Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 21 Issue 2

Global Journal of Management and Business Research: D Volume 21 Issue 2 Version 1.0 Year 2021 Type: Double Blind Peer Reviewed International Research Journal Publisher: Global Journals Online ISSN: 2249-4588 & Print ISSN: 0975-5853 Accounting and Auditing Strictly as per the compliance and regulations of: Cost Hierarchy: Evidence and Implications 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. Keywords: cost hierarchy, activity based costing, cost drivers, cost allocation, manufacturing overhead costs. GJMBR-D Classification: JEL Code: M49 CostHierarchyEvidenceandImplications By Rajiv D. Banker, Gordon S. Potter & Dhinu Srinivasan © 2021. Rajiv D. Banker, Gordon S. Potter & Dhinu Srinivasan. This research/review article is distributed under the terms of the Attribution-NonCommercial-NoDerivatives 4.0 International (CC BYNCND 4.0). You must give appropriate credit to authors and reference this article if parts of the article are reproduced in any manner. Applicable licensing terms are at https://creative commons.org/licenses/by-nc-nd/4.0/. Temple University, Cornell University, University of Pittsburgh