Theoretical framework for

Material Flow Cost Accounting

Master Thesis

to confer the academic degree of Master of Science

In the Master’s Program General Management

Author Anzinger Verena, BSc.

Student Number and enrolment number 1055396, 973

Submission Johannes Kepler University Linz, Institute for Environmental Management in Companies and Regions

Thesis Supervisor a. Univ. Prof. Dr. Heinz Karl Prammer Assistant Supervisor Univ.- Ass.in Mag.a Dr.in Daniela Schrack

Linz, March 2016

Declaration

I hereby declare under oath that the submitted Master's degree thesis has been written solely by me without any third-party assistance, information other than provided sources or aids have not been used and those used have been fully documented. Sources for literal, paraphrased and cited quotes have been accurately credited. The submitted document here present is identical to the electronically submitted text document.

...... Place, Date Signature

II Table of Contents 1 Introduction ...... 1

1.1 Research problem ...... 1

1.2 Research question and objectives ...... 3

1.3 Method and structure ...... 3

2 Sustainability and resource efficiency ...... 6

2.1 Idea and importance of sustainability ...... 6

2.2 Management strategies for critical ecological sustainability ...... 7

2.3 Resource efficiency ...... 9

2.3.1 Reasons for resource conservation ...... 9

2.3.2 Resource efficiency at a macroeconomic level ...... 12

2.3.3 Material efficiency at a microeconomic level ...... 14

2.3.4 Increase in efficiency – development and measures ...... 15

2.3.5 Material management...... 18

3 Material flow cost accounting ...... 21

3.1 History and basic idea ...... 21

3.1.1 Historical background and development ...... 21

3.1.2 Description of MFCA ...... 23

3.2 Goals and principles ...... 24

3.2.1 Goals ...... 24

3.2.2 Principles ...... 26

3.3 Key elements of MFCA ...... 26

3.4 Implementation of MFCA according to PDCA cycle ...... 28

3.4.1 Plan ...... 29

3.4.2 Do ...... 30

3.4.3 Check ...... 30

3.4.4 Act ...... 31

3.5 Fields of application...... 31

3.6 Benefits and selected limits ...... 32

3.6.1 Benefits ...... 32

III 3.6.2 Limits ...... 32

4 Delimitation of MFCA to existing cost accounting and selected EMA approaches 35

4.1 MFCA and traditional cost accounting ...... 35

4.1.1 Aims and purpose of traditional cost accounting ...... 35

4.1.2 Cost accounting principles ...... 37

4.1.3 Criticism of traditional cost accounting approaches ...... 40

4.1.4 Similarities and differences between MFCA and traditional cost accounting ....41

4.2 Delimitation to other (environmental) management accounting approaches ...... 44

4.2.1 Process cost accounting ...... 44

4.2.2 Activity-based costing...... 49

4.2.3 Life cycle costing ...... 52

4.2.4 Balanced scorecard ...... 56

4.2.5 Comparison and delimitation of selected EMA’s to MFCA ...... 60

5 Selected business theories in relation to environmental economic theories ...... 67

5.1 Economic theories ...... 68

5.1.1 Ecological modernization theory ...... 68

5.1.2 Resource dependence theory ...... 73

5.1.3 Systems theory ...... 78

5.1.4 Resource based view ...... 82

5.1.5 Transaction cost theory ...... 86

5.2 Investigation of theory basis of selected EMA approaches ...... 91

5.2.1 Process cost accounting ...... 91

5.2.2 Activity based costing ...... 92

5.2.3 Life cycle costing ...... 95

5.2.4 Balanced Scorecard ...... 96

5.2.5 Theory basis of selected (environmental) management approaches ...... 98

5.3 Assessment of selected economic theories in regard to MFCA ...... 99

6 Conclusion and future outlook ...... 105

7 References ...... 108

IV II Table of Figures

Figure 1: Main elements of Master Thesis ...... 4 Figure 2: Development of DMC of Europe ...... 12 Figure 3: Cost structure ...... 15 Figure 4: Material efficiency in Austria ...... 16 Figure 5: Integrated material management ...... 20 Figure 6: Main goals of MFCA ...... 26 Figure 7: Presentation of material balance ...... 27 Figure 8: PDCA cycle ...... 29 Figure 9: Overview total life cycle costs and revenues ...... 54 Figure 10: Illustration of systems theory ...... 80 Figure 11: Transaction cost theory ...... 88 Figure 12: Theory basis of ABC and process cost accounting ...... 93 Figure 13: Connection between the theories and approaches ...... 94 Figure 14: Theoretical origin of Balanced Scorecard ...... 98

III Table of Tables

Table 1: Efficiency measures...... 13 Table 2: Classification of cost accounting ...... 36 Table 3: Comparison between traditional cost accounting and MFCA ...... 37 Table 4: Calculation example of traditional cost accounting ...... 43 Table 5: Calculation example of MFCA ...... 44 Table 6: Comparison of MFCA and process cost accounting ...... 62 Table 7: Comparison of (environmental) cost accounting approaches and MFCA ...... 66 Table 8: Overview of preventive and end-of-pipe strategies ...... 69 Table 9: Comparison of Huber and Jänicke ...... 71 Table 10: Overview of theoretical background of selected EMA's ...... 98 Table 11: Evaluation of selected theories ...... 103

V IV Abbreviations

ABC Activity-based costing BSC Balanced scorecard DMC Domestic material consumption GDP Gross domestic product LCC Life cycle costing METI Ministry of Economy, Trade and Industry MFCA Material flow cost accounting NPO Non product output PDCA Plan-Do-Check-Act SBSC Sustainability balanced scorecard

VI 1 Introduction

Since about the mid-20th century, there is a growing awareness about the fact that the human has an impact on the environment through its behaviour and economy. The extent to which the industrialized nations already achieved economic growth, and the success sought by developing countries loads at the expense of the environment. These insights are already illustrated through the report "Limits to Growth" from Dennis Meadows et al. in 1972.1

1.1 Research problem One major issue of sustainability is the topic of resource use. Without the constant use of natural resources, the world’s economy as well as its society could not work anymore. Currently about a quarter of the world population consumes three-quarters of the resources and produces three-quarters of wastes and emissions. In the end, consumer behavior and lifestyle of the population decides on the demand for raw materials and how companies deal with products. 2 But as there is an ongoing increase in the global demand for natural resources and a related pressure on the environment, there is the problem that these natural resources are threatened to be overexploited.3

Having a detailed look on this, further subtopics and problems appear. These problems are located in the following areas:4  Many fossil and mineral raw materials show limits.  The extraction and production conditions of renewable raw materials can result in environmentally damaging natural interventions (e.g. loss of biodiversity, water scarcity...).  Damaging emissions can occur within transformation processes in the production.  At the end of the product life, unusable products are going to be wasted.

To handle these problems and to be able to establish an environmentally friendly material and energy cycle, two main issues are important: First, one has to focus on an economically and environmentally friendly use of resources, and second, one has to focus on minimal and little polluting wastes and emissions5. Due to the rising global demand for resources and the simultaneous shortage of natural resources, an efficient and sparing use of resources is

1 Kanning 2009, p. 16 2 OÖ Zukunftsakademie 2013, p. 52 3 SERI n.d. 4 Tischler 1996, p. 157 5 Tischler 1996, p. 159 1 essential and represents one of the greatest economic, social and environmental challenges of nowadays time.6

Especially in the business area, resource efficiency plays a huge role. In addition to the conservation of natural resources, an essential argument for an increase in resource and material efficiency is the possibility to reduce material costs. Nowadays, companies face increasing cost and work pressure. Furthermore, the actual conditions are characterized by international competition, short product life cycles, unsecure markets and increasingly difficult access to capital. Therefore companies are forced to continually decrease their costs through increased efficiency. 7 The economic research developed a huge toolbox over the last 40 years, which can be used to fulfil an economical and sustainable use of resources. One tool which should be highlighted is the material flow cost accounting (MFCA, ISO 14051).8 It is a method which combines cost-related and physical information, in order to minimize inefficiencies and waste in a company and to increase resource efficiency.9

Compared to other accounting systems – such as process cost accounting, activity based costing, or life cycle costing, the MFCA faces little attention in both, theory and practice. It appears so far that it is applied only limited in practice.10

One reason for this problem might be its non-existent theoretical foundation. Although there are already some case studies and reports on the practical implementation of MFCA, but there does not yet exist a pure theory-based research in the MFCA literature. Until now, the primary focus is placed in practice, and even there the attentiveness is low. This refers not only to MFCA in particular, but it is a problem that generally shows up in the field of environmental management systems.11 The author Parker notes that theory and practice should be carried out together as they have the potential to reinforce each other. This argument shows that theories are important and necessary to a certain point, because a theory free of practice is not working and vice versa. For all practical actions people make – consciously or unconsciously - theoretical assumptions, which means that a theory which is logically wrong cannot work well in practice in the end.12 To sum it up: To ensure a further spreading of MFCA in practice, one has to investigate the method’s theoretical roots.

Especially this argumentation can be seen as the starting point for my Master Thesis.

6 Zettl et al. 2014, p. 11 7 Tischler 1996, p. 159 8 Günther 2014, p. 238 9 METI 2007, p. 10 10 Christ/Burritt 2014, p. 2 11 Christ/Burritt 2014, p. 10 12 Bourdieu/Russer/Schwibs 2015, p. 54 ff 2 1.2 Research question and objectives The research questions of this Master Thesis focus on the topics of traditional cost accounting, business administration, and (environmental) management accounting approaches.

 How can we classify MFCA into the traditional cost accounting?  Which methods or business theories are used to explain selected (environmental) management approaches?  Which business theory/theories can explain the material flow cost accounting?

Based on the above mentioned research questions, one can derive the objectives of this Master Thesis. Even if the MFCA has already been analyzed in detail, it is interesting to have a look on its business background. Therefore, the overall goal of this thesis is to show a relationship between the material flow cost accounting and theoretical approaches in business administration to be able to create a theoretical basis in order to gain higher acceptance for MFCA in theory and practice.

Often, the main focus of the current literature is based on an eco-theoretical perspective. This thesis is trying to broaden the angle of view and will show that both, profit and environment can co-exist and can mutually reinforce each other especially through material efficiency. Further, the Master Thesis tries to discover that the integration of the environment into production and cost statements was no ‘freak of nature’. Although it is not visible for everyone at first glance and maybe just rudimentary hidden in some approaches, environmental issues were already deeply rooted in business administration.

1.3 Method and structure In general, the Master Thesis is going to be a theoretical work, which is based on analytical and descriptive methods to examine the already existing theory and literature. This observation is mainly done through a broad literature research. Therefore, a lot of secondary data was observed, and a lot of information was collected and used from books, various studies, the Internet and scientific articles.

This research included the following databases:  EBSCO Host  Google Books  JKU database LISS  Wiso  Electronic Journal Library of the  Springer Link JKU  Emerald  Google Scholar

3 The current literature already provides detailed information on the various environmental cost accounting approaches such as material flow cost accounting. There, the literature tries to discover the whole topic of MFCA, tries to distinguish it from other approaches, finds overlaps etc... This Master Thesis tries to provide another perspective, as already mentioned in the last chapter.

Besides describing general topics like sustainability and resource efficiency, the underlying work is separated into five main topics, which are presented in the following figure.

Delimitation MFCA and MFCA and of MFCA to Conclusion What is traditional business selected and future MFCA? cost administration EMA outlook accounting theories approaches

Figure 1: Main elements of Master Thesis Source: Author’s illustration

After a short introduction into the area of sustainability and resource efficiency, the Master Thesis will provide a general overview of the wide topic of material flow cost accounting. The second step compares MFCA with traditional cost accounting. As material flow cost accounting is somehow related to the traditional cost accounting, it is interesting to find out in which way they are similar or show differences. To find out whether ‘any cost approach is based on a theory’ is true or not, the thesis will have a look on selected environmental approaches and tries to compare it with MFCA. The fourth section of the Master Thesis is about the relationship of MFCA and business administration theories. Especially to be able to relate MFCA and business administration, a special grid is developed in which the core elements of MFCA are examined and compared with other, well-known business theories, such as

 Ecological modernization theory  Resource dependence theory  Systems theory approach

4 / 136  Resource based view  Transaction cost theory

From the author’s point of view, the selected theories represent a good mix of environmental and/or resource oriented theories and are well known in the business world. The goal of this chapter is to find one (or more) theory which are directly related (or at least inspired) to material flow cost accounting. This procedure should help to find out through which theory or approach MFCA can be explained.

To provide full information, it seems useful to distinguish between the various terms, which will be presented especially in this topic, such as theory, approach, model etc. A theory is a system of statements, which covers different rules and hypothesis.13 A model is the replication of parts of reality and tries to provide an image of this reality as far as possible.14

The exact boundaries between the terms are often difficult to determine, since there exists various views and interpretations; for example there is not just one definition of „theory“ as different authors interpret those terms different, which makes it hard to find a consensus.15 The last chapter is characterized by a final conclusion and a future outlook.

13 Giesen/Schmid 1977, p. 268 14 Dörner 1984, p. 337 15 Balzer 1997, p. 48 ff 5 / 136 2 Sustainability and resource efficiency

With the beginning of the 70s, sustainability played an increased role.16 The alarming decline in the quantity and quality of raw materials will make it extreme difficult for companies in the future, when it is about the implementation of a sustainable development and behaviour.17 Therefore it seems to be that the global challenge of the 21st century is still ‘sustainable development’.18

2.1 Idea and importance of sustainability Since about the mid-20th century, the awareness has grown about the fact that the population and it’s way of life have an influence on the environment, not only positively but often negatively, for example due to pollution. Often there is the assumption that the effort to create a better environment goes hand in hand with a reduction of economic development, which does not have to be true. Already in 1972, the report of the ‘Club of Rome’, illustrated by its title ‘The Limits of Growth’, clearly showed to which extent the economic growth from industrialized and developed countries contributed to the deterioration of the environment.19

The report first pointed out that the natural resources are finite and that humanity must deal economically with resources20. So, even if the population is already dealing with the issues of sustainability since the mid 70’s, it was not clearly labeled as ‘sustainability’. The most important contribution to the spread of the term ‘sustainable development ' came through the Norwegian Prime Minister, Gro Harlem Brundtland, who led the World Commission on Environment and Development (WCED) with the final report "Our Common Future" (Brundtland Report ) from 1987. 21 The key message of the report was that people have to 22 care for their environment in order to maintain it for future generations.

A main issue of sustainability is the people’s well-being, which preserves different types of capital such as natural, economic, human and social. The challenge of sustainability is to maintain and enhance these types of capital and furthermore it should avoid their exploitation.23

16 Kanning 2009, p. 16 17 Roy 1998, p. 16 18 Kanning 2009, p. 16 19 Kanning 2009, p. 16 20 Meadows et al. 1972, p. 50 21 Kanning 2009, p. 16 22 Kuhlman/Farrington 2010, p. 3438 23 Taticchi/Carbone/Albino 2013, p. xi 6 / 136 Sustainability might help to reduce costs in the long term, it is able to improve productivity and it might help to reach global standards.24 Generalizing the definition would mean that sustainability is the capability to keep up a specific state or condition. The term itself has a lot of different meanings, depending on the context in which somebody is using it. Due to the manner of this Master Thesis, the focus is placed on resource consciousness and material flows.25 This would mean that in the present situation, sustainability is all about managing resources.

Nowadays problem is that the given extinction and infiniteness of resources (as well as animals and biological diversity) threatens sustainability, which has an enormous effect on the world’s ecosystem.26 Therefore a key requirement for achieving environmental sustainability is the reduction of material, energy, water and land for production and consumption.27

2.2 Management strategies for critical ecological sustainability In addition to various management rules, there are some strategies which should pave the way to sustainable development.28 These are named as compatibility, sufficiency and efficiency strategy.

Compatibility strategy The goal of the compatibility strategy is the steering of anthropogenic (natural foreign) material flows in a way that they will be engaged just in those material streams which can be harmlessly absorbed and processed by the natural environment.29

Sufficiency strategy The sufficiency strategy follows the idea of a reduced resource and environmental consumption.30 The focus is placed on the level of the single individual , especially when it is about the industrialized countries, this strategy would mean a change in the lifestyle of the people.31

24 Badiru 2010, p. 32 25 Badiru 2010, p. 31 26 Bishop 1993, p. 69 27 SERI n.d. 28 Kanning 2009, p. 20 29 Kanning 2009, p. 23 30 Hauff/Kleine 2009, p. 38 31 Kanning 2009, p. 21 7 / 136 Efficiency strategy The efficiency strategy tries to increase resource productivity.32 This means that the services at all stages of the value chain have to be produced with the least possible use of materials and energy.33 The advantage of this approach is that there is the possibility to remove the conflict of economy and ecology through the rationalization of material and energy flows. An increase in resource productivity and energy efficiency results in both economic savings and environmental improvements. When considering all three sustainability strategies, the efficiency strategy is the most implemented method and has the highest importance in operational practice due to its economic advantages.34

Relatively speaking, this would be a good step towards sustainable development. However, the efficiency strategy does not solve the problem of the constantly increasing resource consumption due to the consumption patterns and the growing population.35 The increase in resource productivity can significantly delay the exhaustion of certain (energy) resources. Therefore, the efficiency strategy can have positive relief effects in the short and medium run. Even though, the efficiency strategy on its own is not able to solve the problem of the unsustainable use of the natural environment (it is only postponed).36

Resume Having a look from a macroeconomic perspective, a durable ecologically sustainable economy is only given trough the compatibility strategy. However, it requires time and space for far-reaching ecological innovations in the economy and society that are associated with a profound structural change. In addition, it often comes to social instability.37

Operationally, and from an entrepreneurial perspective the efficiency strategy seems to be the best strategy. The reduction of flows of materials and energy consumption results in reduced costs from the economic point of view; from an environmental perspective resources are simultaneously respected and waste and emissions avoided. Thus, the company's environmental performance increases. For this reason, the efficiency strategy is the most attractive among the three basic strategies of sustainability for companies.38

The best effect is achieved if the efficiency and compatibility strategy should be combined in a way that the efficiency strategy is used prior and synchronously switched to the

32 Hauff/Kleine 2009, p. 38 33 Kanning 2009, p. 20 34 Hauff/Kleine 2009, p. 38 35 Kanning 2009, p. 21 36 Dyckhoff 2000, p. 85 37 Prammer 2009, p. 61 38 Schrack 2014a, p. 60 8 / 136 compatibility strategy. Using both strategies in this way means that the transitional period for the structural change is relieved.39

2.3 Resource efficiency A major focus of sustainability is the availability of resources.40 In the context of resource efficiency often the term “resources” is used. It is about natural resources which can be defined as raw materials for material and energy usage as well as water, air and land.41

Within this work, raw materials and commodities are understood as taken from the natural, unprocessed natural resources and refer to materials, energy, water and air.42 They can be seen as substances or mixed substances in unprocessed state, which enter a production process.43

One approach, which will be discussed due to emissions associated with the scarcity of natural resources and the degradation of the natural environment, is the increase of resource efficiency.44 This can be expressed in terms of resource productivity (output / input) or resource intensity (input / output).45

2.3.1 Reasons for resource conservation Actually, the current economic system of the world is not working under certain perspectives. Especially the ecological resource system is out of balance. Under this consideration it has to be highlighted that it is necessary to adopt the predominant sustainable lifestyle of nowadays population in a way that the use of natural resources has to be lowered.46

Having a look on the development of resource consumption over the last years, it is going to be clear that there is an increasing resource requirement. From 1960-2008, the Austrian resource consumption has risen from 114 to 197 million tons per year, which is equal to 24 tons per person per year or 66 kg per person per day in 2008.47 The average consumption of resources throughout the European Union is 16 tons per person and year. In a European

39 Prammer 2009, p. 62 40 Albino 2013, p. 5 41 BMLFUW 2011, p. 4 42 BMLFUW 2011, p. 7 43 VDI 4800 2014, p. 5 44 Schrack 2014a, p. 71 45 Fischer 2013, p. 3 46 Albino 2013, p. 3 47 BMLFUW 2011, p. 4 9 / 136 comparison Austria is ranked on the fifth place. Only Finland, Ireland, Cyprus and Denmark have higher resource consumption than Austria.48

One of the reasons for this can be seen, for example, in the relatively low population density of the countries. This is accompanied by a relatively high material consumption for extended infrastructure. Another reason lies in the climate. Regarding Austria the argumentation is that due to the alpine climate, houses are built relatively massive. Furthermore, the spreading of the Austrian population is associated with the construction of roads and other infrastructural issues which leads to a more wasteful use of materials than in other countries.49

2.3.1.1 Ecological reasons The current way of resource use will change the ecosystems of the world, often permanently. The extraction and processing of non-renewable raw materials is often energy intensive, associated with significant interventions in the natural and water resources, leading to emissions of pollutants into water, soil and air. Also the production and extraction of renewable resources is often associated with high energy, materials and chemicals, partially water-intensive and is associated with various pollutants. To attract new production areas, land is converted which partially destroys entire ecosystems. Every extraction and preparation of a raw material has an impact on the environment.50

2.3.1.2 Economic reasons From both, an individual as well as from a macroeconomic point of view, the use of resources plays a huge role, especially with regard to its efficient use. From 2004 to 2008 commodity prices multiplied on the international markets. This development can be related to the coincidence of production capacity and the growing demand for raw materials from emerging economies such as India or China. This enormous price increase highlighted both, the dependence on natural resources and their scarcity. Even if commodity prices fell in the wake of the global economic crisis, they already recovered and are going to rise again.51

If there is a lack of resources on a national level, it may be of interest to optimize the use of resources and thus to relieve the foreign trade balance to be able to protect from the influence of price increases on a national basis.52

48 BMLFUW 2011, p. 27 49 Grimm 2010, n.p 50 Umweltbundesamt 2013 51 Faulstich et al. 2009, p. 33 52 Schmidt/Schneider 2010, p. 155 10 / 136 In addition to the consequences for the environment, the use of natural resources has many social implications. There is, for example, the question of the distribution of raw materials, the secure access to fresh water or food security of people around the world. Currently, the per capita consumption of raw materials in the industrialized world is approximately four times higher than in less developed countries. But while a large part of value is carried out of raw materials in developed countries, less developed countries are often disproportionately affected by the environmental and social impacts of these extractions.53

2.3.1.3 Entrepreneurial reasons Companies have a key role in the sustainable development, as they are involved doubled. They cause the problem and are also problem solver.54 For a company to remain competitive, one has to reduce avoidable costs. In this case the energy and material costs of the company and the monetary savings are the decisive parameters.55 Additionally, an operationally sustainable corporate management forms the basis to identify potentials and to increase the overall efficiency of a company. Prerequisite for that process is the analysis and development of efficiency potentials.56

The efficient use of resources leads to cost savings, the generation of competitive potentials and, where appropriate, to the development of new markets which are suitable for the company.57 Furthermore, it helps to reduce the dependence on imports by companies.58

Besides the already mentioned direct economic factors, companies are increasingly faced with environmental constraints (such as tax relief for implementation of energy management systems). Furthermore, the general public perceive, and sometimes expect environmentally friendly behaviour. Additionally, individual sectors are also subject to legal obligations and CO2 certificates are traded as "pollution rights". Last but not least, especially the end customers are increasingly sensitive and often require environmentally friendly behaviour from companies.59

53 Umweltbundesamt 2013 54 Müller/Koplin 2003, p. 29 55 Schmidt/Schneider 2010, p. 153 56 Biedermann/Vorbach/Posch 2013, p. 1 57 Biedermann et al. 2013, p. 1 58 Prammer/Schrack 2014, p. 5 59 Biedermann et al. 2013, p. 85 11 / 136 2.3.2 Resource efficiency at a macroeconomic level According to the Ministry of Quality of Life in Austria resource efficiency describes, the relationship between monetary output and natural resources input on an economic level and thus it shows how high the gross domestic product (GDP) is, which can be generated with a certain domestic material consumption (DMC). Resource efficiency is therefore a relative measure. On that economic level the GDP and the DMC are compared. This comparison helps to determine the overall economic resource efficiency is determined.60

The Eurostat website offers an illustrated statistics, which shows the DMC (tonnes per capita) of Europe overtime. The timeline allows viewing the development of material consumption, from the years 2000 to 2014. The illustration shows the development of the resource consumption, and how it has risen over the years.61

The legend on the left side of each picture gives information about the amount of DMC. What one can see on the figures is that Northern and Central Europe sporadically increased or stayed relatively constant on their resource consumption, while especially Western and Eastern Europe have risen sharply in its resource consumption.

