The Modification Of Operating Leverage Model Based On The Activity-Based Costing(ABC)

Drawing on the state-of-the-art international and domestic research achievements, this paper comprehensively studies the operating leverage model based on the activity-based costing from qualitative and quantitative perspectives and theoretical and practical perspectives, with application of normative research and case study. This article elaborates the operating leverage model based on the activity-based costing mainly from three aspects of theory, the contrast and numerical practice issues.Firstly, this paper introduces some relevant theoretical knowledge about operating leverage. These theories include Cost behavior analysis, Cost-Volume-Profit(CVP) model and the traditional degree of operating leverage (DOL) model which are in traditional managerial accounting; and basic concepts of Activity-Based Costing, activity-based Cost behavior analysis and Cost-Volume-Profit(CVP) model. Then it introduces the definition of operating leverage and the relationship between operating leverage and the risk of management. Finally, simple decision applications of degree of operating leverage (DOL) are also discussed.Secondly, in order to make the DOL model be more convincing, this paper shows the defects of the existing DOL model in turn. In traditional calculations of the degree of operating leverage (DOL), only volume based cost drivers are taken into consideration. Bilici and Dalci(2008)developed the activity-based degree of operating leverage model through gearing multiple cost drivers of activity-based costing into traditional degree of operating leverage model. Although they assume that batch-level cost per batch cost driver activity level and product-level cost per product cost driver activity level are fixed within the relevant range of the production volume, they ignore possible changes in the DOL due to the changes in the number of the batch-level or product-level activities. Then, based on the cost behavior analysis under the activity-based costing and the definition of the degree of operating leverage(DOL), this paper recreates the DOL model under the activity-based costing(ABC) and try to revise the present DOL model. Finally, with the help of a numerical example, this paper analyses the modified model and makes comparison with the present model.At last, based on the analysis of theories and the case, this paper discusses briefly about the degree of operating leverage decision applications, which can make the operating leverage get better application in practice.In a word, this paper modifies operating leverage model, based on normative research and cases comparison operations, which makes operating leverage theory to be more perfect. When facing the changing internal structure and the complicated external environment, enterprises can use operating leverage to gain profits and avoid risks, thereby improve the efficiency and effectiveness greatly of the decision making by the enterprise management.