Measurement Error in Time-driven Costing: An Experimental Comparison of Different Approaches to Estimating Time Consumption
61 Pages Posted: 21 Aug 2013 Last revised: 8 Jan 2019
Date Written: August 19, 2013
Many organizations utilize time surveys for costing purposes and ask employees to provide subjective estimates of their time use. We conduct an experiment to examine measurement error, i.e., the accuracy of subjective time estimates, under different approaches to estimating time consumption. Specifically, we compare an overall approach, as often described in textbooks, and an individual approach, as more recently proposed by practitioners. While the costing literature assumes that measurement error is similar between the two approaches, practitioners claim that the individual approach produces more accurate time estimates and, thus, better cost information than the overall approach. We test this claim given the lack of empirical evidence and argue that the two approaches evoke different cognitive processes. In line with our hypotheses, we find overestimation of time under the overall approach and underestimation of time under the individual approach. We also provide evidence that the individual approach leads to better proportional allocations of time than the overall approach. Our study contributes to the academic literature and adds to the practitioner-led debate about differences between traditional ABC (using an overall approach) and Time-Driven ABC (using an individual approach). The results are relevant to designers of cost and resource planning systems as well as managers using cost information for decision-making.
Keywords: Cost systems, activity-based costing, resource consumption, capacity utilization, measurement error, time estimation
JEL Classification: M41
Suggested Citation: Suggested Citation