Costs by considering the sensitivity of cost changes

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Unformatted text preview: on cost analyses. A managerial implication of our analysis is that sticky costs can be recognized and controlled. Managers can evaluate their exposure to sticky costs by considering the sensitivity of cost changes to reductions in volume. They may increase the sensitivity of costs to changes in volume by making contracting decisions that reduce the adjustment costs associated with changing the levels of committed resources. For example, managers may make it easier to adjust the supply of resources by using temporary employees or outsourcing functions whose demand for resources varies considerably with volume. Our study also has implications for financial analysts and auditors. A common procedure in financial statement analysis involves comparison of SG&A expense items as a percentage of net sales across firms within an industry or over time for a specific firm (White, Sondhi, and Fried [1997, p. 148]). Analysts interpret a disproportionate increase in selling expenses as a negative signal because it may represent a loss of managerial control or an unusual sales effort (Bernstein and Wild [1998, p. 583], Mintz [1999]). This analysis may be misleading because the underlying assumption that selling expenses move proportionately with sales is not empirically valid when the data include both sales increases and decreases. Similarly, auditors implicitly assume that costs should move proportionately with sales when performing analytical review procedures (Messier [2000, p. 545]). Analytical procedures may be improved by a better understanding of how SG&A costs change with revenues. The empirical models employed in this study provide a platform for further research on the causes and consequences of sticky cost behavior. Although the use of Compustat data enabled documentation of the prevalence of sticky cost behavior for a large cross-section of firms, it did not permit finer disaggregation of the SG&A costs. Future research using finer data may provide information on cost behavior for different components of SG&A costs as well as other types of costs. Evidence was also provided that sticky cost behavior is consistent with deliberate decision making by managers who weigh the economic consequences of their actions. Developing a greater understanding of the managerial decision-making processes and the forces that lead to sticky cost behavior will be an important step in improving cost analysis. REFERENCES BALAKRISHNAN, R.; M. PETERSEN; AND N. SODERSTROM. “On the Behavior of Labor Costs in Therapy Clinics.” Working paper, University of Iowa, 1999. BANKER, R., AND H. JOHNSTON. “An Empirical Study of Cost Drivers in the U.S. Airline Industry.” Accounting Review 68 (July 1993): 576–601. BELSLEY, D.; E. KUH; AND R. WELSCH. Regression Diagnostics: Identifying Influential Data and Collinearity. New York: Wiley, 1980. STICKY COSTS 63 BERNSTEIN, L., AND J. WILD. Financial Statement Analysis. New York: Irwin McGraw-Hill, 1998. CHEN,...
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