Reviewing Economic Value Added from Strategic Management Accounting Perspective

Economic Value Added (EVA) appears to be a measure of economic income, an economic concept from Alfred Marshall (Young, 1997). It has been pointed out that reported profit figures in financial reports are distorted measures for this purpose, and such distortion is addressed by the EVA measure. The main value of using EVA as a business performance measure is that: when managers are rewarded based on EVA performance, they will think like business owners and will be less interested in manipulating accounting profits. (Young, 1997).

Reviewing Economic Value Added (EVA) from Strategic Management Accounting Perspective appear to be a straightforward task. First of all, you study Bhimani et al. (2008; Chapter 19).  Next, you read Biddle, Bowen and Wallace (2005), which also introduces the notion of EVA reasonably well. Articles on EVA are not difficult to find. What you need to do is to study a few from the academic sources, e.g. Garvey and Milbourn (2000) and Young (1997) and a few from professional journals. e.g. Parkinson (2004) and Pettit (2000). I especially recommend you to spend more initial effort to study Young (1997) as it explains the nature of EVA, its strengths and weaknesses quite clearly and in an accessible way. Below is my initial diagram to capture the main ideas in EVA. It is very crude in current form, and you are encouraged to reconfigure and refine it via  more literature review of your own:

In your review of EVA, I suggest you to also consider how EVA is to be used in balanced scorecards to support corporate strategic management. Finally, when doing your literature review, I suggest you to consider Ho (2011)'s list of SMA evaluation questions.



References

1. Bhimani, A., Horngren,C.T., Datar, S.M. and Foster, G. (2008) Management and Cost Accounting, FT Prentice Hall.
2. Biddle, G.C., Bowen, R.M. and Wallace, J.S. (2005) in Chew, Jr., D.H. and Gillan, S.L. (editors) Corporate Governance at the Crossroads: A book of readings, McGraw-Hill.
3. Garvey, G.T. and Milbourn, T.T. (2000) "EVA versus Earnings: Does it matter which is more highly correlated with Stock Returns?", Journal of Accounting Research Vol. 38 Supplment, pp. 209-245.
4. Parkinson, J. (2004) "Economic Value Added: Does it Add Value?" International Accountant, May, pp. 36-38.
5. Pettit, J. (2000) "EVA and Production Strategy", Industrial Management, Nov.-Dec., pp. 6-13.
6. Young, D. (1997) "Economic Value Added: A Primer for European Managers", European Management Journal Vol. 15(4)  pp. 335-343.