Cost Stickiness and Cost Inertia: A Two-Driver Model of Asymmetric Cost Behavior

38 Pages Posted: 27 Apr 2015 Last revised: 28 Jul 2016

See all articles by Mark C. Anderson

Mark C. Anderson

University of Calgary - Haskayne School of Business

Joo Hyung Lee

University of Windsor - Odette School of Business

Raj Mashruwala

University of Calgary

Date Written: July 4, 2016

Abstract

In the asymmetric cost behavior model, managers play an active role in determining cost behavior by adding or removing resources as activity changes. Cost stickiness occurs when managers deliberately retain slack resources resulting from a decline in sales activity between periods. Because both sales and long-term capital investments change between periods, we estimate a model of cost behavior that includes two cost drivers: revenue as a volume of activity driver and property, plant and equipment (PP&E) as an assets-in-place driver. We associate cost inertia with slack resources retained when assets-in-place are reduced. We find that changes in SG&A costs separate between the two cost drivers, and that the explanatory power of an asymmetric cost behavior model including PP&E as a second driver is significantly greater than the explanatory power of the single-driver cost behavior model. Similar insights are obtained when we replace SG&A costs with employee headcount or employee costs as the cost measure of interest. In all cases, we find that the cost inertia term is significantly negative and relatively large in magnitude. We estimate an expanded model that conditions analysis of current year cost behavior on the direction of sales change in the previous period and find that the pattern of cost changes is consistent with both cost stickiness and cost inertia.

Keywords: asymmetric cost behavior, cost stickiness, cost inertia, SG&A costs

JEL Classification: M40, M41

Suggested Citation

Anderson, Mark C. and Lee, Joo Hyung and Mashruwala, Raj, Cost Stickiness and Cost Inertia: A Two-Driver Model of Asymmetric Cost Behavior (July 4, 2016). Available at SSRN: https://ssrn.com/abstract=2599108 or http://dx.doi.org/10.2139/ssrn.2599108

Mark C. Anderson

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-3926 (Phone)

Joo Hyung Lee (Contact Author)

University of Windsor - Odette School of Business ( email )

401 Sunset
Windsor N9B 3P4, Ontario
Canada

Raj Mashruwala

University of Calgary ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403-220-4332 (Phone)

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