Integrating Multiple Cost Drivers Of Activity-based Costing Into Financial Leverage

Along with the market competition intensifies, the enterprise faces more and more risk. The financial risk is filled in all kinds of financial activities just like Enterprise’s financing, investment, working capital and profit distribution. Financial risk is about the deviation between the final financial results and the expected managerial goals in enterprise’s financial activities just because of various factors which can’t control, then leads to the possibility of enterprise’s pecuniary or bigger profit loss.Financial leverage is an important measure in financial management to weight the financial risk of the enterprise, often calculated by financial leverage coefficient. Facing the advanced manufacturing enterprise, this paper establishes an activity-based financial leverage model based on activity-based costing which incorporates multiple cost drivers and picture of the behavior of the costs. On that basis, the paper makes comparison between the traditional and activity-based models, then discusses the influence on specific decisions made by management with the help of a numerical example. Therefore, this article mainly includes three parts.The first part, discusses the influence factors of traditional financial leverage, and leads to the oversight of "new" influence--re-tax profit rate by many scholars. Then, traces on how interest pre-tax profit affect the financial leverage, in turn leads to the related theory, such as:cost behavior, CVP analysis, activity-based costing and key problems.The second part, mainly through the contrast to reveal the differences between the traditional financial leverage calculation model and the activity-based calculation model of financial leverage.The third part, this part mainly describes two aspects:EBIT and EPS, then reveals how the different calculation results of the two models impact manager’s decision.In summary, if the batch-level or product-level activities exist within a production environment, and if the number of batch or product CDA levels in the coming period is to be different from the one of the current period, the traditional and the activity-based models will yield different results.