Abstract

The traditional activity based costing (ABC) can be used as a more powerful and accurate pricing tool if integrated with economic value added (EVA), a value-based financial performance measure. The paper is targeted to discus the integrated ABC-and-EVA system that is considered as an engineering management tool used successfully to manage both cost and capital. It allows enterprise leaders to create shareholders value through cost structure improvement. In this integrated system, the cost of activities includes an equitable charge for the consumption of resources at one end and charge for capital demanded and used at the other end. The implementation process of the system is discussed and a comparison with the traditional ABC system is made to make it simple and decisive to the users. The process starts with the identification of activities and then income statement and balance sheet data is adjusted in line with EVA approach. This information is then transformed into transparent capital charges using activity-capital dependence (ACD) analysis, which has been added with the costs of each activity to have integrated total costs. The paper concludes with a discussion of possible changes to corporate strategies and business performance when the integrated ABC-and-EVA system is implemented in a manufacturing company for pricing their products.

Key words: Activity-based costing (ABC), economic value added (EVA), residual income (RI), activity-capital dependence (ACD), engineering management tool.