Towards explaining cost estimation errors in time equation-based costing
Cost estimations provided by ABC are hardly error free. Datar and Gupta (1994) state that the following three types of errors may occur: specification errors, aggregation errors and measurement errors. Reductions in specification and aggregation errors from more disaggregated and better specified cost systems may increase measurement errors and hence errors in product costs (Datar and Gupta, 1994; Labro and Vanhoucke, 2007). In time equation-based costing it is expected that the problem of aggregation is considerably smaller because resources and costs are pooled on a higher level and used by activities on a time unit basis. Furthermore, lowering specification and aggregation errors no longer causes increased measurement errors because in high complexity environments heterogeneous activities no longer have to be split. However, in complex environments costs calculated through time equations can be distorted by a new type of specification error and a new type of measurement error. Specification errors occur due to incorrect structure of the time equations. Measurement errors occur due to incorrect estimation of the time parameters in the time equations.This study explored the origins of errors in time equation-based costing in a case setting. The case data revealed that measurement errors and specification errors in time equations can be explained both from people’s deficient ability to accurately construct time equations and a lack of willingness to maximize accuracy. Specifically, drawing on cognitive psychology literature, experience, length of the time interval and cognitive style were identified as determinants of accuracy. Next to these competency imperfections, the operational employees in the case company were not always wiling to maximize accuracy of time equations. Institutional theory, agency theory and traditional ABC literature offered an explanation as to why they deliberately misreported activity times. The general implication of this explanatory case study is that it revisits the traditional, rather technical analysis of costing accuracy by adding a cognitive, an institutional and an agency perspective.
time equation, costing accuracy, resistance, cognitive factors, explanatory case
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