Asymmetries in Cost-Volume-Profit Relation: Cost Stickiness and Conditional Conservatism

54 Pages Posted: 20 Aug 2013

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Sudipta Basu

Temple University - Department of Accounting

Dmitri Byzalov

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

Janice Chen

University of the Pacific (UOP)

Date Written: March 3, 2013

Abstract

Cost-volume-profit (CVP) analysis is based on a linear model of earnings behavior. However, recent research documents two potential sources of asymmetry in earnings: cost stickiness and conditional conservatism. We examine the implications of these asymmetries for CVP analysis and develop an “asymmetric CVP” (ACVP) framework incorporating both phenomena. ACVP estimates for Compustat/CRSP data reveal dramatic deviations from the standard CVP model (attributed to both stickiness and conservatism). These asymmetric deviations lead to major conceptual revisions in CVP analysis and have a large impact on various CVP benchmarks.

Keywords: resource adjustment costs, break even analysis, budgeting, managerial discretion

JEL Classification: C5, D2, L2, L23, M4, M46

Suggested Citation

Banker, Rajiv D. and Basu, Sudipta and Byzalov, Dmitri and Chen, Janice, Asymmetries in Cost-Volume-Profit Relation: Cost Stickiness and Conditional Conservatism (March 3, 2013). Available at SSRN: https://ssrn.com/abstract=2312179 or http://dx.doi.org/10.2139/ssrn.2312179

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Dmitri Byzalov (Contact Author)

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

Philadelphia, PA 19122
United States

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

Janice Chen

University of the Pacific (UOP) ( email )

3601 Pacific Avenue
Stockton, CA 95211
United States

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