Cost stickiness behavior and financial crisis: Evidence from the UK chemical industry

Ahmed Hassanein,Mohsen Younis

doi:10.22495/cocv17i2art4

Ahmed Hassanein, Mohsen Younis

Open Access

https://doi.org/10.22495/cocv17i2art4

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Abstract

The global financial crisis has created pessimism in terms of prospects of sales rebounding in the future. Therefore, this study aims to examine the stickiness behaviors of firm costs pre, during and post the period of the financial crisis. It uses a sample from the UK chemical industry over the period from 2001 to 2015. The ABJ sticky cost model is applied with the following cost categories: total costs, cost of goods sold, operating costs, selling, general and administrative costs, salaries and benefits, and finance costs. The ABJ sticky cost models are run separately for each cost category over pre (2001-2007), during (2007-2009) and post (2010-2015) the financial crisis. The study finds that total costs have behaved as sticky pre the financial crisis and anti-sticky during and post the financial crisis. Furthermore, cost of goods sold has changed from sticky (pre and during the financial crisis) to anti-sticky (post the financial crisis). Furthermore, salaries and benefits costs have changed from sticky (pre the financial crisis) to anti-sticky (during the financial crisis) and financing costs from sticky (pre the financial crisis) to anti-sticky (after the financial crisis). However, there is no variation in the behavior of selling, general and administrative costs pre and post the financial crisis

Highlights

Traditional cost behavior assumes that variable costs vary symmetrically according to changes in the level of activity
Panel A reports the descriptive statistics for total costs (TC), OGS, operating costs (OC), SG&A, salaries and benefits (S&B), and finance costs (FinC) for the whole sample period (2001-2015)
The results indicate that the β for cost of goods sold (CGS) 2 is -1.210 which is higher than the β coefficients for 2 all other cost categories which are as follows: - .135 for OC, - .415 for SG&A, - .476 for S&B, and - .895 for FinC

Summary

Introduction

Traditional cost behavior assumes that variable costs vary symmetrically according to changes in the level of activity. This means that variable costs change proportionately with changes in the cost driver. Fixed costs remain constant in total despite changes in the cost driver within the relevant range. Some costs are neither precisely variable nor fixed; this type of cost known as mixed cost. According to traditional analysis of cost behavior, managerial decisions (i.e., pricing, cost planning, cost control, budgeting, cost variances, cost standardization, cost reduction and cost allocation) are, precisely, based on prior analysis of cost behavior (Novák et al, 2018)

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