. By attributing types of costs to cost centers and cost carriers, production costs and sales price
floors are calculated.

Cost-Category Accounting is the first phase of cost accounting and aims to define which costs have
been incurred in which amounts during the accounting period. In cost-category accounting, data from
financial accounting is being transferred into costs. These costs are recorded in accordance with a cost
category plan and divided into direct costs and overhead.

Cost Center Accounting follows cost-category accounting and identifies where and in which
amounts have costs been incurred during the accounting period. Also, it is is also responsible for in-
ternal cost assignments and determines cost estimate rates or billing rates (or surcharge rates) should
they be required for cost carrier accounting based on the company’s operational situation. For this
accounting procedure, an overhead allocation sheet is used.

Cost Carrier Accounting is the final phase of cost accounting and determines the production costs
for each product (or service). It provides the basis for price calculation and determines: which types of
costs have been incurred at what amount to produce a certain product or to deliver a certain service.

The process by which costs are allocated to cost centers and then cost carriers is shown diagrammatic-
ally in Table 2.
12

COST CARRIER
COST CATEGORY COST CENTER ACCOUNTING
ACCOUNTING ACCOUNTING (PRODUCT)
Which costs have been Where and in which Which types of costs
incurred in which amounts have which have been incurred in
amounts? costs been incurred what amount for a cer-
during the accounting tain product or service?
Cost distribution to dir- period?
ect costs and overhead
Internal cost attribution
Cost roll-over from and cost estimates or
financial accounting billing rates

e.g. e.g.
Labor I Manufacturing
Raw Materials Process Ia Product A
Operating materials Process Ib
Energy Process Ic Product B
External Services II Warehouse
Calculated Write-Off III Distribution Product C
Calculated Interest IV Administration
Calculated Risk
Other Costs
Table 2: Relationship between Cost Category, Cost Center and Cost Carrier Accounting

Cost attribution is done in two steps: first from joint cost centers like waste management and emis-
sions treatment, to the responsible cost centers in the production process, and secondly from the
production cost centers to the respective cost carriers/objects (e.g., products A and B).

A key to proper attribution of costs is how the company attributes its overhead costs. A simple example
in Tables 3 and 4 shows how overhead cost-attribution can significantly change the production costs of
products.

COST CATEGORIES TOTAL COSTS PRODUCT A PRODUCT B

Materials by recipe/ formula Direct costs 140 70 70

and stock issuing

Working hours by time rec- Direct costs 60 30 30

ords

Depreciation Overhead 50

Rent 10

Energy 5

Communication 10

Administration 25

Top management’s salary 10

Waste & Emissions Treatment 10

Total Overheads Distribution by % 120 60 60
product turnover
Total Product Costs 160 160
Table 3: Environmental Costs hidden in Overhead Accounts
 13

COST CATEGORIES TOTAL COSTS PRODUCT A PRODUCT B

Materials by recipe/ for- Direct costs 140 70 70

mula and stock issuing

Working hours by time Direct costs 60 30 30

records

Energy Cost attribution 5 2 3

to cost centers
Waste and Emissions and products by 10 4 6
treatment actual process
Depreciation flows 50 20 30

Rent Overhead 10

Communication 10

Administration 25

Top management’s salary 10

Total Overheads Distribution by % 55 27,50 27,50

product turnover

Total Product Costs 153,50 166,50

Table 4: Environmental Costs attributed to Cost Centers and Products

What this simplified example shows is that an untrue overhead like waste and emissions treatment
can be attributed more realistically to the company’s two cost carriers, product A and product B,
based on the actual flows of waste and emissions generated by the processes manufacturing the two
products and their associated costs. As a result of this more realistic attribution of costs, Product A
has significantly lower costs (13% lower) than Product B. The conclusion is that whenever possible,
costs should be allocated to the respective cost centers and cost carriers/objects (products) based on
actually measured data.
 
14

2. STEP BY STEP ASSESSMENT

APPROACH

2.1 GENERAL OUTLINE OF THE MFCA ASSESSMENT

The MFCA assessment is done using a step-wise approach:

1. Assessment of materials inputs and outputs in physical terms for the previous business year,
and consequently calculation of total annual NPOs in volumes and value on the system boundary
of the company (this is undertaken in TEST Step 1.4: Identifying total costs of NPOs and priority
flows). The data gathering for the input output mass balance in kg or tonnes as well as calculation
of percentage losses is described in Chapter 2.3. Chapter 2.4 deals with the NPO cost calculation.

2. Distribution of the annual costs to cost centers or more specific processes (this is undertaken in TEST
Step 1.5. Setting up focus areas). In TEST, the NPO costs can be distributed to the process flow chart
of a company (Chapters 2.6 and 2.7.). To satisfy reporting requirements in some countries, companies
may also need to distribute the NPO costs to the environmental media affected (Appendix A)

3. Selection of specific processes or material flows for in depth investigation (TEST Step 1.5)

Steps 1 and 2 also generate improvement options for the accounting information system, in order to
allow for better future data management. Typical recommendations for the improvement of the data
information system are described in Chapter 2.9.

The assessment also provides the baseline for appraisal of investment options as described in TEST
Step 1.8. (e.g. comparing the performance of different RECP technologies and/or end-of-pipe solu-
tions to each other or to existing technologies). The application of MFCA for investment appraisal is
dealt with in Chapter 2.10.

The starting point for the assessment of NPO costs is putting the right team members together.
Experience shows that the production and environmental managers have hardly any access to the
accounting documents of the company and are only aware of a tiny fraction of the company’s en-
vironmental costs. On the other hand, the financial accountant/controller has access to most of the
information but is unable to separate out the environmental part, to calculate a physical mass balance
without further guidance, and is limited to thinking within the framework of existing accounts. Also,
there are severe communication issues between the production and environmental departments, on
the one hand, and the financial department, on the other.

Therefore, having a TEST Team which combines the competencies for monetary accounting, process
engineering, and environmental management, as well as ensuring that the Team gains support from all
sides is vital for the success of any MFCA project.

It is also recommended to focus the assessments on what is easily available from existing records.
It is NOT the goal of an MFCA assessment to come up with “complete data” for the past, thus for-
cing the TEST Team to spend a lot of time tracing old invoices. Rather, its goal is to open the eyes of
management to areas of improvement and to develop an overview on the most significant material
and energy flows and their related costs. It also aims to determine where existing information systems
need improvement so that it provides better data and faster in any future assessment. For this, the
TEST Team should note possible areas of improvement in the information system and submit these as
recommendations to management.
 15

The main source of information for an MFCA assessment, especially in SMEs, is the list of accounts of
the previous fiscal year, as in most companies only this information is consistently available. Thus, the
assessment starts with the list of accounts of the trial balance for the previous business year.

For the first assessment of a material flow balance, only a rough estimation may be performed. In
many companies, the result of the first assessment is not a complete mass balance, but a list of recom-
mendations for improvements of data management, a preliminary understanding of the consistency or
inconsistency of material flows and a baseline for the NPO costs of the previous year, as data in terms
of money is typically more available than in volumes.

Any further splitting down to processes or cost centers or product groups should only be done once
the information has been gathered at the system boundary of the company or legal entity (resulting in
the definition of priority flows - step 1.4 of TEST) and then distributing the total NPO costs to cost
centres or production steps (resulting in the definition of focus areas - step 1.5 of TEST). For these,
the technical analysis for process optimization is then performed.

The first MFCA assessment should not take longer than a 1 to 2 days workshop with the accountant
and process engineer.

NOTE:

The mass balance for the previous business year can be completed well enough in a one-day
workshop together with some additional time for data refinement. The goal is not to be perfect,
but to check the consistency of inputs to outputs, to record significant data inconsistencies, and to
note improvement options for the existing information systems. The MFCA excel tool can still be
used even if the TEST Team only has estimates available to it. It provides a structured approach
that allows gradual refinement over time.

The only necessity is that someone with in-depth knowledge about, and preferably with direct
access to the company’s financial accounting and stock management systems, is working togeth-
er with someone from the production department (and environmental department, if it exists).
Whenever data is not available, the Team makes an estimate, it draws up a record on how the
estimate was calculated, and it formulates a recommendation to improve the data/information
system. All this can be made directly in the MFCA excel tool.

Do not be shy about using estimates! It is better to have an estimate than no figure. Production
staff often can provide very good estimates for loss percentages, which are much more accur-
ate than the figures used by the accounting department. At a later stage, these estimates can be
improved by more detailed measurements. But always record the calculation procedure and the
information source for the estimate.

The goal of the first assessment is to:

• Present to top management as entire a picture as possible of material inputs and outputs as well as
total NPO costs of the previous fiscal year, perhaps even a first distribution of these cost to main
production steps;

• Formulate recommendations on how to improve the information system; and

• Gain management’s support to improve the information system as well as the technical processes.
16

In summary, the first assessment can open the eyes of management in three broad areas:

1. What assessments always make visible, mostly for the first time, are the true size of the costs
of inefficient production and the related wastage of materials and energy use. Even if technical
solutions to reduce these inefficiencies will not be apparent at the end of the first assessment, the
priority flows and focus areas for deeper investigation will be defined and the total range of NPO
costs will be visible as a benchmark against the zero-waste option.

2. New technical improvement options may become obvious, even at this early stage.

3. What assessments will also always make apparent are measures necessary to improve the quality
and consistency of data and information flows in the company. This is the starting point of most
projects and the focus of most follow-up projects.

2.2 GUIDANCE IN THE USE OF THE MFCA EXCEL TOOL

The TEST Team, which should include the company accountant, should use the MFCA Assessment
Template to assess the total annual material and energy flows and related NPO costs. The tool also
provides the option of distributing the NPO costs to different cost centers. Since these are often
equivalent to production processes, the tool therefore also provides good quality data for investment
appraisal of specific processes. In a second step, the system boundary for the material flows in the
MFCA can focus on more detailed processes within a cost centre.

Once the data has been assessed at the company level for the previous business year, the TEST Team
can define the priority flows as described in Step 1.4 of TEST. Next, the data can be distributed to cost
centers, reflecting production processes, thereby allowing the TEST Team to decide on focus areas
for the later in-depth technical assessments (Step 1.5. of TEST). In the end, this may become the basis
for the appraisal of investment proposals.

The MFCA Assessment Template is part of the TEST training kit and has been developed to
assist practitioners in the detailed analysis of material and energy flows in a company.
The tool can be used for:

i. Input/output analysis in volumes (kg or tonnes) at the company system boundary;

ii. Identification of NPO volumes and costs at the company system boundary and at specific cost
centre level;

iii. Selection of priority flows and focus areas associated with highest production losses, NPO
costs or environmental impact;

iv. Distribution of total NPO costs and volumes by environmental media affected or by produc-
tion steps;

v. The distribution by cost centers or production steps provides a good basis for defining focus
areas for further technical assessment;

vi. Recording of recommendations for addressing gaps in the existing company information
system for monitoring important flows.
 17

The MFCA Assessment Template consists of a Microsoft Excel file made up of 4 worksheets that are
interconnected. It is recommended to open the excel file while reading this text.

The Worksheet 1 (“I-O Balance”) allows the TEST Team to build up the Input/Output mass balance
at the company system boundary in physical terms, kg or tonnes. The Team records both physical
and cost information on the company’s inputs, physical data on outputs, as well as the sources of the
information as this should be consistently taken from the list of accounts. Later, the portion of each
input which becomes non product output (NPO %) in volume terms are determined, along with the
related NPO costs. The Worksheet 1 records the physical and monetary values of material inputs in
one work step, as these amounts should be consistent with the financial accounting data. The Work-
sheet 1 contains two columns for the source of information for both values. The financial accounting
system, especially the accounts for materials used for production, as well as stock management and
environmental management, should provide this information in a consistent and detailed manner. The
two columns in the Worksheet 1 entitled “source of information” are intended to ensure that the same
cost centres and accounts are used in future years without having to spend a lot of time finding them
again. It is also practical to document the calculations or estimates made to arrive at a certain figure. It
is possible to add lines into the sheet, just ensure that the automatic excel calculations are maintained.

The assessment can be done in any currency, which should be noted in the heading where EURO
stands in the tool.

At the bottom of Worksheet 1 the relation of input volumes to output volumes should be calculated.
This can be done once for all inputs and outputs (including operating materials and waste volumes)
and another time for the relation of raw and auxiliary materials and product packaging to production
volume only. This depends on the data availability and production necessities.

