Integrating Activity-Based Costing and Economic Value Added in Manufacturing

Abstract

This article presents a cost and perfonnance measurement system that integrates activity-based costing (ABC) with the economic value added financial perfonnance measure. This proposed ABC-and-EVA system is a management support tool for managing costs and capital. The integrated ABC-and-EVA system includes the rate of resource consumption (like traditional ABC), but it also includes capital demand. Implementation steps are illustrated. A traditional ABC system is compared with an ABC-and-EVA system by examining the cost for each activity at the first stage. A firm's capital information is then transformed into transparent capital charges using a newly developed method called activity-capital dependence (ACD) analysis. Changes to the end-product costs and possible changes to corporate strategies and business perfonnance in the proposed ABC-and-EVA system are discussed.