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Cost Systems: Incorporating Uncertainty and Psychological Effects - Two Experiments

English title Cost Systems: Incorporating Uncertainty and Psychological Effects - Two Experiments
Applicant Burkert Michael
Number 140612
Funding scheme Project funding (Div. I-III)
Research institution Institut d'histoire économique et sociale Université de Lausanne
Institution of higher education University of Lausanne - LA
Main discipline Science of management
Start/End 01.04.2012 - 31.03.2014
Approved amount 29'250.00
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Keywords (4)

experimental research; accounting errors; cost systems; time driven activity-based costing

Lay Summary (English)

Lead
Lay summary

Managers make important decisions based on information reported by cost systems. However, cost systems contain errors and often do not feature an adequate level of accuracy (e.g. Christensen, 2010). This lack of accuracy might lead to inefficient decision-making. Considering the impact of errors in cost information, accounting literature has paid little attention to them. Empirical work on errors in accounting is scarce and research in the field has remained rather theoretical and technical not incorporating psychological effects and their impact on errors. Our research project aims at investigating errors in cost systems that stem from exactly these effects applying experimental research. Psychological effects are especially important when designers of cost systems rely on employees’ estimates. In a recent experimental study, Cardinaels and Labro (2008) implement a unique research design that allows benchmarking participants´ estimates of activity durations against the time they actually spent on performing these activities. Moreover, their study shows that errors in participants’ estimates of activity durations vary with different cost system characteristics, implying that errors in time-driven costing stem from individuals’ perceptions and the accompanying behavioral errors. Interestingly, Cardinaels and Labro (2008) find time estimates that were requested in absolute units of time (minutes) to overestimate activity durations compared to percentage estimates of total time. This finding challenges claims made by Kaplan and Anderson (2004, 2007) who advocate a minutes-based response mode, as time estimates in absolute units allow cost accountants assigning cost at practical capacity rather than full capacity. We conduct different experiments based on research in cost risk analysis and psychology literature in order to investigate potential sources of error and mitigation strategies in time-driven costing. Overall, we expect psychological effects to be of increasing importance for designers of all kinds of accounting systems that have to rely on individuals’ estimates. In general, accountants (too) often rely on simple estimation techniques not considering the cognitive biases and behavioral effects that come along with these methods. We believe that this research is especially interesting for practitioners providing techniques that are supposed to mitigate cognitive biases and behavioral errors in time-driven costing. Moreover, decision-makers have to rely on cost information and, thus, improving the accuracy of cost information at comparatively low cost is important. Assigning costs to cost objects in a more accurate way gives managers a better picture of their company.

Direct link to Lay Summary Last update: 21.02.2013

Responsible applicant and co-applicants

Publications

Publication
Traditional ABC and Time-Driven ABC: An Experimental Investigation
Schuhmacher K. Burkert M. (2013), Traditional ABC and Time-Driven ABC: An Experimental Investigation.

Scientific events

Active participation

Title Type of contribution Title of article or contribution Date Place Persons involved
ACMAR Konferenz Talk given at a conference Traditional ABC and time-driven ABC: An experimental investigation 13.03.2014 Vallendar, Germany Schuhmacher Karl;
MAS Midyear Meeting in Orlando, 2014 Poster Traditional ABC and time-driven ABC: An experimental investigation 09.01.2014 Orlando, United States of America Schuhmacher Karl;
7th Conference on Performance Measurement and Management Control Talk given at a conference Traditional ABC and time-driven ABC: An experimental investigation 18.09.2013 Barcelona, Spain Schuhmacher Karl;


Abstract

Managers make important decisions based on information reported by cost systems (Cardinaels & Labro, 2009). However, cost systems contain errors and often do not feature an adequate level of accuracy within these systems (e.g. Christensen, 2010). This lack of accuracy might lead to inefficient decision-making. Considering the impact of errors in cost information, accounting literature has paid little attention to them (Cardinaels & Labro, 2009). Empirical work on errors in accounting is scarce and research in the field has remained rather theoretical and technical not incorporating psychological effects and their impact on errors. Our research proposal aims at inves-tigating errors in cost systems that stem from exactly these effects applying experimental research.Psychological effects are especially important when designers of cost systems rely on employees’ estimates. In a recent experimental study, Cardinaels and Labro (2008) implement a unique research design that allows benchmarking participants´ estimates of activity durations against the time they actually spent on performing these activities. Moreover, their study shows that errors in participants’ estimates of activity durations vary with different cost system characteristics, implying that errors in time-driven costing stem from individuals’ perceptions and, thus, cognitive and psychological effects. Interestingly, Cardinaels and Labro (2008) find time estimates that were requested in absolute units of time (minutes) to overestimate activity durations compared to percentage estimates of total time. This finding contradicts claims made by Kaplan and Anderson (2004, 2007) who advocate a minutes-based response mode, as time estimates in absolute units allow cost accountants assigning cost at practical capacity rather than full capacity. We propose two experiments to investigate potential biases and mitigation strategies in time-driven costing focusing on availability bias and thinking patterns as well as probability elicitation techniques.In the first experiment, we want to replicate the results of Cardinaels and Labro (2008) in a 2x2-design using response mode as between-subjects manipulation (percentages vs. absolute time units), as they apply response mode in form of a sensitivity check, which might raise doubts concerning the validity of the overestimation bias in the minutes-based response mode. Moreover, we introduce estimation technique (point estimates vs. range estimates - minimum, maximum, and most-likely value) as second between-subjects manipulation to mitigate overestimation bias. Furthermore, we control for general risk preferences in the first experiment.In the second experiment, we apply a 3x2 between-subjects design employing response mode (percentages vs. absolute units) and level of activity aggregation (low, medium, and high) as manipulations. We split activities in more detailed sub-activities and hypothesize an interaction effect between response mode and aggregation level. While we expect percentage estimates and estimates in absolute units to perform similarly for high levels of aggregation, we suppose time estimates in absolute units to outperform percentage estimate at low levels of aggregation. While Cardinaels & Labro (2008) find a general trade-off, this design should allow for an interaction effect.
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