Domestic material consumption Year 2000 Domestic material consumption Year 2014 (Tonnes per capita) (Tonnes per capita)

Figure 2: Development of DMC of Europe (Source based on European Commission n.d.)

An important objective in terms of resource efficiency is the absolute decoupling of material consumption from economic performance. Decoupling is about the resolution of the connection of two parameters.62 Rising energy and material consumption while

60 BMLFUW 2012, p. 8 61 European Commission 2015 62 Kommission der europäischen Gemeinschaft 2001, p. 10 12 / 136 simultaneously increasing economic power lead to increased resource efficiency despite rising material consumption. The aim should be an absolute decoupling of economic growth and material consumption. This means that in spite of increasing economic growth there is a decrease of material consumption.63

In Austria political and industrial initiatives were used to relatively decouple economic growth from the increase in material consumption. 64 Today (compared to 2008), the resource use in Austria is more efficient by a factor of 2.5 than it was in 1960. Although the consumption of resources is far risen by a factor of 1.7 in Austria in the last 50 years, resource efficiency could be improved by a factor of 2.5, which can be explained due to the strong increase in economic output in that period (+325%).65 In a European comparison Austria is in the midfield. 66

Due to various actions and initiatives at the international, European and national level one can see that the overall economic and political focus goes towards resource efficiency.

International

Level Initiative

Towards a Green Economy: Pathways to UNEP (United Nations Environment Sustainable Development and Poverty Programme)67 Eradication (2011)

OECD (Organisation for Economic Co- Towards green growth (2011) operation and Development)68

Strategy 2020 (2010)

69 EU (European Commission) Roadmap „Resource efficient Europe“ (2011)

National (Austria)

„Resource Efficient Action Plan“ 70 „Austrian Mineral Resources Plan“71

Table 1: Efficiency measures (Source: Author’s illustration)

63 BMLFUW 2012, p. 15 64 Industriellenvereinigung OÖ 2012, p. 11 65 BMLFUW 2011, p. 4 66 Prammer/Schrack 2014, p. 6 67 UNEP 2015 68 OECD 2015 69 European Commission 2015 70 BMWFW 2015 71 BMLFUW 2015 13 / 136 2.3.3 Material efficiency at a microeconomic level Within this work, the terms “resource” and “material” efficiency are used differently and refer to the observed level, which means that both terms are often used interchangeably at the macro level but at the micro level there is more often the term “material efficiency” because most of the time it is about processed, refined products which are used in the operational performance process.72 That is the reason why the term “material” efficiency is used when describing the company perspective.

Material efficiency is about the goal to achieve a production target or service with the lowest possible use or consumption of the above resources, in order to save costs and protect the environment.73 The so-called "green production", which is about the resource-oriented optimization of processes and equipment, has already been highly relevant in this field. 74 Material efficiency is not only important in the product development and production application, but on almost all levels of the company - investment and financing, operational flow management, marketing and communication...75

The reasons for the increasing consumption of resources can be found in the increasing industrialization and the development towards consumer societies with tendencies towards artificial shortening of product life cycles (obsolescence).76 Therefore, material efficiency is a very good way to reduce overall costs and increase competitiveness.77

When analysing production processes in terms of efficiency, the following steps are recommended: 78 1. Determination of material flows and losses 2. Review of material losses 3. Determination of the causes of material losses 4. Derivation of measures

The evaluation of the efficiency should not be done for a moment; rather, one should measure the change over time.79 In the last years, companies mainly focued on possible efficiency gains with the staff while the topic of efficiency was less respected.80 However,

72 Prammer/Schrack 2014, p. 8 73 Industrie- und Handelskammer Mittlerer Niederrhein 2014, p. 21 f 74 Röh 2013, p. 167 75 Dreuw et al. 2011, p. 20 76 Prammer/Schrack 2014, p. 4 77 Industrie- und Handelskammer Mittlerer Niederrhein 2014 78 bifa 2014, p. 42 79 Rademaekers et al. 2011, p. 109 80 Faulstich et al. 2009, p. 38 14 / 136 material costs constitute by far the largest cost factor in the manufacturing sector and therefore, they are of high importance for enterprises.81 Looking at the average cost of materials one can assume that there are enormous efficiency potentials within the cost structure. Furthermore, there are opportunities and potentials which might help to increase the competitiveness of the economy which are still unused.82

Referring to the data of Statistics Austria (structure of expenses of ÖNACE = Austrian classification of economic activity, 2010 - Section "Manufacturing)", the share of personnel expenses to total expenses did not even reach half of the share of the purchase of material for finishing and processing. About 45% of the costs are attributable to the field of materials costs, while only 18.9% account for personnel costs.

2,60% 3,60%

Material Staff 21,00% 45,90% Merchandise for resale Other expenditures 8,00% Appreciation

18,90% Energy

Figure 3: Cost structure (Source: based on Statistik Austria (2013))

2.3.4 Increase in efficiency – development and measures It is important to distinguish between possible efficiency gains from an economic or an entrepreneurial perspective, such as given on the following pages.

2.3.4.1 Macroeconomic perspective In all the world regions, the productivity increased in recent years. Europe has the highest productivity rate (in 1402 US $ / tonne) and was able to achieve an increase of 77% since 1980th. Even North America was able to increase its productivity considerably (from 697 US $ to 1394 US $).83

81 Faulstich et al. 2009, p. 40 82 Alt/Berrer 2013, p. 4 f 83 BMLFUW 2015 15 / 136 In Austria, the direct material input has risen by 17.8% from 1995 to 2012 and the DMC increased by 5.2%.84 In the literature, different indicators are discussed, with which the material efficiency can be assessed. Most indicators go beyond the use of materials and measure the resource efficiency. However, the input side can be reduced to the use of materials.85

The figure below shows the resource efficiency on a macroeconomic perspective. Since the gross domestic product grew by 40.5% over the same period, the material efficiency increased significantly (GDP divided by domestic material consumption) since 1995. In this case, efficiency indicates how much economic power (in Euros per tonne material use) is generated. In 2012 this economic power was 1.46 million Euros compared to 1.1 million (per 1,000 tons of material used) in 1995.86

When using this information to calculate efficiency the following picture arises (based on economic material flow data for Austria by Statistics Austria).

Resource efficiency

150,0

130,0

110,0 % % ofefficiency increase

90,0

Figure 4: Material efficiency in Austria (Source: based on data from Statistik Austria 2014)

The graph shows that efficiency has risen continuously with minor exceptions from 1995 to 2012. When assuming that the starting point is 1995 and represents the basis of 100, this would mean that till 2012 the efficiency increased by 33.6%.

84 Statistik Austria 2015 85 Techert 2012, p. 7 86 Statistik Austria 2015 16 / 136 2.3.4.2 Entrepreneurial perspective An important argument for an increase in material efficiency in companies is the associated reduction in material costs.87 A recent EU-wide conducted Flash Eurobarometer study showed that about three-quarters of the surveyed managers of small and medium-sized enterprises recorded an increase in the cost of materials over the past five years; 26% say that the cost increase was dramatic. The assessment with regard to the future development of material costs showed a clear picture - almost 9 out of 10 respondents believe that the material costs will continue to rise in the next five to ten years.88 However, the benefits of an increase in material efficiency in enterprises do not only refer to the avoided costs due to higher efficiency. The accompanying additional benefits, for example through better product quality or a reduction in transport costs, can be considerably and might be as high or even higher as the shunned material costs.89

2.3.4.3 Measures to increase material efficiency When it is about the right measures to increase material efficiency, one should have a look on the aspect of “material”. There are three measures which might be useful:90  Reduction of material consumption  Substitution of materials  Increasing the yield or reduce the loss

Further points for increasing the material efficiency can be divided into the following areas91  Production design  Manufacturing and production  Organization

Basically, already within the planning and development phase of products one should use materials economically.92 Within the design of products there are often higher savings as by pure process improvements in manufacturing.93 So, first efficiency gains can already be achieved by a changed product design. 94

87 Liedtke/Busch 2005, p. 32 88 The Gallup Organization 2011, p. 9 ff 89 Frauenhofer Institut 2005, p. 54 f 90 Pastewski et al. 2009, p. 7 ff 91 Schmidt/Schneider 2010, p. 159 92 Baron et al. 2005, p. 42 93 Schmidt/Schneider 2010, p. 159 94 Faulstich et al. 2009, p. 42 17 / 136 These gains can come from the reduction of components to the choice of a new material95. An example of a more efficient product design would be the eco-design. When using eco- design, production processes are considered from the point of the smallest possible impact on the environment.96

The possibilities for action in the field of manufacturing are both in the individual machining processes as well as in workplace design, tool handling and especially recycling.97 Even through the optimization of production processes there is the possibility to save material. For example, through Zero Loss Management the entire value chain as well as the production is searched for potential savings.98 Faulstich et al. (2009) examine potential savings along the value chain and suggest that not only incremental improvements are possible. There is also the possibility to achieve "efficiency jumps" at the level of production of goods. Of particular interest are innovations that lead to a new design of products and processes. A further possibility is represented through a stronger recycling of materials.99

Overall, the organization is also an important determinant of material efficient production. The material flow must be organized in a way that a continuous production with a minimum of internal transport, storage and retrieval, confusion and damage of parts and goods can be assured. In addition, important requirements can be formulated to the logistics of a company. They relate to the disposition of waste optimization, the order overarching optimization, the reduction of batch sizes or in general the material flow tracking.100

2.3.5 Material management Within a company, there are various starting points which can be used to improve resource productivity. In regard to its important role in the production and its resource aspect this Thesis will briefly comment material management and possible developments in regard to resource efficiency. The Materials Management deals with the management and control of material movements within a company and between the company and its environment. Essentially, it coordinates the flow of goods.101

95 Schmidt/Schneider 2010, p. 159 96 eco-world 2013 97 Schmidt/Schneider 2010, p. 159 98 Faulstich et al. 2009, p. 43 99 Faulstich et al. 2009, p. 44 100 Schmidt/Schneider 2010, p. 160 101 Hartmann 2002, p. 12 ff 18 / 136 Resource productivity and material management are closely linked. A sustainable material management can be seen as a measure to achieve resource productivity. To ensure that the resource productivity is enhanced by a sustainable material management, certain measures need to be implemented, such as102  Life cycle based policies for waste, materials and products (such as 3R initiatives)  Integrated supply chain management  Instruments to improve technological change.

Furthermore, it must be ensured that the costs of waste management are also reflected to some degree in the final cost of the customer. 103

Future of material management Due to recent developments, also material management needs to change and has to adequately adapt to these changes. Because of environmental aspects within the material management, the future development goes more and more towards an "integrated material management".104 An environmentally oriented extension or modification of the decisions in the field of material management has to identify or minimize environmental impacts which result from the provision of a company’s resources.105

This concept aims at an overall optimization of materials management subtasks whose planning was previously scattered in various departments of a company (such as purchasing, warehousing and disposition). These subtasks should be linked and combined within the integrated material management to guarantee a holistic perspective.106

A further development can be seen in the ecological advanced target triangle. The traditional triangle is exclusively money driven and based on economic criteria. One focus of material management should be the expansion to ecological objectives. 107 This broadens the requirements of material management and places a new focus on eco-oriented topics as well. 108 In this case, one speaks of the so-called ecological (advanced) target triangle. The figure below should clear out the combination of the traditional material management with ecological targets. The inner pyramid shows the traditional material management whereas the outer pyramid represents the combination.

102 OECD 2011, p. 20 103 OECD 2011, p. 20 104 Stahlmann 1988, p. 24 105 Wicke et al.1992, p. 135 106 Stahlmann 1988, p. 24 107 Hallay 1986, p. 165 108 Stahlmann 1988, p. 45 f 19 / 136

Resource-efficient programme Resource efficient program Low material costs

Traditional model High readiness to Low capital deliver bond High utilization Low emission degree of input materials products

Figure 5: Integrated material management (Source: based on Hallay 1986, p. 165)

In this case, conflicts often arise between economic and environmental objectives. The use of resource-saving and pollutant-reducing processes or products may require a higher cash expenditure, which is not always rewarded on prices from the market. On the other hand there is often a kind of complimentarity between economic and environmental objectives, such as when material savings bring cost reductions.109 The reference between material efficiency and material management is given through the target agreement "low material costs" and the environmental objectives, as there is often a high correlation in this area.110

109 Stahlmann 1988, p. 45 f 110 Förstner 2012 , p. 81 20 / 136 3 Material flow cost accounting

The aim of more resource efficient production passes through the development and use of suitable methods. Almost all of them require an adequate picture of the production process and the determination of all necessary data. A valuable method in this field is given through ecology-oriented controlling. 111

To implement the ecology-oriented controlling a few monetary and non-monetary methods have been developed. To give an overview of them, they can be divided into three sections: Green Differentiated Controlling, Adjusted and Extended Green Controlling. 112

The first stage is about “Differentiated Green Controlling” and it comes from the traditional controlling and includes classic cost instruments which are differentiated by ecology-related costs and revenues. One instrument of this stage is the material flow cost accounting. The monetary valuation of external effects takes place at the second stage through instruments of the “Adjusted Green Controlling”. The instruments of the third and final stage, “Extended Green Controlling”, apply when the ecological resources used are not evaluated under a monetary perspective. 113

Now, this chapter casts a specific focus on one of the methods of the ecology-oriented controlling – MFCA, as it is one of the most efficient tools to fulfil an economical and sustainable use of resources.

3.1 History and basic idea

3.1.1 Historical background and development The MFCA is characterized by a wide variety of influences from environmental and traditional controlling methods. Those who have contributed most to its development are  Residues Cost Accounting  Flow Cost Accounting  Ressource Cost Accounting

Residues cost accounting The beginnings of the method can be found in the mid-90s, under the term "residues cost accounting". It aims to create transparency in regard to the waste production, which

111 Günther/Bergmann/Rieckhof 2013, p. 38 112 Günther/Stechemesser 2011, p. 420 113 Günther/Schröder 2011, p. 7 ff 21 / 136 represents an unwanted output and hidden costs.114 From a resource efficiency point of view, all forms of waste, such as these unwanted by-products or production outputs that require reworking or recycling, represent inefficiency. Its cost evaluation is not trivial. When having a look on waste costs, people often consider just the costs of waste disposal or additional recycling costs. However, these are only the "tip of the iceberg".115

Specifically, this means that residual material or waste costs include more than the actual disposal costs show. They also include the material value that is derived from the price of purchased raw materials, and also the cost of waste handling and for environmental protection activities (so-called end-of-pipe treatments).116

Often, the largest share of costs account for the purchased material, which is frequently leaving the company as a residue. In contrast to conventional cost accounting approaches the residual cost accounting assigns the waste of a production system to a given cost share. Through this approach, it gets clear which costs could be saved when waste would be avoided. 117

Flow Cost Accounting A refinement of the residual material cost accounting is represented through the flow cost accounting. The aim is to consistently represent a company’s material and energy flows. The procedure also allows statements in regard to resource efficiency, since both the inbound in the product flows and the unwanted outputs can be tracked. 118 Therefore, the flow cost accounting sought to quantify and assess all material and energy flows of a defined production system and the connection to the traditional cost accounting. 119

Resource Costing The resource cost accounting represents an environmentally-oriented extension of the operational cost accounting. Its goal is the continuous improvement of the environmental performance and operational business processes by linking business and technical parameters. Just as within the flow cost accounting, unwanted output is considered as an essential saving potential.120 In contrast to the flow cost accounting, also time-related costs are included, such as staff or equipment costs. 121

114 Gleich 2012, p. 38 115 Wagner/Nakajima/Prox 2010, p. 197 ff 116 Wagner/Nakajima/Prox 2010, p. 198 117 Gleich 2012, p. 38 118 Gleich 2012, p. 38 119 Wagner/Nakajima/Prox 2010, p. 197 120 Letmathe/Stürznickel/Tschesche 2002, p. 52 ff 121 Letmathe/Stürznickel/Tschesche 2002, p. 54 22 / 136 Japanese initiative Essentially, it can be said that the existing form of the MFCA is derived from the flow cost accounting, which emerged at the Institute of Management and Environment in Augsburg. Due to the efforts of the Japanese Ministry of Economy, Trade and Industry (METI), initiatives have been launched to further develop environmental management accounting instruments in 1999. Then, in 2000, a Japanese research group was established, which has driven the development of flow cost accounting. Furthermore this group provided significant support for many Japanese industrial companies to help them introduce material flow cost accounting.122

Certification of MFCA In September 2011, the material flow cost accounting was certified under the term DIN EN ISO 14051. The evolved form of flow cost accounting - MFCA - is now a standardized environmental management tool. As environmental management standard, it aims to avoid corporate environmental effects.123 In addition, it is helpful when implementing a resource- efficient strategy.124

3.1.2 Description of MFCA Early practical projects for environmental management showed that material efficiency can only be optimized if one has control over the processes or material flows in the black box of a company. But mastery requires transparency of physical quantities and cost of material flows. The material flow cost accounting can be useful at this point. This method belongs to the material and energy flow oriented cost accounting approaches that can be used to increase the flows of materials effectiveness as well as the eco- and cost-effectiveness125.

MFCA allows the detection of material and energy flows along the individual process stages, and it is also able to map the production process adequately. In this case (if it is used), the ecology-oriented Controlling can make use of the calculated information of material and energy flows and the associated costs, to prepare internal decisions as well as to communicate them to the outside.126

On the one hand the most direct environmental impacts of businesses are directly related to the material and energy flows of the production system. On the other hand, at least in

122 METI 2002 p. 8 ff 123 Gleich 2012, p. 38 124 Rieckhof/Bergmann/Günther 2014, p. 1 125 Wagner/Nakajima/Prox 2010, p. 197 126 Günther/Stechemesser 2011, p. 7 ff 23 / 136 manufacturing companies, the material is often the biggest cost driver. Thus the reduction of material and energy input is the common goal of economic and environmental interests.127

The overall goal of material flow cost accounting is to quantify material flows, material inefficiencies, in particular material losses and other process inefficiencies. Therefore, it goes beyond the requirement of a pure residual cost- or environmental cost accounting method and tracks product material beside waste and environmental costs in addition to other material flow related cost elements.128

In order to reduce material and energy consumption in organizations, material and energy losses need to be quantified and visualized in advance through MFCA. The peculiarity of the method is that it defines produced goods as "positive products" and material loss as "negative products".129 The authors Viere, Möller and Prox (2009) name those “negative products” as "Non-Product Output '(NPO). According to the IFAC, this NPO is a mass flow which exits a company but does not represent a product.130 So the central point of view is that there are internal material flows. These are regarded as cost collector. All costs of the production process (material, system, energy and waste management costs) are assigned to these material flows.131

The respective production costs of negative products are calculated in the same way as those of the finished goods. The production costs of negative products include the material costs, which are the costs of the material needed, and the system costs.132 One can see the costs which are related to NPO through an allocation of caused costs on the various output categories (“product” and “non-product”).133

3.2 Goals and principles

3.2.1 Goals The material flow cost accounting is used when it is about an increasing effectiveness of operational materials, ecology and costs. In summary it can be said that it comes to the acquisition of material and energy flows.134

127 Loew/Fichter/Müller 2003, p. 50 ff 128 Wagner/Nakajima/Prox 2010, p. 198 129 Nakajima 2010, p. 41 130 IFAC 2005, p. 35 131 Schrack 2014a, p. 61 132 Nakajima 2010, p. 41 133 Schrack 2014a, p. 61 134 Wagner/Nakajima/Prox 2010, p. 197 f 24 / 136 The aim of material flow cost accounting is to provide a tool which can be used to reduce a company’s material and energy consumptions and to improve their environmental and cost- related performance. This goal can be achieved by using the following measures: 135  Transparency of material and energy flows  Better communication of material and energy flows within the company  Decision support, especially in areas like process engineering, production planning...

