Abstract

     Human cognitive time has become a key asset of the digital economy, yet we lack the means to manage it. In response to that need, we propose a technology to manage cognitive time in economic organizations. This technology is called cognitive time-driven activity-based costing (CTABC), and it extends the established time-driven activity-based costing technology. CTABC accounts for human agents’ cognitive time and the fact that cognitive time typically does not equal physical clock time for a given economic activity. CTABC also unearths a hidden lever effect that leads to considerable economic inefficiencies. An illustration of the proposed CTABC shows the limitations of contemporary approaches to cost assessments, which ignore errors caused by workers’ cognitive time estimation. This paper contributes to the literature on cost accounting technology and the future of the digital economy. Specifically, it enriches the literature on the problem of the accuracy of employees’ time estimates.

Introduction

     “In an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.”

     In today’s competitive business environment, cost accounting systems must provide accurate information to managers so that they can make well-grounded decisions without negative impacts on the quality of products and services (Ganorkar et al., 2020; Hardan and Shatnawi, 2013; Zamrud and Abu, 2020). Without accurate cost accounting, managers cannot balance incomes and costs to sustain the endeavors of projects and govern organizations, firms, and even whole economies (Berisha, 2017; Ganorkar et al., 2020; Hardan and Shatnawi, 2013). Cost management is crucial for both for-profit and not-for-profit organizations that aim to be competitive and cost efficient (Hofmann and McSwain, 2013; Stouthuysen et al., 2014; Varila et al., 2007). Although the importance of cost accounting is beyond reasonable doubt, studies have shown that understanding cost structures and dynamics and cost assessments is not a trivial task for accountants and managers (Berisha, 2017; Hardan and Shatnawi, 2013; Uyar and Kuzey, 2016).

Discussion and conclusions

     In today’s highly competitive environment, there is an urgent need to calculate costs and revenues accurately so that companies can survive and ensure long-term profitability (Berisha, 2017; Ganorkar et al., 2020). Calculating the cost of products and services, however, remains a difficult exercise to ensure that costs do not exceed market prices. The TDABC model was proposed to remove the limitations of traditional costing systems and the ABC model. The distinctive feature of TDABC is that the time of an activity is at the forefront of the assessment of the cost of that activity. However, employees’ time estimates are prone to measurement errors in cost assessment (Barros and da Costa Ferreira, 2017; Cardinaels and Labro, 2008; Gervais et al., 2010). They lead to misinformed managerial decision making because TDABC accounts for only one kind of time, namely physical or clock-time, assuming that it is objective. The cognitive science literature shows a significant difference between a worker’s cognitive time and physical clock time, understood as the relationship between perceived time and physical time (Block and Eisler, 1999; Levin and Zakay, 1989). In this paper, we propose an updated version of TDABC that accounts for human agents’ cognitive time and the fact that cognitive time typically does not equal physical time, hence producing CTD. The CTABC technology proposed in this paper remedies the shortcomings of time assessment using traditional TDABC by accounting for CTD and incorporating it into the TDABC calculations.

Purpose: In this study, we used time-driven activity-based costing to increase efficiency in our ultrasound-guided breast biopsy practice by understanding costs associated with this procedure. Methods: We assembled a multidisciplinary team of all relevant stakeholders involved in ultrasound-guided breast biopsies, including a radiologist, a lead technologist, a clinical assistant, a licensed practical nurse, and a procedural support assistant. The team mapped each step in an ultrasound-guided breast biopsy from the time of scheduling a biopsy to patient checkout. We completed on average 20 time observations of each step involved in these biopsies from a provider’s perspective. Using capacity cost rate, we calculated the cost of all resources including personnel, supply, room, and equipment costs. Several costly steps were identified in the process, which led to the intervention of changing our overlapping biopsy times to staggered biopsy times. Time observations for each step and cost calculations were repeated postintervention. Results: Our postintervention data showed that the total time spent by the radiologist in an ultrasound breast biopsy decreased by 28%, accounting for 56% of the total cost in comparison with 63% pre-intervention. The radiologist’s wait time decreased by 38%, accounting for 28% of the total cost in comparison with 35% pre-intervention. Our total cost of the procedure decreased by 20%, and the personnel cost decreased by 25%. Conclusions: Time-driven activity-based costing is a practical way to calculate costs and identify non-value-added steps, which can foster strategies to improve efficiency and minimize waste.

