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Mecimore, C. D. and A. T. Bell. 1995. Are we ready for fourth-generation ABC? Management Accounting (January): 22-26.

Summary by Anthony Cunha
Master of Accountancy Program
University of South Florida, Summer 2002

ABC Main Page | ABM Main Page | Cost Management Main Page

This article describes three different generations of ABC systems and compares and contrasts them to each other. The authors talk about how management's need for different information and the need for companies to become more competitive has led to a need for new information from accounting systems.

First Generation ABC Systems

In the early eighties companies moved toward a need for more long term accounting information for planning and control. The first generation ABC systems were such that the emphasis was on cost centers and the drivers related to them. The manufacturing cost were used to find product cost. The main purpose of first generation ABC systems was to separate value added activities and non-value added activities and then to eliminate those that were non-value added. Though this first generation did start to identify internal cost drivers, it did not attempt to identify cost drivers external to the specific business unit. Also it looked at activities as if they were all independent of each other. There was no link between activities or an idea that they could be related to more than one cost pool.

Second Generation ABC Systems

As ABC cost matured companies found that they needed to look not only at the product costs but at the processes that impact those product costs. This was when companies started to allocate cost such as administration and selling along with the manufacturing cost that were found in the first generation. Now companies identified both the activities that were needed in production and the activities involved in the processes that impacted production. These processes included things such as distribution, selling, and other administrative cost that were not identified before. Though this new system expanded greatly on the first generation it still focused on internal drivers only and gave management limited information for planning and control. This was though the first step where activities were linked to other activities and a relationship drawn. Though not a perfect system, this was a great improvement on the first generation.

Third Generations ABC Systems

The third generation is where companies started to look at both internal and external activities and how they affect cost pools. Companies also began to look beyond cost centers at the business unit as a whole. In this expanded system companies link activities to processes and then link those processes to the business unit. Focus is shifted from the product or the activity alone to the complete business unit. With this business unit focus companies were able to see that value is added to a product both before and after production. The third generation looked at support services as a way to gain a competitive advantage and add value where the other two systems ignored them or tried to assign these support activities to a product or service, or eliminate them if they were deemed non-value adding.

Three Generations of ABC Systems
Characteristics First Generation Second Generation Third Generation
Structure Cost Center Cost Center Business Unit
Activities Product Orientation Process Orientation Firm Orientation
Costs Manufacturing Process – Both Manufacturing, Administration and Selling Internal and External
Focus Product Costing Process Costing Value Chain Costing
Relationship between activities No Linkage Linkage Linkage
Cost Drivers Internal Internal Internal and External
Planning Cost Center Cost Center Business Unit
Controlling Cost Center Cost Center Business Unit
Cost Analysis Tactical Tactical Strategic
Hierarchy Product Process Firm

Fourth Generation ABC Systems

The authors discuss how ABC systems are most likely to evolve in the coming years. They seem to feel that as ABC systems have moved from first to second and then to third generation systems they have moved into a wider scope. It seems then that the next step would be to link activities from multiple business units creating a system that links the company as a whole. Though complicated, linking these systems seems possible with the technology of today. Also, the life cycle of ABC systems should become shorter to meet the ever increasing needs of the company management.

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