Activity-based costing for economic value added®

Regina M. Anctil; James S. Jordan; Arujt Mukherji

doi:10.1023/A:1018317230647

Activity-based costing for economic value added®

Regina M. Anctil, James S. Jordan, Arujt Mukherji

Economics

Research output: Contribution to journal › Article › peer-review

8 Scopus citations

Abstract

Economic value added, which is the currently popular term for the traditional accounting concept of residual income (RI), subtracts from operating income an interest charge for invested capital. This paper provides an activity-based cost system that supports RI maximization. We construct a model of participative budgeting for a multi-activity firm in which the cost system allocates plant and equipment cost to products using a formula that includes the interest charge. The budget system we design enables decision makers to identify RI-improving opportunities for outsourcing and dropping unprofitable products. The budget system also has the "open-architecture" property that additional informal communication among activity managers can only serve to increase RI.

Original language	English (US)
Pages (from-to)	231-264
Number of pages	34
Journal	Review of Accounting Studies
Volume	2
Issue number	3
DOIs	https://doi.org/10.1023/A:1018317230647
State	Published - 1998

All Science Journal Classification (ASJC) codes

Accounting
Business, Management and Accounting(all)

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10.1023/A:1018317230647

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AU - Jordan, James S.

AU - Mukherji, Arujt

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AB - Economic value added, which is the currently popular term for the traditional accounting concept of residual income (RI), subtracts from operating income an interest charge for invested capital. This paper provides an activity-based cost system that supports RI maximization. We construct a model of participative budgeting for a multi-activity firm in which the cost system allocates plant and equipment cost to products using a formula that includes the interest charge. The budget system we design enables decision makers to identify RI-improving opportunities for outsourcing and dropping unprofitable products. The budget system also has the "open-architecture" property that additional informal communication among activity managers can only serve to increase RI.

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Activity-based costing for economic value added®

Abstract

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