Material Flow Cost Accounting (MFCA)

Costs considered in MFCA - the hidden costs

Material flow cost accounting (MFCA) is a management tool that aims to improve resource efficiency by providing a detailed analysis of material and energy flows within a production process. In contrast to conventional cost accounting, which focuses primarily on financial transactions and thus only fully allocates the disposal costs to the product, MFCA identifies inefficiencies and environmental impacts by considering the following types of costs, which are allocated to a separate cost center for waste:
 

1. Disposal Costs: These are the costs associated with the management and disposal of waste materials generated during the production process. They include expenses for waste collection, transportation, treatment, recycling, and disposal. MFCA helps to identify and quantify these costs, highlighting the financial impact of waste generation and encouraging the implementation of waste reduction and recycling initiatives to minimize disposal costs.
    
2. Material Costs: These include the costs of raw materials, components, and other inputs used in the production process. MFCA tracks the flow of materials from procurement to the final product, identifying where and how much material is used, transformed, or wasted. This allows for a detailed analysis of material efficiency and loss, helping to pinpoint areas where material costs can be reduced.
    
3. Logistics Costs: These costs are associated with the handling, storage, and transportation of materials and products. They include expenses for moving raw materials, work-in-progress items, and finished goods within the production facility as well as shipping costs to customers. Logistics costs in MFCA highlight inefficiencies in the material flow and opportunities for optimizing logistics processes to reduce costs and improve resource efficiency.
    
4. Labor Costs: These are the costs related to human resources involved in the production process. They include wages, benefits, and other compensation for employees directly engaged in manufacturing as well as those involved in supporting and maintaining the production operations. MFCA examines how labor costs correlate with material flows, helping to identify labor-intensive areas that may contribute to inefficiencies or waste.
    
5. Energy Costs: These costs cover all expenses related to the consumption of energy required to transform raw materials into finished products. This includes electricity, fuel, gas, and other energy sources. MFCA tracks energy use at each stage of the production process, identifying where energy losses occur and providing insights into how energy efficiency can be improved, thereby reducing overall energy costs.
    
6. Investment Costs: Investment costs refer to capital expenditures on machinery, equipment, technology, and infrastructure used in the production process. These costs include the acquisition, installation, and maintenance of production assets. In MFCA, investment costs are analyzed to understand their impact on material and energy flows, ensuring that investments contribute to reducing waste and enhancing overall process efficiency.

By considering these types of costs, MFCA provides a comprehensive understanding of the production process, identifying inefficiencies and areas for cost reduction that conventional cost accounting may overlook. Losses occurring at later stages of the production process contain higher costs because more energy and resources have been used to proceed to those stages, amplifying the financial impact of waste and inefficiencies.

Requirements for Material Flow Cost Accounting

The most important basis and requirement for material flow cost accounting is a material and energy flow model that transparently displays the production processes with material and energy flows, as well as with the waste and losses. When using material flow cost accounting for a production line or an entire site, the first step is always to set up and validate this model.

The sum of all costs attributable to material loss is equal to the maximum cost savings that can be obtained in a theoretically optimal state in which there are no material losses. Another way to view these potential cost savings is as an investment budget for reducing waste. By calculating the real costs of material loss, you therefore dramatically increase the potential for optimization.

Moreover, by avoiding non-essential material and energy flows within your production processes you not only increase energy and resource efficiency but also reap the benefit of cost reduction.

History 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.

• Asian Productivity Organization: Manual on Material Flow Cost Accounting: ISO 14051 (2014). Available online here
• Hyršlová, J.; Vágner, M.; Palásek, J. 2011. Material Flow Cost Accounting (MFCA) – tool for the optimization of corporate production processes. Business, Management and Education 9(1): 5–18. doi:10.3846/bme.2011.01   open access article available here
• ISO 14051:2011 Environmental management - Material flow cost accounting - General framework
• Kokubu, K; Kos Silveira Campos, M; Furukawa, Y; Tachikawa, H.: Material flow cost accounting with ISO 14051.
• Kokubu, K; Kitada, H: Material flow cost accounting and existing management perspectives. In: Journal of Cleaner Production, Volume in print (2014)
• Material Flow Cost Accounting: MFCA Case Examples. Tokyo 2011. Available online here.
• Schaltegger, S; Zvezdov, D: Expanding material flow cost accounting. Framework, review and potentials. In: Journal of Cleaner Production, Volume in print (2014)
• Schmidt, A.; Hache, B.; Herold, F.; Götze, U.: Material Flow Cost Accounting with Umberto
• Schmidt, M.: The interpretation and extension of Material Flow Cost Accounting (MFCA) in the context of environmental material flow analysis. In: Journal of Cleaner Production (2014). Available here.
• Schmidt, M.; Nakajima, M.: Material Flow Cost Accounting as an Approach to Improve Resource Efficiency in Manufacturing Companies. In Resources 2013, 2, pp. 358-369; doi:10.3390/resources2030358. Open access article available online