[4_1]_2003_Anderson_et_al_Are_selling,_general_and_administrative_costs_sticky

[4_1]_2003_Anderson_et_al_Are_selling,_general_and_administrative_costs_sticky

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Journal of Accounting Research Vol. 41 No. 1 March 2003 Printed in U.S.A. Are Selling, General, and Administrative Costs “Sticky”? M A R K C . A N D E R S O N , R A J I V D . B A N K E R , A N D S U R Y A N . J A N A K I R A M A N Received 1 November 2000; accepted 17 June 2002 ABSTRACT A fundamental assumption in cost accounting is that the relation between costs and volume is symmetric for volume increases and decreases. In this study, we investigate whether costs are “sticky”—that is, whether costs increase more when activity rises than they decrease when activity falls by an equivalent amount. We find, for 7,629 firms over 20 years, that selling, general, and administrative (SG&A) costs increase on average 0.55% per 1% increase in sales but decrease only 0.35% per 1% decrease in sales. Our analysis compares the traditional model of cost behavior in which costs move proportionately with changes in activity with an alternative model in which sticky costs occur because managers deliberately adjust the resources committed to activities. We test hypotheses about the properties of sticky costs and how the degree of stickiness of SG&A costs varies with firm circumstances. 1. Introduction Understanding cost behavior is an essential element of cost and manage- ment accounting. In the traditional model of cost behavior that pervades the accounting literature, costs are described as fixed or variable with re- spect to changes in activity volume. In this model, variable costs change The University of Texas at Dallas; The University of Texas at Dallas; The University of Texas at Dallas. Helpful comments from seminar participants at the University of Arizona, the University of Southern California, the University of Texas at Austin, the University of Texas at Dallas, Texas A&M University, Washington University at St. Louis, and the annual conferences of the European Accounting Association in Munich (2000), and the American Accounting Association in Philadelphia (2000) are gratefully acknowledged. 47 Copyright C , University of Chicago on behalf of the Institute of Professional Accounting, 2003
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48 M . C . ANDERSON , R . D . BANKER , AND S . N . JANAKIRAMAN proportionately with changes in the activity driver (Noreen [1991]), imply- ing that the magnitude of a change in costs depends only on the extent of a change in the level of activity, not on the direction of the change. But some allege costs rise more with increases in activity volume than they fall with decreases (Cooper and Kaplan [1998, p. 247], Noreen and Soderstrom [1997]). We label this type of cost behavior sticky. Speci fi cally, costs are sticky if the magnitude of the increase in costs associated with an increase in volume is greater than the magnitude of the decrease in costs associated with an equivalent decrease in volume.
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