Evidence on the Cost Hierarchy: The Association between Resource Consumption and Production Activities

Posted: 29 Aug 2012 Last revised: 9 Oct 2013

See all articles by Shannon W. Anderson

Shannon W. Anderson

University of California, Davis - Graduate School of Management

Karen Sedatole

Goizueta Business School

Date Written: September 4, 2012

Abstract

Modern cost accounting posits that manufacturing overhead costs vary with production unit-volume, batches of production, and with the variety of products produced. However, many studies fail to find an association between manufacturing overhead costs and activities associated with production batches and product variety; rather, the traditional fixed and (unit) variable cost structure is validated. One explanation is that flexible manufacturing methods and optimized production scheduling restore the relevance of the traditional cost model. Another explanation is that the relation holds, but is not detectable because of limitations of the data used in these studies. We explore the separate and joint impacts of these data limitations using data from a modern float glass manufacturing plant and a new time-driven activity-based costing model suggested by Kaplan and Anderson’s (2004, 2007). We find that: 1) batch and product-variety related activities are significantly associated with resource consumption, 2) crude measures of activity promote incorrect conclusions about the strength of the relation between activities and resource consumption, and 3) monthly aggregation of data obscures important aspects of the relation between daily production activities and resource consumption. In sum, even in a highly automated setting that is biased against finding evidence of the cost hierarchy because production scheduling is optimized to minimize batch and product-variety related resource consumption, the cost hierarchy is an apt description of the association between resource consumption and production activity. However, improved measurement and cost model specification are necessary to reveal this association.

Keywords: Manufacturing overhead costs, time-driven activity-based costing, economies of scale, economies of scope

JEL Classification: D24, M20, M40

Suggested Citation

Anderson, Shannon W. and Sedatole, Karen, Evidence on the Cost Hierarchy: The Association between Resource Consumption and Production Activities (September 4, 2012). Journal of Management Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2137134 or http://dx.doi.org/10.2139/ssrn.2137134

Shannon W. Anderson

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Karen Sedatole (Contact Author)

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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