A Field Study on the Limitations of Activity-based Costing When Resources Are Provided on a Joint and Indivisible Basis
Michael W. Maher
University of California, Davis - Graduate School of Management
M. Laurentius Marais
William E. Wecker Associates, Inc.
Journal of Accounting Research, Vol. 36, No. 1, Spring 1998
This paper describes conditions under which both conventional costing and linear activity-based costing can yield poor approximations to actual expenditures. We use a simulation approach based on data from a field experiment in a hospital to estimate how the introduction of a new anesthetic would reduce the demand for nursing services in post-surgery recovery rooms. Based on these simulations of the change in demand for nursing services from using the new anesthetic, we estimate the change in nursing resources that would be implied by (1) the hospital's conventional costing system, (2) "linear activity-based costing", and (3)costing that takes into account the joint and indivisible provision of nursing services caused by the hospital's staffing and compensation policies. Joint staffing occurs because nurses can serve more than one patient at a time. Indivisible staffing occurs because nurses typically worked in four hour shifts instead of by piecework.
The results show that conventional costing understated the estimated impact of the new anesthetic because its cost driver was not directly affected by the introduction of a new anesthetic. By contrast, linear activity-based costing substantially overstated the effects of the new anesthetic on nursing resources. This is because it assumed a change in the provision of nursing services proportional to the change in demand for nursing services, instead of taking into account the joint and indivisible nature of nursing services.
These results for conventional costing support familiar criticisms of conventional costing systems. The results for linear activity-based costing support Noreen's (1991) contention that linear activity-based costing may not provide reliable signals for decision making if resources are supplied on a joint or indivisible basis.
JEL Classification: M40, M46, I12, J33Accepted Paper Series
Date posted: January 12, 1999
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