An Integrated Activity-based Costing and Economic Value Added System as an Engineering Management Tool for Manufacturers

This paper presents a cost and performance measurement system that integrates the Activity-Based Costing (ABC) method with the Economic Value Added value-based financial performance measure. This proposed ABC-andEVA system is an engineering management tool that helps to successfully manage cost and capital. It allows enterprise leaders to create shareholder value through cost structure improvement. In the ABC-and-EVA system, the cost of activities does not only include the rate of the consumption of resources, as it does in a traditional ABC system, but also capital demand. The steps for implementation of the proposed system are illustrated. A comparison is made between a traditional ABC system and an ABC-and-EVA system by examining the cost for each activity at the first stage. Then an adjustment to the income statement and the balance sheet is shown using the Economic Value Added approach. This 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 as a result of adding these capital charges to the activity costs are shown. The paper concludes with a discussion of possible changes to corporate strategies and business performance when the proposed ABC-and-EVA system is implemented in a manufacturing company.