Demand Uncertainty and Cost Behavior

45 Pages Posted: 16 Aug 2011 Last revised: 23 Jul 2015

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Dmitri Byzalov

Temple University - Fox School of Business and Management - Department of Accounting

Jose M. Plehn-Dujowich

Powerlytics. Inc.

Date Written: September 30, 2013

Abstract

We investigate analytically and empirically the relationship between demand uncertainty and cost behavior. We argue that with more uncertain demand, unusually high realizations of demand become more likely. Accordingly, …firms will choose higher capacity of …fixed inputs when uncertainty increases in order to reduce congestion costs. Higher capacity levels imply a more rigid short-run cost structure with higher …fixed and lower variable costs. We formalize this "“counterintuitive"” argument in a simple analytical model of capacity choice. Following this logic, we hypothesize that …firms facing higher demand uncertainty have a more rigid short-run cost structure with higher …fixed and lower variable costs. We test this hypothesis for the manufacturing sector using data from Compustat and the NBER-CES Industry Database. Evidence strongly supports our hypothesis for multiple cost categories in both datasets. The results are robust to alternative specifi…cations.

Keywords: cost behavior, demand uncertainty, cost rigidity

Suggested Citation

Banker, Rajiv D. and Byzalov, Dmitri and Plehn-Dujowich, Jose M., Demand Uncertainty and Cost Behavior (September 30, 2013). Accounting Review, 89(3), 839-865, 2014. . Available at SSRN: https://ssrn.com/abstract=1910066 or http://dx.doi.org/10.2139/ssrn.1910066

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Dmitri Byzalov

Temple University - Fox School of Business and Management - Department of Accounting ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://astro.temple.edu/~dbyzalov/

Jose M. Plehn-Dujowich (Contact Author)

Powerlytics. Inc. ( email )

P.O. Box 164
Mechanicsville, PA 18934
United States

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