Transparency will be achieved mainly by identifying the quantities and costs of the output which is not desired.136 The results of MFCA can ultimately be utilized to carry out improvements (such as on-site improvements or cost improvements) or to alter entire processes (design of a new production process due to new process steps and changes).137

The mentioned transparency can help to control the environmental impacts of a company in order to minimize inefficiency. A reduction of this inefficiency can result in an increase of resource efficiency.138 Eco efficiency can be seen as a further implication of these reduced environmental impacts. Therefore, MFCA also helps to increase eco-efficiency by simultaneously reducing production costs and environmental impacts. 139 Eco-efficiency can be defined as the ratio between economic output and environmental impact, the latter is a result of the economic input.140

Thus, MFCA combines material and energy, as well as cost-related information with the aim to identify environmental and economic inefficiencies in an organization. This view of the costs that are associated with the non-product output (= the inefficient use of resources) should provide an additional decision support for the management to be able to increase resource efficiency and improve environmental performance.141 Especially areas like process engineering, production planning, quality control... can benefit from MFCA. Last but not least, material flow cost accounting aims to improve coordination and communication within the organization as it provides material and energy related data.142

135 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011 (E)), p. 4 136 METI 2007, p. 2 137 Nakajima 2010, p. 48 138 Günther 2014, p. 237 f 139 Nakajima 2010, p. 48 140 Baumgartner et al. 2013, p. 68 141 Wagner/Nakajima/Prox 2010, p. 197 142 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 4 f 25 / 136 Reduction of material and energy consumption

Decision Communication/ Transparency support coordination

Figure 6: Main goals of MFCA (Source: Author's illustration)

In summary it can be said that an efficient allocation of resources can be ensured by reducing the material and energy consumption. The material flow cost accounting is an attempt to reduce both143  The amount of material contained in the products and costs and system costs,  The amounts of material and the associated costs of non-product output

As the reduction of quantities and costs also realises ecological goals, the material flow cost accounting systematically supports the identification of eco-efficiency. 144

3.2.2 Principles To be able to fulfil the material flow cost accounting goal, a few basic principles should be given:145  There is the need for knowledge about material flows and energy input to be able to create a proper material flow model.  It is necessary to estimate and assign costs to material loss.  One needs to combine physical and financial data to be able to quantify material loss in monetary terms.  The data needs to fulfil the demand of accuracy, completeness and comparability.

3.3 Key elements of MFCA Core elements of material flow cost accounting are146  Quantity centre

143 Umweltbundesamt Berlin 2003, p. 89 144 Umweltbundesamt Berlin 2003, p. 89 145 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 4 f 146 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p 5 26 / 136  Material balance  Cost calculation and  Cost allocation.

A quantity centre represents a process or part of a process. For this quantity centre, input- and output objects are quantified in both, physical as well as monetary units.147 The material balance is used to show a complete picture of the material flows through the individual quantity centres148. A simple example of such a material balance is given in the next figure. It shows that there is an input and output. Material enters the material balance as input, depending on the time it remains within the company, it changes the inventory. Afterwards it leaves the company as output, depending whether as a product or non-product.

Within the output stage, different scenarios can occur. Material entering a quantity centre is leaving it, either in the form of a product or a non-product output. Another possibility is that it might be the case that the material remains for a certain time in the company and thus it leads to changes in inventory. As companies usually try to be balanced it is essential in the material balance to distribute its material flows further in product output and non-product output to guarantee an input-output balance in the end.149

Material balance

Input Output

Quantity centre Material Product

Initial Final Non-Product inventory inventory

Figure 7: Presentation of material balance (Source: based on ISO DIN 14051:2011 (E), p. 5)

The third element is the quantification of the costs which are related to the quantity centre’s incoming and exiting material flows - the monetary evaluation. One has to distinguish

147 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 5 148 IFAC 2005, p. 33 149 IFAC 2005, p. 33 27 / 136 material costs, system costs and waste management costs.150 In the course of costing the following steps are taken into account: 151  Distribution of costs into “cost of the product” and “cost of non-product”  Choose an allocation method, as some costs might be available only for an entire process or facility  Cost carryover between the different quantity centres  Costs of non-product output of each process needs to be summed up at the end

Note: Cost allocation is often necessary in the context of energy and system costs, especially if their amount is just known for the overall process and not for each quantity center. In this case there is an assignment problem.152

3.4 Implementation of MFCA according to PDCA cycle Like any other management tool also the MFCA requires a series of implementation steps. The detail and level of complexity of the implementation varies and depends on various factors; for example on the size of the organization, the type of products etc. MFC provides valuable information for the continuous improvement of environmental performance in the environmental economic intersection on the one hand. On the other hand, it allows an easy integration of MFCA in any existing and already known (environmental) management structure.153 The following chart illustrates an outline of the implementation steps that have been designed in agreement with the PDCA (Plan-Do-Check-Act) cycle.

150 Schrack 2014b, p. 160 151 METI 2007, p. 5 152 Schrack 2014b, p 161 153 Schrack 2014b, p. 162f. 28 / 136

 Chances to improve  Involvement of management  Team formation to get know- processes and pro- how ceedings  Define system boundaries & time  Determine quality centres Act Plan

Check Do  Set input and  Communicate output flows of

results each quantity centre  Summarize &  Determine interpret results physical units of material flows

Figure 8: PDCA cycle (Source: based on ISO 14051:2011(E), p. 9)

3.4.1 Plan Once you have decided to make use of material flow cost accounting, the next step is to make sure that the management is involved in the process. This means that a basic requirement for the successful implementation is an adequate participation of top management.154 They should support the introduction of MFCA, should provide resources and should monitor the progress.155

Another crucial step is the formation of a suitable project team which has the appropriate skills. This team is composed of employees from different areas.156 In addition to the professional support, expert knowledge of all those involved in the improvement process is required. Examples would be: operational expertise, technical expertise or environmental expertise. 157 After clarifying the responsibilities, the next step is the delimitation of the subject of investigation as well as the specification of the appropriate system boundaries.158

154 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 10 155 Gallien/Gram 2013, p. 19 156 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p 10 157 Gallien/Gram 2013, p. 19 158 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p 10 29 / 136 The definition of the system boundary affects the complexity and thus the effort of cost accounting. Depending on the desired objective of the analysis also an observation period has to be determined.159 Once the system is defined, so-called quantity centers are determined. A quantity center might be for example: cleaning, cutting, heating etc. 160The question if respectively which processes are combined into one quantity centre or which of them are investigated separately depends on the level of detail which is already clarified at the beginning.161

3.4.2 Do Next, the input and output flows for each quantity centre within the system boundary needs to be set. The central task is to distinguish the output components into product output or non- product output.162 This means that the quantity centers of the input and output flows can be material flows, energy flows, products or semi-finished products or even material- or energy losses. After the allocation to the quantity centers, the physical units of the flows are determined. To create a material balance the items should be converted into a reference unit.163

The determination of monetary units is based on three categories: basically, there is a distinction between material costs, system costs and waste management costs. System and energy costs are allocated to the material costs through the use of a suitable key. The waste management costs are directly attributable to the material losses. At the end of the cost allocation, there is a detailed list of the costs of the finished products and material losses.164

3.4.3 Check To have a good overview of the results of the data, it is recommended to choose a concise format. Possible methods would be matrices such as a material flow cost matrix or a flow cost model. The preparation of data from individual quantity center allows a more precise assessment and identification of the processes and possible inefficiencies. The result of high material losses is that the determined quantity centers are possibly connected with costs and with negative environmental influences.165 The clear representation should help to identify

159 Weber/Oberender 2014, p. 17 160 Gallien/Gram 2013, p. 19 161 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p 11 162 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p 11 163 Weber/Oberender 2014, p. 18 164 Gallien/Gram 2013, p. 19 165 Weber/Oberender 2014,p. 18 30 / 136 significant cost drivers.166 As a next step, the results should be prepared and presented to the target group.167

3.4.4 Act The last step of the PDCA cycle is called “act”. After identifying inefficiencies, these findings must be used to operate more efficiently. This can be designed in such a way that, for example, materials are substituted or processes are improved.168

The reason is that MFCA is a tool to show inefficiencies but it is not designed to execute those improvements. As this approach is a strategic tool, the last step is not used within the implementation process.

3.5 Fields of application MFCA is a material and energy flow oriented cost accounting approach and can be used for all establishments which employ materials and energy regardless of their size, industry or field of activity.169 MFCA is essentially aimed at finding in-house improvement potentials and therefore, it is often used in selected companies, corporate divisions, departments or processes.170

Giving a holistic overview, it is possible to make use of MFCA in the following areas:171  companies and public administration,  along the supply chain and product life cycle,  as well as In local or regional communities.

In detail, the method is especially suitable for the manufacturing sector, in which the material costs represent the largest cost item.172 Under the broad mass of existing environmental controlling instruments the MFCA is classified as one of the most talented and promising methods, when it is about the goal to achieve eco-efficiency in production.173

By improving the transparency through the material flows and energy consumption, policy makers in the production planning, procurement, but also already in the development field

166 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 12 167 Weber/Oberender 2014, p. 18 168 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 6 169 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 6 170 Schrack 2014a, p. 65 171 Moriguchi 2001, p.881 ff 172 Germann/Strobel 2003, p. 113 173 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 6 31 / 136 should be supported to reduce material and energy consumption and thus reduce costs and conserve the natural environment.174

3.6 Benefits and selected limits

3.6.1 Benefits The main benefits can be seen in the field of: transparency, administrative support and implementation effort.

Transparency Basically its methodology is designed in a way that it reports value-monetary inefficiencies or efficiencies, which are calculated on the basis of material and energy flows. Many of the potential efficiency improvement potentials, which are discovered through the use of the material flow cost accounting, can be successfully implemented on individual process level, or within a company, leading to sometimes considerable improvements in efficiency and, to reduced costs.175 This means that MFCA can be seen as a first step towards resource efficiency.176

Administrative support Another advantage can be seen in the cross-divisional support of organizational decisions and in the improved coordination and communication within the company.177

Implementation effort Within the material flow cost accounting, the other flow variables such as energy, water etc. are not inserted. Hence, it can be assumed that the implementation costs and efforts are lower than for other environmental approaches such as in a full flow cost accounting system.178

3.6.2 Limits The main limits are: a lack of enforcement in practice, process or site-specific constraints, a pure cost consideration, its economic focus.

174 Gleich 2012, p. 38 175 Viere et al. 2011, p. 653 176 Günther/Bergmann/Rieckhof 2014, p. 38 177 Fischer 2012, p. 15ff. 178 Germann/Strobel 2003, p. 113 32 / 136 Lack of enforcement in practice and missing theoretical foundation Although the basic idea of the material flow cost accounting was already developed in the 1990s, the spread of the instrument in Europe is still hesitant; what is mainly related to the low awareness of the instrument in operational practice.179 Furthermore, also the not existing theoretical foundation might be a reason for the knowledge gaps in both – theory and practice.180

Process or site-specific constraints In addition, when using the method the focus is placed on the individual production sites. When it is about a process or site-specific assessment of environmental effects, however, there is always the problem of shifting environmental impacts on upstream and downstream stages of the value chain. These shifting are not considered in the material flow cost accounting.181

Pure cost consideration The pure cost analysis means that material can be reported only once within the material and energy flow model. All other movements of this material are not relevant from a cost perspective. Although material and energy flow accounting makes it possible to indicate the total material costs for the period for each section, it is still not possible to provide a continuous, flow-related transparency.182

Economic focus and failure to take account of external costs The bases of all calculations are material costs – which is about the monetary value of material and energy flows. In the DIN EN ISO 14051 it is recommended to fulfil this review with historical cost, standard cost or replacement cost.183 From an environmental perspective this review is problematic because only already internalized costs are included in the calculation. As long as market prices do not reflect the environmental reality, too - in other words, all the monetary value environmental effects of a substance or product, including the external costs – the results of material flow cost accounting lead to irrational decisions from the perspective of sustainability which goes hand in hand with an overuse of natural resources. Without taking into account external environmental impact costs MFCA can reveal internal eco-efficiency potentials, but it cannot provide full-bodied statements relating to eco- compatibility. For this reason, the focus of the conventional material flow cost accounting is

179 Schrack 2014a, p. 62 180 Christ/Burritt 2014, p. 10 181 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p. 5 ff 182 Loew/Fichter/Müller 2003, p. 93 183 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011(E)), p.17 33 / 136 primarily economic. The achievement of ecological optimization can be considered as a subordinate goal.184

184 Schrack 2014a, p. 62 34 / 136 4 Delimitation of MFCA to existing cost accounting and selected EMA approaches

The focus of this chapter is placed on two main themes – traditional cost accounting and (environmental) management approaches. First of all, the thesis will give a short overview of the traditional cost accounting as well as its cost accounting principles and critical aspects. After, the focus will be placed on the differences of MFCA and traditional cost accounting. The second main theme is about EMA approaches. Different management approaches were chosen in advance, mainly due to their prominence and their environmental focus. Those approaches were examined and compared with MFCA.

4.1 MFCA and traditional cost accounting

4.1.1 Aims and purpose of traditional cost accounting Within the corporate accounting, the cost accounting is characterized through three features:185 1. It provides information, primary for operating decisions. 2. It’s an internal accounting method. 3. It is geared to the performance target of the company.

Information generator The main purpose of traditional cost accounting is to produce meaningful information for the preparation of decisions, and the foundations of forecasting and planning.186 As such, it is an information generator.187 Therefore, its task is to provide relevant information at the various stages of the decision-making process.188 This information includes, inter alia, the function and the determination of the amount actually incurred or planned of the substantive goods consumption.189

Internal accounting The focus of cost accounting is internally oriented. It follows the path of production factors in the operation process and is limited to the cost.190 The focus is the short-term impact of costs through employment decisions and management and the control of cost centers.191

185 Schweitzer/Küpper 2011, p. 11 186 Riebel 1990, p. 598 187 Schweitzer/Küpper 2011, p. 37 188 Neugebauer 1995, p. 122 189 Coenenberg 1993, p. 193 ff 190 Haberstock 1977, p. 53 191 Schweitzer/Küpper 2011, p. 38 35 / 136 In terms of costs, there is a distinction between  direct/indirect costs  variable/fix costs.192

After the assignment to individual accounting units, the traditional cost accounting differentiates between direct costs and overhead costs. Direct costs are all those costs that can be attributed directly or causally to activities (such as single material). Overhead costs are costs which arise jointly and for more services.193 Overhead costs cannot be attributed directly to individual cost centers. They are grouped together under the term overheads (or overhead costs) and are divided by average, or other allocation keys, to the cost centers.194

There is no correlation between fixed costs or the amount of fixed costs and its production scale. Examples for fixed costs would be pension or interest on a bank loan. Variable costs are associated with the production volume, the higher the quantity produced, the higher the cost. An example would be material.195

Within cost accounting, there are three subsections196. Each of them is connected to a specific question and issue:

Cost-Category Accounting Cost Centre Accounting Cost Carrier Accounting

For what/why do these costs Which costs arise? Where do the costs occur? occur?

Example: procurement, Example: project or Example: staff, material, administration, distribution, assignment, periodic, depreciation production monthly, quarterly

Table 2: Classification of cost accounting (based on Coenenberg/Fischer/Günther 2009, p. 58)

Comparing the goals of traditional cost accounting with MFCA shows similarities as well as differences. While the traditional cost accounting provides information as a kind of decision support197, the material flow cost accounting shows similarities. The latter collects information

192 Küpper 1994, p. 33 193 Coenenberg/Fischer/Günther 2009, p. 63 194 Jasch 2009, p. 110 195 Jasch 2009, p. 109 196 Haberstock 1977, p. 53 197 Götze 2004, p. 4 36 / 136 in the form of material and energy, as well as cost related information.198 Even if the type of information is not the same, both methods use them as decision support.

Furthermore, both approaches focus on an internal perspective. Traditional cost accounting is an internal cost accounting method199, and material flow cost accounting concentrates on information for internal decision finding and tries to supplement the existing environmental management.200

Furthermore, traditional cost accounting is performance oriented in a way that it focuses on the success of the period. MFCA tries to improve material and energy efficiency which often results in a cost reduction.201.

Traditional cost accounting Material flow cost accounting

Provides various information, for example Provides information in a way that it product related information within the documents material and energy flows product calculation

Focuses on economic performance target of Focuses on increase of material and energy company efficiency

Table 3: Comparison between traditional cost accounting and MFCA (Source: Author's illustration)

4.1.2 Cost accounting principles The costs covered are going to be distributed to cost centers or cost units in the cost center accounting and the cost carrier accounting.202 Within the traditional cost accounting, there are different principles that are used when it comes to an apportionment of costs. In regard to MFCA there is a separation of costs in “costs of the product” and “costs of NPO”. Now the question arises, whether those principles of cost accounting can be applied to MFCA, too or not.

Within the traditional cost accounting, there is a distinction between dimensional and two- dimensional subdivision. The following principles belong to the dimensional subdivision: 203  Principle of causality

198 Wagner/Nakajima/Prox 2010, p. 197 199 Götze 2004, p. 4 200 Finkbeiner 2012, p. 55 201 Jasch 2009, p. 120 202 Coenenberg/Fischer/Günther 2009, p. 59 203 Riebel 1990, p. 600 ff 37 / 136  Principle of average  Principle of proportionality  Principle of financial viability

There are two ways of mapping cost allocation principles. One-dimensional cost allocation principles use output (= employment) as the only reference. Multi-dimensional cost allocation principles have several references which may differ depending on the company.204

4.1.2.1 One-dimensional subdivision Principle of causation The well-known concept of the causation principle is regarded as the fundamental principle of accounting205 or as the elemental principle of cost accounting206. It corresponds to the dominant rule of cost allocation. It states that the costs are going to be attributed only to those cost centers and cost carriers who create them causally.207

Within traditional cost accounting material costs are assigned to individual product units based on their causation. However, the MFCA splits the material direct costs in costs that flow into the product and those who belong to the non-product output, regardless of its causaility.208

Principle of average The average principle applies to the allocation of fixed costs and other overheads. If an allocation of costs is not possible to cost units according to the principle of causation, then the costs will be distributed by averaging the created services.209 This means that the overheads are distributed among the average functional units or other reference. Each functional unit gets the same costs. The distribution of overheads is executed proportionally and not causally. This shows that there is no similarity between the principle of average and MFCA.210

204 Hoitsch/Lingnau 2007, p. 38 ff 205 Heinen 1958, p. 1 ff 206 Dorn 1961, p. 57 207 Haberstock 1977, p. 55 208 Schrack 2014b, p. 144 209 Haberstock 1977, p. 55 f 210 Schweitzer/Küpper 2011, p. 59 38 / 136 Principle of proportionality The proportionality principle applies as a form of average principle.211 A number of costs cannot be attributed directly to the cost centers and cost carriers. Often the proportionality rule is applied for the distribution of such overhead costs to cost centers and cost carriers. It states that the costs shall be distributed in proportion to certain metrics.212 The aim is a causation-related distribution. A proportional distribution is just causal, if the cost function has a linear history and if one splits a fixed amount with respect to the independent variable.213

MFCA uses the principle of proportionality for example in regard to the allocation of system costs, due to the fact that distribution keys are used.214 This means that the proportionality principle can be compared with MFCA hen it is about overhead costs

Principle of financial viability This principle can be understood as another form of the principle of averages.215 It can also be applied if the distribution of costs according to the principle of causation is not possible.216 The distribution of costs depends on the financial viability of the products. As a measure of financial viability, one considers the gross profits which are achieved with the products. The larger the gross profit of the product, the higher the costs which are attributed to the product.217

This principle is especially used when it comes to the allocation of co-products. 218 Assuming that NPO can be seen as a co-product this principle could work, but as the existence of revenues is a prerequisite and they normally do not produce revenues (just in special cases, for example it is possible to sell it to recyclers, than a company would gain negative costs) also the principle of financial viability cannot be used.219

4.1.2.2 Two-dimensional subdivision The main principle of this field is the principle of identity according to Riebel.220 It states that one can assign only those expenses to the individual cost objects which are triggered by the

211 Götze 2004, p. 19 212 Schweitzer/Küpper 2011, p. 58 213 Schmalenbach 1963, p. 360 214 Schrack 2014b, p. 146 215 Coenenberg/Fischer/Günther 2009, p. 60 216 Kosiol 1979, p. 150 217 Schweitzer/Küpper 2011, p. 59 218 Freidank 2008, p. 156 ff 219 Schrack 2014b, p. 146ff 220 Riebel 1990, p. 75 ff 39 / 136 same decision.221 The central idea is that just business decisions trigger costs in a company.222

MFCA is pursuing the idea of a material flow-related distribution of costs, as these costs are allocated to material flows.223 For a cost accounting point of view, costs can not follow material flows. This means that also the principle of identity (in terms of material flow cost accounting) does not sufficiently explain the distribution of costs to the product categories and NPO. 224

Although the principle of causation, the proportionality principle, the principle of financial viability and the principle of identity do not correspond completely to MFCA225, they are still helpful in regard to the collection and improvement of inefficiencies in regard to NPO226.

