Traditional ABC and Time-Driven ABC: An Experimental Investigation

We conduct an experiment to investigate the accuracy of different time estimation approaches in activity-based costing (ABC). Employing a 2 x 2 between-subjects design, we vary time-driven costing approach and number of tasks per activity. Specifically, we compare traditional ABC -- estimating time in a top-down approach based on total work time (typically in relative units) -- and time-driven ABC (TD-ABC) -- estimating time in a bottom-up approach directly focusing on the single activities (typically in absolute units). Most importantly, the two systems differ in their reference points for time estimation (total work vs. activities). Moreover, we vary number of tasks per activity manipulating heterogeneity between activities.Our design builds on a study by Cardinaels and Labro (2008). We ask 78 student participants to provide time estimates for activity durations after having performed a set of 20 tasks. As percentage estimates in traditional ABC have to add up to 100 %, we adapt time estimates in TD-ABC correcting for consistent under-/overestimation bias. Our results indicate that TD-ABC results in more accurate estimates when the number of tasks per activity varies. However, when activity heterogeneity is low, we do not find either approach to be more accurate. Moreover, when we do not correct estimates for consistent bias in TD-ABC, our results reveal that participants heavily underestimate time in TD-ABC. We conduct analyses indicating that this underestimation bias results in significantly less accurate estimates for TD-ABC compared to traditional ABC questioning implications on practical capacity in TD-ABC. Finally, we provide evidence that individuals access different reference points for time estimation in TD-ABC and traditional ABC.We contribute to accounting literature directly comparing the accuracy of different time-driven costing approaches. Moreover, our results suggest that organizations should rely on TD-ABC for time estimation. However, implications about practical capacity have to be treated with caution as TD-ABC is prone to consistent under-/over-estimation.

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