Are Selling, General, and Administrative Costs “Sticky”?

TLDR

A fundamental assumption in cost accounting is that the relation between costs and volume is symmetric for volume increases and decreases. The study investigates whether costs are “sticky”—whether they rise more than they fall with equivalent activity changes—and tests how the degree of SG&A cost stickiness varies with firm circumstances. Our analysis compares the traditional model of cost behavior in which costs move proportionately with changes in activity with an alternative model in which sticky costs occur because managers deliberately adjust the resources committed to activities. We find, for 7,629 firms over 20 years, that SG&A costs increase on average 0.55% per 1% increase in sales but decrease only 0.35% per 1% decrease in sales.

Abstract

A fundamental assumption in cost accounting is that the relation between costs and volume is symmetric for volume increases and decreases. In this study, we investigate whether costs are “sticky”—that is, whether costs increase more when activity rises than they decrease when activity falls by an equivalent amount. We find, for 7,629 firms over 20 years, that selling, general, and administrative (SG&A) costs increase on average 0.55% per 1% increase in sales but decrease only 0.35% per 1% decrease in sales. Our analysis compares the traditional model of cost behavior in which costs move proportionately with changes in activity with an alternative model in which sticky costs occur because managers deliberately adjust the resources committed to activities. We test hypotheses about the properties of sticky costs and how the degree of stickiness of SG&A costs varies with firm circumstances.