Annex B. Material Flow Cost Accounting (MFCA) and Environmental Management Accounting (EMA)

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1 Annex B Material Flow Cost Accounting (MFCA) and Environmental Management Accounting (EMA) Content 1. Material Flow Cost Accounting (MFCA) 2. A Case Study of MFCA: Canon Inc. 3. Environmental Management Accounting (EMA): Relationship with MFCA The purpose of this annex is to provide general explanation of Material Flow Cost Accounting (MFCA) including a case study. Because MFCA is categorized as a component of Environmental Management Accounting (EMA), a brief explanation of EMA is also provided and the relationship between them is indicated. 1. Material Flow Cost Accounting (MFCA) MFCA is a system for measuring the flows and stocks of materials (raw materials) in a production process in both physical and monetary units. The German Federal Environmental Ministry and Federal Environmental Agency define MFCA regards the relevant material flows as cost collectors, and therefore allocates the costs of the company s production operations to these material flows 1. MFCA is discussed in UNDSD workbook on EMA 2 as a promising EMA tool, and Japanese workbook on EMA 3 also adopted MFCA as a primary tool. MFCA changes conventional organizational production concepts, and provides a new type of information that is cost and quantity information based on resource productivity for environmental management as well as production management. The creation of more products from finite resources by minimizing the amount of input resources including energy, which leads to minimizing non-product emissions, significantly contributes both to environmental conservation and sustainable development. MFCA can strongly support this mission mainly within an organization. In order to pursue this mission organizational production processes should be revised from the standpoint of the environment. Flow information for materials including energy and water, which are input resources, must be carefully examined because conventional information on materials is not very well treated for 1 FEM/FEA (2003) Guide to Corporate Environmental Cost Management, Germany Federal Environmental Ministry and Federal Environmental Agency, p.22. In Germany IMU (Institute für Management und Umwelt) has been played a critical role to develop this tool. 2 UNDSD (2001) Environmental Management Accounting: Procedures and Principles, United Nations, pp Ministry of Economy, Trade, and Industry (METI) (2002) EMA Workbook, METI Japan. JISC/Japan 1

2 environmental management. In MFCA all input materials flowing through production processes must be traced and categorized as product or non-product (material loss), and both products and non-products are treated as products in the calculation, in which the costs are measured separately. The saleable products are called as final products or positive products and wastes (emissions) are called as negative products or non-product output. From the viewpoint of MFCA, an organization is seen as a material flow system shown in Figure 1. Figure 1. Material Flow in an Organization Although the value of negative products is generally overlooked by conventional cost accounting, MFCA calculate the value by allocating material and processing costs to them. The difference between conventional cost accounting and MFCA is shown in Figure 2, which is a very simple example. This production process produces one product from 100kg materials ( 1,000) and processing cost ( 600). As Figure 2 shows, even if wastes are visible as substances in the factory, the value of the waste is usually overlooked in conventional cost accounting, and this amount is automatically included in the cost of output (product). However, in MFCA the waste is considered to be another product (negative product), and proper amounts of cost is allocated to it based on some proper criteria, which is weight in this example. Therefore, the value of the waste as a negative product is calculated as 320. This information provides an incentive to management to reduce that cost. JISC/Japan 2

3 Figure 2. The Difference between MFCA and Conventional Cost Accounting In MFCA the emissions (wastes) that were thus far simply deemed refuse are evaluated in terms of economic loss, and attention is called to the wastefulness and inefficiencies of many production processes. This stimulates improvement measures for reducing such waste, bringing about reductions in wasteful use of materials, which in turn reduces emissions as well as material and waste disposal costs. Therefore, both a reduction in the environmental impact and a real economic benefit are achieved. MFCA is applied to not only large companies, but also small and medium sized enterprises. While this tool is especially useful for manufacturing companies, there is much possibility for other sectors including primary and service industries. Any organizations in any sectors which handle or consume materials that involve energy can get considerable benefits from MFCA. Therefore, this tool is also very promising for developing countries as well. In addition, MFCA may also be extended beyond the bounds of a single organization and applied for realization of resource productivity improvements across the entire supply chain. Applications and benefits of MFCA on a global scale among organizations can also be anticipated. JISC/Japan 3