The table at the bottom of Worksheet 1 also relates the total costs of inputs to the total expenditure
from the list of accounts. In manufacturing companies the costs for materials, water and energy inputs
are about 50-90% of total expenditures. Any improvement of resource efficiency will thus also signifi-
cantly improve economic performance.

Note that wherever the sign “#DIV/0!“ appears in the table, the calculation is done automatically.

See Chapter 2.3 for further information on the physical mass balance.

As a result of completing the Worksheet 1, the priority flows for further investigation should be
defined (at the end of STEP 1.4 of TEST).

The Worksheet 2 (“process flow chart”) contains a simple structure to record the main production
steps and supporting cost centers, and should follow the process flow chart of the company (Chapter
2.6). The cost centers defined here should next be linked to the production steps of third worksheet
(“NPOs cost breakdown”).

The Worksheet 3 is used for accounting for the total NPO costs and is explained further in Chapter
2.4. The actual cost assessment is performed in this worksheet only. Note that the I-O mass balance
in worksheet 1 is calculated in tonnes or kg and contains no data on costs for disposal, depreciation
etc. Not all costs are calculated on the Worksheet 1 for the I-O balance. This occurs in the Worksheet
3. The NPO costs of material and energy inputs are directly transferred from the Worksheet 1, and in
addition, in cases where the company has a very well developed cost accounting system, Worksheet 3
records the costs for waste management/end-of-pipe costs as well as MFCA system costs. The most
common costs recorded in addition to the NPO costs of material and energy inputs are related to
waste disposal and waste handling, as well as depreciation of a wastewater treatment plant or other
end-of-pipe equipment.
18

All the cost categories are already set and should not be changed, otherwise the aggregation to Work-
sheet 4 will not work. However, the TEST Team should list the different cost items related to each
cost category under that cost category and should indicate the reference (the cost accounts or cost
centre reports from which they are taken). With respect to costs that are incurred by a defined piece of
environmental equipment it is recommended to simultaneously collect the data on external services,
personnel, and operating materials, especially if this information is available from the same cost centre
reports. Care needs to be taken to avoid double counting if data is taken from the list of accounts as
well as from cost center reports, e.g. the same operating materials will show up on different cost cen-
tre reports and on the list of accounts.

Once the total annual costs have been recorded in column B of Worksheet 3 (Chapter 2.4), they can be
distributed to the main production steps (Chapters 2.6 and 2.7). The last work step in Worksheet 3 pro-
vides a breakdown of NPO costs by cost centres or major production process. In most SMEs this break
down will have to be estimated by the production manager during the first workshop, as most likely no
detailed records are available. During the TEST project a refinement of this first estimate will gradually
reveal the real distribution of NPO cost to main production steps. This may require installing a metering
system at critical production steps, most likely defined as focus areas for further investigation.

The excel tool automatically aggregates the costs of each category, but when adding lines to fill in
more details a last cross check is recommended to make sure all aggregations are complete. There is a
control function in Worksheet 3, to cross check that the value in the column “Total Euros” is identical
to the sum of costs assigned to the cost centers. If this is not so, an error will show. The values are only
identical if all costs in the “Total Euros” column are assigned to a cost center.

As a result of completing the Worksheets 2 and 3, the focus areas can be defined based on the pro-
duction steps with the highest NPO costs (at the end of STEP 1.5).

The sum of the costs of all categories in Worksheet 3 is automatically transferred to the Worksheet 4,
“NPOs Cost Summary” (Chapter 2.4.5). This worksheet provides an overview and a better presenta-
tion layout, showing the aggregated totals by cost category and calculates the costs into percentages to
show the most relevant costs. This figure should also be compared to the total expenditures from the
list of accounts.

Please note: If columns or rows are added or deleted, then the same needs to be done for the other
worksheets, if the information is linked.

Working with the worksheets and the different cost categories are explained further in the next chapters.

1 2 3 4
 19

2.3 INPUT-OUTPUT ANALYSIS OF MATERIAL FLOWS IN PHYSICAL TERMS

2.3.1. THE PHYSICAL MASS BALANCE

The mass balance is based on the assumption that whatever materials enter a company must (at some
point) also leave it. The mass balance includes all material inputs, as well as the resulting amounts of
products and waste and emissions in physical volumes (kilograms or tonnes). The volumes of pur-
chased inputs (or better yet, the volumes of materials actually used for production, if the company has
a good stock management system) are compared to the production volume or the sales statistics, as
well as to the records of waste and emissions.

The first step in implementing an MFCA assessment is the development of a mass balance or input
output balance in volumes of the materials flowing through (inwards and outwards), and stored
within, the system boundary of the company for the complete previous fiscal year. As noted earlier,
in most companies data is available only for this system boundary. This is especially true for SMEs,
which normally do not have a cost accounting system established and might only annually assess the
losses of materials and products through stock management. Thus, the assessment starts with the list
of accounts of the trial balance for the previous business year and data from the stock inventories.

Table 5 below shows the overall structure of the mass balance, which is reflected in the structure of
Worksheet 1. The input-output types are in line with the standard practice of mass balancing and the
general structure of ISO 14031 for environmental performance indicators for operational systems.

MATERIALS INPUTS PRODUCT OUTPUTS

Raw and Auxiliary Materials, Packaging Products (including their packaging) and sold
by-products
NON-PRODUCT OUTPUTS (Waste and
Operating Materials
Emissions)

Water Waste

Energy Wastewater

Air Emissions

Table 5: Input and Output Types

First, on the input side, raw, auxiliary, and operating materials consumed in the previous business
year according to the accounting records are entered in detail, with their monetary values, volumes
and account number. The quantities (e.g. tonnes) and monetary values (e.g., in ¤) of each input are
entered. Similarly, on the output side, the products and by-products are entered in detail, along with
their quantities and monetary values. The volumes of waste and emissions are also entered, but not
the costs of their management; this is entered in the Worksheet 3. It is most important to make sure
that all this volume data is consistently recorded (this may require recalculations) in the same mass
units (kilograms or tonnes), not in pieces, m2, bottles, or other units that do not allow for aggrega-
tion. Water and energy should be recorded in the Worksheet 3 (and throughout the Excel file) in their
respective units (liters, kWh, etc.) but not aggregated.

The following is guidance as to the categorization of possible input and output materials present in
a company.
20

Raw materials
Raw materials constitute the main components of the company’s products.

Auxiliary materials
Auxiliary materials become part of the product, but are not its main components (e.g. glue in furniture
or shoes, baking powder and salt in cakes).

Packaging
A distinction needs to be made between packaging entering the company as part of the input materials
and packaging leaving the company as part of the product(s).

Packaging of input materials should be recorded under output (as waste) if becomes solid waste (e.g.
paper, plastic, glass). If instead it is returned to the supplier, it should not be recorded at all. Its input
is typically not recorded separately, as it is part of the weight of the input materials. If packaging is
kept in a reuse system, e.g. pallets, then the amount repurchased annually is recorded as input and as
output as equivalent to broken packaging.

With regard to packaging of the companies products, several countries require a detailed recording as
taxes are levied on packaging put on the market. So typically there are good records available.

Operating materials
By definition, operating materials are not included in the product(s). Some of these materials may be
incorporated into the buildings of the company, but the major part are used to service the technolo-
gies or the raw and auxiliary materials along the process lines. Examples include cleaning chemicals,
solvents, detergents, oils, etc.

Energy
In general, energy is an input. Apart from companies in the utility sector, companies do not normally
sell energy as a product, although some of the companies which produce their own electricity are
selling any excess to the grid.

When energy is an input, in almost all cases it can be considered equivalent to an operating material.
Like operating materials, the energy which a company brings into its premises is not a visible part of
the final product, but it is necessary for production.

Energy can enter the company as a material input in the form of energy carriers like coal, oil, natural
gas, and biomass (and, very rarely, in the form of stored energy, in batteries). It can also enter the com-
pany in the form of electricity, purchased from external suppliers. Increasingly, companies are also
generating their own electricity, mostly from renewable energy sources.

Where coal, oil, natural gas, and biomass are burned on-site to generate energy these inputs emit CO2
and other air pollutants, requiring efforts by the company to control these emissions. Where data on
volumes is available, these would be recorded under air emissions.

Energy is recorded as an input in non mass units (e.g. Kwh) and it is not balanced. Emissions from energy
consumption are also recorded. The costs related to energy use are recorded in Worksheets 1 and 3.

Water
Water consists of all the fresh water which the company takes from public grids, from private wells,
and from surface waters (in some cases, it can also include rainwater; in rare case, sea water). It is
recorded in cubic meters in order to able to relate it to the mass balance in tonnes. It may however
be tricky to calculate the mass balance if water is part of the product. Depending on production and
specific products, It may also be decided to calculate the mass balance without the water balance.
 21

Products
For product output it is possible to record only the volumes and not the turnover, if the company does
not wish to share this information with external members of the TEST project team.

By-products
By-products are all those outputs which the company sells in addition to the main product(s); this
includes waste sold for recycling.

If a company produces electricity on-site using diesel generators or renewable energy technology, the
percentage of electricity that is sold to the grid is considered a by-product.

Out-of-specification products might be recorded as waste or as by-products depending on whether

they are sold or not. If they are internally re-processed, their record is only kept for the identification
of efficiency improvements and will not show up in the mass balance, as they do not leave the system
boundary of the company.

Waste, Wastewater, Air Emissions

In the Worksheet 1, waste, wastewater and air emissions are recorded only with their respective
volumes for the mass balance. It may be necessary to work with estimates for the first assessment. The
costs for disposal and emissions treatment are recorded in the Worksheet 3 in the cost category “waste
management/end-of-pipe costs”, sub-category “fees, taxes, and permits”.

Other NPO costs are also recorded in the Worksheet 3 and not in the Worksheet 1 for the mass balance.

22

2.3.2. GUIDANCE ON THE MASS BALANCE

Companies may find it useful to separately calculate the material, the energy and the water balances
and we can recommend this approach based on experience from TEST. While the material balance
cannot be calculated without inputs from accounting and stock management, the energy and water
balances will need the help of process technicians.

Once as much as possible of the input and output data are entered, the sum of the volumes of output
products and waste is checked for consistency with the sum of the input materials (column 3). In
theory, these should be equal. However, in most companies the Input/Output analysis does not neces-
sarily balance very well in the first years of data assessment. In fact, a mass balance simply may not be
possible if, as is often the case, no data on the volumes of operating materials and waste is available:
what is often most easily available is data on raw and auxiliary materials because of their strong con-
nection to the products made. Table 6 shows a typical although fictitious result of a first assessment
for a company in the pulp and paper sector in a developing country.

Other issues can make reaching a balance tricky. For example, there is the issue of purchase versus ac-
tual consumption. The materials purchased include all inputs to the warehouse (stock) by delivery no-
tice. However, the material actually used for production may be significantly different due to changes
in inventory and losses on stock. Depending on the company, these materials are assessed by separate
recordings of the materials withdrawn from stock for production, by measurements at the processes,
or by simply recording inventory losses. Ideally, the mass balance should be based on the materials used
for production. The same issue holds on the output side. Perhaps only sales volumes exist for products
rather than production volumes, which might not be the same if there is a stock of products taking place.

In addition to this, there can be difficulties where several processes involve water and there are sig-
nificant evaporation losses, or there can be chemical reactions, where materials “disappear” but only
to “reappear” as different chemical species.

In many companies, only rough estimations may initially be possible for some input data, so the first
mass balance is often incomplete. This will lead to a list of recommendations for improvements of the
company’s data management, a preliminary understanding of the level of coherence of the material
and energy flows and a baseline for the Non-Product Output (NPO) costs of the previous year, as data
in terms of money is typically more available than in volumes. These results are used to define prior-
ity flows - step 1.4 of TEST. After this, the total NPO costs can be split up and allocated down to the
level of processes or cost centers or product groups. This allocation can be limited to the priority flows
only. This results in the definition of focus areas - step 1.5 of TEST. For these, the technical analysis
for process optimization is then performed.

In the first assessment, the Input-Output-Balance hardly ever balances off to zero. But the goal is
not to be perfect in the initial assessment, but rather to gain an understanding of the dimensions of
material flows and of the quality of the information systems that record them. With increased quality
of information systems, the differences between inputs and outputs can be reduced, sometimes by
simple good housekeeping measures.