4.1.3 Criticism of traditional cost accounting approaches Due to the long existence of the traditional cost accounting, there are already a few aspects criticised. This Master Thesis will have a look on three main cost accounting problems and does not represent a complete list. The criticism focuses on: the distribution of overhead costs, the calculation problem and the proportionalization of fixed costs.

4.1.3.1 Distribution of overhead costs Overheads (and therefore to a large extent also fixed costs) occur in all corporate divisions. In the production there are particular costs for staff, materials and supplies, energy, depreciation and interest. Material overhead costs occur often related to the cost of storing material, interest, insurance.... Typical selling expenses would be advertising and sales campaigns, and billing. But, already the detection and measurement of the used volume of goods is difficult within the area of overhead costs.227

The main problem can be seen in another field. Often there is no adequate consideration of the shifting cost structure. The latter means that in the past there has been a shift in the cost structure. This happened at the expense of variable direct costs and thus leads to a significant increase in fixed overheads.228

221 Freidank 2008, p. 194 222 Schrack 2014b, p. 145 223 Strebel 2003, p. 158 224 Schrack 2014b, p. 145 225 Prammer 2009, p. 266 226 Schrack 2014b, p. 147 227 Küpper 1994, p. 35 228 Kalenberg 2008, p. 297 40 / 136 While there is still a differentiation between direct and indirect costs, the latter are, however, distributed with flat rate surcharges or differentiated charge rates to the cost centers and cost carriers. Due to the increasing proportion of overheads this surcharge rates are partly a multiple of the underlying direct costs. Subsequently, the transparency suffers as a clear and transparent break down of the product’s cost structure is not given.229

As a consequence, there arise problems in the application of traditional cost accounting. A causal allocation of overheads is always difficult especially in the indirect performance range, as the real reasons for causing the overheads are not included in the settlement.230

4.1.3.2 Calculation problem In order to carry out a cost unit account, two issues must be known: Firstly, one needs the amount of costs; secondly, one needs to accurately estimate the number of units, which should bear the costs. This requires sound knowledge of the market and a stable demand, which is often not easy to elicit.231 Therefore, it is quite difficult to calculate the costs and especially the cost unit account.

4.1.3.3 Proportionalization of fixed costs The total costs can be attributed easy if costs and service quantity proceed proportionally. The author Rummel has the assumption that the costs proceed linear, if they are variable. This assumption refers to the law of proportionality. 232

The problem refers to the proportionalization of fixed costs. Here, the fixed costs are attributed to individual product units, although there is no connection with the output quantity. Through the fixed cost degression, the unit costs decrease with each new unit which is produced (economies of scale). However, it involves no real savings; it’s all about apparent savings as the amount of fixed costs is already paid.233

4.1.4 Similarities and differences between MFCA and traditional cost accounting The main differences between traditional and material flow cost accounting are located in three areas: treatment of costs, transparency and data documentation.

229 Olshagen 1994, p. 15 230 Kalenberg 2008, p. 297 231 Coenenberg/Fischer/Günther 2009, p. 64 232 Koch 1966, p. 99 233 Küpper 1994, p. 45 41 / 136 Treatment of costs A fundamental difference between material flow cost accounting and the well known traditional cost accounting can be seen in the treatment of costs through material losses and inefficiencies in processes. The traditional cost accounting relates all the material and system costs to the product. Although material losses are visible in the traditional cost accounting, these costs are not listed independently as it is done within MFCA (into product and non product output). So one can say that conventional cost accounting assigns all material and system costs to the product and thus also its material losses. The MFCA treats material losses as cost units. In contrast to conventional cost accounting, the processing costs are distinguished in energy costs, system costs, and costs of waste management. The fact that it is useful to split the costs of material losses gets even clearer when having a look on all the issues which belong to material losses.234

The material loss composes of:  the sum of the costs of the material, which is included within material loss,  the energy and system costs, which are attributed to the material loss, due to reasonable allocation criteria  and also the overall costs of waste management, which is involved in the loss of material.235

Transparency MFCA emphasizes the cost of material losses and inefficiencies, and draws attention to it. This can help to reduce resource consumption, and waste as well as undesirable environmental impacts. MFCA shows these extra costs and can identify possible savings and efficiency gains.236 Thus, the essential difference can be seen in the creation of transparency for all costs associated with the product itself and the non-product output.237

Data documentation Conventional accounting approaches partially show incomplete data as they are not able to fully document the use of materials and energy.238 Moreover, there is no transparency about the inefficient use of materials239. The traditional cost accounting just uses the disposal costs.

234 Österreichisches Normierungsinstitut (DIN ISO 14051:2011(E)), p. 14 235 Österreichisches Normierungsinstitut (DIN ISO 14051:2011(E)), p. 14 236 Österreichisches Normierungsinstitut (DIN ISO 14051:2011(E)), p. 14 237 METI 2007, p. 10 238 Loew/Fichter/Müller 2003, p. 85 239 Strobel/Redmann 2002, p. 69 42 / 136 Even if it is possible to attribute all costs to the product or the non-product-output, it is not enough to focus only on these disposal costs.240

Missing product calculation MFCA can be seen as a supplement to traditional cost accounting, even if it cannot replace it. A main reason for this is especially the missing product calculation.241 It means that even if MFC provides a lot of useful information, it does not give any answer about, for example, the final product price or how high the individual margin of a product should be.

The next two tables should help to clearly point out these differences on a practical example. As one can see, the difference is mainly on the right hand side of both tables, especially when it is about the “output of the waste”. Within this example, the following information is assumed (equal for both approaches): There is an input which consists of 100 kg and which is used to produce a special output. This output is on the one hand side the product itself, with about 70 kg and on the other hand side waste, with 30 kg.

The traditional cost accounting does show that we have a waste of 30 kg, but it does not give any information about the costs of material, or the processing costs.

Traditional Cost Accounting

Output (product) Product (70 kg) Material 1,400 €

Input (100 kg) Processing cost 360 € Total cost 1,750 €

Material 2,000 € Processing cost 500 € Output (waste) Total cost 2,500 € Waste (30 kg) Material - € Processing cost - € Total cost - €

Table 4: Calculation example of traditional cost accounting (Source: based on Jasch 2009, p. 117)

In contrast, the material flow cost accounting clearly points out that there is a waste of 30 kg and the costs which are related with this waste. This example shows how effective MFCA is and that this approach increases transparency and provides information.

240 Jürgens 2002, p. 113 f 241 Biere/Götze 2012, p. 140 43 / 136

Material Flow Cost Accounting

Output (product) Product (70 kg) Material 1,400 €

Input (100 kg) Processing cost 360 € Total cost 1,750 €

Material 2,000 € Processing cost 500 € Output (waste) Total cost 2,500 € Waste (30 kg) Material 600 € Processing cost 150 € Total cost 750 €

Table 5: Calculation example of MFCA (Source: based on Jasch 2009, p. 118)

4.2 Delimitation to other (environmental) management accounting approaches The following pages will place a focus on various (environmental) cost accounting approaches. The aim of this chapter is to find out how these approaches work to be able to explore their theoretical background.

The following approaches are going to be examined: process cost accounting, activity-based costing, life cycle costing and the balanced scorecard. After a short explanation, the approaches will be compared with material flow cost accounting.

4.2.1 Process cost accounting Actually, there are two well known approaches which are related with process cost accounting; namely 242  Activity-Based Costing according to Cooper, Johnson und Kaplan, as well as  Process cost accounting based on Horváth and Mayer.

In the German-speaking countries the focus is placed on the process cost accounting which complements the marginal costing in the manufacturing sector. In the Anglo American area the Activity-Based Costing (ABC) is seen as a separate cost accounting system especially for indirect areas of the manufacturing industry, for service companies and the NPO sector.243 This Master Thesis will cover both approaches. The first one is the process cost

242 Friedl 1994, p. 144 243 Coenenberg/Fischer/Günther 2009, p. 145 44 / 136 accounting which will be topic of this chapter, and the second is the ABC which will be discussed in the next chapter.

4.2.1.1 Idea The process cost accounting is considered as an instrument by which all dimensions of a sustainable cost management can be analyzed. This approach is based on the traditional cost-type accounting and cost center accounting.244 Its origin can be traced back to deficiencies in flexible standard costing.245

The process cost accounting is a cost accounting system whose application field is mainly in indirect performance areas such as R&D, design production preparation, quality assurance, purchasing, logistics and sales. More complex and customized solutions and enhanced quality assurance activities etc. result in a significantly higher proportion of these areas on the value chain and have led to a sharp rise in overheads in the overall costs of the company. The main goal of process cost accounting is the increase of transparency in indirect performance areas. From this, other objectives such as supporting the overhead management and strategic calculation (program policy), the determination of cross- departmental cost drivers or ensuring efficient resource consumption can be derived. 246 Process cost accounting represents an additional cost accounting system for the use of resources.247

Due to the limited use in the field of overhead costs, the process cost accounting should be integrated into an existing cost accounting system, as it mainly represents the indirect performance range.248 It is whether a new nor an independent branch of cost accounting.249 Basically, it is based on a cost-category, cost centre and cost carrier accounting such as traditional accounting.250 The direct costs of the products are assigned directly and the indirect costs are distributed indirect to the cost center through a process cost center accounting.251

244 Horvath/Niemand/Wolbold 1993, p. 315 245 Stibbe 2009, p. 218 246 Horvath/Niemand/Wolbold 1993, p. 315 247 Stibbe 2009 , p. 222 248 Horvath/Niemand/Wolbold 1993, p. 315 249 Voegele/Sommer 2012, p. 195 250 Horvath/Mayer 1989, p. 216 251 Schneider 1995, p. 32 45 / 136 It’s is to determine the financial cost of an operation (=process cost rate).252 The focus is not placed on products or projects, but on the processes within the company.253 The basic assumption of the process cost accounting states that the overheads of the indirect performance range are not caused directly by products, but by processes. Therefore the overheads of indirect performance range are not taken into account on quantitative dependent variables, but on the respective process amount.254

The development of this approach is based on changes in the value structure, which are accompanied by changes in the cost structure.255 What does that mean? The proportion of fixed costs and overheads on the total costs of doing business increased disproportionately.256 Additionally to this, there is a growing importance on indirect, overheads triggering functions such as research and development, logistics, production planning, quality assurance, sales, management and service.257 However, the associated costs (overhead costs) do not vary to the output in the short term.258 Ultimately, the aim of the process cost accounting is the broad allocation of process costs to the product as cost units.259 In this respect, the process cost accounting is a costing method which is inspired in its basic structure to the traditional cost accounting practices.260

Process cost accounting provides a way to incorporate environmental costs. As mentioned above, this approach is particularly suitable for the settlement of activities of the indirect provision of services, including the environmental one.261 As part of the environment-oriented process cost accounting, the evaluated resource consumption per unit of output is determined. This leads to a better cost transparency and sensitizes the costs in charge of environmental issues.262 Environmental costs of indirect service areas normally occur as overheads. Their consideration, however, is regarded as crucial for the planning and decision support of environmental measures. The aim is an analysis of the costs that occurred. Within the centre of analysis, there is a backtrack of the claimed resources, which represent the cost driving activities.263

252 Voegele/Sommer 2012, p. 197 253 Voegele/Sommer 2012, p. 193 254 Schweitzer/Küpper 2011, p. 357f 255 Coenenberg/Fischer/Günther 2009, p. 145 256 Coenenberg/Fischer 1991, p. 22 f 257 Coenenberg/Fischer 1991, p. 22 258 Cooper/Kaplan 1988, p. 97 259 Franz 1990, p. 607 260 Franz 1990, p. 115 261 Günther 1994, p. 229 262 Herbst 2001, p. 198 263 Holze 2003, p. 211 46 / 136 4.2.1.2 Aim The aim of process cost accounting can be divided into two main parts:264  Control of indirect activity areas  Causation related distribution of overheads

As mentioned, the primary goal of the approach is to get an overview and control over the indirect performance areas.265 By using the process cost accounting, a source-related assignment of overhead costs can be made.266 This can be guaranteed through the detailed mapping of business processes which results in an increase of (cost) transparency in the indirect performance areas.267 Furthermore, it increases the possibility of a more efficient planning and control of overheads.268

This leads to further objectives such as the support of the management of overheads and the goal to achieve efficient resource consumption.269 A second objective of this approach is the aim of a causation related distribution of overheads.270

The support for the management overheads through the process cost accounting or the increase of cost transparency in the indirect performance areas form the basis for the support of numerous decisions with strategic importance. This includes pricing policies, the (long-term) programming and decisions on the production depth (in-house production versus external procurement).271

4.2.1.3 Key elements As a first step, the processes or activities of the indirect areas should be defined and their resources utilization rate should be assessed.272 Processes or activities are repetitive tasks that arise in the various cost centers or departments of a company when carrying out the tasks.273

Within the next step, the medium and long-term factors that influence cost or resource changes should be made visible through so-called cost driver. Cost drivers are the variables

264 Roth 1994, p. 229 f 265 Roth 1994, p. 229 f 266 Bea 2015, p. 318 267 Horvath/Niemand/Wolbold 1993, p. 315 268 Roth 1994, p. 229 f 269 Horvath/Niemand/Wolbold 1993, p. 315 270 Roth 1994, p. 229 f 271 Bea 2015, p. 318 272 Horvath 1998, p. 10 273 Coenenberg 1993, p. 62 47 / 136 that influence costs of a process and count as a variable for number of process penetrations.274 This means concretely: When doubling the processes, one can assume a doubling of resource depletion and thus a doubling of the costs.275

As far as there are cause-effect relationships, the process costs are able to be attributed in a further step, for example, attributable to products or customers to demonstrate their use of resources from the indirect section.276

In general, the process cost accounting includes the costs of all resources used. All cost elements are assigned to resources, so that an individual resource profile emerges.277

4.2.1.4 Reflection A variety of empirical studies shows significant changes in the cost structure as already described above. This explains the high interest in new approaches of cost accounting as the process cost accounting, aiming to better influence the long term costs.278

This approach helps to explain to the management what environmental costs are and where they are from, since they are systematically associated with the known business processes. With the identification of processes in overhead costs and the billing of occurred overhead costs on the basis of process cost rates, the relationship between the products and the claimed processes is taken into account. Thereby, it is possible to achieve a more equitable allocation of these costs to cost units.279

Even if the introduction effort through the decomposition of processes and the cost allocation (of these processes) are high – it is worth the effort. A cost analysis takes place process- related and not cost centre-related. This plays a great role, especially in regard to the change of the processes through the integration of social, ecological and economic responsibility.280

A major advantage of process cost accounting is its versatility and compatibility with other accounting methods. Occasionally one can use it to solve specific problems for an ongoing cost control. Furthermore it is possible to use it as an exclusive cost accounting instrument or to combine it with traditional cost accounting such as an overhead costing or marginal

274 Horvath 1998, p. 10 275 Mayer 1998, p. 10 276 Horvath 1998, p. 5 277 Mayer 1998, p. 11 278 Küpper 1994, p. 32 279 Fichter/Loew/Seidel 1997, p. 66 280 Colsman 2013, p. 77 48 / 136 costing. This combination can be found quite often in practice, because through this use, the workload of a nationwide introduction of process cost accounting can be avoided and instead a few key processes and their process costs are taken into account.281

In summary, process costing is an accounting concept, which is based on an existing account structure and its field of application is mainly located in the indirect performance areas. It is a response to environmentally-induced developments in the cost structure of companies, and emerged due to the rise of overheads block. Its strengths lie primarily in the structuring of the overhead areas and the identification of cost drivers. By increasing the transparency in this area, the process cost accounting is able to contribute to support strategic decisions. Weaknesses can be seen in the fact that it does not work causally in regard to the neutral processes as well as in its full cost character.282

4.2.2 Activity-based costing Even if there are a few early approaches of process cost accounting in the German-speaking area; the first structured approach of this has been developed in the mid-eighties in the United States. Under the name of "activity-based costing" (ABC) Cooper, Johnson and Kaplan have provided key contributions to this concept.283

4.2.2.1 Idea Having a look on the structure, ABC can be characterized as full cost accounting.284 The criticism of the US widespread traditional overhead costing acted as a trigger for the development of the approach. The criticism was based on the fact that overheads were charged over wages.285

The focus of activity-based costing is the provision of information for the medium- and long- term planning and control.286 Essentially, it comes to the analysis of the cost assignment in the cost centre and cost unit accounting. Instead of fix surcharges, which are based on material value, one should charge costs for the used service. The application of the approach to environmental measures represents an analysis of all environmental protection procedures within the company. This analysis includes both production and administrative

281 Horvath / Partners 2011, p. 6 282 Bea 2015, p. 320 283 Schweitzer/Küpper 2011, p. 364 284 Schweitzer/Küpper 2011, p. 365 285 Schweitzer/Küpper 2011, p. 364 286 Cooper/Kaplan 1988, p. 20 ff 49 / 136 processes.287 Through this analysis, the costs of individual operations are put together (e.g. the environmentally disposal of a unit of waste), in order to distribute them afterwards based on their causation (e.g. according to the different resulted amounts) to the cost units and cost carriers.288

The main point is that some products contain more on overhead costs than others. Just take the example of two products: Product A and product B, its basis is the same, for example both are computers, a robot etc. But just imagine that product A would be tailored to its customers needs which means that there are more costs related to product A than product B. A traditional accounting system would allocate the same costs to both products, even if one of them is especially related to the overhead costs more expensive than the other. ABC has the claim to allocate just those costs to the products which it actually produces.289

4.2.2.2 Goal ABC is an attempt to assign the overhead costs of direct and indirect performance ranges based on their causation on the products. In the early contributions the aim of this approach is the provision of information for product and program planning for the medium and long- term.290 Recently the support of natural resource management is emphasized as a goal, too. To achieve these goals, both the direct and indirect power ranges are displayed.291

4.2.2.3 Key elements Starting point of the activity-based costing is the formation of processes (activities) in direct and indirect performance range. The processes must be defined in a way that the use of commodity consumption of a process can be determined by a single cost driver.292 With respect to the number of cost driver, which should be considered, the focus is placed on the relative costs of processes beside the diversity of products and the quantities of products; this means the proportion of process-reference-related costs in the total costs of the company.293 For each defined process a so-called cost pool is created under the usage of key sizes, which includes all costs occurred by the realization of the considered processes in the accounting period.294

287 Loew/Fichter/Müller 2003, p. 57 288 Schaltegger/Burritt 2000, p. 130 f 289 The Economist 1998 290 Cooper/Kaplan 1988, p. 20 291 Cooper/Kaplan 1991, p. 89 292 Schweitzer/Küpper 2011, p. 365 293 Friedl 1994, p. 152 294 Schweitzer/Küpper 2011, p. 365 50 / 136 4.2.2.4 Reflection If there are already experiences with ABC, then the effort to implement the method is similar to process cost accounting.295

Generally, the activity-based costing tries to fulfil a more causal distribution of costs in the cost units and cost carrier accounting. In addition, the analysis of activities and processes helps to identify inefficiencies within the workflows. When focusing on environmental protection processes, environmental costs are assigned causally to the cost units and to the products/services. Through that, one can avoid to wrongly attribute excessive environmental costs to products that take little corporate environmental protection in their production processes. After the calculations, operations can be investigated through a simple cost- benefit analysis to get a comparison, as the costs have already been determined. This analysis can lead to positive effects in environmental management, under the condition that identified efficiency potentials are not used for budget cuts but instead they are used to evaluate the performance of the environmental management.296

Although activity-based costing offers a number of advantages (for example it links corporate goals, activities and costs; it is strongly commercial oriented)297, the problem is that the cost information sometimes show just limited relevance, because: 298  The costs of the indirect performance range are not assigned causally to the cost units.  Also irrelevant costs are assigned to cost units, which are not relevant for the decision making.

