A Study on the Product Profitability Model Based on Activity-Based Costing and Economic Value Added

Activity-based costing (ABC) can improve the accuracy comparing to traditional costing (TC), but it ignores the opportunity cost of the capital and loses the integrality of cost. Prior Product Profitability models based on either TC or ABC cannot consider the opportunity cost of assets and cannot provide the information of the idle cost of capacity unused. This paper constructs a product profitability model by combining the activity-based costing and economic value added theories in order to improve the accuracy and integrality of cost information. Specifically, by introducing an imaginary product, the model reveals the idle cost of unused resource and activities. Furthermore, a real case study is given to illustrate the model. The result shows the proposed model improve the accuracy and visibility of management´s product mix decision comparing to the existing traditional models.