Experience from implementation of TEST in SMEs shows that for the sake of RECP can be sufficient
to try to complete specific mass balances for priority flows only. To focus specific mass balance(s) on
matching only specific important inputs with related product and non-product output(s) can be more
effective for exploration of RECP potential as it enables to utilizes limited capacities for going deeper
for selected priority flows and focus areas.
 23

MATERIAL & USD* TONNES* SOURCE SOURCE OF NPO per- RECOMMENDA-

ENERGY FLOWS OF INFOR- INFORMATION centage TIONS FOR INFOR-
BALANCE: INPUT / MATION FOR TONNES [% vol- MATION SYSTEM
OUTPUT (year 2014) for USD ume]
1. Materials Inputs Account
number
1.1. Raw and Auxiliary
Materials
Raw Materials 1.700.000 8.000 50500 Weighted at the in- 25% It is recommended to
coming warehouse monitor the actual loss
of raw materials
Subtotal 1.700.000 8.000
1.2. Packaging Materials
Strings and steel traps 5.000 not Included Not monitored 2% It is recommended
available in account to assign packaging
#89000 materials costs on a
separate account
Subtotal 5.000 -
1.3. Merchandise
not to be recorded, only
if they run through the
production process
Subtotal - -
1.4. Operating Materials 100%
Repair & Maintenance 12.000 not 70000 & Not monitored Separate materials
Materials available 70100 and services on this
account. Gradually in-
clude these materials in
stock management and
record also volumes.
Operating materials 50.000 not 50600 Not monitored Record the total volume
available of chemical s bought by
material groups, as well
as the total input into
production.
Aluminium sulfate 0,5 Estimated by pro-
duction manager
Caustic Soda 0,15
Bleaching chemicals 70
Subtotal 62.000 71
1.5. Water
Water from the river not Not monitored establish a metering
available system
Water consumption 100 not 78010 Not monitored should be available
from public supply (hl) available from the invoice
Subtotal 100 -
1.6. Energy
Electricity in Kwh 300.000 1.500.000 78030 Calculated as record information
0.2usd per Kwh from the invoice
Diesel 20.000 not 65620
available
Wood in m3 150.000 6.500 65630 invoices measure delivery into
incoming store and the
amounts actually used
to production
Petrol 5.000 not 65600
available
Gasoline 300 not 65610
available
Subtotal 475.300
TOTAL INPUTS 2.242.400,00
24

MATERIAL & USD* TONNES* SOURCE SOURCE OF NPO per- RECOMMENDA-

ENERGY FLOWS OF INFOR- INFORMATION centage TIONS FOR INFOR-
BALANCE: INPUT / MATION FOR TONNES [% vol- MATION SYSTEM
OUTPUT (year 2014) for USD ume]
Account
2. Product Output
number
2.1. Products
Sales Finish Goods 6.600 40000 The production It is recommended to
volume of each keep a record of the
day is physically monthly production
measured. volume.
Subtotal - 6.600
2.2. Byproducts
Subtotal - -
TOTAL TURNOVER / - 6.600
PRODUCT OUTPUT
 25

MATERIAL & EN- USD* TONNES* SOURCE SOURCE OF NPO per- RECOMMENDA-
ERGY FLOWS OF INFOR- INFORMATION centage TIONS FOR INFOR-
BALANCE: INPUT / MATION FOR TONNES [% vol- MATION SYSTEM
OUTPUT (year 2014) for USD ume]
3. Waste and Emissions
3.1. Solid Waste
Total non hazardous not It is recommended to
waste available record the amount of
waste regularly (week-
ly, daily, per shift).
Plastic waste 40 Estimated as 115kg Record the amount
per day as waste of plastic waste if not
in the trash paper; available form the
sorted out during disposal invoice
the pulping process
Waste for Recycling
Subtotal 40
3.2. Hazardous Waste
Hazardous Waste 5 estimated Record the amounts of
hazardous waste
Waste oil 1 estimated Record the amounts of
waste oil and ensure
correct disposal
Subtotal 6
3.3. Waste Water
Quantity of waste water not Establish metering
in m3 available system
COD not
available
cellulose material in 1.500 Calculated as
waste water total solid input
minus output at the
bottom
Subtotal -
3.4. Air Emissions
CO2 emissions heating to be calculated
plant based on boiler
fuel CO2 emission
factor
CO2 emissions vehicle to be calculated
fleet based on car fuel
CO2 emission
factor
Subtotal -
TOTAL Waste and
Emissions

in %
Total solid input paper and chemicals in volumes 8.071
Total output in volumes 6.606
Difference 1.465 18

Total input trash paper in volumes 8.000

Total output paper in volumes 6.606
Difference 1.395 17

*unless otherwise indicated

Table 6: Pulp and Paper Company – Example of Mass Balance and Worksheet 1
26

2.3.3. GUIDANCE ON DATA GATHERING

Table 7 below shows where it is normally possible to find data for completing the input/output mass
balance on the system boundary of the company using different information systems. If consistent and
well kept, these allow a monthly data controlling system.

INPUTS OUTPUTS
Sources of informa- Materials Products Sources of informa-
tion tion

List of accounts, stock Raw materials Main products Production statistics,

management, recipe production planning
system, recipe

List of accounts, stock Auxiliary materials By-products Production statistics,

management, recipe production planning
system, recipe

List of accounts, stock Packaging Waste and emissions

management, recipe

List of accounts, stock Operating materials Hazardous waste Invoices, separate

management, cost monitoring
centre reports

Water Solid waste Invoices, separate

monitoring

Invoices, separate Different sources Air emissions Measurement,

monitoring, cost cen- calculations
tre reports

Energy Wastewater Invoices, separate

monitoring

Invoices, separate Different energy

monitoring, carriers
cost centre reports

Table 7: Data Sources for the Mass Balance

As a starting point, it is best to start with the accounts in the list of balances (also called list of ac-
counts) of conventional bookkeeping from the previous business year. Only this information source
is available in all companies and should be quite complete. It certainly provides a complete overview
in monetary terms of purchased and used raw materials, auxiliary and operating materials in a given
month or year as well as the cost of disposal, repair, insurance, transportation etc. Each account of the
profit and loss statement should be examined to determine whether any material flows are recorded
there. Personnel costs are not considered in the physical material flow balance but in later steps as
part of the MFCA cost assessment in the third excel sheet.

Operating materials are usually not (well) recorded in the warehouse stock management system, but
are assigned to expenditure at the time of purchase. In most companies, their consumption is not
recorded on the production cost centers, making it practically impossible to trace who has used how
much of them. In cost calculation, often only estimates are used for the calculation of product prices,
but hardly ever does anyone check if these estimates conform to real consumption.
 27

The material purchase cost of wasted materials is often the most important NPO cost category, al-
though this will depend on the value of raw materials relative to the labour intensity of the sector. In
companies with stock management, it is not the value for materials purchased which is used, but the
value of materials which is consumed for production.

In some enterprises the entire material purchase is booked on one account and only by evaluating
manually the extensive cost centre accounts or stocktaking lists is it possible to expose the actual ma-
terial use into the material groups. As an aid, the recordings of the production manager can be multi-
plied with the assigned quantities with average prices, in order to at least be able to indicate orders
of magnitude. Unfortunately, it is obvious that such a system cannot strengthen cost consciousness in
handling raw, auxiliary and operating materials.

The frequent lack of proper balancing at the system boundary of the company is the first step in
identifying gaps in the company’s information systems. For this reason, it is important for the TEST
Team to develop recommendations on how to gradually improve the company’s information systems.
Their implementation during the TEST cycle ensures that better data can be generated for the next
year, leading to a better closure on the mass balance. The goal should be that after a certain number of
TEST cycles the balancing is equal within an acceptable margin of error.

Data inconsistencies in the information systems are not the only barrier to arriving at good mass bal-
ances. The lack of data on materials and energy flows within the company boundary also represent a
major barrier. These barriers can be overcome by improving the cooperation between the production
and accounting departments.

The only information system available in all companies is the accounting system where all invoices are
recorded. These normally contain information not only on costs, but also on volumes purchased. The
goal is for both sets of information to be captured from invoices at the moment they are recorded in
the accounting system and to gradually improve the regular data monitoring systems. However, vol-
umes need to be consistently recorded in mass units (e.g., kilograms or tonnes), not pieces or units, in
order to be able to aggregate the volume figures. Often, investing in a weighing scale at the incoming
warehouse in order to be able to recalculate pieces, boxes, bottles, m2 and other units consistently into
kg or tonnes is the first improvement measure implemented.

Other common recommendations are the opening of new accounts for the different material inputs, and the
clear definition of which material numbers are to be posted to which account to make aggregation possible.

All material inputs should be recorded in the Worksheet 1 of the excel file with the amount of material
used for production. The materials lost on stock should be recorded separately, as the measures need-
ed to address these losses are different from the material used during the technical processes (materi-
al deterioration, spoilage and sometimes theft instead of leakages and scrap). Often, only the amounts
purchased may be available for several material categories, but not the actual amounts consumed in
a given period, and perhaps only sales volume for the output side and not production statistics for a
given period. The problem of purchase/sale numbers versus actual consumption and production num-
bers has been alluded to. So, one immediate improvement option would be in the stock management
and recording of all materials actually used for production.

Clear definitions as to which elements of the Input/Output analysis are recorded on what accounts,
which material numbers are assigned to which accounts and which materials are also recorded in
stock management are essential and should be noted in an internal accounting manual. The objective
is to obtain as complete a listing as possible of all material inputs by main categories. This will help
avoid having to break down accounts at a later date to show quantities used.
28

Once the total material input has been recorded in physical and monetary terms to the degree
available, the Worksheet 1 is used to answer the question: how much of the listed inputs actually
leave the company as product and how much is wasted as NPO? An estimate is made of the product
output and non-product output percentages for all input volumes. The results are recorded in the
column “NPO %” of Worksheet 1. The losses for each listed material input need to be traced or esti-
mated. In companies with good information systems, NPOs are monitored, not estimated.

The inputs with a high NPO share which is associated with high financial losses and where there is
potential for improvement will be identified as priority material, water or energy flows and become
subject for further investigation in TEST Step 1.5 and 1.6.

2.3.4. WHAT MIGHT CONSTITUTE NPOs?

The Table 8 summarizes the concept of MFCA: all inputs by definition either become a product or a
non-product output. The balance, however, can only be calculated if all inputs and outputs are record-
ed consistently in volumes (for example tonnes and hectolitres).

MATERIALS INPUTS PRODUCT OUTPUTS

Raw and Auxiliary Materials, Packaging Products (including their packaging) and sold
By-products
Operating Materials NON-PRODUCT OUTPUTS (Waste and Emissions)

Water X % NPO of Raw, Auxiliary and Packaging

Energy X % NPO of Water

100 % NPO of Operating Materials, Energy

Table 8: Materials Inputs, Product Outputs and Non Product Outputs

Advice on the estimation or calculation of loss percentages is provided as follows:

Raw materials
Non-product solid raw material output will mostly be disposed of as solid waste. Examples are metal
scrap from metal cutting operations, metal turnings from metal drilling operations. They can also end
up as the pollutant load in wastewater (e.g., in the form of high BOD in fish processing) or as an air
pollutant (e.g., as dust from grinding). If the raw materials are gaseous (e.g., industrial gases, perfume)
they will most often be emitted to the atmosphere. If the raw materials are liquid (e.g. milk), the
non-product raw material output is generally disposed of as part of mixed wastewater streams.

For a first estimate, the company’s internal calculation percentages for scrap of final product can be
used to estimate the NPO of raw materials. The employees at the related production lines often can
provide very good estimates, which are not known to the environmental or financial departments.

Eventually, with more detailed material flow balances, scrap percentages may need adjustment.
Product returns, obliteration, repackaging for other countries or specified customer requests, quality
control, production losses, spoilage, wastage, decay in storage, shrinkage, etc. are some of the causes
of waste generation that call for measures to increase production efficiency, which may be profitable
both from an economic and environmental point of view.

Auxiliary materials
In general, non-product outputs of auxiliary materials come from the same sources as raw materials
and suffer the same fates. However, sometimes the loss percentages are lower.
 29

Packaging
The packaging for products which is purchased will mostly leave the company with the product, but a
certain (normally small) percentage of internal losses, e.g. due to repackaging for specific destinations
or poor housekeeping, can occur and should be estimated.

The packaging materials delivered together with input materials are not recorded under inputs and thus no
NPO needs to be calculated. Packaging material not returned to suppliers of input material ends up as solid
waste and should be recorded there. As there isn’t a recording on the input side of this kind of packaging,
the mass balance will be off, however, the goal of this analysis is not to achieve an overall balance matching
to zero but to identify priority flows and focus areas and to make detailed balances only for those.

