Cost Behavior Theory

Cost Behavior: The understanding of cost behavior is fundamental to management accounting. The traditional idea of cost behavior is that costs can be treated as fixed or variable based on their relationship to volume or a related cost driver.

In cost accounting literature, cost behavior can be classified into two, namely fixed costs and variable costs. Fixed costs are defined as the cost which does not entirely change when business activity increased or decreased, while the variable cost is the cost which the total proportionally increases towards the increase in activities and proportionally decreases towards the decrease in activities (Carter, 2009). Variable costs proportionally change by changing in driving activities; the magnitude of

The traditional view of cost behavior has been that the costs are either fixed or variable with respect to changes in volume. This view holds that changes in costs are driven solely by the magnitude of change in the cost driver. The direction of change in the cost driver has no role to play with this model. Several studies (notably, Callen, 1991, Callen, et al., 1998, Noreen and Sorderstrom, 1994, 1997) have been discussed regarding the limitations of models of cost behavior that are based on the assumption of a linear cost structure.

Cooper and Kaplan (1998) asserted that cost stickiness occurs when managers direct a supply of contract costs that is not cost-effective. The managers may decide to keep the all resources in the way; while a firm may report a decrease in revenue, costs do not decrease like revenue does.

Several studies have found that the increase of cost is higher when the volume of activity increases compared to the cost decline during the volume of activity decreases (Cooper and Kaplan, 1998; Windyastuti and Biyanto,

This stickiness contributes to the dimensions of management behavior. Anderson et al. (2003) and Suberamaniam and Weidenmier (2003) found that this stickiness is connected to the economy. Noreen and Soderstorm (1997) do not share this view and Cooper and Kaplan (1997) believe the behavior of costs results from management characteristics. Their fundamental theory says that cost stickiness results from a series of managing contracts to increase resources (raw material, human capital, etc.), the violation of which will result in a loss (decrease in demand). Managers may decide to retain their resources. Firms may report a decrease in revenue, but the costs will not decrease. Other research on the difference in intensity of cost stickiness in different sections of an organization clearly shows that intensity is relates to the core