Introduction

With increasing health care costs and evolving payment models, it is more critical than ever that medical providers maximize value by increasing efficiency and decreasing costs. Although value is difficult to define in health care, Porter’s widely cited definition of value is outcomes achieved relative to costs (outcomes/cost) [1]. To enhance value, one must improve outcomes or decrease cost. Although there has been a significant focus on improving patient outcomes in the recent past through regulatory and financial incentive models, there has been scant emphasis on decreasing cost. To decrease cost, one must be able to evaluate the true cost of a medical process or procedure. Calculating the cost of a medical process or procedure is challenging because various shareholders in the health care arena often define costs differently. Health care policy makers may refer to cost as the money paid to providers for medical services, and providers may define their costs by their reimbursement, but these are not necessarily the costs incurred by the health care system for a medical process or procedure [2,3]. Not knowing true costs prevents one from truly decreasing costs, which can have substantial negative downstream consequences such as the inability to adequately negotiate reimbursement in a bundled payment model.

Time-driven activity-based costing (TDABC) is a new ABC variant that enables you to build powerful and flexible cost models quite simply (Kaplan and Norton, 2008, p. 209). Described in the literature as a simple model, TDABC can be considered the next generation of activity-based costing (ABC). This new solution was designed by Kaplan and Anderson specifically to simplify the implementation process and the time-consuming and expensive maintenance of its forerunner ABC (Kaplan and Anderson, 2007a, 2007b; Tse and Gong, 2009; Balakrishnan et al., 2012b; Hoozée et al., 2012). Since then, the model has demonstrated great practical applicability (Everaert et al., 2012), given the countless examples of use and implementation in the literature (Everaert et al., 2008a; Kaplan and Norton, 2008; Demeere et al., 2009; Hoozée and Bruggeman, 2010; Giannetti et al., 2011; Kont and Jantson, 2011; Tanis and Ozypici, 2012; Campanale et al., 2014). These examples range from companies in the hotel sector (Dalci et al., 2010) to healthcare (Campanale et al., 2014) and even financial services (Kaplan and Norton, 2008). However, it seems that the literature has been mainly focused on companies related to services insofar as examples of TDABC models in manufacturing companies are scarce. This is curious, as Stratton et al. (2009) in their quantitative analysis showed that the model from which TDABC evolved has been implemented in manufacturing, and there are also published works on manufacturing companies using ABC (Anderson et al., 2002; Liu and Pan, 2007). Furthermore, TDABC is considered a model capable of handling the complexity and variability of daily activities (Everaert et al., 2008a). Could this be a trivial gap in the literature or is there another reason? In fact, to the best of our knowledge, only the study by Öker and Adigüzel (2010) illustrates a model in a manufacturing company and ends by concluding that TDABC is more suitable for service companies. This is because, as the authors say, in service companies, resources can be assigned through labour hours. However, using only this measure for manufacturing companies is difficult, as machinery time must also be considered, which means that two practical capacities must be calculated and two time equations must be created for each production process. Taking the results of Öker and Adigüzel (2010) as a starting point, we aim to examine in further detail the suitability and the complexity of building a model for manufacturing companies. To do so, we adopt an interventionist approach allowing us to take part in the model designing process from the very beginning, and thus collect more sensible, richer and detailed insights (Suomala et al., 2014). Based on this insider experience and on the model that resulted from the fieldwork, we then report the model and compare and discuss other models that are available in the literature for service companies. The host company in this study was GP (a fictitious name for the purpose of confidentiality), namely, a Portuguese company in the frozen food sector. Given the competitive environment in which GP operates, the managers felt the need to modify their costing practices and expressed interest in the researchers’ suggestion to design a pilot TDABC model for the company. Prior to this, a very rudimentary costing system had been used, which simply attempted to identify the cost of each production batch.