Operating materials
Since operating materials are by definition not included in the product, all goes to non-product output
(some of these materials may be incorporated into the buildings of the company, but will eventually
also become NPO). They can contain dangerous substances that need to be disposed of under special
regimes.

Administrative operating materials (like paper and other office supply) may be disregarded in the
first assessment.

Energy
As mentioned earlier, in the TEST approach, as in accounting, energy is considered to function like
an operating material, with 100% of it becoming NPO. Since energy is expensive in many countries,
the recording of energy as NPO is also necessary to ensure its distribution to cost centers in the third
worksheet, which in turn leads to define the focus areas for the TEST project. In companies with sub-
stantial flows of raw materials and products, energy consumption is often defined as priority flow.

The form that energy-related NPOs will take can vary. Where energy carriers such as coal, oil, natural
gas, and biomass are material inputs to the company and are burned on-site to generate energy (most
often in the form of steam) these inputs emit CO2 and other air pollutants. These will be the material
NPOs from energy inputs recorded in Worksheet 1 under emissions. There are also other forms of
NPOs from all types of energy inputs, the most common being heat and noise, but these are not con-
sidered in the MFCA Excel Tool except where equipment is purchased to mitigate their effects.

Water
In many sectors, water is used mostly or entirely as an operating material (e.g., cleaning water, cooling
water, steam) and therefore 100% of the input becomes non-product output. For some sectors, espe-
cially in the food industry, water also acts as an auxiliary material, with some of the water inputs going
into the product.

Products
Even after their manufacture, products can become non-products outputs. Product returns, obliteration,
repackaging for other countries or specified customer requests, quality control samples, production loss-
es, spoilage in storage, shrinkage, etc. are some of the causes of products becoming non-product outputs.
30

Care needs to be taken with certain flows. For instance, returns of final product and losses of product
during production may be considered as a waste output or, if sold, as a byproduct. Double counting
of raw material and product losses must be avoided. The lost sales volume may also be considered on
Worksheet 3 as cost with a separate line under raw materials.

INPUT HINTS FOR ESTIMATION OF NON-PRODUCT OUTPUT (NPO) IN

PERCENTAGES
Raw materials For the first assessment, it may be reasonable to estimate the NPO percentage
for all raw materials as a total if no data is available for each separate material
input, e.g. 5-20 %. For example in the pulp and paper sector, an overall NPO
of up to 25% seems reasonable.

Over time it is best to gradually improve the information system, especially

the measuring and quality management for the main inputs and processes
Auxiliary materials For auxiliary materials the loss percentage may be lower than for raw materials.
Product Packaging
Experience shows 1–10% to be a reasonable range. In case no better data are
available, start the calculation with 5 %.
Operating materials Defined as 100 % non-product output
Energy
Defined as 100 % non-product output (unless company sells electricity pro-
duced on site to the grid)
Water Depending on product and processes. 100% for the pulp and paper sector as
the sold product is dry.
Table 9: Estimating NPO percentages

2.4 PROCESS FLOW CHARTS

For TEST, or any RECP project, it is important to distribute the total company-wide annual NPO costs
to production steps or cost centres. Therefore, once the material flow balance and NPO cost assessment
on a company level have been completed, and once top management has given its agreement as to which
flows should be considered priority, , the next step is to allocate the data from the system boundary of
the company fence to its internal processes. It is a prerequisite in order to proceed from Step 1.4 of TEST
to step 1.5. To do this, the structure for the process flow chart must first be set up, using Worksheet 2.

In accordance with cost accounting principles, internal processes are differentiated between the main
production processes, where the raw materials are converted into products, and additional supporting
processes, which are not directly linked with the flow of raw materials and products.

Cost centres are defined departments, units or even machines in a company to which costs are allo-
cated. Different managers are often responsible for different cost centres. Sometimes there is also a
differentiation between profit and cost centres or production and supportive cost centres. Production
cost centres (also called profit centres) are directly linked to the value-added process of the company
(the production process) while (supportive) cost centres are not directly linked to production process
(e.g. advertising, human resources, maintenance, steam production, wastewater treatment).

The structure of existing cost centres is often not related to the company’s production steps. So, a
process flow chart can be drawn and amended by supportive business areas like stock management or
quality control.

Figure 1 provides a schematic process flowchart that can be viewed from different perspectives: engin-
eers go from the system boundary of the company down to specific processes via process flow diagrams,
Sankey charts etc., while accountants apply cost accounting, stock management and production plan-
ning systems in addition to the profit and loss accounts. The secret to efficiency lies in defining inter-
faces at which all these information systems are linked to each other and provide consistent information
on a regular basis, opening the door to management and resource efficiency improvements.
 31

Process flow charts, which trace the input and output volumes of material flows (solid, liquid and
gaseous) on an engineering process level, give insights into company-specific processes and allow the
determination of losses, leakages and waste streams at the originating source. This requires a detailed
examination of individual steps in production - again in the form of an input-output analysis, but
sometimes linked to technical Sankey diagrams.

The process flow charts may be used to combine technical information with cost accounting data.
This can be done on a yearly basis, for cost centers or even more specific production units like a single
piece of equipment. In total, the data should aggregate to the yearly amount at the company level.

This level of material flow analysis will be the responsibility of technicians, but the data gathered should
be crosschecked to ensure consistency with the cost accounting system. Usually, a harmonization of
technical data with data from financial bookkeeping is not undertaken due to lack of inter-departmental
communication. Experience has shown that such a consistency check provides great optimization po-
tentials, and has thus become a major tool in environmental accounting. Consistent data and information
systems for process engineering and financial accounting are vital for efficient production management.

Emissions

Output

Input

Waste
Water

Products

Figure 1: Process Flow Charts: Opening of the Black Box

Splitting up the corporate flows into cost centers, or even down to specific production equipment al-
lows for more detailed investigation of technical improvement options, but also for tracing the sources
of costs. Most companies have their very specific process flow charts at hand. Linking them with the
existing cost centre structure may be a challenge and opportunity for improvement. For SMEs with no
cost accounting, this project step often means that this is the first time when costs are distributed to
production steps.

It is recommended to draw the process flow chart developed at maximum for the 20 most significant
process steps related with significant shares of NPO. The total NPO costs, and if available also the
volumes, will then be distributed down to these process steps in order to define the focus areas for
further investigation of improvement options.

Table 10 shows an example for a bakery, which is also available in the training tool kit. Table 11 provides an
example of how to complete this step in a pulp and paper company. Worksheet 2 of the MFCA excel file is
used for the process flow chart, which should later be linked to columns C onwards of Worksheet 3.
32

INPUT MAIN PRODUCTION ADDITIONAL PRO- OUTPUT

PROCESSES CESSES
Materials purchased Incoming Store Materials used for
production

Electricity Refrigeration Air emissions

Cooling agent

Materials used for pro- Preparation of materials Packaging waste of input

duction and tools materials

Egg white Beating the egg white Beaten egg white

Electricity Dirty bowl

Egg yolks, flour, sugar, Mixing Cake dough

etc. Dirty bowl
Electricity Organic waste

Oil for the baking pan Baking pan filling station Cake ready for oven
Dirty bowls

Gas Baking Baked cake

Dirty pan
Waste heat
CO2, NOx emissions

etc.

Test cake Quality assessment Organic waste

Chemicals chemicals waste
(hazardous waste)
Waste water

Dirty bowls and pans Cleaning room Clean bowls and pans
Cleaning agents Waste water
Hot water cleaning agents in waste
water

Packaging materials Packaging room Packaged cake

Electricity Solid waste

Electricity Sales room Solid waste

Marketing and back
office materials

Wood pellets Energy conversion with Fossil and perhaps

Gas combined block and biogenic CO2
steam production as well
as the compressed air
system for cooling

Maintenance materials Maintenance Solid and hazardous

and tools waste

Untreated waste water Waste water treatment Pretreated water to

from production municipality

Solid waste from the dif- Waste collection centre Waste to licensed
ferent production steps/ supplier
cost centres

Office materials Administration Waste

Etc.
Table 10: MFCA Worksheet 2: Process Flow Chart for a Bakery
 33

INPUT DETAILED MAIN ADDITIONAL OUTPUT

PRODUCTION PRODUCTION PROCESSES
STEPS PROCESSES
Waste cardboard, Incoming storage Losses on stock,
waste paper Waste
Auxiliary and operat-
ing materials includ-
ing their packaging

Waste cardboard, 1st separation of Pulp preparation Waste

waste paper solid waste Waste (rubbish),
plastic waste
Water, electricity Pumping water
from the river

Water, electricity Soaking the paper

Electricity 2nd separation of

waste

Auxiliary and operat- Mixing Mixing Waste, wastewater

ing materials,
chemicals, electricity

Auxiliary and Paper forming and Paper machine Waste, wastewater,

operating materials, compressing unqualified product
electricity

Wood Steam production Steam

Electricity, steam Drying Drying Unqualified prod-

uct, waste heat

Electricity Sizing Finishing & Waste

packaging
Electricity Rolling Waste

Electricity Packaging Waste

Final products Product storage Losses on stock

Operating materials Maintenance Waste

Diesel, petrol, Logistics Air emissions

gasoline

Operating materials Administration Waste

Total cost centres 5 6

Table 11: Pulp and Paper Company – Process Flow Chart Worksheet 2. Due to complexity of production
process, the detailed production steps are added to the main production processes.
34

2.5 ANNUAL NPO COSTS AT THE COMPANY LEVEL

After completion of the mass balance to the degree possible, the next step is to record in Worksheet
3, column B those annual NPO costs which have not been automatically exported from Worksheet 1.
The purpose of this is to add to the latter the universe of costs that the environmental manager deals
with and that can possibly be reduced by integrated pollution prevention and material and energy
efficiency projects. These costs include not only the typical end of pipe and waste management costs
(Category 2), but also MFCA system costs (Category 3), which are the NPO share of the costs of the
cost centers with NPO losses. The goal is not to show that environmental protection is expensive, but
rather to highlight the scope for savings potentials.

Overall, Worksheet 3 is used to estimate the Total NPO Costs, where these are made up of the
following items:

Environmental protection expenditure

(waste disposal, emissions treatment, control and waste prevention costs)

+ Material Costs of Non Product Output

(Costs of unproductive material at purchase prices or production costs (including e.g. cap-
ital
and personnel costs)

+ MFCA System Costs

(NPO share of the costs of the cost centers with NPO losses)
________________________________________________________________________________________________
= Total NPO costs

Figure 2: Total NPO Costs

Environmental and material flow costs at the company level are just a subset of the bigger cost
universe that management need to consider for good decision-making. Environmental costs are
just part of an integrated system of materials, energy and money flows through a company, and
not a separate type of cost. Doing MFCA is simply doing better, more comprehensive Manage-
ment Accounting, where the eyes of management are opened to hidden costs. Therefore, the
focus of MFCA is not so much on assessing total environmental costs, but on arriving at a revised
calculation of production costs on the basis of material flows (including energy and water).

For the assessment of total annual NPO costs, the broad cost categories in Figure 2 are further divided
into cost categories that conform to standard accounts. These are shown in Table 12 which shows the
typical loss percentages and relate to column B in Worksheet 3. The total costs are also automatically
aggregated to Worksheet 4.
 35

NPO COST CATEGORIES % SHARE OF NPO

1. NPO COSTS OF MATERIAL AND ENERGY INPUTS

• Raw and Auxiliary Materials e.g. 2- 20 %

• Packaging Materials e.g. 2- 10 %

• Operating Materials 100 %

• Water 1-100 %

• Energy 100 %
2. WASTE MANAGEMENT/END OF PIPE COSTS

• Equipment Depreciation of EoP Equipment

• Internal Personnel

• External Services

• Fees, Taxes and Permits

• Fines, Remediation and Compensation

3. MFCA SYSTEM COSTS

• Equipment Depreciation

• Internal Personnel

• External Services

• Other Costs

• TOTAL COSTS
4. ENVIRONMENT RELATED EARNINGS

• Other Earnings

• Subsidies for RECP/EMS Projects

TOTAL NPO COSTS
(minus TOTAL ENVIRONMENT-RELATED EARNINGS)

Table 12: NPO Cost Categories. This table is not a separate worksheet but shows how the columns of Work-
sheet 1 and Worksheet 3 should be automatically linked to each other regarding the NPO costs.

2.5.1. MATERIALS AND ENERGY COSTS OF NON-PRODUCT OUTPUT

The total set of entries in column A of Worksheet 3 in the category NPO Costs of Material and Energy
Inputs should be identical and linked to column A of the mass balance in Worksheet 1. The different
inputs of material, water and energy should therefore be copied and pasted from (or linked from)
Worksheet 1 to Worksheet 3. Take care to insert enough lines before inserting in order to maintain the
automated summary and control functions.

