Integrating Activity-Based Costing with Economic Value Added

Abstract

Activity-Based Costing (ABC) was developed in the mid 1980s by Kaplan and it has been applied very popular in developed countries with obvious advantages. Although ABC system has more advantages than traditional costing (TC) system, but in today's competitive economic environment it has not met fulfilled provision of sufficient information for decision-making, especially single ABC method ignores capital cost. The lack of capital cost is the reason why some products have inaccurate product costs and as results of that they have profit under ABC method but when capital cost is charged to those products, they cause a loss because they consume high invest fund. Imprecise information provided by single ABC method to managers is the reason why managers make inaccurate decisions. How to overcome this limitation of ABC? This paper researches on the integration of ABC with Economic Value Added (EVA™) as one way to overcome its limitation and innovation management accounting. Based on the data provided by Dong Su Company, this paper calculated profits of two customer groups using the new methodology (EVA-ABC) and also the old methodology (single ABC) to show how vague or inaccurate is the results you get when you use the old methodology and how accurate is the results you get when using the new methodology. The calculation showed that under EVA-ABC group 1 generates the value (13%) for this company but group 2 reduces the value of the business and destroy its capital (-8%). However under the single ABC method, the calculation showed that both two customer groups create profits for Dong Su with profit rate are 20% and 4% respectively which was incorrect.