The Impact of Abc and Eva on Business Profitability and Performance

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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
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With better information, better decisions can be made in a firm to improve profitability—this is the power of ABC.” (Wisner, n.d.) While firms will likely benefit from ABC, the system is mainly an accounting and cost-based method of viewing and analyzing an organization and its activities. (Johnson, n.d.). ABC systems are designed to capture costs that appear on the revenue and expense statement only. This approach is flawed because it provides incomplete information. Management must also capture the cost of capital employed to produce a certain product or serve a certain customer. For example, if a customer insists on extended terms of payment, the additional carrying cost of Accounts Receivable associated with this customer must be captured in the ABC system. “Managers must focus on cost and capital.” (McDowell & Schnider, 1999). Economic value added is a widely recognized tool that is used to measure the efficiency with which a company has used its resources. EVA is an estimate of true economic profit, or the amount by which earnings exceed or fall short of the minimum required rate of return by investors. In other words, EVA is the difference between return achieved on resources invested and the cost of resources. Higher the EVA, better the level of resource unitization. EVA is the invention of Stern Stewart & Co., a global consulting firm, which launched EVA in 1989. As developed by Stern Stewart & Co., EVA is calculated

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