Column B of Worksheet 3 should next be directly linked to Column G of Worksheet 1, where the NPO
costs have already been recorded. If the cells are not directly linked it is likely to lose changes during
the data assessment.
36

2.5.2. WASTE MANAGEMENT/END OF PIPE COSTS

This cost category comprises conventional waste disposal and emission treatment costs including
related equipment, internal personnel and external services. It comprises all treatment, disposal and
clean-up costs of existing waste and emissions and can often be directly traced from the list of ac-
counts or from cost centers like wastewater treatment or waste management. The related costs should
be recorded in column B of Worksheet 3.

There can be questions as to what assets constitute end-of-pipe solutions. In general, it may be stated
that assets are allotted 100% to Category 2 when they offer no integrated solution to an emission, but
rather constitute a technology that does not solve the emissions problem at its source, but rather shifts
it from one environmental medium to another (e.g., from the air to the soil and then into the water).
These approaches are often expensive and inefficient, but seem to provide a quick answer to a legal
emission requirement.

Another issue is the apportioning of costs as environmental from projects which have a broader scope,
where these are related to the control of material and energy flows. Some projects not only have
effects of environmental protection (protecting nature), but also have effects on neighbours (noise,
odours) or employees (health and safety). In addition, projects can be aimed at reducing risks in cases
of accidents and other occasional production events for employees, nature or neighbours. It is often
difficult to determine precisely the environmental portion of these costs. Here, it should be kept in
mind that it is not the most important task to spend a lot of time defining exactly which costs are en-
vironmental and which are not, or what percentage of something is environmental or not, or if Energy
belongs to NPO and to what degree. The most important task is to make sure that ALL relevant and
significant costs are considered when making business decisions.

Depreciation for related equipment

This cost category contains the depreciation costs for End-of-Pipe equipment, like waste compacting
equipment, wastewater treatment plants, dust, air and noise filters. Depreciation spreads the invest-
ment costs over the expected lifetime for the equipment. Depreciation can be based on financial or
cost accounting procedures, or simply be estimated as 10 % of investment costs, depending on the
accounting data of the company.

Related Personnel
Labour time related to equipment linked to control and management of the existing waste and emis-
sion flows is recorded here, along with the costs of personnel for waste collection and disposal, legal
compliance, e.g., reporting to authorities and the staff of a wastewater treatment plant.

Taxes, Fees, Charges, Permits

Disposal fees, wastewater fees, packaging-license charges, energy taxes, emission permits and other
eco-taxes are recorded here.

Fines and Penalties, Clean-up costs, remediation, etc.

The fines for exceeding pollution restrictions are to be recorded here. In some sectors, costs for clean-
up, remediation and landscaping may be required, especially in the mining and oil industry, for gas
stations, power plants, etc.

2.5.3. MFCA SYSTEM COSTS

This cost category deals with additional MFCA System Costs according to the MFCA ISO 14051
standard. ISO 14051:2011 defines system costs as cost incurred in the course of in-house handling of
the material flows, except for material cost, energy cost and waste management cost, and provides as
 37

examples the cost of labour; cost of depreciation and maintenance; cost of transport. For cost centers
with highly inefficient production processes this actually implies recording nearly all costs of this cost
center as NPO costs. As a baseline for further investment options this actually makes sense.

These costs need to be taken from cost centre reports. If the cost centers or production steps, defined
in Chapter 2.6., are identical to an existing well developed cost accounting system, then the remaining
costs of these cost centres, not already captured in the cost categories Materials Costs of NPO and
Waste Management/End of Pipe Costs, could be included here with the loss percentage share of the
main raw material or final product. The total MFCA system costs need then to be manually counted
from the related cost centre distribution, as this information is not available from the list of accounts.

This cannot be done in the first one-day workshop, but may be a follow-up project for companies with
well advanced information systems.

2.5.4. ENVIRONMENT RELATED EARNINGS

Revenues from selling materials for recycling and other by-products, as well as funding for environment
projects and the receipt of monetary environmental awards are recorded here. It is recommended not to
offset sales of materials for recycling in the input category, but to separately account for it as an output.

2.5.5. TOTAL ANNUAL NPO COSTS

The MFCA Worksheet 4 automatically calculates the total NPO costs, showing the percentage distri-
bution by cost categories.

Table 13 provides an example for a pulp and paper company. It is worth highlighting that the data of
this case study refers to an SME located in a transitional economy with no EMS and no wastewater
treatment plant in place. This explains the negligible NPO costs associated with end-of-pipe and
integrated prevention (readers can compare this situation to that described in Table 21 in Appendix A,
which is a pulp and paper plant in Austria). Under these circumstances, energy costs accounts for 49%
of all NPO costs and the losses of raw materials for 44 % of total NPO costs. Improving efficiency for
those two inputs will thus also significantly reduce costs.
38

USD PERCENTAGE [%]

1. NON-PRODUCT OUTPUTS (NPO) 965.000 99,8%

1.1. Raw and Auxiliary Materials 427.500 44,2%

1.2. Packaging Materials 100 0,0%

1.4. Operating Materials 62.000 6,4%

1.5. Water 100 0,0%

1.6. Energy 475.300 49,2%

2. END-OF-PIPE 2.000 0,2%

2.1. Equipment Depreciation 0 0,0%

2.2. Operating Materials 0 0,0%

2.3. Water and Energy 0 0,0%

2.4. Internal Personnel 0 0,0%

2.5. External Services 2.000 0,2%

2.6. Fees, Taxes and Permits 0 0,0%

2.7. Fines, Remediation and Compensation 0 0,0%

3. INTEGRATED PREVENTION 0 0,0%

3.1. Equipment Depreciation 0 0,0%

3.2. Operating Materials, Water, Energy 0 0,0%

3.3. Internal Personnel 0 0,0%

3.4. External Services 0 0,0%

3.5. Other 0 0,0%

TOTAL ENVIRONMENT-RELATED COSTS 967.000 100,0%

(1. + 2. + 3.)

4. ENVIRONMENT-RELATED EARNINGS
4.1. Other Earnings 0 0,0%

4.2. Subsidies 0 0,0%

TOTAL ENVIRONMENT-RELATED EARN- 0 0,0%

INGS

TOTAL ENVIRONMENT-RELATED COSTS & 967.000 100,0%

EARNINGS

Table 13: Pulp and Paper Company - Total NPO Costs in Worksheet 4

2.5.6. PRESENTATION TO TOP MANAGEMENT

Once the TEST Team has these results, it is recommended that the table created on the Worksheet 4
be presented to Top Management, as the basis for a discussion and agreement about which material
or energy flows the company will choose as priority flows for the TEST project (see the case studies
in Chapter 3).
 
 39

2.6 MFCA - DISTRIBUTION OF COMPANY-WIDE NPO COSTS TO COST

CENTERS OR PRODUCTION STEPS

The process level is the main focus for pollution prevention and RECP projects. Data on the process
level is also necessary for further analysis by products. It is crucial that the system boundaries for
financial calculation by cost centers and for technical monitoring can be related to each other.

According to ISO 14051, a full MFCA across all cost centers or process levels requires full mass bal-
ances for each process step. In the TEST approach, this is not generally recommended. The aim in
TEST is to use the MFCA approach to focus efforts on a few priority flows, which should then be the
subjects of full mass balances. However, a full MFCA may be recommended, if:

• The portion of material costs of the entire operational expenditures is least 50%.

• There are production procedures where a broad product range can go through alternatively vari-
ous production steps.

• Cost Accounting is well established in the organization; and

• Product prices are actually being calculated on the basis of the cost center accounts (many SMEs
do not apply cost accounting at this level of detail).

In business sectors where basically one product is produced with a set procedure (breweries, paper
industry, energy utilities), an extensive allocation of material flows and related system costs to differ-
ent cost centers and production processes may not be necessary. In these sectors it may be sufficient
to perform MFCA on an annual basis for the system boundary of the company and only break down
the total annual NPO costs including waste management costs to the main process steps as performed
on Worksheet 2 and 3.

This section describes how to complete compilation of the MFCA excel worksheet 3, by filling col-
umns C onwards during step 1.5 of the TEST guidelines. This step is useful for the identification of
priority areas, highlighting processes that are associated with high economic losses related to NPO. At
this step the total NPO costs in column B of Worksheet 3 are apportioned to cost centres or produc-
tion steps as defined in Worksheet 2. Columns C-O (or more or less as defined in Worksheet 2) should
be directly linked to the cost centers/process steps defined in Worksheet 2.

Assign the total NPO costs in Column B to each cost centre/main process where they originated.
The annual costs are distributed to cost centres based on measured or estimated data. Use measured
data to the degree possible and record recommendations for improved data availability. In order
to facilitate the distribution of the figures in column B to column C-O, line 15 for raw and auxiliary
materials allows you to estimate the percentage distribution of the total NPO costs across the cost
centres, which can then be used, together with the subtotal of NPO costs to fill out line 14. Experi-
ence shows that production managers are better able to estimate the percentage distribution than
the cost allocation. Certainly, 100 % of all costs for each cost category need to be distributed to the
defined cost centers/process steps. In order to ensure consistency, column P contains a function
that automatically cross checks the full distribution of all costs recorded in column B. A similar
system exists for all the subcategories.

Next, all costs for waste management and end-of-pipe should be distributed to the relevant cost cen-
ters/process steps to the degree possible. This is facilitated by cost accounting reports and requires
expert judgements from the assessment team. The cost center HSEQ (Health Safety Environment
Quality) may also be used as a collection option.

The MFCA system costs should only be reported if a detailed cost accounting system allows drawing
them directly with their respective NPO share from cost center reports.
40

The outcome is a distribution of total annual NPO costs by costs centre or production step - line 180
of Worksheet 3. These costs should then be transferred into a percentage distribution (line 181) and
the cost centers/process steps with the highest share of NPO costs are candidates for being chosen as
focus areas (these costs also become the baseline for any RECP project established for chosen focus
areas). Other criteria, like the technical possibility to reduce NPO in a defined process step, should
also be taken into consideration and recorded.

An example of worksheet 3 for the pulp and paper company, for the first cost category only, is provided
in Table 14.

ENVIRONMENT- COST CENTERS (PRODUCTION PROCESSES, DEPARTMENTS, ETC.)

TOTAL USD

AL COST CAT-

Finishing

Mainten-
Manage-

Adminis-
Machine
Prepara-
EGORIES
Storage

Logistic
& Pack-

Energy
Mixing

Drying

tration
Paper

aging

ment

ance
Pulp

tion

1. Non-Product 965.000
Outputs (Npo)
1.1. Raw and
Auxiliary Materials
Raw Material 25 425.000 38.250 148.750 21.250 4.250 127.500 85.000
% loss druing pro-
duction
Loss in Stock 2.500 2.500
Subtotal 427.500
1.2. Packaging Ma-
terials
Strings and steel 100 100
traps 2 % loss

Subtotal 100
1.4. Operating
Materials
Repair & Mainten- 12.000 600 1.200 600 6.600 600 1.200 1.200
ance, +-M/C
Operating materials 50.000 2.500 42.500 5.000
Subtotal 62.000
1.5. Water
Water from the
river
Water consumption 100 5 80 15
from public supply
Subtotal 100
1.6. Energy
Electricity 300.000 6.000 75.000 15.000 15.000 135.000 15.000 9.000 9.000 21.000
Diesel 20.000 20.000
Wood 150.000 150.000
Petrol 5.000 5.000
Gasoline 300 300
Subtotal 475.300
Total Category 1 965.000 49.250 224.350 79.955 19.850 274.100 100.700 160.280 9.000 25.300 22.215

Table 14: Pulp and Paper Company - Breakdown of NPO Costs by Cost Centers in Worksheet 3
 41

2.7 RECOMMENDATIONS FOR IMPROVING INFORMATION SYSTEMS

In general, the data quality depends on the quality and availability of traditional accounting sys-
tems like financial accounting, stock management, and for larger companies cost accounting and
production planning. Some recommendations for the improvement of data collection and infor-
mation systems have resulted from several case studies with SMEs in transitional countries and
are discussed below.

