Application of ABB in environmental management accounting: Incorporating MFCA into the budget process

Traditional management accounting methods are difficult to provide the necessary information for environmental economic management decisions. In response to the increasingly urgent need for decision-related information, a new branch of accounting, environmental management accounting, has emerged and is receiving increasing attention. Material Flow Cost Accounting (MFCA) is a useful tool for managing complex resource and waste streams. However, MFCA is mainly used for ex-post accounting and reporting and no efforts are made to use it for forecasting. In this study, we introduce MFCA method into the budgeting process of manufacturing firms, and thus construct an MFCA-ABB (Activity-Based Budget) model. This model is applied to JLC Company which is a fragrant liquor manufacturer in China, in order to forecast and plan for its resource consumption, positive product output, and negative product generation. Based on the forecasts of involved material flows, inefficiencies in the company's liquor production process are identified; scenario analysis is then conducted to determine the optimal process and the technology adopted. The proposed MFCA-ABB model turns a pure operating budget into an environmental-economic budget, thus achieving both environmental and economic benefits for the company. Besides, this study makes an attempt to apply ABB in environmental management accounting, which suggests the possibility of applying the conventional management accounting tools, after modified, to the environmental-economic management of manufacturing firms in the future.