4 2. A Case Study of MFCA: Canon Inc. There are many case studies of MFCA in the world. For example, more than 50 case studies are available in Japan. In Germany IMU has been promoting MFCA and published lots of case studies 4. If the scope is enlarged to waste cost management, huge numbers of case studies and examples are available (please see, for example, Bennett and James, 1998, USEPA, 2001 and IFAC, 2005). Among many case studies, Canon is picked up here because this is a typical success example in MFCA which achieved eco-innovation. Canon introduced MFCA to a lens factory located in Utsunomiya Japan in 2001 as a first trial. Since then as of December 2006, MFCA was being used by a total of 12 sites in Japan and eight overseas in the company. The economic effects of these efforts at major manufacturing sites in Japan was 620 million in 2005 and 1.0 billion in 2006 (Canon Inc., Sustainability Report 2007, p.37). In this section the case of the lens factory in Canon is explained. Figure 3. The Processing of Lenses Lenses are being processing in the factory as shown in Figure 3. Before introducing MFCA, Canon understood the own process of processing lenses as higher production yield rate, which was 99% in the above chart of Figure 4. Conventional management tools were based on the number of finished goods. In this case, only one piece per 100 glass-materials was faulted, so this production yield rate is considered to be 99%. But MFCA measures the difference between the weight of in-put material and finished product 4 IMU introduced MFCA into the following companies under Eco-Effizienz (Eco-Efficiency) Project, sponsored by Bayerische High-Tech-Offensive, Germany: Ciba Spezialitätenchemie Pfersee (Chemical), Freudenberg Haushaltsprodukte Augsburg (Textile), Sortimo International (Automotive), Rohrleitungsbau Süd (Tank Construction), Fujitsu Siemens Computers (Computer), Keimfarben (Mineral Dyes) PCI Augsburg (Chemical), Hörauf & Kohler (Plastics), TopStar (Furniture). In Chiba in this list, MFCA revealed material differences about $2, and employees are encouraged to work on the reduction of material losses. (Please see JISC/Japan 4

5 ( positive product ). Then, Canon found the real yield ratio based on MFCA is only 68%, not 99%. As the below chart of the figure 4 shows, MFCA indicated that this process wasted about 32% of glass-material by weight, which was overlooked by conventional cost accounting. This means that much space for improvement was revealed through MFCA. Figure 4. Comparison between Conventional Management and MFCA MFCA provided more detailed information on the negative product (wastes) as shown in Figure 5. MFCA analysis made clear the following points: Material loss was 1/3 of the total; About 2/3 of the material losses was generated in the grinding process; The material losses generated in the grinding process mainly consisted of the material cost and the cost of disposal/treatment of waste liquid, etc., which was due to sludge produced. Canon analyzed this information carefully, and started improvement initiatives for reduction of wastes in co-operation with the supplier of the material. JISC/Japan 5

6 Figure 5. MFCA Analysis: Cost Structure and Proportion between Positive and Negative Product As a result, Canon developed a new model of lens called Near-shaping as shown in Figure 6. The shaved portion of Near-shaping lens is smaller by 80% than conventional lens. By introducing the Near-shaping lens, the amount of sludge in processes in Canon was significantly decreased. In addition to such environmental conservation effects, this development and introduction of the new material achieved comprehensive cost reduction regarding material costs, energy costs, waste disposal costs and processing costs. This is a very typical eco-innovation generated through MFCA. JISC/Japan 6