4.2.2.5 Difference between process cost accounting and ABC ABC is often equated with the German process cost accounting. Others see differences between those two approaches. Horváth et al. picked up and modified the approach of ABC in the end of the 80s. After this modification, process cost accounting emerged. The main criticism of Horvath was that the reference values within activity-based costing have no relation to the cost units; nevertheless they are used to charge the overheads to the cost carriers. Therefore Horvàth limits the consideration to the direct performance range.299

295 Fichter/Loew/Seidel 1997, p. 32 296 Loew/Fichter/Müller 2003, p. 62 297 Fichter et al. 1997, p. 66 298 Friedl 1994, p. 154 299 Schweitzer/Küpper 2011, p. 364 51 / 136 ABC is a very useful and effective form of cost accounting, but not an entirely new system. It uses the traditional cost category-, cost centre and cost carrier accounting.300 In summary, one can say that while the process cost accounting in Germany is more a complementary tool for a better handling of overheads in the indirect areas, the American activity-based costing refers more to the assignment of direct and indirect costs to cost units and cost carriers.301

The purpose for the introduction of ABC in the US was to improve the product calculation by source-related allocation of production overheads. The allocation of indirect costs process areas on the same principle was seen as a side effect. Historically the product costing was in the foreground, but solely based on the indirect areas in the Activity-Based Costing. It tries to make the budgeting of indirect areas transparent through the activity-based costing.302

The special features of the method of process costing compared to ABC is marked by greater differentiation of cost centers, through the pursuit of accurate cost information and by the purpose to identify interface problems between the organizational units using the activity- based costing.303

There is no general statement about which of the two approaches is better. The usefulness mainly depends on a company’s condition. The process cost accounting approach is more appropriate in typical German companies with numerous cost centers or if there are constantly interface problems between functional organizational units that perform together a main process. Such interface problems occur when employees in functional units (for example, product development) only see their functional task (as design change), while they do not really observe the impact on other functional units (example feasibility in production).304

4.2.3 Life cycle costing Actually, strategic decisions have significant impact on the future success of companies. The problem is that operational management is little related to these strategic decisions. The result is that a strategy-oriented cost and performance accounting is required. The Life Cycle Costing provides such an enhanced strategy orientation.305

300 Remer 2005, p. 7 301 Herbst 2001, p. 97 302 Gaiser 1998, p. 70 303 Gaiser 1998, p. 71 304 Gaiser 1998, p. 75 305 Coenenberg/Fischer/Günther 2009, p. 31 52 / 136 4.2.3.1 Idea The life cycle costing (LCC) has its origins in the US, where it is used for efficiency evaluation and design of large-scale projects in the fields of industrial engineering, military and aerospace since the 60s. Since the mid-80s, there is a growing interest in the concept in German-speaking countries.306

The concept of life cycle costing (LCC) is defined as a process of analysis and planning of life cycle costs.307 In detail this means that the concept is based on the analysis and design of costs throughout the life of a product or project, from development until the end of its useful life. An essential basis is the relationship between the activities and resource operations in the different phases of the life cycle.308 Due to the time gap from design, development and manufacture; traditional cost accounting systems do not provide decision- making information.309

The life cycle costing examines how the temporal execution and success control effect the individual phases.310 This is an approach with a long-term approach, whose findings are aimed at influencing expenditures and costs. The life cycle costs in particular are defined as all costs which occur for a plant, a product or a system for initiating, planning, implementation, operation and for decommissioning, throughout the life cycle.311

In principle, literature distinguishes different perspectives: the manufacturers’ perspective (supply side) and the procurement perspective (customer perspective).312 The figure below should give an overview of the various types of costs which might occur within a product’s life cycle (given from the perspective of a manufacturer).

306 Hermann 2010, p. 143 307 Wübbenhorst 1984, p. 16 f 308 Küpper 1994, p. 65 309 Coenenberg/Fischer/Günther 2009, p. 31 310 Küpper 1994, p. 66 311 Wübbenhorst 1984, p. 70 312 Voegele/Sommer 2012, p. 238f 53 / 136

Total life cycle costs

Actual operating time Procurement / Construction Production Usage Disposal distribution

 Development costs  Guarantee costs  Dismantling  Material costs costs  Production costs  Disposal  Distrbution costs costs

Figure 9: Overview total life cycle costs and revenues (Source: based on Spengler/Hermann 2006, p. 32 ff)

The focus is on the coordination of the three decision variables performance, time and cost. Through the performance aspect and the consideration of the entire life cycle (cradle to grave), there is the possibility to integrate ecological aspects.313

4.2.3.2 Goal LCC refers to the following objectives:  Survey of costs and revenues during the life cycle.  Minimization of the total costs.  Influencing costs

An important goal of LCC (life cycle costing) is to collect all costs and revenues incurred during the whole life of a product, in order to get a comprehensive picture of the profitability of a product.314

Another goal is to influence the total cost in consideration of the follow-up costs to be able to minimize them. Therefore, it is necessary to put a special focus on the creation cycle of a product or project, as decisions and investments in the development phase have a great influence on follow-up costs.315

In addition, when using LCC at a very early stage, it is possible to influence the structure and amount of the expected total costs and revenues already in the development phase. It can

313 Wübbenhorst 1984, p. 2 314 Erichsen 2011, p. 272 315 Back-Hock 1988, p. 6 54 / 136 be said that due to the predominantly long-term expression, the life cycle costing is an instrument of strategic controlling.316

4.2.3.3 Reflection In order to make further decisions, it is important to have knowledge about the basic costs, revenues and cash flows. In addition, the life cycle costing shows, whether a product is expected to carry itself and how high the total profit will be. The life cycle gives an overview of the expected product success. Over time it shows the points at which there is a need for improvement.317

Life Cycle Costing must be understood as a cyclical process in which the cost objectives are constantly checked and must be questioned. This results in a constant market and customer orientation that allows the sub-company to ensure competitiveness.318

Additionally, life cycle costing is used to plan projects. Furthermore, it provides information about a product’s profitability to be able to decide between alternatives, for example, decided in the purchase of large capital goods. It supports decision making, and can be useful in the product design as well as in the development and use of products.319

A major criticism of this approach is directed against the isolated perspective with respect to individual products.320

316 Erichsen 2011, p. 273 317 Erichsen 2011, p. 281 318 Mikus et al. 1997, p. 229 319 Coenenberg/Fischer/Günther 2009, p. 584 320 Bea 2015, p. 325 55 / 136 4.2.4 Balanced scorecard The original concept of the Balanced Scorecard (BSC) has been developed by Richard Kaplan and David Norton in the early nineties. BSC resulted from the criticism of the unilateral and backward-looking orientation of accounting and financial ratios of companies.321 It can be seen as an integrated management system.322 Furthermore, it represents both a performance measurement system to measure performance as well as a strategic management tool.323

4.2.4.1 Idea The various ratios are often the result of individual instruments such as material flow analysis or cost accounting, the Balanced Scorecard provides a framework for integrating many individual instruments, as it summarizes the results of these instruments.324

The BSC is intended to support the implementation of business strategies in action. To guarantee this, it measures the achievement of objectives. The bases are key figures. However, it does not only use short-term monetary variables as it includes also intangible aspects such as expertise, development potential...325

The idea is to implement the vision of a company's strategies, qualitative and quantitative objectives and the necessary measures to achieve them. The task of BSC is, above all, to provide a framework to guarantee the successful implementation of the strategies of a company. The exercise is not to formulate a strategy, but to allow using meaningful indicators to traceable monitor the strategic objectives in a transparent and comprehensible manner. For the Ecological Balanced Scorecard, this means that the variety of business processes associated with environmental issues, for example, waste management, and product safety are examined on their cause and effect relationships to the corporate strategy and the appropriate KPI must be derived.326

The core tasks of the Balanced Scorecard are - in addition to implementing the strategy - improved information processes and institutionalized care of the executives with strategic and operational information.327

321 Kaplan/Norton 1997, p. 5 322 Zarnekow 2005, p. 104 323 Kaplan/Norton 1997, p. 5 324 Colsman 2013, p. 68 325 Müller/Rolf 2003, p. 203 326 Fahrbach/Heinrich/Pfitzner 2000, p. 87 327 Funkl/Tschandl/Heinrich 2012, p. 185 56 / 136 With the development and introduction of the BSC two essential steps must be distinguished: First, the strategy must be mapped to the BSC according to the framework, so that on the one hand, the strategy can be communicated in all areas of the company (strategic component) and on the other hand, the degree of strategy fulfilment can be measured (Performance Measurement). To reach this, traditional and rather short-term financial indicators that measure past performance with indicators of other perspectives, are linked by cause-effect relationships with the financial targets. In the second step, the organizational conditions must be created, which refocuses the management activities of the strategy. The management process combines targets and incentive systems with the performance figures of the BSC, directs the allocation of resources on activities with the highest potential for strategy fulfilment and develops the strategy in a feedback and learning process.328

4.2.4.2 Goal Main focus of the BSC is the improvement of effectiveness, such as the customer benefits, working atmosphere and image.329. The aim of the Balanced Scorecard is:330  To present an information system as a basis for planning and control of the company, to give the management a quick but meaningful overview of the business operations.  To ensure that the formulated strategies set by the top management are implemented on each operational level with the necessary concretization degree.

4.2.4.3 Key elements Kaplan and Norton propose an orientation towards four perspectives, in order to ensure long term financial success through the contributions and the conversion of soft factors and intellectual capital such as intangible assets and human capital. These four perspectives are:331  Financial perspective  Customer  Internal processes  Learning and development

In connection with planned figures / targets, comparison between planed targets and regular state of affairs, the BSC can be seen as an instrument of controlling in all divisions. That’s the reason why it is also useful in the area of environmental management, where, for

328 Zarnekow 2005, p. 105 329 Steinacher 2000, p. 148 330 Müller-Hagedorn/Büchel 1999, p. 158 331 Kaplan/Norton 1997, p. 9 57 / 136 example, environmental material flows and their sustainability effects can be integrated systematically into a metrics-driven management system. In this case, one speaks from a Sustainability Balanced Scorecard (SBSC).332

4.2.4.4 Sustainability balanced scorecard The comprehensive approach makes the Balanced Scorecard interesting to corporate environmental protection. It represents the extension of conventional Balanced Scorecard for sustainability management by integrating environmental and social aspects in the BSC. 333

Its primary objective is to integrate all three pillar of the sustainability strategy – economic, environmental and social – in order to achieve a successful implementation of corporate and business strategies. Through this, the company’s performance can be improved in all three dimensions of sustainability.334

The BSC is used to transmit corporate strategies into operational variables and implement them. Using the SBSC the environmental and social management is geared towards335  The successful implementation of the strategy  integrated into the classic management and  exploits potentials between economic, environmental and social goals.

The information system of the (sustainability) balanced scorecard provides the necessary information, and passes through all the elements of a balanced scorecard. Sustainably acting managers, environmental managers or other users of a BSC can make use of the provided information and the continuous data analysis.336

Within a top-down oriented process it is examined which aspects contribute to the successful implementation of the strategy. For this purpose, each perspective is checked in regard to sustainability issues and their strategic importance.337 The aim of a SBSC is the integration of all three pillars of sustainability (economic, environmental and social).338

332 Funkl/Tschandl/Heinrich 2012, p. 181 333 Colsman 2013, p. 68 334 Zingales/Hockerts 2002, p. 37 335 Colsman 2013, p. 68 336 Funkl/Tschandl/Heinrich 2012, p. 185 337 Colsman 2013, p. 68 338 Schaltegger 2000, p. 128 58 / 136 Environmental elements within the four perspectives of the Sustainability Balanced Scorecard may look like this:339  As part of the financial perspective, the economic consequences of past decisions and derived measures are assessed. Environmental strategic objectives are for example the reduction of current waste costs or cost savings through efficient use of resources.  In the customer / stakeholder perspective, the perspective of customers and other stakeholders will be displayed. In the foreground there is the presentation as a responsible company towards the environment and society. Product-related environmental aspects are for example the avoidance of critical substances, or consumption of resources in the use phase.340  The internal process perspective includes indicators for mapping input and output relations, compliance with environmental legal requirements or data for eco- efficiency.  The inclusion of the learning and growth perspective takes into account the realization that qualified and motivated employees on the one hand and the continuous adaptation of environmental targets and programs on the other hand are important for the achievement of strategic environmental goals.341

The difference between both kind of scorecards (BSC and SBSC) is that the conventional balanced scorecard remains almost exclusively in the market-economic environment. Exchange processes that take place outside the market mechanism, are hardly taken into account. 342

4.2.4.5 Reflection The balanced scorecard is not an ideal performance measurement system. It tends to simplify reality, as it focuses only on a few cause/effect relationships.343 In reality, however, these relationships are not always clearly assigned through the complex environment. Through that possible trade-offs between the objectives often arise, which are not immediately apparent through this complexity.344

339 Fahrbach/Heinrich/Pfitzner 2000, p. 88 340 Schaltegger 2002, 35 ff 341 Schaltegger 2002, 35 ff 342 Figge et al. 2001, p. 20 ff 343 Meyer 2002, p. 8 344 Pessanha/Prochnik 2006, p. 8 59 / 136 About the formulation of appropriate targets, indicators and measures SBSC provides the starting point for an integrated sustainability controlling.345 It is not an instrument of strategy formulation; it rather builds on an existing strategy, and serves to implement it. On the one side, the SBSC helps to shed light on the relationship between business objectives and activities, and on the other hand it considers both, environmental and social aspects of a company. This gives companies the opportunity to improve the company's performance in all three dimensions of sustainability. The aim of this sustainability-oriented competitive strategy is to improve the eco-efficiency of the business activities; an example in terms of the ecological dimension would be that the material-based resource efficiency of the processes is in the foreground.346

4.2.5 Comparison and delimitation of selected EMA’s to MFCA Within this chapter the above described environmental management approaches are examined based on six elements as well as compared to MFCA. These elements are:  their goals,  whether they follow a process or product oriented perspective,  whether they consider costs, revenues or both,  whether they consider waste or not,  which account type does it belong to,  whether they follow a strategic or operative orientation.

Before the analysis of the EMA’s starts, it will be helpful to have a look on each element and it’s relation to MFCA.

The main goal of MFCA is the reduction of material consumption. As a further goal, it helps to increase transparency.347 It follows a process perspective, as it has a detailed look on the different production steps to find inefficiencies.348 In general, MFCA mainly focuses on costs, but in individual cases, revenues from by-products and non-product outputs can be added as negative costs (therefore these negative costs can be seen as revenues in a wider sense). A main point is the consideration of waste in the form of NPO (non-product output). Furthermore, MFCA can be classified as full cost accounting.349 All in all, it shows a strategic perspective as it mainly plans and does not execute the improvements or solves the inefficiencies.

345 Colsman 2013, p. 69 346 Schaltegger/Burritt 2000, p. 53 347 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011 (E)), p. 4 348 Nakajima 2010, p. 48 349 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011 (E)), p. 30 60 / 136 Process cost accounting The process cost accounting can be summarily described as a new, cost of interdepartmental approach that increases the cost transparency in the indirect performance areas. It ensures an efficient use of resources, shows the capacity utilization, improves the product calculation, and thus it avoids strategic mistakes.350

There is a focus on the business processes as well as on the costs incurred.351 Through its business processes one can derive that process cost accounting follows a process perspective, as it is already included in the name. Furthermore, through the effect chain between customers-products-processes-resources one can add strategic impulses through process cost accounting, which suggests a mainly strategic orientation.352 (This point is described within the analysis of ABC on the next pages.)

Essentially, the process cost accounting follows the principle of full-cost accounting, as it imputes not only the directly attributable direct costs to cost objects, but also the overhead costs, especially the products.353 Regardless of its basic full-cost nature, it is already quite common to attribute the process cost accounting a marginal costing character.354

Except of the fact that it does not clearly consider waste, process cost accounting and material flow cost accounting show one main similarity. Especially their character and method are equal. The following figure shows that both approaches take parts of their costs to distribute them to individual accounts in order to guarantee clarity.

Material flow cost accounting Process cost accounting Sales and administrative overheads Sub- Analysis of costs of material Sub- should be spread over the Goal355 losses356 Goal manufacturing costs of individual products357

350 Remer 2005, p. 7 351 Mayer 1998, p. 5 352 Mayer 1998, p. 5 f 353 Franz 1991, p. 537 354 Fröhling 1992, p. 109 f 355 Within this table, reference is made to the cost accounting specific goal of MFCA. This can be distinguished from the overall goal of MFCA which refers to the increase in the efficiency of material and energy consumption (already mentioned in chapter 3.2) 356 Österreichisches Normierungsinstitut 2011 (EN ISO 14051:2011), p. 14 357 Lechner/Egger/Schauer 2006, p. 831 61 / 136 359 Method358 Method  Volume-neutral (fixed) costs Distribution of non- Distribution of costs  Product costs  Non-volume manufacturing costs into:  NPO-costs dependent into: (individual) costs

Table 6: Comparison of MFCA and process cost accounting (Source: Author's illustration)

Activity based costing The initial aim of ABC is the provision of information360, but new approaches show that it also supports the natural resource management361.

ABC investigates production and administrative processes, which highlights its process perspective even if it solely focuses on costs and does not consider explicitly waste (the costs for waste are included in the indirect performance area).362 There is a strong indecision in the literature to whether activity-based costing and process cost accounting are more strategic, operational or if they go in both directions. The author Daube makes a classification based on the scope of activities. He says that ABC is designed for the operational and strategic cost management; whereas process cost accounting has a higher strategic character.363 Due to the detailed planning and monitoring of process costs, one can speak of a strategic orientation of the process cost accounting.364 Additionally, when having a look on the structure, ABC can be characterized as full cost accounting.365

The main difference between Activity based costing and MFCA can be seen in the consideration and analysis of waste. ABC may recognize its existence, but MFCA clearly focuses on waste and its related costs, which comes clear when having a look on the already mentioned classification of “positive products” and “negative products” (=Non-Product Output).

358 Umweltbundesamt Berlin 2003, p. 89 359 Ehrlich 2002, p. 144 360 Cooper/Kaplan 1988, p. 20 361 Cooper/Kaplan 1991, p. 89 362 Loew/Fichter/Müller 2003, p. 57 363 Daube 1993, p. 205 364 Glückler et al. 2012, p. 43 ff 365 Schweitzer/Küpper 2011, p. 365 62 / 136 Life cycle costing Life Cycle Costing is a product-oriented design of cost accounting.366 By focusing on the life stages of the product, a consideration of costs and revenues is assured.367 Through the explicit inclusion of the revenues within the process of life cycle costing, an essential requirement of the concepts of a strategy-oriented corporate accounting is justified. Furthermore, the long-term orientation seems to be assured in this concept.368

The aim of the approach is to optimize the costs and revenues incurred on the entire life cycle to be able to increase the overall efficiency.369 Therefore, it is about a complete listing of all costs and revenues incurred during the product lifecycle as well as their source-related assignment to the product.370

Another aspect of the life cycle costing is it‘s contemplation. Usually, individual periods are considered across all products. Here, the life cycle costing analyses a product over all periods.371

It mainly focuses on a strategic perspective, as it lists all the costs and revenues, but it does not make any actions to increase revenues or decrease costs. Furthermore, it does not directly focus on waste as a separate element– it may be the case that LCC shows the costs for waste or disposal in its overall list of costs and revenues, but it does not strongly focus on them.

Additionally, as in this case, one talks about a life cycle costing concept it is not possible to classify it into the scheme of full or marginal cost accounting.

Balanced Scorecard In business practice, performance measurement systems have been used for a long time, but they are just conditionally suitable as an instrument of strategic corporate management Traditional performance measurement systems consider just existing data and sizes without placing them in a strategic context.372 In recent years, new systems have been developed to address these shortcomings, just as the Balanced Scorecard, which combines strategic and

366 Günther 1994, p. 249 f 367 Günther 1994, p. 251 368 Bea 2015, p. 325 369 VDI 2884 2005, p. 5 370 Bea 2015, p. 321 371 Schrack 2014b, p. 130 372 Hyperspace 2010, p. 3 ff 63 / 136 operational elements.373 To summarize it, the aim of BSC is to implement the company's strategy in operational activities.374

It is difficult to classify BSC within a product or process perspective as it fits into both. As already mentioned, it consists of four perspectives – one of them clearly focuses on an internal process perspective. But recently, more and more authors insist on an additional, product, perspective. The reason for this additional perspective is that the products are not sufficiently illuminated in the process perspective. In addition, the pursued environmental aspects have a different background in the production and in the products.375

Within the financial perspective, the Balanced Scorecard focuses on different financial ratios and measures, depending on the chosen instruments the used data (costs or revenues) may vary.

Concerning the waste consideration, one has to differentiate between the Balanced Scorecard and Sustainability Balanced Scorecard. The first one does not clearly focus on waste in contrast to the second one. The SBSC tries to implement a sustainable strategy; if one part of this strategy considers for example the reduction of waste, than this part can be answered with yes. This means that it depends on the company, its strategy and the direction which it wants to go. Environmental strategic objectives of the financial perspective could be for example the reduction of current waste costs or cost savings through efficient use of resources.

The SBSC is more versatile and can be applied to a wide variety of companies and organizations. It takes a value-oriented vision of sustainability management, as it combines ecological, economic and social objectives.376 Their focus is therefore not solely on a cost perspective, as it is in the MFCA. It seems that the (Sustainability) Balanced Scorecard is a step further in the process than MFCA, as it tries to integrate all the results of different instruments into a scorecard.

As already mentioned, the balanced scorecard focuses on improving effectiveness377; whereas the material flow cost accounting is specialized in the aspect of efficiency378. Efficiency refers to the economic principle, and has the goal of an optimal cost-benefit ratio;

373 Kaplan/Norton 1997, p. 5 374 Fahrbach/Heinrich/Pfitzner 2000, p. 85 375 Rausch 2009, p. 60 f 376 Colsman 2013, p. 69 377 Steinacher 2000, p. 148 378 Günther/Bergmann/Rieckhof 2014, p. 38 64 / 136 so that at the end, the benefit is higher than the cost used. Effectiveness aims to achieve a desired goal; it is about the degree of target achievement.379 This argumentation shows that the BSC and MFCA follow a contrary principle.

In this area, it seems that BSC and SBSC do not fit well to the other approaches, which makes it difficult to put them into the same categories or in the same classification as the others. The reason is that BSC/SBSC is no classical cost instrument. It is more a guide, as well as a planning and information tool. It also differs significantly from the other approaches because it takes into account other, non-monetary and soft success factors.380

Conclusion All approaches, including the material flow cost accounting have a strategic orientation (even if some also have an additional, operational focus). Referring to the cost accounting classification, process cost accounting, the ABC and the material flow cost accounting belong to the full cost accounting. Furthermore, it can be noted that apart from the SBSC all other approaches belong to the "Differentiated Green Controlling”. This means that those approaches are conventional cost instruments that identify ecology-related costs and revenues381, which shows that they can be used in an environmental background.

