Modeling cost behavior: Linear models for cost stickiness

College

Ramon V. Del Rosario College of Business

Department/Unit

Accountancy

Document Type

Article

Source Title

Academy of Accounting and Financial Studies Journal

Volume

15

Issue

SUPPL.1

First Page

25

Last Page

34

Publication Date

1-1-2011

Abstract

Literature acknowledges that costs might not be linear and proportional with activity levels. However, conjectures about the sticky behavior of costs are largely based on anecdotal and empirical evidence despite sufficiently advanced economic theory that explains cost behavior (Cooper and Kaplan, 1998; Noreen and Soderstrom, 1997; Banker and Johnston, 1993). For instance, while Noreen and Soderstrom (1997) find no evidence of stickiness, Anderson, et al (2003) find that SG&A costs are sticky that is, they increase, on the average, by 0.55% per 1% increase in revenues, but decline by 0.35% per 1% decrease in revenues. Subramaniam and Weidenmier (2003) confirm cost stickiness, finding that total cost increase 0.93% per 1% increase in revenues but decrease only by 0.85% per 1% decrease in revenues. Both studies used data from US firms. This paper derived a basic cost behavior model and used this model to test whether asymmetric cost behavior in Philippine firms is also prevalent, using different linear models such as OLS and GLS regression analyses. It concluded that GLS regression analysis is not more efficient than OLS regression analysis.

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Disciplines

Accounting

Keywords

Cost

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