Asymmetric Cost Behavior Across Life Cycle Stages

Mohamed Abdelghany Abdelhay,Ahmed Mahmoud Youssef,Mohamed Hamdy Awad

doi:10.5296/ijafr.v11i3.18876

Abstract

The traditional model of cost behavior has been criticized for its symmetric cost behavior assumption. A new model has been proposed assuming that costs respond differently to upward and downward activity changes. The main objectives of this paper are to investigate the existence, degree, and nature of asymmetric cost behavior (ACB) phenomenon and examine how the organization life cycle (OLC) affects this phenomenon in the context of Egypt. The current study achieves these objectives by employing multiple regression to explore the behavior of cost of goods sold (COGS), selling, general and administrative cost (SGA), and total cost (TC) for 1577 firm-year observations (99 manufacturing firms) during the period from 2000 to 2019. The results demonstrate that all three cost proxies (COGS, SGA, and TC) are sticky with the highest degree of stickiness to TC. In addition, OLC is a conditional factor that affects how costs behave in response to change in activity level. Consistent with theoretical propositions, both COGS and TC exhibit anti-stickiness behavior for firms in the introduction stage and stickiness behavior for firms in the growth, mature, and shakeout/decline stages. However, SGA is only sticky for firms in the mature stage. However, the hypotheses related to asymmetric behavior of SGA were rejected for firms in the introduction, growth, and shakeout/decline stages.

Highlights

Cost behavior is considered one of the most significant analyses of the decision-making process
The current study extends those studies by investigating the stickiness behavior of other costs such as cost of goods sold (COGS), which represents a large percentage of the cost structure in manufacturing firms, and the COGS (TC)
The primary financial data used in our asymmetric cost behavior (ACB) estimation include sales revenues (REV), cost of goods sold (COGS), selling, general & administrative cost (SGA), and total cost (TC)

Summary

Introduction

Cost behavior is considered one of the most significant analyses of the decision-making process. Anderson, Banker, & Janakiraman (2003; ABJ hereafter) provide empirical evidence that selling, general and administrative cost (SGA) decreases less when revenues decrease than they increase when revenues increase by an equivalent percentage. They labeled this new phenomenon as "cost stickiness". Other studies prove that costs are anti-sticky in that they decrease more as output level falls than they increase as output level rises by an equivalent percentage (Kama & Weiss, 2013; Weiss, 2010) Both scenarios represent the forms of ACB.

Objectives

Methods

Results

Discussion

Conclusion