The following table should give a clear overview and can be used as a summary of the above mentioned information.

MFCA PCA ABC LCC BSC

Reduction of Transparency, Delivering of material/energy efficient Economic information for Goals Transparency consumption, resource efficiency planning and transparency consumption control

Perspective Process Process Process Product Product/process

Cost/revenues Costs / Costs / (depending on the Cost/revenues Costs Costs (revenues) revenues chosen financial ratios)

Consideration Yes in the case of Yes No No Yes/No of waste SBSC, no in the

379 Maywald 2009, p. 20 380 Hahn/Wagner 2001, p. 1 381 Günther/Schröder 2011, p. 7 ff 65 / 136 case of BSC

Strategic or Strategic & Strategic & operative Strategic Strategic Strategic operative operative consideration

Table 7: Comparison of (environmental) cost accounting approaches and MFCA (Source: Author's illustration)

Giving a final conclusion, it seems that MFCA and PCA show the highest similarities. Even if they are not equal in all points, they have one main aspect in common: both approaches distribute their costs on individual accounts. Only MFCA and PCA have this aspect in common. Additionally, they show a high correlation in their aims, they follow the same process oriented perspective, consider waste and are highly strategic approaches. For the additional analysis, this result can be interesting as it might help to find the right theoretical background of MFCA.

66 / 136 5 Selected business theories in relation to environmental economic theories

As already mentioned at the beginning of the thesis, there rarely exists theoretical background for the various approaches within the environmental management field. That is the reason why this chapter places a special focus on the theoretical background of  selected environmental management approaches and  material flow cost accounting.

First of all, the thesis will have a look on selected economic theories/approaches (ecological modernization theory, resource based view, systems theory, resource dependence theory, transaction cost theory) and their key characteristics. This should help to clearly compare the chosen theories in regard to material flow cost account in the end. Before this evaluation takes place, the thesis will investigate the theoretical background of the previously mentioned cost accounting approaches (process cost account, ABC, life cycle costing, balanced scorecard). The reason for this step is that some of the examined approaches show similarities to MFCA, and therefore it might be the case that there are not just similarities between the approaches but also between their underlying theories. As a next step, the thesis focuses on MFCA and its potential theoretical background.

67 / 136 5.1 Economic theories

5.1.1 Ecological modernization theory Ecological modernization is a model of environmental action and a systemic-evolutionary approach to environmental research. The approach has emerged in the 1980s and 1990s, first in various individual aspects, which together added gradually to the modernization theory-based theory of evolution.382

5.1.1.1 Idea and purpose The concept of the ecological modernization was introduced in the 1980s by the political scientist Martin Jänicke and the sociologist Joseph Huber.383

The ecological modernization theory is considered as a concept of preventive environmental policy.384 Modernization in its economic core is about the improvement of processes and products.385 Proponents of ecological modernization theory argue that economic and social development as well as environmental goals can go hand in hand, and the economy benefits from the persecution of environmental objectives. Through technological progress a decoupling of economic growth and environmental degradation is achieved, which provides a lot of economic and environmental benefits.386

The strategy of ecological modernization assumes that economy and ecology, industry and nature, need not necessarily be mutually exclusive. They can be harmonized as far as it is possible to make environmental productivity (resource and energy productivity) as a source of prosperity, as one did it with labour productivity in the previous years. It is about more efficient and especially nature-friendly use of resources and energy. Ways to fulfill this goal can be seen in industrial eco-innovations, controlled by appropriate economic and legal- administrative frameworks and methods of environmental management.387

A categorical classification of ecological modernization theory in the different variants of environmental strategies is possible mainly by Jänicke. Following Gerau (1978), Jänicke distinguishes between four environmental policies, each consisting of two remedial and preventive strategies:

382 Huber 2011b, p. 279 383 Gibbs 1998, p. 4 384 Zimmermann/Hartje/Ryll 1990, p. 137 385 Jänicke 2000, p. 2 386 Lexikon der Nachhaltigkeit 387 Huber 2011, p. 143 68 / 136 End strategy Preventive strategy the repair or compensation of not prevented the ecological modernization - the design environmental impacts associated with of existing production processes and environmental impair production processes products more environmentally friendly and products through technical innovation disposal, which makes previously harmful the structural change as a substitute of production processes and products environmentally problematic forms of environmentally acceptable through production and consumption through additional measures ecologically adapted forms.

Table 8: Overview of preventive and end-of-pipe strategies (Source: based on Jänicke (1988), p. 13)

Ecological modernization differs from strategies like repair and disposal. Environmental innovations do not try to implement of so-called end-of-pipe solutions to reduce the environmental impact. Those end-of-pipe approaches belong to the end strategies. Those strategies involve a relatively ineffective, costly, unproductive and little economic and rather not innovative strategy that does not change the problem core. The ecological modernization tries to prevent the emergence of emissions, waste and material consumption in economic processes already in their origin, or tries to decrease them.388

Subsequently, ecological modernization is possible in two forms, an incremental innovation (cleaner technology), as well as a radical innovation (clean technology).389

The concept is one of the precautionary, preventive strategies. It is a strategy that minimizes the cost of raw materials, environmental protection costs and, where appropriate, the costs of environmental damage and increased economic productivity and technical innovation rate and possible problem areas are eliminated or avoided.390 Following Jänicke, he just recommends preventive environmental strategies because they allow double benefits - ecological and economic ones.391 As the strategy of ecological modernization aims to increase both, ecological and economic efficiency.392

388 Jänicke 2008, p. 58 389 Jänicke 2008, p. 60 390 Jänicke 1988, p. 13 391 Jänicke 1988, p. 23 392 Wicke 1982, p. 247 69 / 136 Generally, the strategic starting point of the concept lies in science and technology.393 Technological innovations are considered as linchpin of ecological modernization.394 In order to steer innovation in an ecological direction, however, it requires a new balance between economy and ecology. Therefore ecological modernization theories emphasize the importance of competition and market dynamics of ecological reforms. They integrate economic instruments in governance concepts and emphasize the role of civil society and economic actors in the process of ecological modernization.395

Within this theory, it is not just about technical measures for precaution against air, water and soil pollution and to increase efficiency (material and energy), but also about economic and fiscal policy measures aimed at expansion and completion of economic production functions. Furthermore, it is about the development of the legal bases for action and it also requires a change in the socio-cultural rationality of action.396

Digression: Different starting points of Huber and Jänicke The authors Jänicke and Huber are considered as the "founders" of ecological modernization theory, both actors consider the approach of two different points. Jänicke presents the concept of ecological modernization project as a technology-based approach to innovation, whereas Huber considers the ecological modernization in terms of social modernization.397

The focus of this thesis is not placed on the different perspectives of the authors, but rather on the general statements with regard to the ecological modernization theory. For the purpose of completeness the following table should give an overview on the differences of the author’s argumentation:

Comparison of Huber and Jänicke Martin Jänicke Joseph Huber The concept is used to describe a The author Huber (1993) describes that technology-based innovation approach of ecological modernization is not the end of the environmental policy, which focuses on modern societies but it starts the continuation technical transition towards a reduction of at a new level in dealing with the environmental and resource utilization environment and resources. through more efficient processes and

393 Brand 2014, p. 70 394 Huber 2011, p. 283 395 Brand 2014, p. 71 396 Huber 2003, p. 60 397 Brand 2014, p. 69 70 / 136 products. The theory will primarily change the The core idea is that the technological existing, ecologically forms of economy advancement in its impact leads to an through technical innovation.398 increase in resource productivity with an more efficient use of raw materials, energy resources and environmental media such as air, water and soil.399 sociological focus – technology-based focus development of modern societies

Table 9: Comparison of Huber and Jänicke (Source: based on Jänicke (1988), p. 23 & Jänicke (1984), p. 22)

5.1.1.2 Application field Ecological modernization is closely linked with innovation. The innovation refers to the initial launch of a new technology. This can improve some or all life stages of a product.400

Ecological modernization offers the opportunity to develop new technical innovations that pursue both economic and environmental benefits. A more environmentally friendly use of resources (eco-efficiency) affects different areas. Those areas could be for example material intensity (which is the efficient use of materials) energy intensity (is about the efficient use of energy),401 the surface intensity (efficient land use), the transport intensity (efficient logistics) or the risk intensity (in plants, materials, products). Implicitly, also the pollution intensity of waste and emissions is affected.402

5.1.1.3 Benefits and limits The combination of technological, social, economic and ecological perspectives results in the possibility to develop and implement sustainable technologies. The possibility of ecological and economic win-win solutions is emphasized, which results mainly in cost reductions and success in innovation competition. Therefore, there a benefits in term of the environmental aspect, on a micro economic level (for companies), but also on a macro-economic level for whole economies403

398 Jänicke 1988, p. 23 399 Jänicke 1984, p. 22 400 Jänicke 1984, p. 25 401 Jänicke 2008, p. 60 402 Jänicke 1984, p. 21 403 Jänicke 2000, p. 2 71 / 136 However, it is doubted whether ecological modernization is an appropriate way out of the environmental crisis. In the case of ecological modernization there are at least two points404 - although it seems that this approach has universal validity, ecological modernization is based on developments of some northern European countries. This requires very strong political institutions, which sends signals towards consumers and industry in terms of greener behavior. In addition, it is assumed that when using the appropriate environmental instrument the social practices inevitably develops in the predicted direction, which cannot be granted in reality.405

At its limits the ecological modernization theory encounters where potentially marketable technical standard solutions are not available. The unsolved environmental problems ("persistent problems") of land use, biodiversity protection, soil protection, the storage of nuclear waste or climate protection have - so far - boundaries. 406 Also the modernization approach is not a suitable option. Further, there is the problem that incremental eco- efficiency gains are still not a sustainable solution. They tend to be destroyed by growth processes and the rebound-effect (Example: Specific emission reductions that are neutralized by growing traffic).407

Overall it can be said that the concept of ecological modernization is too coarse to make the changes plausible which are taking place actually.408

404 Buttel 2000, p. 57 ff 405 Weiland 2007,p. 60 406 Jänicke 2000, p. 12f 407 Jänicke 2000, p. 13 408 van Tatenhove/Arts/Leroy 2000, p. 29 f 72 / 136 5.1.2 Resource dependence theory Prevention, utilization and development of resource dependencies is the theorem of resource dependence approach. This approach explains organizational behavior in the context of critical resources arising from dependency relationships for corporate environment and demands of stakeholders.409

5.1.2.1 Idea and purpose The resource dependence theory has its roots in the classical systems theory, organizational theory and social exchange theory. It is an approach which helps to analyze the system- environment relationships.410

The approach represents a theoretical framework to explain behavior within and between companies, which is considered in the context of the organizations critical resources.411 The resource perspective draws attention to the central importance of resources for life, function and viability of natural and man-social systems. Both, the companies as a whole as well as individual institutions depend on a steady flow of resources from to fulfil their purpose and to meet their own (company) targets.412

Generally, the resource dependence theory assumes that companies do not only want to survive, but they want to make profits - namely those who are not just normal, but beyond the level that can be achieved in perfect competition. These profits are based on different resources and capabilities of the company.413

The resource dependence approach places the following assumptions:  Organizations are faced with scarce and critical resources.  Organizations can gain those resources in exchange with other organizations.  The fact that organizations depend on the resource acquisition of other organizations, reduce their autonomy.  Therefore, organizations are trying to preserve their autonomy by developing special inter-organizational relationships that compensate their loss of autonomy.  If this is not possible, organizations develop different strategies to control the behavior of organizations from which they depend, for instance by creating dependency.414

409 Brunner 2009, p. 31 410 Pugh/Hickson 1996, p. 23 ff 411 Pfeffer/Salancik 1978, p. 1 ff 412 Müller-Christ 2003, p. 93 413 Kryphausen-Aufseß 1997, p. 459 414 Van Gils 1984, p. 1081 73 / 136 The resource dependency theory assumes an external perspective. Nevertheless, their suitability has been demonstrated for the analysis of internal company as well as project- related contexts.415 The theory is strongly based on the assumption that the aspects which determine an organization; are determined from the outside - more specifically, that it is determined by those who have control over critical resources from which the organization is dependent.416

Based on this, three main aspects need to be considered:  Environment  Dependency  External partners

Environment A company is closely linked to the environmental conditions.417 It is important to shield the organization from those critical resources.418 Such resources are necessary for the survival and functioning of the company as a producer of goods and services and are largely from the organizational environment. The interactions and links lead to dependencies of the considered company from those units of the environment that have resources that are necessary for the company or over which the organization has only limited control and procurement options.419

As no organization can perform their services regardless of their environment, they are forced to interactive relations. The need for external reference of resources and related to this, the dependence from resource supplier result in new problems. The resource dependence approach refers to resources like material, capital and labor, furthermore for example, information, technologies, innovations or services. Such resources can be both materially and immaterially, and it can be regarded as inputs or outputs.420 Depending on the importance of the related resources, the resulting exchange relationship of the considered company and its transaction partner can be dependent, reciprocal or dominant.421

415 Neubauer 2009, p. 51 416 Rumelt/Schendel/Teece 1994, p. 33 417 Hawley 1950, p. 3 418 Rumelt/Schendel/Teece 1994, p. 33 419 Brunner 2009, p. 31 420 Brunner 2009, p. 32 421 Silver 1993, p. 505 74 / 136 Dependency For the degree of dependence on external resources suppliers, a variety of factors is responsible –the meaning of the exchanged resource for power generation, the relative scarcity of resources and their concentration can be mentioned in the market as the most important.422 Are the resources of the considered company stably and uniformly distributed within the environment to the external organizations and if there do not exist interdependent relationships, than it is called a quiet, randomized environment. Within their environment, the companies must develop skills, they need to save resources and need to be able to change their resource suppliers in regard to their demand.423

In the second environment type, the quiet, clustered environment, resource availability may vary over time, making it difficult to predict a sufficient supply of resources. Other types of environments are called restless-reactive and turbulent.424

If there are problems with the inflow and outflow of inputs and outputs based on the resource dependency theory, than the theory is primarily interested in self-generation of critical resources. Critical resources are those resources that guarantee a lasting competitive advantage over competitors of the same division. Therefore, it is not about the interaction of company and the environment, but the internal generation of resources. Only in the consideration of their effects the environment is brought into play.425

External partners Such relationships need partners – the external stakeholders. Those are transaction partners, which are both in-house (as shareholders, employees, business executives) as well as outside the company (for example, customers, suppliers, competitors, government) and can occur as actors. Normally, the transfer their resources they demand something from the company.426 Furthermore, the theory deals with the distribution of power. It is about the power of those, who might have an influence on the flow of critical resources from external sources. This power is strongly related to dependence.427

422 Jacobs 1974, p. 46 423 Brunner 2009, p. 34 424 Brunner 2009, p. 35 425 Schreyögg 1997, p. 483 426 Brunner 2009, p. 35 427 Rumelt/Schendel/Teece 1994, p. 33 75 / 136 Let’s assume the following example: player A will be called depending on actor B when B controls resources or services, which A attaches a personal value and which he cannot obtain from alternative sources. 428

Such asymmetrical dependencies between individuals lead to an imbalance. Within such a relationship between individuals, the behavior of an actor can be controlled or limited externally to a certain degree.429

Companies are always trying to keep dependencies on other businesses as low as possible; on the other hand they try to increase their dependency on their own company.430 Such a behavior follows the rationality of sustainability.431 Those dependencies between companies can be distinguished according to whether they are on one side or another, and according to whether they are made in the vertical (symbiotic dependence) or horizontally (depending competitive). 432

Summing up the main points, companies act according to three principles, when using the resource dependence approach433:

 They strive for a long-term survival of the organization by assuring the inflow of critical resources with the highest possible probability in the future. 434  They search for ways to reduce the negative effects of external constraints, especially in regard to those which affect the freedom of action of the organization.435  The companies are trying to maximize their autonomy in order to increase the current and future adaptability to claims.436

5.1.2.2 Application field As an example of the application of the resource dependency theory, the human resources management can be mentioned. The approach can be used to develop strategies to bind the resources of professionals and executives, which means theirs skills which are significant for

428 Emerson 1962, p. 31 ff 429 Brunner 2009, p. 31 430 Aulinger 1996, p. 188 431 Müller-Christ 2003, p. 93 432 Aulinger 1996, p. 188 433 Johnson 1995, p. 7 434 Thompson 1976, 55 ff 435 Benson 1975, p. 232 ff 436 Silver 1993, p. 488 ff 76 / 136 the company's success. Thus, the resource dependency theory can be used in terms of staff retention, recruitment and knowledge management.437

5.1.2.3 Benefits and limits The fact that companies have different positions of power within its competitive environment is highlighted by the Resource-Dependence approach. This provides a theoretical framework for the analysis of such power imbalances and their impact on organizational behavior.438

The Resource-Dependence approach also has weaknesses and limitations, which are responsible for the fact that the theory is not positioned within the management and organizational research. Firstly, the theory is not able to show a holistic relationship between the companies considered and its environment. By considering the company as an open system the organizational environment will receive special attention. All policies and actions are always interpreted as a reaction of the organization on perceived or potential external restrictions imposed by the environment.

A second difficulty can be seen in regard to the decision-makers within the organization. If they are seen as stakeholders, and interpret their decisions as behavior throughout the organization, than they act ultimately in response to their own claims. In addition, the approach does not deal with a prevailing information asymmetry, it is assumed that the organization has sufficient information, and there is free access to them.439

Another point of criticism is the fact that the approach does not consider the bounded rationality of actors, so that relations between companies are presented as the result of rationally acting companies. As a result, individual aspects are hidden.440

437 Grieger et al. 2010, p. 1 438 Brunner 2009, p. 37 439 Gulati et al. 2002, p. 282 440 Aulinger 1996, p. 197 77 / 136 5.1.3 Systems theory System oriented approaches treat mainly the pooling of resources through integration.441 In this sense, systems theory is regarded as a key method for describing complex causal relationships in science and technology.442

5.1.3.1 Idea and purpose The systems theory is based on the assumption that all existing phenomena in reality - both natural and man-created – have certain similarities. 443

The main components of the theory are444  Systems  Environment  Relationships  System boundaries

Systems theory focuses on the structuring of systems.445 A system is a set of elements with relationships between these elements and their properties.446 Elements are the individual components of a system which won’t be further decomposed or divided. Examples of elements of the system organization can be: tasks, people, material resources and information. Under another point of view, for example, agencies and departments might be considered as elements of an organization.447

Thus, a system consists of interconnected cells that are related to each other and interact. Relations are links between elements and links between the system and its environment. In organizations as dynamic systems, the individual elements are not independent, but they influence each other in their behavior.448 The function of a system arises from the relationship between inputs and outputs – in which input and output develop out of substance, energy and information arise.449

441 Nolte 1999, p. 154 442 Marko 1995, p. 1 443 Krieger 1996, p. 12 444 Aebi 2004, p. 5 445 Hess 2002, p. 104 446 Aebi 2004, p. 5 447 Mangler 2006, p. 16 448 Mangler 2006, p. 16 449 Bleis 1996, p. 92 78 / 136 Systems can be distinguished in regard to areas which do not belong to the system. Thus, organizations and companies can be understood as a system.450

The main feature of the system “company” is its integration with the economic and social environment. A company’s environment can be described by the degree of complexity. In general, the complexity describes the number of possible states of a system. Transferred to the economic environment of a company, this means that, for example, a large number of customers with constantly changing and highly heterogeneous requirements lead to a high degree of complexity. The objective of management must be to disassemble a company in such coupled subsystems that it can handle the complexity of the given environment adequately; but it still has to focus on its overall aim.451

To disconnect the system from the areas lying outside the system, a line is drawn. This definition determines what is inside and what is outside the system. From the perspective of a system, the environment is understood as everything which is not part of the system – everything which is outside the specified system limit and therefore it is everything outside the organization.452

In this regard, it is also possible to distinguish between open and closed systems. Open systems have relations to the environment (e.g., businesses, families ...). Closed systems have no environmental relations.453

In terms of systems theory, a company is  an open system (because it has relations with its business environment - customers, suppliers ... -)  complex (as it consists of a large number of individual elements and a variety of relationships between the elements)  socio-technical (Elements can be both human and tangible objects such as machines).454

If the company and the natural environment are conceived as open systems and the interactions between them understood as exchanges, two fundamental relationships are given: 455

450 Mangler 2006, p. 16 451 Hess 2002, p. 104 452 Mangler 2006, p. 16 453 Ulrich 1970, p. 105 454 Coenenberg/Fischer/Günther 2009, p. 34 455 Strebel 1976, p. 508 79 / 136  The environment acts as a supplier which provides raw materials, resources and consumer products (oxygen, water, scenic beauty, raw materials).  The environment is used as the recording media for not usable by-products of production and consumption.

The figure below clearly represents the above mentioned relationships. The rectangle consists of two parts. Part 1 is the ecosphere (which is defined as “environment” within the systems theory”, whereas part 2 represents the technosphere. Within the technosphere, various companies are located (C1, C2, C3...), some interact with each other and some not (those companies represent the “elements” within the system theory). The system “technosphere” can be seen as an open system, as it gets input in the case of resources from the outside and it submits output in the form of products and by-products to the outside.