The business environment in which today’s companies are inserted has undergone enormous changes over the last decades caused by deregulation, increased global competitiveness, reduced costs associated with information, demand for greater diversity of products, among others. The development of new technologies, essentially linked to automation and information systems, has led to significant advances, which have had repercussions on the various organizations that make up the business fabric, affecting virtually all the departments and their areas of intervention. Companies no longer compete locally only and have come to deal with competition from companies located on other continents, embedded in distinct realities and diverse business environments. These changes have forced these organizations to implement ever more sophisticated costing systems [3]. Important decision-making within an organization, such as the placing of new products on the market or the continuation or termination of the marketing of other products or services, as well as the design and definition of the selling price, will have to be supported by reliable information regarding to their industrial cost and profitability [4]. Customer satisfaction is a key prerequisite for the viability of companies and organizations. However, customer satisfaction must be ensured by meeting their expectations, but the selling price of the product will always have to be higher than its production cost. This is a requirement that companies can-not abdicate [5]. As a consequence of the profound changes that have taken place over the last few years, there is strong pressure in the organizations to increase productivity at reduced prices, so that to obtain a method of estimating the costs of the various products produced in the same company in a rigorously and accurately way has become a strategic objective [2]. However, the mere knowledge of the costs of a particular product may not be sufficient for a company to remain competitive. There is a need to constantly improve their processes by detailing how the various activities within the company are developed in order to increase efficiency and effectiveness, which will lead to more competitive and higher quality products and services [6]. On the other hand, the selection of the costing method more appropriate to the reality of each organization can be a complex task [7], and the misallocation of indirect fixed costs, as it occur in some traditional costing systems, leads to obtaining incorrect industrial costs and may lead to misallocated management decisions [8]. The Activity-Based Costing (ABC) method has been seen as a useful tool to achieve a costing system more efficient, since it identifies and analyses the production activities that lead to the product object of the cost [9].

Value-based health care (VBHC) has been proposed as a strategy to address the challenges facing health care today [1]. Value is defined in terms of the value equation − health outcomes achieved per unit cost expended over the entire care delivery value chain (CDVC) [2]. The CDVC disregards boundaries between departments and organizations, and captures all processes in the care continuum for a medical condition. Fixed bundled payments to reimburse each CDVC hold providers accountable for the full cycle of care. The ability for providers to compare health outcomes and costs is expected to foster improvement through competition on value. There is currently great interest in VBHC, mostly directed at identifying which health outcomes are appropriate to measure for a particular medical condition [3]. Less attention has been paid to developing a standard for cost calculations [4]. The problem addressed in this paper is that valid value-based comparisons are not possible with- out consensus around how to calculate costs formedical conditions, and if solved, health care providers will be able to understand the cost of care delivery for conditions and control cost. This paper reviews the empirical application of the costaccounting tool, Time-driven activity-based costing (TDABC), presented as the solution to the cost-crisis in health care [5]. In modern competitive reimbursement environments, providers and policy makers are looking for cost-accounting solutions capable of informing process improvement and meeting the expectations of cost-control policies [5–7]. However, previous attempts to develop process-oriented cost-accounting methods in health care, such as Activity-based costing (ABC), have proven challenging. One reason is that it is too resource intensive in large or complex organizations [6,8]. ABC was first applied in health care in the early 1990s [9]. It proved more useful than traditional cost-accounting methods [10,11], but demanded large resource investments, which led to partial or incomplete applications [12]. This was exacerbated by the complexity inherent to health care organizations [13–16]. After peaking in the mid-1990s [12], the subsequent demise of ABC [11] exemplifies the need to find balance between validity in costing and the resources expended to achieve that validity [15,17]. TDABC was presented by Kaplan and Anderson [8] as a modified version of ABC that sought to find this balance. TDABC hasdemonstrated some success in the production and service industries [18]. It prioritizes accuracy over precision, i.e. “approximately right rather than precisely wrong” [6]. Accuracy is how close your cost estimate is to actual cost, and precision is the number of decimal places you include in your estimation. TDABC demands fewer resources by requiring only two key parameters: the capacity cost rate (CCR), and the time required to perform activities in service delivery [8] – thus the name “time-driven” ABC. The CCR is the cost of capacity-supplying resources divided by the practical capacity of those resources. TDABC has been described as a microcosting approach well-suited to accommodate the complexity of cost accounting in health care organizations [5,19]. In 2011, Robert Kaplan and Michael Porter presented a seven-step approach to the application of TDABC in health care settings (Table 1) as the solution to the cost crisis, and linked it to the VBHC agenda [5] (hereafter, all references to TDABC will be to this approach). Given the increasing interest in VBHC and the need to understand the cost of care delivery for medical conditions, the current empirical evidence of TDABC applications in health care should be investigated. Therefore, the aim is to explore why TDABC has been applied, how its application reflects the seven-step model, and what recommendations can be drawn for future applications in health care.

