The Behavior of Overhead Costs: Evidence from Hospital Service Departments

Posted: 7 Aug 1995

See all articles by Naomi S. Soderstrom

Naomi S. Soderstrom

University of Melbourne

Eric W. Noreen

University of Washington

Abstract

Costing systems including activity-based costing generate average cost data. When these average costs are used for decision-making it is implicitly assumed that they approximate marginal costs. (In other words it is assumed every cost is strictly proportional to activity they are entirely variable.) Using data from hospitals in the State of Washington we examine the time-series behavior of overhead costs. In most instances a fixed cost model depicts cost behavior more accurately than a variable cost model. And nearly all of the effect of a change in activity on costs appears to occur in the same year as the change in activity. Finally when a mixed cost model allowing for both fixed and variable elements is estimated the estimated proportion of variable costs in the overhead accounts is very modest.

JEL Classification: D24, M40

Suggested Citation

Soderstrom, Naomi S. and Noreen, Eric W., The Behavior of Overhead Costs: Evidence from Hospital Service Departments. Available at SSRN: https://ssrn.com/abstract=55770

Naomi S. Soderstrom

University of Melbourne ( email )

Victoria
Melbourne, 3010
Australia

Eric W. Noreen (Contact Author)

University of Washington ( email )

231 Mackenzie Hall
Seattle, WA 98195
United States
206-543-4869 (Phone)
206-685-9392 (Fax)

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