Open AccessCost Hierarchy: Evidence and Implications
Author(s) -
Dhinu Srinivasan
Publication year - 2022
Publication title -
global journal of management and business research
Language(s) - English
Resource type - Journals
eISSN - 2249-4588
pISSN - 0975-5853
DOI - 10.34257/gjmbrdvol21is2pg1
Subject(s) - hierarchy , production (economics) , empirical evidence , consumption (sociology) , indirect costs , total cost , economics , overhead (engineering) , implicit cost , labor cost , econometrics , operations management , microeconomics , computer science , engineering , mechanical engineering , social science , philosophy , accounting , epistemology , sociology , market economy , operating system
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.