Cost Hierarchy: Evidence and Implications

Rajiv D. Banker; Gordon S. Potter; Dhinu Srinivasan

doi:10.34257/GJMBRDVOL21IS2PG1

Cost Hierarchy: Evidence and Implications

Rajiv D. Banker * §

Contact

Gordon S. Potter

Contact

Dhinu Srinivasan

Contact

University of Pittsburgh

Cost Hierarchy: Evidence and Implications

Article Fingerprint

ReserarchID

MBRHSYU2

DOI
10.34257/GJMBRDVOL21IS2PG1

Cost Hierarchy: Evidence and Implications Banner

AI TAKEAWAY

Abstract

Empirical evidence on the association between overhead costs and non-volume related cost drivers is mixed. Anderson and Sedatole (2013) offer possible explanations for the lack of evidence and find that the cost hierarchy is descriptive of the association between resource consumption and production activity. In this paper, we provide evidence on the presence of the cost hierarchy by studying the behavior of indirect production labor costs using daily data for five years from seven production departments of an industrial equipment manufacturer. We find that in addition to direct labor costs, the number of setups and number of distinct parts are also significantly associated with indirect production costs in at least six out of the seven production departments. Interestingly, despite our evidence for the existence of the cost hierarchy, the simple method of estimating these indirect costs as a proportion of only direct labor costs performs remarkably well in predicting costs.

References

35 Cites in Article

Reference Format

Margaret Abernethy,Anne Lillis,Peter Brownell,Paul Carter (2001). Product diversity and costing system design choice: field study evidence.
Shannon Anderson,Karen Sedatole (2013). Evidence on the Cost Hierarchy: The Association between Resource Consumption and Production Activities.
R Balakrishnan,K Sivaramakrishnan,S Sunder (2004). A Resource Granularity Framework for Estimating opportunity costs.
R Banker,S Datar,S Kekre,T Mukhopadhyay (1990). Costs of Product and Process Complexity.
Rajiv Banker,Gordon Potter,Roger Schroeder (1995). An empirical analysis of manufacturing overhead cost drivers.
David Belsley,Edwin Kuh,Roy Welsch (1980). Regression Diagnostics.
G Box,D Cox (1964). An Analysis of Transformations.
R Cooper,R Kaplan (1987). How Cost Accounting Systematically Distorts Product Costs.
R Cooper,R Kaplan (1991). The Cost of Quality.
R Cooper,R Kaplan (1992). Activity-Based Systems: Measuring the Costs of Resource Usage.
N Dopuch (1993). A Perspective on Cost Drivers.
George Foster,Mahendra Gupta (1990). Manufacturing overhead cost driver analysis.
H Glesjer (1969). A New Test for Heteroskedasticity.
W Greene (2011). Econometric Analysis.
J Hamilton (1994). Time series analysis. James D. Hamilton Princeton University Press.
A Harvey (1981). The Econometric Analysis of Time Series.
A Harvey (1993). Time Series Models.
Olena Fomina (2014). Creating Business Value: Managerial Accounting and Non-Financial Reporting.
Christopher Ittner,William Lanen,David Larcker (2002). The Association Between Activity‐Based Costing and Manufacturing Performance.
Christopher Ittner,David Larcker (1997). Extending the Boundaries: Nonfinancial Performance Measures.
C Ittner,D Larcker (2001). Assessing Empirical Research in Managerial Accounting: a Value-based Management Perspective.
Christopher Ittner,John Macduffie (1995). EXPLAINING PLANT‐LEVEL DIFFERENCES IN MANUFACTURING OVERHEAD: STRUCTURAL AND EXECUTIONAL COST DRIVERS IN THE WORLD AUTO INDUSTRY.
John Innes,Falconer Mitchell,Donald Sinclair (2000). Activity-based costing in the U.K.’s largest companies: a comparison of 1994 and 1999 survey results.
R Kaplan,S Anderson (2004). Time-driven Activity-based Costing.
Robert Kaplan,Steven Anderson (2007). Time-Driven Activity-Based Costing.
E Labro (2004). The Cost Effects of Component Commonality: a Literature Review Through a Management-accounting Lens.
Eva Labro (2015). Hobby Horses Ridden.
W Lanen,S Anderson,M Maher (2013). Fundamentals of Cost Accounting.
R Mccleary,R Hay (1981). Applied Time Series Analysis for the Social Sciences.
Noreen,E,N Soderstrom (1994). Are Overhead Costs Strictly Proportional to Activity? Evidence From Hospital Service Departments.
Rolla Park,Bridger Mitchell (1980). Estimating the autocorrelated error model with trended data.
S Prais,C Winsten (1954). Trend Estimators and Serial Correlation.
P Schmidt (1988). Dickey-Fuller Tests.
Martijn Schoute (2011). The relationship between product diversity, usage of advanced manufacturing technologies and activity-based costing adoption.
Halbert White (1980). A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.

Download References

Funding

No external funding was declared for this work.

Conflict of Interest

The authors declare no conflict of interest.

Ethical Approval

No ethics committee approval was required for this article type.

Data Availability

Not applicable for this article.

How to Cite This Article

Rajiv D. Banker, Gordon S. Potter, Dhinu Srinivasan. 2022. "Cost Hierarchy: Evidence and Implications". Global Journal of Management and Business Research - D: Accounting & Auditing GJMBR-D Volume 21 (GJMBR Volume 21 Issue D2).

More Citation Formats

Select Citation Style:

Download Citation

GJMBR Volume 21 Issue D2

Explore Journals Explore Volume Read This Issue

Journal Specifications

Crossref Journal DOI 10.17406/GJMBR

Print ISSN 0975-5853

e-ISSN 2249-4588

Keywords

Not Found

Classification

GJMBR-D Classification JEL Code: M49

Submission ReceivedApril 10, 2021
Peer Review Double Blind
Handling Editor
Accepted May 5, 2021
Published May 15, 2021

Version of record

v1.2

Issue date

January 10, 2022

Language

English

Experiance in AR

Explore published articles in an immersive Augmented Reality environment. Our platform converts research papers into interactive 3D books, allowing readers to view and interact with content using AR and VR compatible devices.

View in VR

Read in 3D

Your published article is automatically converted into a realistic 3D book. Flip through pages and read research papers in a more engaging and interactive format.

View in 3D

Article Matrices

Total Views: 983

Total Downloads: 57

All Trends