The Impact of Abc and Eva on Business Profitability and Performance
The Impact of ABC and EVA on Business Profitability and Performance.
Value-added activity-based costing (ABC) and economic value added (EVA) measures have much impact on business profitability and performance. With the implementation of the ABC methodology, companies are able to pinpoint the products that are most profitable, determine what contributes to financial performance, forecast costs, profits, and amount of resources needed, identify the root of poor financial performance and better track costs of activities and processes. (Johnson, n.d.). Economic value added is a performance measure used to enable companies to improve financial efficiency. Activity-based costing coupled with economic value added measures help to forecast the true profitability of a business. The ABC component focuses on operating expenses while the EVA component focuses on capital costs. This integrated strategic management system is able to account for all costs incurred in the process of generating products, jobs, or services. Traditional cost allocation methods as originally used by companies did not provide the correct information in order to see the true profitability of a product or a service. The information obtained with traditional cost methods are based on an allocation of costs via only a few cost drivers. These drivers, usually direct labor hours or direct machine hours, allocated overhead expenses without paying attention to the fact that one process or product may use more of an expense than another. For example, a product that has a short processing cycle may use a disproportionate amount of inventory space or time on the receiving dock. Therefore, allocating a percentage of these costs based on a single cost driver may make the product seem more or less profitable. (McDowell & Schnider, 1999). Therefore, traditional cost allocation methods provided a lot of overcosting and undercosting of products or services. The uneven allocation of
Value-added activity-based costing (ABC) and economic value added (EVA) measures have much impact on business profitability and performance. With the implementation of the ABC methodology, companies are able to pinpoint the products that are most profitable, determine what contributes to financial performance, forecast costs, profits, and amount of resources needed, identify the root of poor financial performance and better track costs of activities and processes. (Johnson, n.d.). Economic value added is a performance measure used to enable companies to improve financial efficiency. Activity-based costing coupled with economic value added measures help to forecast the true profitability of a business. The ABC component focuses on operating expenses while the EVA component focuses on capital costs. This integrated strategic management system is able to account for all costs incurred in the process of generating products, jobs, or services. Traditional cost allocation methods as originally used by companies did not provide the correct information in order to see the true profitability of a product or a service. The information obtained with traditional cost methods are based on an allocation of costs via only a few cost drivers. These drivers, usually direct labor hours or direct machine hours, allocated overhead expenses without paying attention to the fact that one process or product may use more of an expense than another. For example, a product that has a short processing cycle may use a disproportionate amount of inventory space or time on the receiving dock. Therefore, allocating a percentage of these costs based on a single cost driver may make the product seem more or less profitable. (McDowell & Schnider, 1999). Therefore, traditional cost allocation methods provided a lot of overcosting and undercosting of products or services. The uneven allocation of
References: Dooley, Brian, (2007, March 1). Using activity-based costing techniques to drive supply chain process improvement and business profitability. ALLBUSINESS.COM. Retrieved from http://www.allbusiness.com/company-activities - management/operations- supply/10560911-1.html Johnson, Christina C. Chapter 1: Introduction to the Balanced Scorecard and Performance Measurement. PDFCAST.org Retrieved from http://pdfcast.org/pdf/chapter-1- introduction-to-the-balanced-scorecard-and-performance-measurement-systems McDowell, D & Schnider, M. (1999, April). ABC, the Balanced Scorecard and EVA, Distinguishing the Means from the End. EVAluation, 1(2). Retrieved from www.iteam.ru/publications/strategy/section_27/article_1071/ ABC, The Balanced Scorecard and EVA Roztocki, N. and Needy, K. L. (1998, October 1-3). An Integrated Activity-Based Costing And Economic Value Added System As An Engineering Management Tool For Manufacturers, 1998 ASEM National Conference Proceedings, Virginia Beach, pp. 77- 84. NEWPALTZ.EDU. Retrieved from http://www2.newpaltz.edu/ ~roztockn/virginia98.pdf