Determinants of ‘Sticky Costs': An Analysis of Cost Behavior using United States Air Transportation Industry Data

48 Pages Posted: 26 Jul 2011 Last revised: 1 Dec 2011

See all articles by James N. Cannon

James N. Cannon

Iowa State University; Utah State University, School of Accountancy

Date Written: June 24, 2011

Abstract

This paper examines determinants of sticky cost behavior (asymmetric cost changes in response to revenue increases and decreases). Cost accounting researchers have examined sticky costs to gain insights about management capacity decisions as demand fluctuates. The majority of the extant literature infers that costs decrease slower than they increase with demand fluctuations because management retains unused capacity in anticipation of future demand resurgence. I use United States Air Transportation industry data to provide empirical evidence that sticky costs are also associated with capacity and output selling price changes as management adjusts capacity and sales volume. Specifically, I conclude that sticky costs can arise when the marginal cost of adding capacity as demand grows is greater than the marginal benefit from reducing capacity as demand falls. Additionally, I provide some evidence that sticky costs arise as management drops output selling price to a greater degree as demand falls than they raise price as demand grows. These results identify additional determinants (to the retention of unused capacity) of sticky cost behavior, stressing the importance of using precise model specification to gain insights about management actions leading to sticky cost behavior.

Keywords: Sticky Costs, Cost Accounting, Capacity Decisions, Air Transportation

JEL Classification: M41

Suggested Citation

Cannon, James N. and Cannon, James N., Determinants of ‘Sticky Costs': An Analysis of Cost Behavior using United States Air Transportation Industry Data (June 24, 2011). AAA 2012 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1895615 or http://dx.doi.org/10.2139/ssrn.1895615

James N. Cannon (Contact Author)

Utah State University, School of Accountancy ( email )

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Iowa State University ( email )

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United States
801-927-7718 (Phone)

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