Data recording of material purchase by material groups in financial accounting

In many companies the entire material purchase is booked to one account only, material purchase, and
not to several accounts according to the different materials (e.g. flour, sugar, eggs for a bakery). Even
if materials are also assigned numbers it is difficult to expose the actual material use within larger
material groups (actual amount of flour used for production). As an aid, the recordings of the produc-
tion manager can perhaps be multiplied with average prices, in order to be at least able to indicate
orders of magnitude. The fact that such a system cannot strengthen cost consciousness in handling
raw, auxiliary and operating materials is obvious. It is recommended that goal be that the purchase for
each material group is eventually recorded on a separate account and that inventory differences are
recorded separately.

Separate accounts for material groups

A clear distinction between the accounts for raw, auxiliary and operating materials is necessary, espe-
cially when non-product output (NPO) costs are intended to be assessed. Raw and auxiliary materials
are part of the product, thus loss percentages need to be calculated or estimated. Operating materi-
als are by definition not part of the product and thus must become part of waste and emissions. The
amounts and values used are often not consistently recorded.

• Separate materials from services

Accounts for materials and utilities should be clearly distinguished from accounts for services. If only
materials are collected on an account then the volumes used may be estimated dividing with average
prices. Materials and supplies for maintenance need to be separated from maintenance services, thus
allowing total materials input to be calculated.

Posting of inventory losses

The posting of inventory changes should be carried out separately for the different materials accounts
(e.g. flour, sugar, eggs) and include a separate recording of the price and volume difference. This way,
accurate data on materials inputs and outputs in volume and price can be obtained for each material
group and the total amounts and values of materials used are available for further controlling meas-
ures. Posting of the total difference of inventory change to one separate account leads to lack of know-
ledge regarding actual materials used.

Recording of material numbers in production planning systems

It should be clearly defined which material numbers belong to which material group and account.
The material groups should be traceable, e.g. by separate accounts. This recommendation calls for a
consistent hierarchy between accounts, material groups and material numbers on stock.
Volumes should be added gradually to the recordings of material numbers in stock management. This
way, consumption would be aggregated automatically into volumes. Consistent use of volumes (kg or
tonnes), not units (pieces) in the information system ensures that the total sum automatically aggre-
gated does not have to be manually corrected.

Estimation and recalculation of scrap percentages

The loss percentages for raw materials, packing material, auxiliary materials and the final product
are often based on outdated estimated values and only are recalculated for a few material groups. The
employees on-site usually have more precise estimated values than the accountants. A correct recalcu-
lation often leads to frightening results.
42

Strive for consistency of system boundaries for MFCA in technical and financial information systems
and define which accounts, cost centers and cost categories must be consistent by amount and value.

The input-output material balance is hardly ever consistent with the system boundaries of the accounts
and cost center reports. For example, for the recording of the costs and amounts of waste in one com-
pany project three different values and records were provided for one site (record of the environmental
manager without the costs for weighing, transporting and renting the disposal bins; the financial account
with some wrong postings; and the accounts of the several suppliers with additional services).

New Accounts
Separate accounts for the utilities (energy, water) should be established, defined as direct costs of
production.

Earnings from sales of scrap metal, steam condensate etc. should not be offset directly against the materials
purchase account. Instead, separate accounts for other earnings from by-products should be established.

Mass, water and energy balances for defined process steps

During the first MFCA assessment, the mass balance is split up into the main production steps or cost
centres. Establish data monitoring points to regularly repeat this exercise and check consistency with
existing information systems.

New Cost Centers

Rework the structure of cost centres and make it consistent with technical data monitoring interfaces,
so that regular performance measurement is possible. The creation of self-standing, independent cost
centers is recommended for:
• Waste landfills (only in the case where the company has its own existing landfill or or is
planning one)
• Wastewater treatment plants (especially if these have their own personnel, significant main-
tenance and chemicals consumption)
• Environmental, health and safety management (This is very useful if a joint responsibility is
defined as well and the related invoices for monitoring, equipment, prevention and disposal
become easily available from the information system.)
• Energy management (recommended if energy, e.g. steam, is produced on site)
 43

COMMON RECOMMENDATIONS FOR IMPROVEMENT OF

INFORMATION SYSTEMS

This box gives a list of the most common recommendations from the case studies and can also be
used to benchmark companies.

FINANCIAL ACCOUNTING
The financial accounting system with the list of accounts of the trial balance should be used as the
starting point for the NPO assessment. Thus, the data is consistent and can be benchmarked.
The accounts for raw materials, packaging and operating materials, as well as energy and water
consumption should be clearly separated and not mixed into other accounts. It may be recom-
mended to separate accounts (e.g. for packaging and auxiliary materials) or create additional
accounts to clearly reflect the consumption of the different input categories of the mass balance.
There should be a defined hierarchy between main accounts e.g. for main raw materials, more
detailed accounts for e.g. several raw materials of one type by different suppliers and the system
of material numbers in stock management. Thus, the material numbers in stock management can
be aggregated by value and volume and are directly related with one specific account in financial
accounting.
Posting of inventory losses should be done separately for each main accounting group and not only
in one line. The actual consumption is thus available for each material group or category.
The accounts for material inputs in physical volumes should be separate from accounts for servi-
ces, e.g. also for maintenance, water and energy management, disposal fees.
Earnings from sales of scrap metal, steam condensate etc. should not be offset directly against the
materials purchase account. Instead separate accounts for other earnings from by-products and
waste for recycling should be established.

COST ACCOUNTING
If the company is large and complex enough, a cost accounting system with assessment of costs by
defined cost centers should be installed.
The structure of the cost centers should be consistent with the process flow chart. It is recom-
mended to use the diagram of main processes to define cost centers.
For large companies with an existing cost center system it is recommended to establish a cost
center for environmental management and perhaps for the wastewater treatment plant in order to
be able to trace the related costs more easily.
If energy or steam is produced on-site a separate cost centre for energy management may be advis-
able.
The total annual NPO costs should be distributed to the main cost centers/production centers.
The NPO volumes of lost materials and used operating materials and energy should be distributed
to the main cost centers/production centers.
This distribution should be based on regular measurements (per shift, dialy, monthly) for the im-
portant consumption/waste streams.

STOCK MANAGEMENT
A stock management system with recording of materials used for production should be estab-
lished at least for raw materials.
It should also include packaging materials.
It should also include operating materials. (Starting point should be all chemicals and cleaning materials).
The materials should be consistently recorded by volumes, not by units. Units can not be aggregated.
There should be a defined written procedure, which materials should be posted on which ac-
counts. The consumption of different material groups should available in money and volume. (not
only one account for materials purchased and another for changes in stock of many materials
together, but one account for each material group, e.g. wheat, milk, butter). It is recommended to
44

post the inventory differences specifically to the different material groups so that actual consump-
tion and expenditure is available not only on the highest aggregated level but by material type.
There should be a scale in the incoming store. All purchase can thus be weighted. This is also
necessary for monitoring of maximum shelf weight.
It is recommended to monitor total production volume before packaging. In some companies
only sales volume was available.
The production loss and returns from customers should be weighted and monitored in a
monthly statistic.
Loss of raw materials and loss of final product should be separately monitored and measured.
The scale should also be used to weight the waste volumes. A monthly statistic should be kept on
the waste volumes produced.
Waste should be stored at appropriate stores (separate stores with readable labeling for main
waste types, safety containment for hazardous waste) and disposed regularly.
Raw materials are often purchased in small bags and in huge quantities, require a lot of handling
and packaging materials. It is recommended to investigate with suppliers if shipping and storage
in large bags, bulks or even lorries are possible.
Loss of packaging materials for own products should be monitored.
It is required to separate the stores for chemicals, fuels and other liquids from stores for solid materials.
It is required to install retention safety containment for all chemical stores.
It is recommended to improve labelling in all stores.
It is recommended to monitor maximum shelf weight in the stores.
It is recommended to switch to electrical forklifts in all stores. The gasoline is polluting the
raw materials.
It is recommended to assess the amounts actually used for production and separately monitor
losses on stock and during production.

ENVIRONMENTAL MANAGEMENT
A waste separation and management scheme that allows for waste separation for recycling and
monitoring of volumes and costs per type of waste should be installed.
Keep monthly statistics on all types of waste in an excel file.
It’s recommended to monitor hazardous waste and its correct disposal.
It is recommended to monitor the amounts of waste oil from maintenance and to dispose of it
correctly, in addition, there may be soil contaminated with oil which also should be disposed as
hazardous waste and treated properly.
It’s recommended to collect organic waste separately and compost it.
It is recommended to establish a regular monitoring system for water consumption in production
and other processes.

SAFETY MANAGEMENT
It is recommended to install a safety management system and establish a person responsible for
safety management.
It is recommended to store liquids separate from solid goods. It is recommended to investigate if
safety containments are required for chemicals in order to prevent spills.
Make sure that the floors are not slippery or wet as there is a risk of accidents and a waste of water.
Provide safety paintings on the floor to differentiate between path ways and production areas.
Make sure that no materials are stored in undefined areas.
Control of steam pressure in order to prevent risks.
 45

2.8 APPLICATION FOR INVESTMENT APPRAISAL OF RECP TECHNOLOGIES

Environmental managers face a common dilemma when it comes to investment decisions related to
environmental protection. First, they often have an engineering background and are not so familiar
with accounting tools. Second, they often have no direct access to the financial information system.
Third, the data that would be needed to show the costs of existing inefficient equipment are not vis-
ible in the existing accounting information systems. Thus, the benefits of integrated pollution preven-
tion are often underestimated.
Investment appraisal is used to determine the cost savings of an investment option compared to the
current situation or for comparing two competing investment choices. It is thus essential that the cur-
rent status of operating cost of equipment and related physical material flows be known.

The economic variables for assessment in static financial analysis include:

• Initial investment costs

• Operating costs and earnings,

• Profit,

• Return on Investment, and

• Pay-back period.

All methods of investment appraisal assume that all future inputs and outputs of an investment deci-
sion are quantifiable and financial values can be attached to them.

In dynamic financial analysis, the expected future monetary inflows and outflows are discounted to
the time of the investment and calculated into an internal discount rate or annuity. The opportunity
costs of capital (the lower value of cash flows which do not occur today but only in the future) are con-
sidered by discounting them with the interest rate of the financial markets. The sum of all discounted
future cash flows determines the net present value of a project or investment, which is compared to
the value of the old equipment and to the interest rate of the financial markets. A planned investment
has to be more profitable than receiving interest on a bank deposit.

Payback methods for capital budgeting do not consider cash flows beyond the payback period. Some
companies adopt internal rules that only projects with a payback period of two or three years will be
accepted, regardless of possible long-term benefits. Discounted cash flow methods in principle consid-
er all relevant future cash flows until the project ends, but as many companies apply excessively high
interest rates, which result in a negligible present value for medium- and long-term costs and savings,
only the first three years count in effect for the investment decision.

The approach and shortcomings of methods such as the payback period, internal rate of return, or
internal interest rate (IIR) are discussed in any textbook on corporate finance.

For RECP and environmental protection, the task is not so much to change the basic concept of
discounting future monetary flows, but to ensure the inclusion of all relevant earnings and expens-
es. RECP measures help to reduce not only disposal and emissions treatment costs but also increase
the efficiency with which purchased materials and energy are used. Costs of lost input materials are
usually much higher than pollution treatment costs. However, when calculating investments, the
former costs reduced costs for materials and emission treatment are often not completely calculated.
This results in distorted investment decisions.

The calculation sheet for Total NPO cost in Table 12 and Worksheet 3 and 4 may also be used to
calculate several investment alternatives and comparing them, or to directly estimate the resulting
cost savings. An annual assessment of total environmental expenditures should have been performed
46

beforehand, in order to provide a sound data basis. Depending on the project or investment, only some
cost categories may be relevant, but the likelihood of forgetting significant cost factors is decreased.

Once the total costs of two alternatives have been assessed for one year, they can be extended into
time series for capital budgeting. Estimates of monetary inputs and outputs for the first three years
should be more detailed. For years 4 to 10 rough annual estimates would be sufficient.

Once the data is available in good quality, the actual calculation can then be made by applying the
related functions in Microsoft Excel or by using other software like the UNIDO COMFAR III EMA
tool. The latter is an advanced version of financial appraisal software that is being used to asses RECP
Technology Options.
 
 47

3. CASE STUDIES

3.1 AIGUEBELLE, MOROCCO

The company Aiguebelle is active in the food industry. It has one production site with 146 employ-
ees. It works 3 shifts, 6 days a week. The main products are confectionery and chocolates. The main
market is the local market (90%), with the remaining 10% being exported to Africa and the Middle
East. The company was founded in 1868 and still works on the same site, but now has too little space.
It is planning to move to a new factory outside Casablanca in a couple of years. Chocolate production
is quite labour intensive. There is no separation into specific production lines in the cost accounting.
The company does not have an environmental management system according to ISO 14001, but is
planning for ISO 22001 certification.

