Costing Rule and Cost Behavior in the Korean Defense Industry

Abstract

This paper investigates the cost behavior in the Korean defense industry. Managers in the defense industry tend to have motivation to manage earnings because the costs incurring in the production process of defense articles are reimbursed based on cost plus contracts. Results are as follows. First, in the sample of the defense sector, SG&A costs and total manufacturing costs exhibited anti-stickiness whereas labor costs exhibited cost stickiness. Other cost components displayed symmetric cost behavior. Next, in the commercial sector, material costs, direct material costs, total * This paper is partially drawn from Hong-Jung Yong’s dissertation at Seoul National University ** Defense Acquisition Program Administration, e-mail: afdragon@hanmail.net *** Business School, Seoul National University, e-mail: ahnts@snu.ac.kr **** Correspondent Author. School of Management, Kyung Hee University, e-mail: jhrjhr@khu.ac.kr ***** Department of Accounting, Soongsil University, e-mail: parkjh04@ssu.ac.kr 32 Seoul Journal of Business manufacturing costs, cost of goods sold, and total costs exhibited antistickiness. Labor costs showed cost stickiness whereas SG&A costs, overhead costs, and indirect production costs had symmetric cost behavior. Overall, the results reveals that the change rate of labor costs of the defense sector exhibits more cost stickiness to changes in sales than the commercial sector.