Time Is Relative : How Framing of Time Estimation Affects the Accuracy of Cost Information

Accurate cost information is critical to effective decision-making within organizations. Cost computations often rely on subjective judgments by employees regarding the amount of time a particular product or service consumes. We compare the accuracy of two commonly used approaches to eliciting subjective time estimates so critical to accurate cost information. Specifically, we compare estimation error, i.e., measurement error, when employees estimate (i) the total time for all iterations of a task (the traditional approach) versus (ii) the average time for one iteration of a task (the modern approach). While the two approaches are mathematically equivalent in theory, we hypothesize and find that they evoke different cognitive processes, which lead to significant differences in measurement error. Using a laboratory experiment, we show overestimation of total time under the traditional approach and underestimation of total time under the modern approach. Moreover, we find that, compared to the modern approach, the traditional approach leads to greater error in the allocation of time among different tasks, but only when the number of task iterations varies across tasks. Our results are robust to different response modes of the traditional approach (estimates in percentages and absolute time units). This study is relevant for designers and users of cost and performance measurement systems in that total errors undermine capacity utilization decisions, while allocation errors lead to cost cross-subsidization and poor resource allocation decisions