Cost behavior

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Cost behavior
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Cost behavior is the way in which the costs of the company change due to current events that take place in the company[1].

The basic principle of cost behavior is their increase during the increasing production activity of the company and decrease in costs during the reduced production activity of the company. But there are exceptions to this rule[2].

Cost control and knowledge is an important task in the work of every manager or executive. Such knowledge allows for good functioning of the organization or company. By determining the cost behaviour it's very important to know whether the costs will exceed revenues or be lower than revenues in a given market situation. Costs can vary greatly. They can divide into those that are subject to a lot of factors and change very often. There are also those that are very stable and hard to influence by any action. The ability to anticipate events that cause costs to rise is an important ability in the company in the area of financial management[3].

Among the factors that have a fundamental impact on the behavior of costs, two types of costs can be distinguished in each company. Fixed costs and variable costs where[4]:

  • Fixed costs - are those that do not change with the increase or decrease in the production.
  • Variable costs - are those that change with the increase or decrease in the production.

Asymmetric cost behavior

In economics, contrary to the standard and well-known principle of cost behaviour, where an increase or decrease in a company activity results in a proportional increase or decrease in costs, there is also a concept more commonly known as asymmetric cost behavior. Asymmetric cost behaviour refers to a situation where an increase or decrease in a company's activity results in a disproportionate change in the cost behaviour[5].

Sticky costs

Enterprise costs can be called "sticky costs" when they grow faster when the company's activity increases than when the company's activity decreases while maintaining the same amount in both cases. Companies whose costs are sticky record much greater decreases in revenue than companies whose costs are not sticky. This is because sticky costs lead to much smaller cost adjustments with decreasing production activity, leading to much lower cost savings. Less cost savings lead to lower revenues for the company [6] .

Footnotes

  1. Finker S., Jones Ch., Kovner Ch., ( 2013 ), Financial Management, Elsevier, p. 132
  2. Weiss D., ( 2010 ), " Cost Behavior and Analysts, Earnings Forecasts", The Accounting Review, p. 1440 - 1442
  3. Finker S., Jones Ch., Kovner Ch., ( 2013 ), Financial Management, Elsevier, p. 132
  4. Reimer K., (2017), Asymmetric Cost Behavior, Springer Gabler, p. 2
  5. Banker R., Byzalov D., Chen L. , (2013), Journal of Accounting and Economics, Elsevier, p. 2-14
  6. Weiss D., ( 2010 ), " Cost Behavior and Analysts, Earnings Forecasts", The Accounting Review, p. 1440 - 1442

References

Author: Maciej Plęskowski