Primary Research of the Advantages and the Cost Control of the ABC &amp; EVA Integrated System

Haibo Hu

doi:10.5539/ibr.v3n3p141

Abstract

The integrated product of Activity-Based Costing (ABC) and Economic Value Added (EVA) is the ABC & EVA system, i.e. the integrated cost system. Traditional ABC method gives priority to the interior activity chain of enterprise to implement the cost analysis, but ignores the capital cost, so the cost accounting is not complete. The ABC & EVA system brings the capital cost into the cost management, which could not only open out the real economic value created by the cost objects, but extend the pure cost computation of ABC to the performance evaluation. Based on the principle of the ABC & EVA system, the enterprise cost control strategies under the integrated cost system are proposed.

Highlights

The integrated product of Activity-Based Costing (ABC) and Economic Value Added (EVA) is the ABC & EVA system, i.e. the integrated cost system
The ABC & EVA system brings the capital cost into the cost management, which could open out the real economic value created by the cost objects, but extend the pure cost computation of ABC to the performance evaluation
When the enterprise evaluates the investment item or the profitability of the new product, it will find that the ABC method could not reflect the capital cost consumed by the investment item or the new product, and the enterprise can not control the investment risk

Summary

Integration of ABC and EVA

EVA is the economic profit of operating profit after tax minus all capital costs (including debt cost and equity cost). (4) Through accounting the product cost by the integrated mode of ABC & EVA, those products would bring values for the enterprise would be confirmed For those products, the enterprise could implement the cost control into each activity and make the activity analysis taking the activity as the center according to the requirements of ABC, and carry out the cost control based on the cost driver to more effectively and sustainably reduce the cost. The enterprise cost control based on the integrated cost view is the concept of “complete cost”, and it includes the management costs and the capital costs in various activities, and it could compensate the structured deficiency that traditional activity cost view could not reflect the using cost and the opportunity cost, so the product cost will be controlled more completely and truly. The cost control based on the integrated cost view is the whole-process cost control concept to completely extend the range of cost control, and the cost control includes the pre-event control, the on-event control, and the past-event control

Pre-event cost control in the view of integrated cost

On-event cost control in the view of integrated cost

Post-event cost control in the view of integrated cost