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Additional Evidence on the Sticky Behavior of Costs

Chandra Subramaniam, Marcia Weidenmier Watson

Advances in Management Accounting

ISBN: 978-1-78441-652-2, eISBN: 978-1-78441-651-5

Publication date: 29 March 2016

Abstract

Purpose

This paper attempts to resolve the conflicting results on sticky cost behavior in prior literature. Large sample studies find that selling, general, and administrative costs (SG&A) and cost of goods sold (CGS) are sticky, that is, costs are less likely to decrease when activity decreases than to increase when activity increases. In contrast, studies limited to one industry find little or no sticky cost behavior.

Methodology/approach

We investigate whether SG&A and CGS sticky cost behavior differ across/ four major industry groups (manufacturing, merchandising, financial, and services) characterized by different production, operational, and economic environments. In addition, we study whether sticky cost behavior arises for all changes in activity level (as measured by revenue changes) or for only large changes in activity level. Finally, we investigate whether determinants of sticky cost behavior vary across industries.

Findings

Our results suggest that costs in the manufacturing industry are the “stickiest,” while costs in the merchandising industry are the “least sticky,” with financial and service industries exhibiting some level of sticky cost behavior. Further, we find that sticky cost behavior is industry-specific, both in the magnitude of activity changes that give rise to sticky cost behavior and in the determinants that drive the behavior.

Research limitations/implications

Our investigation of 20 distinct sub-industries within the “stickiest” manufacturing industry finds that while some sub-industry groupings show significant sticky behavior, most do not. This result may explain why, contrary to large sample studies, single industry studies find little or no sticky behavior in costs.

Originality/value

Our research is the first to try and reconcile the conflicting results on sticky cost behavior. Understanding the pervasiveness of stickiness is necessary to move research forward in this domain.

Keywords

Acknowledgements

Acknowledgments

The authors would like to thank Mary Stanford, Robert Vigeland, Larry Walther, and workshop participants at the University of Kentucky, Mississippi State University, Virginia Commonwealth University and the 2003 AAA Management Accounting Conference. Professor Weidenmier Watson gratefully acknowledges financial support from the Charles Tandy American Enterprise Center at Texas Christian University. All errors are our own.

Citation

Subramaniam, C. and Watson, M.W. (2016), "Additional Evidence on the Sticky Behavior of Costs", Advances in Management Accounting (Advances in Management Accounting, Vol. 26), Emerald Group Publishing Limited, Leeds, pp. 275-305. https://doi.org/10.1108/S1474-787120150000026006

Publisher

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Emerald Group Publishing Limited