Material Flow Cost Accounting (MFCA) as a Tool for Identifying Hidden Costs and Rationalizing Resource Use Compared to Traditional Cost Accounting

Abstract

Cost accounting is traditionally used to allocate all costs associated with production loss to good products, which does not enable management to independently measure the resources that are being wasted in terms of materials, energy, and manufacturing processes. Material flow cost accounting, which was developed according to ISO 14051:2011, solves this problem by measuring the flow of each unit of material entering the manufacturing process in physical and monetary terms, classifying outputs into "positive" and "negative" products." This study applies MFCA to the audited 2025 financial statements of Baghdad Soft Drinks Company, an Iraqi PepsiCo franchisee, reclassifying total operating cost of IQD 763.59 billion into MFCA’s four cost centers and estimating the value of the negative product under three literature-informed loss-ratio scenarios (5%, 8%, 10%). The results show that MFCA reveals a negative-product cost of IQD 38.18–76.36 billion — 36 to 73 times larger than the IQD 1.05 billion the traditional system discloses as scrap-sale revenue — and equal to 20–41% of net profit before tax. The findings confirm that a material “hidden cost” exists in the company’s accounts and offer a replicable procedural model for other Iraqi industrial companies constrained to published secondary data.

Keywords:       Material Flow Cost Accounting; Traditional Cost Accounting; hidden costs; environmental management accounting; ISO 14051; Iraq; food and beverage industry.