Cost Hierarchy: Evidence and Implications

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

doi:10.34257/GJMBRDVOL21IS2PG1

Authors

Rajiv D. Banker
Gordon S. Potter
Dhinu Srinivasan

Keywords:

cost hierarchy, activity based costing, cost drivers, cost allocation, manufacturing overhead costs

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.

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How to Cite

Cost Hierarchy: Evidence and Implications. (2022). Global Journal of Management and Business Research, 21(D2), 1-16. https://doi.org/10.34257/GJMBRDVOL21IS2PG1

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