At the beginning of the TEST project, Aiguebelle was not aware of its total environmental costs, nor
did it have knowledge of the concept of NPOs. After the MFCA assessment, which was done based on
preliminary estimates using data from production, accounting and the monitoring system for internal
production waste, the company realized that 5.18% of the total sales in monetary terms was lost (not
converted into final product). The total NPOs were estimated at 950,000 Euros and represented 9 % of
total costs.

The company also initially wanted to focus only on energy, as they considered this their main priority.
Yet after the MFCA assessment they realized that raw material losses were also a significant loss in
monetary value, corresponding to 36.2 % of total NPOs. The company had some environmental costs
in the form of payments to external service providers for waste management, but it also had some en-
vironmental revenues since it was able to sell some of its waste for recycling. This is shown in lines 2.3
and 4.1 of the Table 15. These costs are the only ones related with environmental management which
are visible in the accounting system. The breakdown of NPO is presented in Table 15 (the monetary
value is not disclosed due to confidentiality reasons).
48

NON-PRODUCT OUTPUTS (NPO) PERCENTAGE DISTRIBUTION %

1. Costs of Material and Energy Inputs 98.1%
1.1. Raw and Auxiliary Materials 36.2%
1.2. Packaging Materials 3.6%
1.3. Operating Materials 6.9%
1.4. Water 2.7%
1.5. Energy 48.7%

2. Waste Management/End of Pipe Costs 2.5%

2.1. Equipment Depreciation of End of Pipe Equipment 0,0%
2.2. Internal Personnel 0,0%
2.3. External Services 2.5%
2.4. Fees, Taxes and Permits 0,0%
2.5. Fines, Remediation and Compensation 0,0%

3. MFCA SYSTEM COSTS 0,0%

3.1. Equipment Depreciation 0,0%
3.3. Internal Personnel 0,0%
3.4. External Services 0,0%
3.5. Other costs 0,0%

TOTAL COSTS (1. + 2. + 3.) 100.6%

4. ENVIRONMENT-RELATED EARNINGS
4.1. Other Earnings -0.6%
4.2. Subsidies 0,0%
TOTAL ENVIRONMENT-RELATED EARNINGS -0.6%
TOTAL NPO costs 100.0%
Table 15: Aiguebelle NPO break down
KPIs and related baselines were identified for all flows with significant NPO costs. Benchmarking
and estimation of potential for savings showed there could be reasonable potential for improvement.
Based on high NPO costs and potentials for savings and improvements, energy consumption and raw
materials were defined as priority flows selected for detailed analysis. The company implemented
a monitoring system consisting of several weighing scales in the packaging line. Finally, the follow-
ing focus areas were selected considering the breakdown of NPOs to cost centers and potential for
improvement as shown in Table 16.

COST CENTERS % OF TOTAL NPO % OF TOTAL NPO

EXCL. ENERGY AND WATER
Store house 4.96% 8.58%
Mixing of ingredients 19.49% 5.53%
Conching 20.13% 18.23%
Temperature control of dough 6.12% 10.00%
Molding or extrusion of products 13.66% 25.00%
Recooling 20.57% 14.08%
Quality control 4.65% 9.11%
Cleaning of equipment 3.80% 0.89%
Administration 1.99% 0%
Logistics 4.65% 8.58%
Table 16: Aiguebelle focus areas highlighted in green

In order to have better information, the company established a monitoring system for the loss of
materials, and particularly its chocolate. Some of the chocolate can be recycled, but some is burned
during the process.
 49

2015 TO RECYCLE TO BURNING TOTAL

January 15,674.80 10,110.70 25,785.50

February 16,603.00 6,058.21 22,661.21
March 16,587.00 5,434.00 22,021.00
April 13,491.20 4,793.40 18,284.60
May 12,447.50 7,378.00 19,825.50
June 10,509.00 5,768.40 16,277.40
July 3,922.00 8,963.00 12,885.00
August 13,790.50 3,301.00 17,091.50
September 17,611.00 5,197.46 22,808.46
October 16,561.00 5,897.74 22,458.74
November 10,001.80 7,169.82 17,171.62
December 12,687.40 5,906.48 18,593.88
TOTAL 159,886.20 75,978.21 235,864.41
% 68% 32% 100%
Table 17: Aiguebelle monthly data monitoring

It was thus noticed that losses by burning represented only 32% of total rejects, with 68% being re-
cycled as shown in Table 17.
The losses of chocolate were further broken down by production steps as presented in Figure 3.

Burn losses 2015 – Total losses: 235,864 kg

0,40
37%
0,35
28,70%
0,30

0,25 Destroyed
0,20 (burned) 32%

0,15 Recycled 68%

10,90%
0,10
7,80% 8,40%
5,50%
0,05 1,60%
0,20%
0

Destroyed Recycled
Figure 2: Aiguebelle loss statistics

It turned out that one specific line in the molding flow process was responsible for 28.7 % of burn loss-
es and was thus chosen as first priority for detailed analysis (TEST Step 1.6) and for the generation of
improvement options. The preparation phase was not chosen as a priority area as it had recently been
investigated and improvements were in the planning stage already. OPIs were identified and monitor-
ing was also installed at the level of focus areas. After having enough data on performance of specific
OPIs the baselines were established.

Improvement options were generated. The suggested investments, estimated to be 795,236 Euros,
will save around 1,161,226 Euros per year, with a payback period equal to 0.68 years. This will re-
duce the consumption of water by 12,154 m3/year, of energy by 2,067 MWh/year and of raw materi-
als by 96 tons/year. The emissions of CO2, BOD5 and COD will be reduced by 1,023 tons/year.
50

3.2 AL-HAY HAMOUD HABIBA & SONS, JORDAN

Al-Haj Mahmoud Habibah & Sons Co. is a medium-sized enterprise that was established in 1951 for
producing different types of oriental sweets and pastries (hot and cold) for the local market. The com-
pany participated in the MED TEST II project in order to reduce production losses and costs through
a more efficient use of resources and to reduce operational costs by reducing energy consumption.

At the beginning of the project, the company was not aware of its total environmental costs, nor was it
familiar with the concept of NPO. They estimated the total environment related costs to about 2,500
Euros annually for waste disposal. After the MFCA assessment, which was done based on preliminary
estimates using data from production and accounting for the fiscal year 2015, the company realized that
from a financial point of view 63% of the total NPOs was due to energy consumption, 32% was due to
losses in raw and auxiliary materials (including losses of products) and that 5% of NPOs was related to
packaging materials and water.

The mass balance of raw materials input to products output showed a loss of about 6% of raw ma-
terials. It was recommended to actually monitor the loss of raw materials and final products. It was
also recommended to record the actual amounts of raw and auxiliary materials consumed in stock
management on separate financial accounts, and to consider purchase in larger bulks and big bags, as
there is a lot of handling and waste related with packaging of raw materials.

KPIs and related baselines were identified for all flows with significant NPO costs. Estimation of po-
tential for savings and regular monitoring of the relevant focus processes showed that there could be a
reasonable potential for improvement.

Based on high NPO costs and potential for savings, energy as well as raw and auxiliary materials flows
(the latter including losses of products in the production processes) were selected as priority flows for
detailed analysis.

The company decided to put in place a regular inspection and monitoring system of the generated solid
waste from each focus area in the process. The measurements of solid waste generated showed signifi-
cant improvements due to the implementation of saving measures: through these, 64% of the solid waste
could be reduced. Most of the implemented measures can be considered good housekeeping measures
such as changing the way of cutting the products and controlling staff practices in the cutting process.
Additionally, they include investments to replace the dough cutting machine by a more efficient machine
to consistently portion dough and to install an on site laboratory that can measure specific characteris-
tics of the used frying Ghee to check its suitability and to determine when to dispose of it.

The project’s energy efficiency experts investigated the plant’s energy system and conducted energy
measurements to identify the main energy users, inefficiencies and their root causes. Accordingly, 10
saving measures were proposed to reduce the consumption of energy (electricity and fuel) by heat con-
servation and recovery, and improve the lighting and cooling systems. Implementation of these measures
will reduce the company’s energy consumption by approximately 28% and CO2 emissions by 21%. Addi-
tionally, the company decided to replace its chiller, which will also result in further energy savings.
 51

3.3 PATES WARDA, TUNISIA

Pates Warda operates in the agri-food sector, employs 400 persons, and produces couscous, pasta and
special pasta. 65% of the production of the company is sold in the local market and 35% is exported to
the international markets. This company is a leader in the local market, holding 36% of market share.
It is certified ISO 9001, ISO 14001, ISO 22000.

At the outset of the project, it was found that the company did not have an exact idea of its total
environmental costs. The environmental costs recorded in its accounting system were limited to the
costs of solid waste collection and transport to landfill and the wastewater fee for discharge into the
public sewerage system.

The company had no precise knowledge of, or tracking system for, its losses of raw materials during
production operations, losses of packaging, losses related to customer returns and operating materials.
The use of the MFCA tool by the company was intended to improve this situation by establishing a
reliable information system useful for setting objectives for reducing losses.

Setting up the MFCA tool already led to the identification of several shortcomings of the existing
information system:

• Difficulties in data collection related to quantities of consumed materials such as packaging and
the rate of waste generated;

• Conflicting data between the accounting system and the ERP operating system;

• Global accounts that record expenditures of different kinds and natures;

• Absence of weighing scales at the reception of raw materials;

• eed to estimate the NPO percentages, mainly for raw materials and packaging, as no monitoring
N
data was available;

• Difficulties to gather data for product returns from customers for couscous and pasta.

The implementation of the MFCA concept provided the opportunity for testing the relevance and
coherence of the information system in place. Interesting, and for the plant personnel exciting, discus-
sions between the production, accounting and quality departments took place throughout the MFCA
exercise. These highlighted the need to work together and to communicate regularly. Discussions on
the estimates of the rate of loss of raw materials oscillated between 5% and 3%, to be consensually de-
termined at 3.1%. Also, in the beginning there was no estimate of the packaging loss rate. Testing and
evaluations of packaging consumption over a certain period of production made it possible to estimate
the NPOs of the main packaging materials at 1.86%.

Of paramount importance was the fact that the implementation of MFCA demonstrated that 1,160,000
Euros of sales are lost as NPO (not converted into final products), which corresponds to a total NPO
estimated at 5% for raw materials.

At the beginning of the project, the company wanted to focus only on energy as its priority flow, but
the MFCA assessment revealed that material losses were also very important as they accounted for
28.7% of total NPO costs. Another priority flow that was not well monitored was operating materials,
which represented 17% of the total NPO costs.

The graph in Figure 4 shows the distribution of NPO costs:

52

Raw Material
27%

Energy
53%

Operating Material
17%

Packaging Material Water

1% 2%

Figure 4: Pates Warda, NPO costs break down

Key Performance Indicators (KPIs) were established for all priority flows. Comparison with inter-
national benchmarks was used for setting targets for improvement. Based on criteria related to the
high costs of NPOs and consideration of the potential for improvement, priority flows and priority
areas were selected for further analysis and identification of RECP solutions.

Aware of the importance of NPO costs, the company decided to implement the following actions:

• Installation of a weighing system for raw materials at reception (incoming store)

• Installation of a hook scale for weighing packaging waste and recording it

• Installation of a flow meter and ultrasonic air leak detector for monitoring the consumption of
compressed air

• An energy data acquisition system connected to a computer processing station

• A system for monitoring maintenance and repair expenditures, with particular attention to pre-
ventive actions in order to manage the consumption of operating materials.

• I mplementation of good housekeeping measures such as improvement of the brushing system in

order to reduce losses in the couscous line.

• A facility for collecting and recycling product waste from the lines of short and long pasta.

• system for recovering steam emitted into the air, resulting from the couscous cooking operation,
A
in order to reuse it for preheating of the drying air and the water upstream of the boiler.

