Costing system design and honesty in managerial reporting: An experimental examination of multi-agent budget and capacity reporting*

Time-Driven Activity-Based Costing (TDABC) systems use time inputs and distinguish between the cost of resource usage and the cost of unused capacity to provide accurate cost information. Importantly, TDABC produces aggregate signals of unused capacity at the department level, which offers the potential for superiors to assess misreporting or slack creation during budgeting without knowing which subordinates contributed to the slack. In a multi-agent participative budgeting experiment, we examine the impact of two capacity reporting conditions against a condition where capacity reporting is absent. When superiors receive an aggregate signal of unused capacity and subordinates have no discretion over cost allocation input parameters, misreporting of cost budgets decreases compared to when capacity reporting is absent. However, the benefits of capacity reporting on misreporting largely vanish when subordinates have discretion over the inputs allowing them to hide their unused capacity. When discretion is absent, subordinates anticipate peers to reduce misreporting to avoid the superior's rejection of their aggregate proposal. Yet, discretion over the inputs changes subordinates' anticipation in that they expect others to misreport and hide unused capacity to appear honest. Costing system designers should thus be aware that giving employees discretion over time inputs can offset the decision-making benefits of TDABC.