On the Determinants of Measurement Error in Time-Driven Costing

Although employees' time estimates are used extensively for costing purposes, they are prone to measurement error. In an experimental setting, we research how measurement error in time estimates varies with: (1) the level of aggregation in the definition of costing system activities (aggregated or disaggregated); (2) task coherence (the extent to which the activities that require time estimates present themselves coherently or incoherently); and (3) when notice is given that time estimates will be required (in advance or after the fact), that is, whether participants know that time estimates will be required before they perform the activities. We also test on response mode (estimates in percentages or absolute time units). The results suggest an important trade‐off between the level of aggregation and measurement error: increasing aggregation in the definition of activities leads to lower measurement error. Also, advance notification reduces measurement error, especially in settings with aggregated activi...

[1]  W. Poynter,et al.  Duration judgment and the segmentation of experience , 1983, Memory & cognition.

[2]  Christopher D. Ittner,et al.  Activity-based costing concepts for quality improvement , 1999 .

[3]  Scott W. Brown.  Attentional resources in timing: Interference effects in concurrent temporal and nontemporal working memory tasks , 1997, Perception & psychophysics.

[4]  Ronald R. King,et al.  An Experimental Investigation of the Effect of Cost Information and Feedback on Product Cost Decisions , 1997 .

[5]  Z. Griliches,et al.  Is aggregation necessarily bad , 1960 .

[6]  D Zakay,et al.  Concurrent duration production as a workload measure. , 1998, Ergonomics.

[7]  G. A. Miller.  THE PSYCHOLOGICAL REVIEW THE MAGICAL NUMBER SEVEN, PLUS OR MINUS TWO: SOME LIMITS ON OUR CAPACITY FOR PROCESSING INFORMATION 1 , 1956 .

[8]  Richard A. Block,et al.  Contextual Coding in Memory: Studies of Remembered Duration , 1985 .

[9]  S. W. Brown,et al.  Time perception and attention: The effects of prospective versus retrospective paradigms and task demands on perceived duration , 1985, Perception & psychophysics.

[10]  M. Boltz,et al.  The processing of temporal and nontemporal information in the remembering of event durations and musical structure. , 1998, Journal of experimental psychology. Human perception and performance.

[11]  Dan Zakay,et al.  The Impact of Time Perception Processes on Decision Making under Time Stress , 1993 .

[12]  R. Kaplan,et al.  Measure Costs Right: Make the Right Decisions , 1988 .

[13]  Srikant M. Datar,et al.  Aggregation, Specification and Measurement Errors in Product Costing , 1994 .

[14]  S. Goldfeld,et al.  Estimation and prediction from aggregate data when aggregates are measured more accurately than their components , 1974 .

[15]  K. Fiedler,et al.  Two halfs may be more than one whole : category-split effects on frequency illusions , 1994 .

[16]  Greg W. Marshall,et al.  Activity-Based Costing: Accounting for a Market Orientation , 1998 .

[17]  A. Drewnowski.  Attributes and priorities in short-term recall: A new model of memory span. , 1980 .

[18]  J. Michalski,et al.  Physician resource utilization in radiation oncology: a model based on management of carcinoma of the prostate. , 1998, International journal of radiation oncology, biology, physics.

[19]  D. Kahneman.  Attention and Effort , 1973 .

[20]  R. Block,et al.  Prospective and retrospective duration judgments: A meta-analytic review , 1997, Psychonomic bulletin & review.

[21]  Yair M. Babad,et al.  Cost driver optimization in activity-based costing , 1993 .

[22]  Sarah E. Bonner.  A model of the effects of audit task complexity , 1994 .

[23]  Shyam Sunder,et al.  Accuracy of linear valuation rules in industry-segmented environments: Industry- vs. economy-weighted indexes , 1990 .

[24]  Carolyn M. Callahan,et al.  The Differential Impact of Accurate Product Cost Information in Imperfectly Competitive Markets: A Theoretical and Empirical Investigation , 1998 .

[25]  Ratna G. Sarkar,et al.  The Impact of Activity Based Costing on Managerial Decisions at Insteel Industries - a Field Study , 1999 .

[26]  Scott W. Brown,et al.  Attention, Multiple Timing, and Psychophysical Scaling of Temporal Judgments , 1992 .

[27]  R. Block.  Prospective and Retrospective Duration Judgment: The Role of Information Processing and Memory , 1992 .

[28]  Robin Cooper,et al.  Implementing Activity-Based Cost Management: Moving from Analysis to Action : Implementation Experiences at Eight Companies , 1993 .

[29]  Michael W. Maher,et al.  A field study on the limitations of activity-based costing when resources are provided on a joint and indivisible basis , 1998 .

[30]  R. Kaplan,et al.  Time-driven activity-based costing. , 2003, Harvard business review.

[31]  M Migliore,et al.  A model of the effects of cognitive load on the subjective estimation and production of time intervals. , 2000, Bio Systems.

[32]  Richard A. Block,et al.  Remembered duration: Effects of event and sequence complexity , 1978 .

[33]  The Effects of Time Pressure on Duration Discrimination , 1985 .

[34]  D. Ariely,et al.  A timely account of the role of duration in decision making. , 2001, Acta psychologica.

[35]  M. Major,et al.  Managers divided: Implementing ABC in a Portuguese telecommunications company , 2005 .

[36]  L. Hasher,et al.  Automatic and effortful processes in memory. , 1979 .

[37]  Robert Libby,et al.  Incentives, Effort, And The Cognitive-Processes Involved In Accounting-Related Judgments , 1992 .

[38]  L. Allan.  The perception of time , 1979 .

[39]  Eric W. Noreen,et al.  Conditions Under Which Activity-Based Cost Systems Provide Relevant Costs , 2005 .

[40]  M R Jones,et al.  Expected endings and judged duration , 1993, Memory & cognition.

[41]  R. Ornstein,et al.  The experience of time , 1986 .

[42]  Robert S. Kaplan,et al.  Advanced Management Accounting , 1989 .

[43]  Scott W. Brown,et al.  Attentional processes in time perception: effects of mental workload and event structure. , 2002, Journal of experimental psychology. Human perception and performance.

[44]  Peter Robinson,et al.  The cost of library services: Activity-based costing in an Australian academic library , 1998 .

[45]  Geoffrey B. Sprinkle,et al.  A Review of the Effects of Financial Incentives on Performance in Laboratory Tasks: Implications for Management Accounting , 2000 .

[46]  Amitava Chattopadhyay,et al.  Waiting for the Web: How Screen Color Affects Time Perception , 2004 .

[47]  Brian P. Shapiro,et al.  Do Cost-Based Pricing Biases Persist in Laboratory Markets? , 1999 .

[48]  Geoffrey B. Sprinkle,et al.  The effects of monetary incentives on effort and task performance: theories, evidence, and a framework for research , 2002 .

[49]  C. J. Wolfe,et al.  The effects of system design alternatives on the acquisition of tax knowledge from a computerized tax decision aid , 2000 .

[50]  J. Christensen,et al.  The classical foundations of 'modern' costing , 1995 .

[51]  Ivan T. Robertson,et al.  On the relationship between time management and time estimation , 1999 .