Center for Economic Research, Department of Economics, University of Minnesota
Economic value added (EVA), which is the currently popular term for the traditional
accounting concept of residual income, subtracts from operating income an interest charge
for invested capital. This paper provides both a normative justification for EVA and an
activity-based cost system that supports EVA maximization. We construct a model of
participatory budgeting for a multi-activity firm in which we show that, if investment
decisions are made myopically each period to maximize EVA, the resulting path of plant
and equipment vectors asymptotically approximates the path that maximizes discounted
cash flows. The cost system allocates plant and equipment cost to products using a formula
that includes the interest charge.
Jordan, J.S., Anctil, R. and Mukherji, A., (1994), "Activity-Based Costing for Economic Value Added", Discussion Paper No. 278, Center for Economic Research, Department of Economics, University of Minnesota.
Jordan, J.S.; Anctil, Regina; Mukherji, Arijit.
Activity-Based Costing for Economic Value Added.
Center for Economic Research, Department of Economics, University of Minnesota.
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