Activity-based costing (ABC) is an accounting system that aids in providing various methods of calculating dynamically and practically the true cost of doing business for manufacturers and services. The core characteristic of ABC is that overhead costs are driven by activities themselves not products. ABC assigns a company's overhead costs, which are the indirect cost such as electricity, lighting, heat or marketing, into the product's cost. Specifically, ABC applies nonunit-level activity drivers to achieve more accurate cost assignments. Product diversity, which means products consume overhead activities in systematically different degrees, is also greatly considered under ABC to avoid cost's distortion. ABC has two stages and it focuses on direct tracing and driver tracing. Originally developed by Robert Kaplan, a Harvard Business School professor, ABC is still a relatively new method of cost allocating yet it is quite popular and widely used by many companies.
Victorinox Swiss Army is the original maker of the Swiss army knife, which is multi-tool pocket knife first developed for the Swiss Armed Forces. In 2005, the acquisition of the rival company Wenger has made Victorinox become again the sole supplier for the Swiss army. Beside its original lines of multi-purpose knives, Victorinox also produces other high quality travel bags, wrist watches, cutlery knives and even its own fashion brand.
As a wide perspective, Victorinox can implement ABC successfully in accordance to the company's great diversity of products. As an illustration, comparing two products with different volumes from Victorinox, the Tinker knife and the Deluxe Tinker knife, should emphasize the application of activity-based costing. The regular Tinker knife is a high-volume product with only 12 tool while the Deluxe Tinker is a low-volume product with a complication of 17 tools. In brief, a simplified process of the making of a Swiss army knife involves...
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