Part 1: Ecosphere Part 2: Technosphere

Input Output (e.g. resources) C4 (e.g. product, by- products) C1 C2 C3

C5

Figure 10: Illustration of systems theory (Source: Author's illustration)

With regard to environmental issues, especially the determination of the material and energy exchange relationship in combination with the systems theory is interesting: The system "company" is in exchange relationships with other systems. These are not only monetary nature, they are considered as a material-energetic basis. Especially their externalization which affects the environment is interesting. In the broadest sense, this can be understood as all burdens of corporate environment which emerge but without making the company responsible for them. The object of the system theoretical research is the disclosure of corporate system with its inner and outer streams. Its knowledge and the resulting consequences on its own system as well as on other systems should identify ways to minimize the environmental impact (material savings, recycling etc.).456

456 Tischler 1996, p. 30 80 / 136 5.1.3.2 Application field The authors Steinmann and Schreyögg refer explicitly to the system-theoretical interpretations by Luhmann. Here, the system / environment theory is seen as a reference framework for the control of the company as a complex system in a complex environment.457

The current systems theory, as it applies in different areas of knowledge and practice today, has different roots, which go back to philosophical, psychological, sociological as well as engineering and scientific researches and theories. Based on the different backgrounds, the theory is also used in different areas such as in cybernetics, synergetics or medicine for use.458

Although one can say that the systems theory was coined by those various sciences, in general, one assumes that the systems theory goes back to the biology and forms the basic considerations of this approach, together with cybernetics. Cybernetics focuses on the regulation and control, and often refers to the mathematical aspects of systems theory.459

Therefore, it is difficult to establish a clear demarcated area of application of systems theory.

5.1.3.3 Benefits and limits The advantage of this approach is the possible observation of the system from the outside - through the bird's eye view. So interactions and relationships between elements and systems can be better illuminated and visualized. There a better explanation of real phenomena is possible.460

The disadvantage of the systems theory is that the system is viewed as given and static and the dynamics of the interaction of the system is sought with its environment, without questioning the peculiarities of the system. Furthermore, complex systems are broken down into smaller structures and thereby they often generalize what leads to a reduction of complexity, but often at the expense of expressiveness and wholeness.461

457 Steinmann/Schreyögg 2000, p. 398 458 Kleve 2005, p. 6 459 Dedié 2014, p. 52 ff 460 Bleis 1996, p. 94 461 Bleis 1996, p. 94 81 / 136 5.1.4 Resource based view Markets of the 21st century are characterized by a high competition among numerous providers. If one considers the market side as given, this leads to the question why companies are varying degrees of success in the industry. This takes a look at the features of the company - its resources.462 Based on this, the focus is shifted from the market to the procurement markets of resources and the company internal resource management.463

5.1.4.1 Idea and purpose During the 80s, two schools of thought have emerged: First, the so-called Harvard School and the Market-based view of strategy. This is challenged by the Resource based View (RBV) of Strategy.464 The resource-oriented approach is an independent economic- theoretical approach which was affected by elements of other theories (Property rights theory, transaction cost theory, industrial economics ...).465 The resource-oriented approach gained much attention within the research because it serves as an explanation for sustainable strategic competitive advantage of organizations.466

This approach establishes a connection between the resources of a company and its competitive position.467 As a counterpart to the market-oriented perspective, RBV focuses on the internal analysis of the company as a bundle of resources at the center. The success relevance of resources will be highlighted in the corporate management in particular through the resource based view.468 The objective is to work up the approach of resource orientation.469

From the perspective of RBV, companies consist from a historically based and individual bundle of resources and capabilities.470 Since a precise definition of resource is difficult to date, there are varieties of systematization.471

All categorization experiments have in common that at least a distinction between material and immaterial resources is made. Material resources consist primarily of assets, as shown

462 Hieke 2009, p. 63 463 Gomez/Bleicher 1995, p. 43 464 Gomez/Bleicher 1995, p. 32 465 Hieke 2009, p. 63 466 Hieke 2009, p. 61 467 Hess 2002, 36 f 468 Wolf 2008, p. 569 469 Hieke 2009, p. 63 470 Bamberger/Wrona 1996, p. 386 471 Wolf 2008, p. 571 82 / 136 in the balance sheet on the asset side. Intangible resources designate, for example, patents and R&D results which may arise in the balance sheet.472

In this work primarily the classification of Bamberg / Wrona is used, since it is already been transferred from David to the controller section.473 According to this classification tangible, intangible, financial and organizational resources are differentiated. Also, the use of control instruments is based on different resources, which can be understood as a detail of the resource bundle of the company and therefore they can be investigated based on the schema.474 Financial resources are generally of minor importance because they represent only basic resources in general.475

Even material resources have little importance in the era of controlling instruments and possibly include specific hardware components. Intangible and organizational resources are especially important. The latter includes cultural aspects, the integration of the instrument in the organizational structures and processes as well as networking between the management tools.476

Resources and their exploitation are seen as the basis of corporate success.477 The Resource Based View of Strategy builds on the theory, which traced the long-term success of a company on the specificity of their resources on strategic resource advantages of a company compared to the other suppliers.478

Not all resources and skills are relevant for success in the same way, but especially those who with which a sustainable competitive advantage can be achieved.479 The consideration of the approach focuses on the level of the company with the objective to examine the internal and external resources to find out their competitive strategic potential.480 This means, it is trying to figure out how far different resources contribute to corporate success.

472Meckl 2010, p. 57 473 Bamberger/Wrona 1996, p. 386 f; David 2005, p. 58 ff 474 David 2005, p. 58 ff / 141 ff 475 Steinmann/Schreyögg 2005, p. 207 476 Baltzer 2013, p. 196 477 Hungenberg 2008, p. 63 478 Gomez/Bleicher 1995, p. 43 479 Baum/Coenenberg/Günther 2007, p. 250 480 Burr/Stephan/Werkmeister 2011, p. 22 83 / 136 The resource based view sees companies as a collection of physical and intangible skills and assets. This is an explanation, which examines the internal requirements of an organization, under which existing resources can be a strategic competitive advantage.481

Basically, any company has resources. If those resources are not or only limited imitable, transferable or substitutable with low wear, a company has superior long-term success.482 This means subsequently that a company must meet a variety of conditions in order to achieve a lasting, defensible competitive position and thus a permanent, strategy-related pension:  The resources must be limited or it must be possible to make them in a unique way to core skills so that they are perceived as added value and thereby affect the strategic success resources.  On the other hand, these core skills need (core competencies) to be sustainable defensible483  Another key assumption is that resources are limited mobile, and therefore they cannot be simply bought.484

This result on four main characteristics of resources and capabilities: valuable, rare, inimitable and non-substitutable. In a later publication Barney speaks from the organization of companies as a feature of sustainable resource, instead of the non-substitutability. Herewith the structure of companies is meant, and it is seen as a prerequisite for the successful exploitation of resources and capabilities, which was prepared from the VRIS the VRIO approach.485 A further development of the RBV is the knowledge-based view, as well as the dynamic capabilities approach.486

The ability of a company to recovery, which means the combined use of its resources, is denoted as skills or competencies.487 The long-term success of the company is returned to the uniqueness of specific resources or their combination. Therefore, reference points are internal company factors.488

481 Barney 1986, p. 1239 ff 482 Hess 2002, 36 f 483 Gomez/Bleicher 1995, p. 43 484 Hess 2002, 36 f 485 Hieke 2009, p. 66 486 Hieke 2009, p. 67 487 Baum/Coenenberg/Günther 2007, p. 250 488 Hess 2002, p. 37 84 / 136 5.1.4.2 Application field It has been shown that the resource based approach has been used particularly in the management literature. First of all, RBV is quite important for the whole research in the field of strategic management. It is about the development, the protection and exploitation of resources - what resources should be built up by a company, how it has to happen and how imitation barriers guarantee a sustainable competitive advantage.489

In strategic marketing, the internal and external analysis of a company is basically the starting point of all marketing technical considerations. The resource approach provides valuable assistance in order to make the evaluation of the company's internal strengths and weaknesses more realistically through detailed requirements and better structuring.490

5.1.4.3 Benefits and limits The advantage of the resource based view lies in its realistic assumption of imperfect markets. In addition, the approach has a dynamic potential.

Especially, the “resource” termination is considered as critical, as well as the fact that different authors define "resources" differently. Furthermore, it is a relatively one-sided and half-baked theory that brings a lack of implications for practice.491

489 Hieke 2009, p. 75 490 Hieke 2009, p. 77 491 Burr/Stephan/Werkmeister 2011, p. 22 85 / 136 5.1.5 Transaction cost theory The transaction cost approach is an institutional economics approach. This theory is about the monetary costs incurred in the execution of transactions, and tries to explain the existence of institutions. 492

5.1.5.1 Idea and purpose The first approaches to this theory came from Coase, who dealt with the problem of efficiently setting organizational boundaries.493 He put the theory that the terms market and company are alternative forms of coordination of economic activities; furthermore they are substitutive in large parts. Fundamental are the costs, which are caused by the exchange of goods on the market - whereby the efficient coordination can be seen as the decision criterion at the end.494 Through the work of the author Williamson, the transaction cost theory developed further.495 He grabbed the thoughts of Coase and clarified and developed it through the integration of bounded rationality.496

Summing up all the arguments, we can realize that the starting point of the transaction cost approach is the single transaction. It can be defined as a transfer of property rights to resources (production factors, information, ideas, right), goods and services between actors. The transaction is thus not the actual power exchange (physical transfer of goods between trading partners), but it is the prior negotiation and organization of the power exchange.497 Therefore, transactions constitute the basic unit of analysis of the transaction costs approach.498

In general, the approach can be divided into four areas:  the transaction as an analysis subject,  the temporal perspective or the cost elements of the transaction (ex post and ex ante)  restrictions in regard to the people as transaction partner,  the different arrangements that are available to deal with the transactions.499

Especially the last two points should be considered in more detail:

492 Wiegandt 2009, p. 115 493 Coase 1937, p. 386 ff 494 Fischer 1994, p. 582 495 Jost 2001, p. 2f; Braitmayer 1998, p. 230 496 Neugebauer 1995, p. 40 497 Burr/Stephan/Werkmeister 2011, p. 9 498 Williamson 1990, p. 20 499 Aulinger 1996, p. 127 ff 86 / 136 Restrictions As mentioned, transactions constitute the basic unit of analysis of the transaction costs approach.500 Its existence is justified - among other things – in the fact, that each of these actors has different interests or have a different level of information.501 Further, there are two premises within the transaction cost approach which can be distinguished:

 The economic agents behave rationally limited in terms of bounded rationality. This behavior can be explained due to imperfect information.  The economic agents pursue personal goals. They behave opportunistically in order to maximise their own utility.502

An additional restriction results from the aspect of risk preferences, as one can assume a risk neutrality of the people. Those three aspects (bounded rationality, opportunism, and risk neutrality) represent the behavioral assumptions of economic entities, which have an major influence on the decision process (whether one chooses market or hierarchy) in the end.503

Coordination options The transaction cost theory attempts to explain why certain transactions - exchange of services - are handled in certain institutional arrangements and organized more or less efficient. This means that there is the question of which arrangement is ultimately the most efficient or least expensive form. Institutional arrangements can be market (complete, external, market coordination) and hierarchy. This means power exchange within an organization, but also different forms such as franchising or joint ventures.504

The arguments of Coase are based on the assumption that the coordination of economic activity is associated with costs, whether it is paid on the market or taking place in the company. The amount of such transaction costs is then crucial for the profitability of these two alternatives.505 As the efficiency criterion plays a role, it has a great influence on the decision for or against a particular arrangement.506 A contractor will integrate market transactions as long as the costs for the inclusion of an additional transaction are higher than the cost for the coordination through the price mechanism.507

500 Williamson 1990, p. 20 501 Da-Cruz 2010, p. 76 502 Neugebauer 1995, p. 41 503 Williamson 1985, p. 388 ff 504 Kieser/Walgenbach 2007, p. 52; Braitmayer 1998, p. 240 505 Jost 2001, p. 2 f 506 Müller-Stewens/Lechner 2005, p. 149 507 Jost 2001, p. 2 87 / 136 The figure below should give a short overview from the transaction cost theory through an example. At the beginning there are company A and company B. If both of the companies would produce on their own, there would exist internal transaction costs through a hierarchy arrangement; but if company A and company B would work together in the sense of a market arrangement than external transaction costs would emerge.

Concerning, which institutional arrangement would be the best, one need to remember that the efficiency criterion is in the foreground. For example, a market-based solution is a more efficient form of coordination if it is more cost effective than a solution within the company.508

Market

Company A Company B

External transaction Internal transaction Internal transaction costs costs costs

Hierarchy

Figure 11: Transaction cost theory (Source: Author's illustration based on Braitmayer (1998), p. 230ff)

Taking into account the previously mentioned four parts, one can conclude that the central thesis is that (under the consideration of the mentioned behavioral assumptions) the organization and execution of a particular transaction is more efficient if the characteristics of the outstanding transaction match with those of the institutional arrangements.509

5.1.5.2 Application field The main field of application of the transaction cost theory is the issue of in-house production or external procurement. From the transaction cost theory, the following recommendations can be derived: The higher the specificity, the uncertainty and the incidence of transaction

508 Müller-Stewens/Lechner 2005, p. 149 509 Ebers/Gotsch 2001, p. 235 88 / 136 are, the more likely the transaction is processed using hierarchical coordination mechanisms within a company.510

The approach can answer questions for the optimal performance of depth; furthermore it can make statements in regard to corporate boundaries or for optimum company size.511 Applications exist in many sectors, such as in the automobile industry or in the field of hospitals.512

Additionally, the transaction cost approach can be applied to a variety of business-relevant issues.513 Possible examples are (not exhaustive):  Delegation of power and control rights  External financing of projects  Provision of company-specific resources  Initiation and implementation of goods exchange514

5.1.5.3 Benefits and limits Although the transaction cost theory is a relatively new theory yet and needs to be further developed in many areas, it already produced many positive contributions to the organization research and also to other fields of research such as microeconomics, or competition policy.515

Despite its relatively narrow focus, the transaction cost theory also offers an explanation for the existence of organizations and for the advantages of various institutional forms for carrying out transactions. But it relies on both established concepts (such as rationality, uncertainty), as well as on new explanatory factors such as transaction-specific investments. Furthermore, it provides clues for the design of inter-organizational relationships and therefore goes beyond the mere consideration of organizations and their design forms.516

However, it seems that the theory is still incomplete in many areas and needs further improvement. For example, Williamson criticizes that the conditions to describe characteristics of institutional forms are incomplete and the transaction cost theory takes into

510 Burr/Stephan/Werkmeister 2011, p. 13 511 Rasche/Wolfrum 1994, p. 509 512 Da-Cruz 2010, p. 87 513 Jost 2001, p. 25 514 Jost 2001, p. 26 515 Picot 1982, p. 338 f 516 Wiegandt 2009, p. 125 89 / 136 account only a part of possible explanatory factors for the occurrence of transaction costs.517 In addition, the neglect of relevant factors will be applied to the choice of institutional form as a point of criticism.518

Other critical aspects can be related mainly on the blurred term of transaction costs519, the lack of systematics and the blurred separation between market and hierarchy.520

But for the practical implementation in the various areas, it remains important to what extent it is possible to refine the general statements of the theory and to take into account characteristics of the object under examination.521 The problem in the practical use of transaction costs as a decision criterion can be also seen in the current accounting as there is a lack of separation between transaction costs and the direct costs of service provision.522

Nevertheless, the transaction cost theory is considered as logical consistent, micro- analytically grounded theory which provides a contribution to the organization of research through its general level of knowledge.523

517 Wiegandt 2009, p. 125 518 Wiegandt 2009, p. 126 519 Brand 1990, p. 73 520 Nutzinger 1977, p. 378 521 Wiegandt 2009, p. 127 522 Weber 1991, p. 41 523 Ebers/Gotsch 2002, p. 248 90 / 136 5.2 Investigation of theory basis of selected EMA approaches Over the years, various cost accounting and/or environmental approaches have developed and often they have their origins in well-known theories. The aim of this chapter is to have a look on the possible underlying theories of those approaches, which have been described in previous chapters.

5.2.1 Process cost accounting The origin of the process cost accounting is in the United States in the activity based costing, a model developed by Johnson, Kaplan and Cooper.524 As already mentioned, these systems should not be equated.525 The reason for this is that ABC has arisen out of the dissatisfaction over the outmoded overhead calculation; additionally the approaches focused on the overhead costs in manufacturing.526

The process cost accounting has its origins in quality management by putting the provision of services in the center of attention. Thus, the approach is essentially an overhead analysis, which attempts to transmit the overhead costs on the basis of the induced activities on the product.527

As it is repeatedly demonstrated that the process cost accounting has developed from the ABC, it can be assumed that their theoretical basis can be found there, too. Due to that, the theoretical background of the ABC has to be investigated next.

524 Fischer 2000, p. 91; Voegele/Sommer 2012, p. 192 525 Däumler/Grabe 1997, p. 266 526 Hirschmann 1998, p. 83 527 Meyer 2011, p. 193 91 / 136 5.2.2 Activity based costing Activity based costing can be seen as a system-based approach. Based on its goal, features and systematisation as a managerial value chain analysis with a focus on strategic planning, it is often seen as an alternative to the “Theory of Constraints” (TOC)528.529

Eliyahu M. Goldratt is the founder of the Theory of Constraints. In his view, selective improvements in companies and organizations use little. Based on the systems theory he developed the Theory of Constraints (TOC) in 1997.530

Within literature, there is a constant debate whether TOC or ABC should be used. On the one hand, TOC is the established approach on the other side; some cases prove ABC as more effective. In the end one can say that its background and also the goal of both approaches are similar.531

The focus of activity based accounting is placed on its activities. Those activities translate inputs (such as resources) into outputs. Amongst other things, ABC tries to identify those resources to guarantee an efficient resource use.532 Similar to ABC also the theory of constraints is dealing with an effective use of resources. The latter tries to find the optimum use of resources to avoid bottlenecks. 533

It is already discovered that the theory of constraints can be derived from the systems theory.534 Based on this assumption as well as on the fact that both approaches are system- based ones, one can conclude that the activity based costing has its roots in the systems theory, too.

The figure below shows the connection of the four parts – systems theory, theory of constraints, ABC and process cost accounting. The elements are classified into “underlying theory” and “cost accounting approach” to provide a better overview. The systems theory and the theory of constraints belong to the underlying theories, whereas process cost accounting and activity based costing are cost accounting approaches.

528 Note: The „Theory of constraints“ is a combination of various methods to improve the performance of systems. It considers that a change in the majority of variables in an organization has only a small impact on the whole performance. The goal of the theory is to determine the variable which significantly improves the results (this variable is called “constraint”. (Goldratt 2003, p. 30ff) 529 Cooper/Bray/Parzen 2007, p. 2 530 Goldratt 2003, p. 36 ff 531 Cooper/Bray/Parzen 2007, p. 2 532 Maher/Lanen/Rajan 2006, p. 240 ff 533 TOC institute 534 Cooper/Bray/Parzen 2007, p. 2 92 / 136 The starting point of the explanation can be seen in the “systems theory”. The figure presents it as the initial theory for the remaining three. Going away from there (represented through the single arrow), the next theory would be TOC. As mentioned above, TOC developed out of the systems theory.

Even if ABC and Theory of constraints are two different types (one is a cost accounting approach and the other is a theory) they follow the same goal – increase performance. That means that they can be seen as alternatives and can be used interchangeable (represented through the double arrow). Furthermore, it is proven that process cost accounting developed out of ABC (represented through the single arrow from process cost accounting to ABC), which would mean that they have the same underlying theory. As the theoretical background of activity based costing is already explained (systems theory), it follows that also the systems theory is the basis of process cost accounting (represented through the arrow from systems theory to process cost accounting).

Underlying theories Cost accounting approaches

Systems theory

Theory of ABC Process cost constraints accounting

Merging of theory and approach through the

same basis – their goals

Figure 12: Theory basis of ABC and process cost accounting (Source: Author's illustration)

Even if the systems theory has already been described above, it is briefly summarized in the following, to clearly point out the relation between ABC and systems theory and additionally to TOC (to make its link even clearer). For a better understanding it is packed into an example to show it in written form and also graphically displayed – the respective number in the text corresponds to the pictorial representation in the graphic.

93 / 136 Example: Consider an organization as a system (= Systems theory 1), with different areas and departments, such as a production, marketing and finance department (those represent just selected ones, in reality there are even a lot more, but due to simplicity the thesis covers only those three).

With its various departments the organization and its activities/processes, can be broken down in a process chain (= process cost accounting or activity based costing, depending if we focus on activities or departments). Those processes are (directly or indirectly) dependent on each other. For example the marketing department needs information from the production to find out how it can effectively promote the product.

The overall system is only as good as the weakest link. Therefore improvements in powerful areas do not positively influence the overall result. The overall system can be improved only, if the limitation of the system is going to be optimized (bottleneck 3).535 If one assumes that the production department does not work well, it would not help to put more effort into the marketing or finance department, based on TOC. The organization first has to improve the weak department (production) to be able to improve the whole performance.

Organization 1 Systems theory as a system

Theory of Process ABC constraints cost accounting Optimize overall Corporate divisions as process system, starting 2 chain from the limiting 3 factor Figure 13: Connection between the theories and approaches (Source: Author's illustration)

535 TCW n.d. 94 / 136 5.2.3 Life cycle costing The origin of the LCC can be found in the English-speaking world. In the early 30s of the last century, life cycle costs were taken into account in the procurement of tractors.536

The early reflections of the life cycle costing usually took place from the customer's perspective and considered investments and products. This type of life cycle cost analysis is similar to the TCO approach ("Total Cost of Ownership"), which differs from the detailed consideration of the transaction costs in purchasing from the LCC approach.537 If one would use the same logic as above, one could say that life cycle costing and TCO would represent alternative approaches with the same theoretical background.