The first cycle of implementation of MFCA during the first year in the company allows to draw the
following lessons learnt:

• The company initially wanted to focus only on energy flows but the MFCA assessment revealed that
material losses were too high, corresponding to 28.7% of NPO costs. Also, the company was sur-
prised by the NPO value of the operating materials which represents 17% of the total NPO costs; The
MFCA exercise revealed that total environmental costs are underestimated by the company as the
accounting system records only waste management costs estimated at 38.400 Euros or and no atten-
tion is paid to losses of raw material et packaging that account for an NPO value of 1,240.000 Euros;
 53

• Gaps in the information system led to providing conflicting data between the accounting system and
the ERP operating system and resorting to the use of estimates in the absence of weighing scales;

• Lack of communication between accounting and production departments resulting from incon-
sistencies in the data, concerning losses (e.g. variation in estimates between 5% and 3% for raw
materials loss)

• The MFCA exercise allowed to provide a realistic estimate of the NPO rate at 5% (3.1% NPO re-
lated to raw materials and 1.9% NPO related to finished products returned from customers), thus
making the lost value of sales at about 1,160.000 Euros;

Other unexpected revelations were:

• The MFCA exercise triggered the awareness of the company about the importance of NPO and
convinced it to set a target for the reduction of NPO by 25% per year.

• A series of actions were taken to improve company’s information system for flow costs, in particu-
lar, a system for weighing raw materials at the reception stage as well as the generated waste from
production. Also, the company will invest in an energy data acquisition system connected to a
computer processing station. This will be included in TEST action plan adopted by the company.

• After the MFCA first cycle evaluation, the company intends to integrate the MFCA tool within its
accounting management system.
 
54

3.4 AL-GHRAWI, LEBANON

The Al-Ghrawi business began manufacturing a number of Dried Fruit, Malban and Nougat products
in 1891. At that time, production was done solely by hand. Today, the company offers about 500 differ-
ent sweets produced in two factories. The main processes are:

• Chocolate Dipping

• Chocolate Filling

• Delights

At the beginning of the TEST project, the company was estimating the total costs for energy consump-
tion, but was recording no other environmental costs, so there were no costs recorded for water input,
wastewater treatment, and waste disposal.

The MFCA assessment was done based on the list of accounts for 2015 and preliminary estimates for
the loss percentages based on production data. For the year 2015 the costs for water input and waste-
water treatment could be neglected. But, in light of upcoming legal requirements, the total NPO costs
were first calculated as they show up in the list of accounts 2015 and then with additional costs for
water input calculated at an average price of 0.0084 Euro/litre of water input. This average price was
calculated based on the actual costs of purchasing water from external suppliers and several studies
done on water shortage in Lebanon.

The company initially wanted to focus the improvement options on energy, as it considered this its
main priority. But the MFCA assessment showed that the NPO costs of raw and auxiliary materials are
significantly higher as shown in Table 18.

% WITHOUT WATER COSTS % INCLUDING WATER COSTS

100.0% 100,0%

1.1. Raw and Auxiliary Materials 52.3% 47%

1.2. Packaging Materials 1.6% 1%

1.4. Operating Materials 9.9% 9%

1.5. Water 0.7% 11%

1.6. Energy 35.6% 32%

Table 18: Al-Grahwi, NPO breakdown without and including shadow water prices

The MFCA assessment showed that the costs for materials and energy input account for about 53% of
total expenditures. Using an estimate for loss of raw materials of 4% in line with international bench-
marks, the NPOs of raw materials account for 52.3% without water costs, and 47% including water
costs, of total NPO costs. The total NPO costs including water costs account for 5% of total production
costs.

After conducting the mass balance based on measured data, the previously estimated NPO for raw ma-
terials was accurately calculated based on a flow chart process. The resulting recalculations decreased
the NPOs of raw materials from 52.3% to 32.3% without water cost and from 47% to 28.3% with water
cost. These losses cannot be avoided due to current process constraints. Also, the records for packing
materials, which previously were estimated as only recorded in units, were converted into volumes
and the mass balance was gradually refined.
 55

Al-Ghrawi next installed meters for energy and electricity as well as for water consumption. Since
November 2016, readings have been taken from installed meters. Data analysis for installed meters and
expert observations showed a high potential for energy savings and a good potential for water savings.

Based on high NPO costs and savings potentials the Table 19 shows which processes were selected for
further investigation:

Steam system 30% of energy consumption

Air Conditioning system (AC) 23% of energy consumption

Chocolate Production without AC 10% of energy consumption

Delight Production without AC 11% of energy consumption

Hot water for delights 3.5% of water consumption

Hot water for other non products 44% of water consumption

Table 19: Al-Ghrawi, processes with high NPO share

According to the TEST methodology, the following priority flows and focus areas were selected for
further monitoring and improvement options as presented in Table 20.

PRIORITY FLOW/ FOCUS AREA

Energy Air Conditioning Units
Energy Steam Boiler
Water Hot water for Delight Vats Cleaning
Water Hot water for other non-production uses
Raw and auxiliary materials Solid Waste Generation
Heat loss t Generators Heat Loss
Heat loss Hot Water Tank

Table 20: Al-Ghrawi, priority flows and focus areas

It was recommended to repeat the MFCA assessment for the upcoming financial years. Thus, the
improvements of the information system and of inputs and outputs in costs and volumes will become
visible.
56

APPENDIX A EMA -
DISTRIBUTION OF NPO COSTS TO
ENVIRONMENTAL MEDIA
Statistical agencies in several countries require reporting of environmental protection expenditures
by environmental media from certain large companies in specific business sectors, especially energy
utilities and companies who also fall under the CO2 Emission Trading Schemes. In this case, the com-
panies will perform an EMA, since there is no need for more detailed analysis of NPO cost distribu-
tion within the company. In cases where this reporting is mandatory, this may be the main reason for
a company to establish an EMA system. Note that the NPO costs of materials input are typically not
reported to national agencies.

To assist any users of this manual who are subject to such reporting requirements, a number of case
studies described in the public literature are given here. Table 21 provides published information on
an EMA assessment of the pulp and paper company SCA Laakirchen in Austria, which indicates the
average distribution of the total environmental costs to the different environmental media, by en-
vironmental cost categories. This Table is highly valuable to show a real case example with a real cost
distribution. Please note that the terminology is slightly different to the MFCA standards terminology,
which was developed significantly later.

EMA FOR ESTIMATION AND DISTRIBUTION OF TOTAL ENVIRONMENT-RELATED

COSTS – AUSTRIA

SCA Graphic Laakirchen AG, one of SCA’s pulp and paper production sites, has been tracking its
physical and monetary information under EMA since 1999 and has a well-established, consistent
system for capturing and assessing material flows and environment-related costs. The information
collected is used for decisions related to both environmental management and general production.
SCA Laakirchen annually calculates total environment-related costs and discloses their percentage
distribution by environmental domain in its environmental statement, as illustrated in Table 21.

The data in Table 21 illustrate the fact that the “materials purchase and processing costs of NPOs”
(cost category 1 in Worksheet 3) in many companies are often significantly higher than more fam-
iliar environment-related “waste and emissions control costs” (cost category 2 in Worksheet 3) –
approximately four times higher in the case of SCA Laakirchen. Fig. 21 also illustrates the fact that
“prevention and other environmental management costs” at SCA Laakirchen are quite low, despite
the fact that the company has implemented a number of preventive projects in past years that have
achieved significant savings in “materials cost of NPO” as well “waste and emission control.”

The data allow SCA Laakirchen to compare its environment-related costs from year to year. For
example, although manufacturing output rose almost 23% between 2002 and 2003, the use of a
new paper machine kept the total environment-related cost increase to just 14.7% over the same
period. This illustrates the overall positive financial impact of the company’s environmental
management initiatives. A more detailed look at the cost changes between 2002 and 2003 also
revealed some interesting points. For example, the overall cost of operating the wastewater
treatment plant did not change even though it was enlarged to handle the increased wastewater
resulting from expanded production. This was because the operational efficiency and mainten-
ance of the wastewater treatment plant were improved in several ways as it was expanded.
 57

Costs in other categories did increase. For example, the purchase costs of auxiliary materials in-
creased not only because of expanded production, but also because of international price changes.
SCA Laakirchen also observed that the distribution of total costs and earnings across the differ-
ent environmental domains remained more or less constant over the years: 22% air/climate; 54%
wastewater; 23% waste; 1% other.

The physical results of SCA Laakirchen’s environmental management efforts were also presented
in the company’s annual environmental statement. For example, despite a production increase of
about 23%, the procurement of water increased by only 11% and wastewater volume by only 13%.
In absolute terms these represent increases, but they are improvements per unit of production.
Use of physical inputs, such as fillers, recovered paper and energy, also increased in absolute terms
but reflected eco-efficiency improvements.
Source: SCA Laakirchen Website, IFAC EMA Guidance document, 2005

Note: the data in the Table 21 below are presented as a percentage of the total environment-relat-
ed costs and earnings for the company

ENVIRONMENTAL DOMAIN
SOIL +
ENVIRONMENT-RELATED AIR + WASTE- GROUND
COST CATEGORIES CLIMATE WATER WASTE WATER OTHERS SUM

Material Consumption Cost of NPOs

Raw materials 15.2% 15.2%
Packaging 0.1% 0.1%
Auxiliary materials 2.7% 2.7%
Operating materials 0.1% 42.2% 0.5% 42.8%
Energy 19.8% 19.8%
Water 0.0% 0.0%
Material Processing Cost of NPOs 0.2% 1.0% 1.2%
Subtotal 19.9% 42.4% 19.5% 81.8%

Waste & Emission Control Costs

Equipment depreciation 0.1% 2.8% 0.4% 3.3%
Operating materials and services 0.2% 5.5% 0.1% 5.8%
Internal personnel 0.7% 1.0% 0.1% 1.8%
Fees, taxes and fines 0.9% 2.7% 6.0% 9.6%
Subtotal 1.9% 12.0% 6.5% 0.1% 20.5%

Prevention and other Environmental Management Costs

External services for env. manage- 0.4% 0.4%
ment
Internal personnel for env. protection 0.1% 0.3% 0.4%
Subtotal 0.1% 0.7% 0.8%

I - VI Environment-related Cost 21.9% 54.4% 26.0% 0.1% 0.7% 103.1%

Total

Environment-related Earnings -3.1% -3.1%

Total

Total Environment-related Costs 21.9% 54.4% 22.9% 0.1% 0.7% 100.0%

& Earnings
Table 21: Environment related Costs by environmental Media at SCA Laakirchen
58

APPENDIX B: REFERENCES

Bouma J.J., Wolters J. Management Accounting and Environmental Management: A survey among 84 Eu-
ropean companies, Erasmus Center for Environmental Studies, Rotterdam, 1998

Fischer, H., Wucherer, Chr., Wagner, B., Burschel, C. Umweltkostenmanagement. Kosten senken durch
praxiserprobtes Umweltcontrolling, München, Wien, 1997.

IFAC, Environmental Management Accounting International Guidance Document on environmental man-

agement accounting (EMA), International Federation of Accountants, IFAC, New York 2005, www.ifac.org

International Organization for Standardization (ISO) ISO 14031, Environmental Performance Evaluation -
Guideline and general principles, Geneva, 1999.

International Organization for Standardization (ISO) ISO 14051, Material Flow Cost Accounting, Geneva,
2011

Jasch Ch., Danse M., Environmental Management Accounting pilot projects in Costa Rica, in Bennet M.,
Rikhardson P., Schaltegger S. (Eds.) Implementing Environmental Management Accounting: Status and
Challenges, Kluwer Academic Publ. , Dordrecht, NL, 2005

Jasch Chr. Environmental Management Accounting: Procedures and Principles, UN Divisions for Sustaina-
ble Development, 2001.

Jasch Ch., Schnitzer H., Umweltrechnungswesen – Wir, zeigen, wie sich Umweltschutz rechnet, Beispiel-
sammlung zur Umweltkostenrechnung und Investitionsrechnung, Im Auftrag von Bundesministerium für
Verkehr, Innovation und Technik sowie Bundesministerium für Land- und Forstwirtschaft, Umwelt und
Wasser, Wien, erschienen als Schriftenreihe 29/02 des IÖW Wien, Oktober 2002 und in den Berichten aus
Energie- und Umweltforschung des BM VIT 4/2003

Jasch Ch., Institut für Ökologische Wirtschaftsforschung, Vienna, Austria, Environmental and Materi-
al Flow Cost Accounting - Principles and Procedures, (Eco-Efficiency in Industry and Science, Vol. 25),
Springer, Heidelberg, New York, 2009

Jasch Ch., Governmental Initiatives: The UNIDO Test approach, Journal of Cleaner Production, 108 (2015),
1375 - 1377

UNEP. 2001. Promoting financing of Cleaner Production Investments – UNEP Experience. Ari Huhtala.
UNEP: Paris, 2001. www.financingCP.org

UNIDO COMFAR III Expert, COMFAR III EMA Module, Vienna, 2009