7 Figure 6. Near-shaping to Reduce Sludge in Process After this success, Canon started to introduce MFCA into other factories including overseas. For example, MFCA was introduced into a subsidiary of Canon in Thailand. In this factory, MFCA changed the perception of production manager. MFCA revealed that material loss rate was 20% and this information motivated employees to reduce it. Finally half of material losses have been reduced and much economic benefits were enjoyed. As this project targeted energy (fuel and electricity) and water consumption, considerable improvements also came out in these areas. This is a very important example of MFCA in the developing countries. 3. Environmental Management Accounting (EMA): Relationship with MFCA Environmental management accounting (EMA) is a set of procedures used within corporations and other organizations for linking environmental considerations with economic pursuits. The International Federation of Accountants (IFAC) defines EMA as the management of environmental and economic performance through the development and implementation of appropriate environment-related accounting systems and practices. 5 EMA covers not only the monetary calculation regularly handled by accounting, but also extends to the calculation of materials on a physical basis. The former is called MEMA (monetary EMA), and the latter is called as PEMA (physical EMA). Figure 7 shows the main part of the framework of EMA as defined by the United Nations Division for Sustainable Development 6. MFCA is one of the most promising tools to integrate MEMA and PEMA. 5 IFAC (2005) International Guidance Document: Environmental Management Accounting, International Federation of Accountants, p UNDSD (2001) Environmental Management Accounting: Procedures and Principles, United Nations, p.10. JISC/Japan 7

8 Figure 7. The Framework of EMA (Source: UNDSD, 2001) EMA has a broad range of application fields and covers and a variety of tools. For example, Japanese METI s EMA Workbook explains the following six tools: Environmental investment appraisal Environmental target costing Environmental budgetary matrix Materials flow cost accounting (MFCA) Life-cycle costing Environmentally-conscious performance evaluation These procedures are divided into the information provision system that forms the basis of EMA, and individual procedures that support internal management decisions using the information received. The information provision system is the more fundamental of the two categories, and is comprised of MFCA and life cycle costing in the Japanese METI s workbook. Figure 8. Positioning of MFCA in the EMA System JISC/Japan 8

9 The position of MFCA in the EMA system can be presented as shown in Figure 8. While life cycle costing focuses on products beyond the boundary of an organization, MFCA targets mainly manufacturing processes within it. Therefore, when an organization is considered as a unit, MFCA would form more basic platform for EMA. In addition, while MFCA is completely independent from regulated accounting such as financial accounting, MFCA uses conventional accounting information, and therefore this tool can be also located as an interface between EMA and conventional accounting system. JISC/Japan 9

10 References Bennett, M. and James, P. (eds.) (1998) The Green Bottom Line, Greenleaf Publication. FEM/FEA (2003) Guide to Corporate Environmental Cost Management, German Federal Environmental Ministry and Federal Environmental Agency. IFAC (2005) International Guidance Document: Environmental Management Accounting, International Federation of Accountants. Ministry of Economy, Trade, and Industry (METI) (2002) Environmental Management Accounting Workbook, METI ( Ministry of Economy, Trade and Industry (METI) (2007) Guide for Material Flow Cost Accounting, METI ( Kokubu, K and Nakajima, M. (2004) Sustainable accounting initiatives in Japan: Pilot projects of material flow cost accounting in J. D. S. Hausmann, C. Liedtk and E. U. Weizsacker (eds.) Eco-efficiency and beyond, Greenleaf Publishing, pp Kokubu, K. and Nashioka, E. (2005) Environmental Management Accounting Practices in Japan, in Rikhardsson,P.M., Bennett,M., Bouma,J.J. and Schaltegger,S. (eds.) Implementing Environmental Management Accounting: Status and Challenges, Springer, pp Nakajima, M. and Kokubu, K. (2002) Materials Flow Cost Accounting, Nihon Keizai Shinbunsha. (available only in Japanese and Korean). Schaltegger, S. and Burritt, R. (2000) Contemporary Environmental Accounting, Greenleaf Publication. Strobel, M. and Redmann,C. (2001) Flow Cost Accounting, IMU (Institute für Management und Umwelt). UNDSD (2001) Environmental Management Accounting: Procedures and Principles, United Nations. UNDSD (2002) Environmental Management Accounting: Policy and Linkage, United Nations. USEPA (2001) An Organizational Guide to Pollution Prevention, US Environmental Protection Agency (EPA 625-R ). Wagner, B. and Enzler, S. (eds.) (2006) Material Flow Management: Improving Cost Efficiency and Environmental Performance, Phsica-Verlag. JISC/Japan 10