Another way would be to have a look on LCC from a more marketing oriented perspective.538 The concept of 'costs' within the life cycle costing is imprecise, because the used amounts should be seen as deposits and withdrawals instead of costs, which also illustrates the close link of the Life cycle Costing to investment appraisals.539 However, while the investment appraisal supports the assessment of decision alternatives in the field of potential factors, the life cycle costing helps to make strategic and product-oriented decisions.540

The latter has a lot of similarities with the famous marketing lifecycle model and assumes a so-called development phase, the market phase and the decommissioning or aftercare phase. Analogy, the life cycle costs can be shared in pre-production costs (costs within the development phase), operating performance or litigation costs (costs of the market stage) and follow-up costs (costs of disposal or aftercare phase).541

Another point of view is provided through the economic life analysis as it is closely related to the approach of life cycle costing. 542 Its goal is to provide a holistic and systematic consideration of the costs over the entire life cycle. This should help the user of a product or system within a product decision, especially as it does not exclusively focus on the investment costs but it considers the overall costs and consequently selects the most favourable alternative. The manufacturer gets timely information about the phase-related costs and their interdependencies in the early stages of the product which helps to find ways to optimize potential costs.543

536 Dettmer 2006, 164 f 537 Geißdörfer 2009, p. 55 538 Horvath 1996, p. 44 ff 539 Horvath 1996, p. 513 540 Ewert/Wagenhöfer 2005, p. 292 541 Reichmann/Fröhling 1994, p. 287 542 Hermann 2010, p. 132 543 Hermann 2010, p. 131 95 / 136 As one can see, there are a lot of possible starting points to find the theoretical background of life cycle costing, but all of my findings do not end up in a single theory.

5.2.4 Balanced Scorecard Against the background of increasing criticism of the one-dimensionality financial metrics systems in the US, the Balanced Scorecard was created. The aim was to adapt the existing performance measurement systems in accordance to the increased requirements of companies.544

The starting point of Kaplan and Norton for the development of the Balanced Scorecard was that a unilaterally oriented corporate strategy involves only conventional performance criteria such as revenue, profit, cash flow or capital utilization. This unilaterally oriented corporate strategy can even hinder the achievement of corporate goals. Because if one focuses just on financial data, it is not apparent why someone reached or did not reached corporate goals.545

The author Knapp investigates specifically the historical development and the context of the Balanced Scorecard within a scientific article. Within this article, he separates the BSC into three elements or management concepts:  Goals and measurement  Motivation and communication  Business strategy or customer value discipline546

Based on these elements, different theories can be derived. This shows that it is impossible to derive only one theory from the Balanced Scorecard, due to its volume. Instead, the Balanced Scorecard is composed of various theories due its complexity.

The first element – goals and measurement – is influenced by MBO (management of objectives).547 The focus of this approach is placed on the objectives. The aim of this process is to implement the strategic goals of the entire company and its employees by setting targets for each organizational unit and also for employees jointly.548

544 Wirtschaftslexikon n.d. 545 Kidwell/Scherer 2001, p. 113 ff 546 Knapp 2001, p. 4 547 Knapp 2001, p. 4 548 The Economist 2009 96 / 136 The element “motivation, communication and the human” is influenced by the theory of open- book management549. Open book management is a model that aims to create transparency in order to increase efficiency in the company. The basic idea is that the information received by the employees does not only serve to increase the effectiveness, but they are intended to help employees understand how the company works as a whole.550

People do not just want to know why they are doing something; they also want to find the “reason-behind” in their work; to say it in other words: they do want to see that their work has a value. That is the reason why the open book management is closely related with Maslow’s hierarchy of needs; due to that, Knapp says that the open book management has its roots in the hierarchy of needs.551

The third element “business strategy” is strongly influenced by the concept of “Discipline of Market Leaders” from Treacy and Wiersema.552 The central thesis of the authors is that no company can succeed today, when it tries to please everyone. Instead, each company must define a unique buyer benefit, which is offered only by the company alone on a selected market. Furthermore, they distinguish three benefit categories or strategies. Each of these alternatives results in a buyer benefit - cost leadership, product leadership and customer partnership.553

Above all, the customer perspective of the Balanced Scorecard is structured in accordance with the market positioning of Treacy and Wiersema.554 Kaplan and Norton describe the customer's perspective as the most valuable part of the development process of the Balanced Scorecard.555 To differentiate successfully, they also follow the principle of a customer-oriented strategy with three different strategic differentiation approaches - performance or product leadership, customer partnership and cost leadership; equally to the differentiation of Treacy and Wiersema.556

The figure below should give an overview of the already mentioned elements of BSC and their theoretical background.

549 Knapp 2001, p. 5 550 Kidwell/Scherer 2001, p. 113 ff 551 Knapp 2001, p. 8 552 Knapp 2001, p. 9 553 Treacy/Wiersema 1995, p. 10 554 Kerth/Asum/Nührich 2007, p. 204 555 Kaplan/Norton 1997, p. 36ff 556 Girmscheid 2010, 154 f 97 / 136 Goals & MBO measurement

Theory of Open- Book Motivation, Management Balanced communication, Scorecard human Hierarchy of Needs

Business Value Discipline strategy

Figure 14: Theoretical origin of Balanced Scorecard (Source: Author's illustration)

5.2.5 Theory basis of selected (environmental) management approaches The analysis shows that it is not easy to find the theory of an environmental approach. Often, it is not clear which theory really fits or there are even more theories which need to be combined to describe an approach. The following figure should provide an further overview of the above given investigation.

Environmental approach Theoretical background557

Can be related to theoretical background of activity based costing, therefore: Process cost accounting  Theory of constraints  Systems theory

 Theory of constraints Activity based costing  Systems theory

 Total cost of ownership Life cycle costing  Marketing lifecycle model

 Management by objectives  Theory of Open Book Management Balanced Scorecard  Hierarchy of needs  Discipline of Market Leaders

Table 10: Overview of theoretical background of selected EMA's (Source: Author's illustration)

557 Note: As mentioned at the beginning, the distinction between „theory or no theory“ is difficult. Since no clear distinction can be made, management practices are also included within the consideration. 98 / 136 5.3 Assessment of selected economic theories in regard to MFCA The following chapter should help to reflect the previously described theories in order to compare it with MFCA. To make this even possible, four general elements are used to be able to evaluate the economic theories. The chosen elements are:  perspective, if the theory represents an internal and/or external perspective,  direction, if it follows an environmental and/or ecological direction,  if the character of optimization (resource and/or economic optimization) is given,  if it is possible to implement theory based on an resource oriented character (includes all resources, from natural to company related resources).

Ecological modernization theory Ecological modernization has an external focus. This clearly comes out, when having a look on its core. As already written above, the theory assumes that “economy and ecology, industry and nature, need not be exclusive”. It involves a lot of factors: such as technology (technological development), politics, economy… and this mainly on a macroeconomic perspective, based on the national economy which points out the external orientation.

The core idea is that the technological advancement in its impact leads to an increase in resource productivity. This means, a more efficient use of raw materials, energy resources and environmental media such as air, water and soil. Modern societies also evolve in the future. Modernization in industry and practices lead to an increase in efficiency and this directly results in a decrease in environmental impact and resource consumption.558

In essence, ecological modernization is a strategy of cost reduction. Indeed, it offers the chance of self-financing by way of reduction of input costs. In regard to employment policy one can speak of a labor-saving rationalization investment – which makes clear, that in this sense, one can also speak of ecological rationalization. Ecological rationalization can be understood as operating cost reduction strategy, based on the use of resources. Additionally, the approach is ecological, because it reduces the level of conversion of scarce resources in pollutants and waste.559

This also means that ecological modernization can be seen as a formula for the common intersection of ecology and economy560. This explanation includes already two elements: First, a resource orientation is clearly given and second, the direction is economically as well as ecologically.

558 Jänicke 1984, p. 20 f 559 Jänicke 1988, p. 23 560 Jänicke 2008, p. 58 99 / 136 Within the ecological modernization, a more efficient use of energy and natural resources is regarded as crucial to simultaneously improve the environment’s quality and to promote prosperity and the progress of society.561 Efficiency often goes hand in hand with optimization and an optimal use of those resources and processes, but as this is not clearly given one can say that the criteria of optimization is not fully met.

Another argument is that ecological modernization follows the efficiency principle, such as MFCA.

Resource dependence theory and Resource based view The resource dependence theory of Organization and the resource based view of strategic management are two research approaches that place the concept of resource in the forefront of their consideration.562

While there are parallels between those approaches, it must be noted that both place its focus an opposite perspectives. The biggest difference is probably the fact that the resource based view assumes a corporate perspective, in which it focuses on corporate resources; whereas the resource dependence theory places an internal - as well as - a corporate external focus.563

The resource dependence theory focuses on making extraordinary profits with resources and does not try to optimize processes or resource consumption. This also highlights is economical perspective. It completely disregards a possible ecological perspective.

Even if the resource based view concentrates more on the right combination of resources (e.g. substitutability, transferability...) it does not take into account their optimization as a part of success. In contrast to the resource dependence theory, the RBV distinguishes between different types of resources (material, immaterial...), but it also disregards waste or other ecological parts.

Systems theory Whether the systems theory follows an internal or external perspective mainly depends on the interpretation. As an organization can be seen as an open or closed system, also the systems theory can be seen as internally and/or externally oriented. If one assumes the organization as open, then also the environment has to be taken into account which would

561 Lexikon der Nachhaltigkeit 562 Kryphausen-Aufseß 1997, p. 453 563 Schreyögg 1997, p. 483 100 / 136 mean that its perspective is internal and external. The thesis assumes that most organizations are open, especially as companies are often involved in relationships with, for example, suppliers. Based on this argumentation the statement is not completely met, as an additional perspective is given.

Furthermore, the systems theory can be seen as economically and environmentally based on the considered relationships and elements of the organization. A detailed explanation is already given within the chapter “5.1.3 Systems theory”. The theory mainly focuses on the structure of the system, which also includes finding out, how the most effective and optimal structure is (also based on optimization).

Even if the theory might also focus on resources, a clear orientation on them is not given, as mainly the structure of the system as well as their elements is in the centre of consideration, even if those elements or systems might consist of resources (for example staff).

Transaction cost theory In regard to the perspective of transaction costs approach, one can consider both, an internal and external corporate perspective. This conclusion arises out mainly from the field of application, as both in-house production (internal corporate perspective) and external production (company-external perspective) are contemplated. Furthermore, also in regard to the different forms of cooperation - markets and hierarchies – the argumentation of an internal as well as external perspective makes sense. The extreme forms of market and hierarchy provide a corporate or enterprise-external perspective. This means that the internal perspective is given, but not fully met, as it is not possible to make a clear demarcation on the basis of the perspective.

The transaction cost theory refers to both, the production costs to create the exchanged goods as well as to the transaction costs incurred by the handling and organization of exchanges. Production costs include the expenditure of resources and the provision of services, while the transaction costs include the resource requirements for the information, integration, management and control of the exchange.564 The efficiency criterion in the transaction costs approach assumes the economical use of scarce resources. The use of resources is thereby expressed by production and transaction costs.565

564 Wiegandt 2009, p. 119 565 Williamson 1990, p. 98 f 101 / 136 Furthermore, the transaction cost theory looks at the effective coordination of economic power relations.566 It deals with the question of whether resources are kept within the company and thus hierarchically coordinated or whether they should be coordinated through the market.567 To sum this up, a resource orientation is given, as the theory tries to find an effective way to coordinate resources.

In the acquisition and use of resources especially transaction costs are important. Furthermore, through the choice of an efficient form of organization, these costs must be minimized and optimized.568 This shows that also the character of optimization is fulfilled, but the process of optimization is not an important aspect, as the theory mainly concentrates on the fact of being effective, which shows that the character of optimization is not fully met.

The main focus on the transaction cost theory is that each transaction should be designed in a way that it has the lowest production and transaction costs in total. Only in this case, a transaction may be referred to as totally efficient.569 This could be seen as an argument against the transaction cost theory as it highlights its focuses of being effective and trying to find effective relations570, whereas MFCA focuses on efficiency571. Additionally, the transaction cost theory does not consider ecological aspects, for example whether it would be ecologically better to make use of the market or to produce in-house. It just takes into account monetary resources and an economically effective use.

Final evaluation On the following pages, a final evaluation of MFCA in regard to the various economic theories is given. When reflecting the used elements on which the theories are analysed (perspective, direction, optimization and resource orientation), one might get the impression that they are formulated to general and a bit unspecific. But when having a look on the whole analysis it turns out that they represent the main aspects of a theory. As it is often difficult to make clear statements whether something is definitely internally or externally oriented, it seems to be the best, to make use of an evaluation based on a grading system. This means that an element can be fully met, mediocre met or it is not fulfilled. The first row of the following table, which also shows the heading, represents the statements in accordance to MFCA, which means: material flow cost accounting is internally oriented, as it focuses on the production process and the related use of resources. It is mainly economically oriented but

566 Picot 1991, p. 147 567 Nolte 1999, p. 154f 568 Burr 2002, p. 96 569 Weber 1991, p. 39 570 Picot 1991, p. 147 571 Günther/Bergmann/Rieckhof 2014, p. 38 102 / 136 also focuses on the ecology, as it has a look on waste (ecologically) but also on inefficiencies (which often go hand in hand with an uneconomically manufacturing). Furthermore it tries to improve and optimize processes (due to the already mentioned inefficiencies) and it strongly focuses on resources.

Now, the next step is to evaluate the selected economic theories in regard to their accordance with these statements. To make this possible a special grading system is used, which consists of “+” (if there is a 100% accordance), “o” (if there is a mediocre accordance) and “-“ (if there is no accordance).

Character of Ecological & Resource- Internal optimization economical oriented perspective (resource and/or direction application economic)

Systems theory + o + -

Ecological modernization - + o + theory

Resource based + o - + view

Resource o o - + dependence theory

Transaction cost o o o + theory

Legend: “+” Fully met, “o” Mediocre met, “-“ Not fulfilled

Table 11: Evaluation of selected theories (Source: Author's illustration)

Similar to the BSC/SBSC also the MFCA is complex which makes it difficult to find just one theory which could be used as underlying theory. Based on its strong economical and ecological focus as well as due to is resource orientation it could be assumed that it could be seen as the theory of MFCA. Interesting is that the ecological modernization theory emerged in 1982572, whereas MFCA established in the end of the 1980’s. This shows that especially in 1980-1990, the awareness of environmental topics was high. It seems that ecological

572 Gibbs 1998, p. 4 103 / 136 modernization and material flow cost accounting are more parallel approaches where the ecological modernization theory is the macroeconomic version and the material flow cost accounting provides the microeconomic as well as more cost oriented version. This could mean that both theories go back to common roots and were affected by similar conditions (such as increasing environmental awareness etc.).

Finally, especially the combination of systems theory and transaction cost theory provide a good theoretical background for the material flow cost accounting. First of all, through the systems theory, there is a strong internal perspective. Furthermore, the coordination and structure of resources is focused, which also includes finding out how the most effective and optimal structure is (also based on optimization). This means that a resource orientation is given, as that theory tries to find an effective way to coordinate resource. This strong resource and optimization character mainly comes from the transaction cost theory. Through the systems theory, an economical as well as ecological perspective is given. Even if those theories do not provide a strong ecological character, it can be argued that this is just a further development of the already given (little) ecological aspect of the systems theory.

Furthermore, it is already proven that MFCA primarily focuses on its economic component, due to the disregard of external costs (mentioned in the chapter “Similarities and differences between MFCA and traditional cost accounting), which further underlines this argument.

Another aspect is that process cost accounting shows strong similarities with MFCA and the origin theory of the first one can be seen in the systems theory. As PCA and MFCA are quite similar, it seems logical that there are also parallels in their theories which would be partly given in this sense.

104 / 136 6 Conclusion and future outlook

The main goal for the future must be to transfer new scientific findings to improve the eco- efficiency and environmental compatibility in operational practice. One element which allows this is the sustainability-oriented material flow cost accounting. It can be distinguished from the other instruments by its ability to identify potential cost savings and at the same time realizing a reduction in the environmental burden in the environmental economic intersection.573 The material flow cost accounting is a quite comprehensive and complex theory. It would be able to fill lots of books and literature in which the approach is explained and investigated.

Within the whole field of environmental management approaches, there is not much literature on theory. When comparing selected environmental approaches such as process cost accounting, activity based costing, balanced scorecard and life cycle costing there are partially similarities with MFCA. Especially, process cost accounting follows the principle of separating costs, such as material flow cost accounting classifies output as product and non- product output. When having a look on the selected environmental management approaches, different economic theories can be seen as their theoretical background, namely systems theory, total cost of ownership, management by objectives, hierarchy of needs, open book management and disciplines of market leaders, just to name a few.

Due to its complexity, it is not possible to name just one theory as the theoretical background of MFCA. Even if ecological modernization theory shows a lot of parallels it is more an approach which developed parallel in two directions (for a macro- and microeconomic level) in the same time period. A better way of explaining the origins of MFCA is given through the combination of systems theory and transaction theory. This is given through its comprehensive orientation of economic and ecological direction, its internal perspective as well as its resource and optimization character.

The authors Christ and Burritt (2015) argued and observed that especially action-based case studies are given at the moment. Even if this kind of research was important and was particularly important in the past; one has to highlight the practical consequences and implications of MFCA. For example, it seems quite useful to make use and execute case studies and various comparative case studies especially of organisations which implemented MFCA voluntarily. In particular their difficulties within the implementation might provide

573 Schrack 2014b, p. 290 105 / 136 insights the future as well as the further development of MFCA.574 Additionally, it would be helpful to follow the development of MFCA longitudinally, and over a longer period, to see its development over the time.575

From today's perspective, the MFCA is mainly an instrument for companies which try to find potential cost savings and want to do this proactively and strategically under consideration if sustainability aspects . Therefore, the main challenge for the future is to accelerate the application of the instrument in practice. Above all, this raises the question of who shows up responsible for spreading into operational practice. Since the motivation to apply the instrument at the present time does not seem sufficient to come from the company itself, it is purposeful to provide the impetus for the implementation of material flow cost accounting, for example, through research projects within ministries or universities.576

Although through the release of the ISO certification (ISO 14051), this does not mean automatically an increase in the implementation of MFCA within organizations as there are various other (management) accounting systems. In such cases it would be quite interesting to find out their reasons and why those companies make use of a special instrument.577

Another possible, future investigation would be to consider and compare the usefulness of MFCA as an ad-hoc tool versus one that involves the routine generation of information. As discussed in Section 2, MFCA is generally viewed as an ‘environmental cost accounting’ tool. Burritt et al. (2002) suggest that this assumption implies that the provided information have to be generated routinely over time. However, some suggest that MFCA can still provide valuable information when used on an ad-hoc basis; which would mean that it is a tool which is used either for the purpose of a one-off decision or from time to time in an irregular manner. 578

To sum this up, interesting research topics would be for example:  Why do companies do not make use of MFCA or why should they use it?  What is really needed to successfully implement MFCA in companies (in regard to organizational capabilities?  What is already known in practice from the ISO 14051?579  How prominent is MFCA in organizations and companies? 580

574 Christ/Burritt 2015, p. 6 575 Christ/Burritt 2015, p. 6 576 Schrack 2014b, p. 289 f 577 Christ/Burritt 2015, p. 7 578 Christ/Burritt 2014, p. 8 579 Christ/Burritt 2015, p. 7 580 Christ/Burritt 2015, p. 9 106 / 136 First, it is evident that to the present time the research methods used to investigate MFCA in practice have been extremely limited. While the focus on action-based case work is no doubt important, it overlooks the vast array of methodological approaches and tools that are available to the contemporary researcher. In summary, survey-based research is scarce, interview based research nonexistent, and the use of statistical analysis beyond basic percentage counts of relatively small samples virtually absent. As may be expected, the current one dimensional mindset severely limits the generalizability of research findings and may have contributed to the rut in which the MFCA literature now finds itself.581

So at the beginning, it is important to fully consolidate what is already given and known about MFCA to be able to answer further questions. In the end, it seems significant to focus on further research in the field of MFCA, for example in the form of case studies, surveys, interviews or survey based statistical research to be able to answer these questions.582

Having a look on a possible development of MFCA, two directions could be interesting:  Combination/correlation of material flow cost accounting and innovation  Creation of a new theory, based on main elements of MFCA.

For future investigations it might be interesting to find out if there is a relation or correlation between material flow cost accounting and the degree of innovation. As MFCA clearly focuses on energy and material consumption and provides information about those flows and costs it might be the case that through this information innovative ways can be found to reduce possible production inefficiencies. Therefore a possible future research question could be if MFCA could be used to support innovation within an organization.

One possible way for future developments would be to create a completely new theory. This Master Thesis found out that within practice MFCA is not fully accepted. One reason for this could be the missing theoretical background. Furthermore, the thesis found the main elements of MFCA and in which (well-known) theories these elements are anchored. One possible conclusion could be to choose those elements and combine the related theories into one, new theory. In this case, it would mean that one has to take the ecological modernization theory (due to is ecological and economical direction as well as due to is resource-oriented application) and combine it with the systems theory (to include the character of resource and economic optimization and the internal perspective) into a completely new theory. But even in this case, the question of acceptance comes up, too.

581 Christ/Burritt 2015, p. 9 582 Christ/Burritt 2015, p. 9 107 / 136 7 References

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