Increasing transactions between firms, such as the exchange of materials and information, are the reason for the “hidden factory,” meaning high manufacturing overhead costs (Miller and Vollmann, 1985). Traditional cost accounting practices (e.g., volume-based costing) have been unable to allocate these costs to products accordingly (Dickinson and Lere, 2003; Thyssen et al., 2006; Uskonen and Tenhiälä, 2012). Yet accurate cost data is crucial for decision-making and has been seen as a source of competitive advantage (Gupta and Galloway, 2003; Berling, 2008; Lin et al., 2012; Maiga et al., 2014). Cooper and Kaplan (1988) presented activity-based costing (ABC) as an alternative cost accounting approach. Initially, ABC was intended to be implemented for intra-firm purposes only (La Londe and Pohlen, 1996). However, the reduction of a company’s own contribution to a product’s value due to outsourcing (McCarthy and Anagnostou, 2004; Schulze et al., 2012) resulted in more transactions at the interorganizational level (Weber et al., 2010). Furthermore, global competition has increased and puts pressure on firms and their supply chains (Khataie et al., 2011; Askarany et al., 2010). Today, not only individual firms but also whole supply chains compete against each other. Consequently, the need for coordinated activities, as well as information sharing, within and across supply chains has arisen (Schulze et al., 2012). Supply chain management (SCM) supports firms to manage inter-company material, information, and financial flows to collectively enhance productivity, performance, and profitability (Gunasekaran et al., 2004; Templar et al., 2016). Efforts today to improve competitiveness include suppliers and customers. Cost transparency across the supply chain, in addition to appropriate customer service levels, is seen as a crucial success factor (Hoffjan et al., 2011). ABC has been the subject of general reviews that describe its evolution (e.g. Innes et al., 2000; Bjørnenak and Mitchell, 2002), discuss its organizational aspects (Shields, 1995; Krumwiede, 1998), or examine its communication patterns (Lukka and Granlund, 2002). Various attempts have been made to integrate SCM and ABC (Lin et al., 2001), while the inter-organizational nature and the relational context represent the main characteristics (Cooper and Slagmulder, 2004). Thus far, the intersecting literature of SCM and ABC has not been reviewed. So, the contribution of this paper is to provide the current status and future directions of ABC in SCM. As the concept of ABC remains stable, whereas the terms “supply chain” and “SCM” still experience confusion regarding their meaning (Mentzer et al., 2001; Carter et al., 2015), this paper focuses on different ABC adoption levels within various “understandings” of the supply chain and SCM, respectively.