Activity-Based Costing for Economic Value Added

Review Of Accounting Studies, Vol 2. No. 3

Posted: 15 May 1998

See all articles by Regina M. Anctil

Regina M. Anctil

University of Minnesota - Twin Cities - Carlson School of Management

James S. Jordan

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics; University of Minnesota - Twin Cities - Carlson School of Management

Arijit Mukherji

affiliation not provided to SSRN (deceased)

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.

JEL Classification: M40, M46

Suggested Citation

Anctil, Regina M. and Jordan, James S. and Mukherji, Arijit, Activity-Based Costing for Economic Value Added. Review Of Accounting Studies, Vol 2. No. 3, Available at SSRN: https://ssrn.com/abstract=88216

Regina M. Anctil (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Department of Accounting
Minneapolis, MN 55455
United States
612-624-1050 (Phone)
612-626-1335 (Fax)

James S. Jordan

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics ( email )

1994 Buford Avenue
1151 Management & Economics
St. Paul, MN 55108
612-625-5054 (Phone)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
649 Management and Economics
Minneapolis, MN 55455
United States
612-625-8526 (Phone)
612-626-7795 (Fax)

Arijit Mukherji

affiliation not provided to SSRN (deceased)

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