Question

1. Japanese companies are companies that apply Material Flow of Cost Accounting (MFCA) and this cost calculation method is then brought to Indonesia. Material Flow of Cost Accounting (MFCA) collaborates with ISO 14051. In connection with of MFCA to Indonesia, explain the MFCA starting from the historical process of MFCA, the definition of MFCA, the process of calculating MFCA, and the advantages if the companies using MFCA (using info graphic and explanation, you can also using example) (30 points).

Answer 1

Material Flow Cost Accounting (MFCA) is an instrument used by manufacturing companies to improve their material efficiency. By avoiding material losses (waste), energy, costs and CO₂ emissions should be saved. To achieve this, MFCA can be used to calculate the actual costs of waste (Hidden Costs). MFCA is an important element of operational resource efficiency for companies and is standardized through ISO 14051.

Historical Process of MFCA

The idea of Material Flow Cost Accounting was born in the 1980s. The aim was to develop an instrument to support environmental management and eco-controlling.

The method originated in Germany, but the breakthrough came in Japan. One example is the camera manufacturer Canon, which was able to save more than €30 million in material costs between 2004 and 2012 through Material Flow Cost Accounting.

Inspired by the Japanese best practice examples, more and more companies are taking a closer look at their material flows and material waste. And it's worth it, because the loss of material means lost added value, because the waste material was also purchased, processed and moved.

MFCA Best Practice Example - SWU Special Yarns

How can a textile company increase its turnover by 2.6% without investing in new facilities or losing the quality of its products?

By using Material Flow Cost Accounting (MFCA), the experts at ifu Hamburg helped SWU Special Yarns, an industrial yarn manufacturer, find a surprising answer to this question.

With the optimization measures identified, SWU was not only able to increase sales, but also save 61 tons of raw material and 225 tons of CO2 equivalents per year.

The case study is an excerpt from the recently published book "100 Pioneers for Efficient Resource Management", a joint project of the Institute for Industrial Ecology (INEC) at Pforzheim University and the Baden-Württemberg State Agency for Environmental Technology.

MFCA and its associated benefits

MFCA runs on the basic principle of conservation of Physics that states that “Energy can neither be created nor destroyed but it can be transformed”. Likewise MFCA emphasize that whatever goes in the production process as Input should come out as useful Output minimizing wastage or non-products. According to ISO 14051: Material Flow Cost Accounting; “MFCA is a tool for quantifying the flows and stocks of materials in processes or production lines in both physical and monetary units” (ISO, 2011, p.3). In traditional cost accounting, cost of waste and its disposal is dumped into overhead account which hides the resultant significant cost (Nakajima M. et. al.; 2014). However, MFCA classify the output into two categories that are “intended product” and “non-product/negative product”. The reporting of this negative product (Waste) helps in better understanding of waste costs and consequently helps in reduction of this waste either through product improvement or process improvement (Sulong F. et. al.; 2014). Thus the MFCA logic is simple; “Less waste leads to less inputs which reduces costs and environmental hazards.” In a study by Nakajima M. et al (2014); it is observed that MFCA identified two types of material losses. First are such material losses that can be tackled directly by production department itself as such losses may be reduced/improved at the production site. The other types of material losses are such that require cooperation from outsiders such as suppliers and involve further technical and financial studies. However, it is very difficult to attain the collaboration/cooperation of suppliers in such markets where there is high bargaining power of suppliers (Porter‟s five forces). This proposition is also confirmed by Sulong F. et. al. (2014) in their case study of a Malaysian SME, Alpha, and an automotive parts manufacturer, where Alpha while decided to change the technical design of its process to minimize waste experienced non-cooperation by its supplier which resulted in a delay of procurement of material required for that specific process. The benefits of MFCA implementation are: proper understand ability and identification of inefficiency areas, reduced costs of waste production and disposal, reduced costs of direct materials; reduced adverse environmental impacts, innovation, accuracy in product costing, improvement in n inter departmental communication regarding the use of resources and increased internal and management control (IFAC, 2005; Scavone, 2005; Kokubu and Tachikawa, 2013; METI, 2007; Schaltegger et al., 2002, 2012)

ISO 14051: Material Flow Cost Accounting

The importance of MFCA is also manifested by the fact that International organization for standardization (ISO) introduced a new standard “ISO 14051: Material Flow Cost Accounting” in September 2011 as a guide to businesses and as a source of awareness for businesses operating globally. ISO believes in the universal application of MFCA to all businesses regardless of their type as manufacturing or services. The ISO 14051 is a guidance standard rather a certification standard which means that it is not binding on the organizations and it is up to the will of the corporate to introduce MFCA in their organization voluntarily through “self-motivated implementation” (Kokubu and Tachikawa, 2013). The involvement of ISO provides MFCA reliability and credibility which has so far been absent. Moreover, the standards proposed by ISO from time to time has a wider impact not only because of its huge membership portfolio of more than 160 countries (ISO, 2014) but also because of the consultants that are involved in interpreting these standards thus provides businesses an opportunity to obtain more knowledge and information about potential marketing opportunities (Heras-Saizarbitoria & Boiral, 2013). Schaltegger et al. (2011) verifies the notion that the better known and publicized an environmental management accounting tool is, the more the probability that it is adopted by business.