The traditional accounting method is arbitrary allocating overhead cost to product based on volume criteria such as direct labor cost on an occasional basis, therefore it fails to meet the needs of managers for purposes of cost analysis and performance measurement.
Conversely, the activity-based costing (ABC) system focuses on the traceability of costs to products, based on the resources consumed by the activities needed to produce the individual products.
ABC system is more than an accounting system. It is a management process. ABC enables managers to manage activities and business processes by providing a cross-functional, integrated view of the firm.
As a result, ABC system replaced the traditional system and the benefits of the system were proven at many companies.
Of course, this system didn't generate process map and company profits automatically.
The important thing is that ABC gives managers product information accurately and timely, moreover, it gives insights of the causal relationship of cost.
Although ABC systems have contributed much to improving the management of operating costs, they have fail to account for the full cost of capital. Therefore, activity and product cost are underestimated , also managers, based on that kind of information, can be misled in improving company value.
One of most important purposes of any corporation is to create economic value for shareholders. This requires allocating, managing, and redeploying scarce capital to its most profitable use.
EVA(economic value added) is the widely accepted system for measuring true company value.
If ABC system could be modified to include capital costs and capital drivers, the result will be an improved management system that helps managers focus on all the necessary elements of creating company (shareholder)value, including operational costs and capital cost.
This paper proposes a new method of combining the ABC and EVA systems and uses case study to testify that the combined system is effective and necessary to increase company value.
