Cost Stickiness: Behavior and Factors Lies Zulfiati*, Rimi Gusliana, Siti Nuridah Department of Accounting Sekolah Tinggi Ilmu Ekonomi Indonesia Jakarta, Indonesia *lies.zulfiati@stei.ac.id Abstract—The objective of the study is to analyse the sticky cost behaviour and the factors that affect the cost stickiness on manufacturing companies listed in Indonesia Stock Exchange. The behavior of sticky cost in this study is found by analyzing selling, general and administrative costs which are categorized into several industry groups to observe the annual degree of sticky cost of each group of industry. In addition, the factors that affect the cost stickiness are capital intensity ratio, employee intensity ratio, incentive management as measured by free cash flow, and the control variable, firm size. The method used in this study is multiple linear regression analysis using the equation as measured by Anderson, Banker and Janakiraman. The sample is determined by purposive sampling method with the number of samples of 97 companies during the period 2014-2018. The results of this study are that sticky cost behavior occurs in all manufacturing companies in Indonesia. The largest and smallest degrees of sticky cost occur in animal feed and other sectors, which is as proof that the company of such sectors has inconsistent management in supervising and controlling selling, general and administrative costs. Furthermore, the results of the factors affecting the cost stickiness show that: 1) capital intensity ratio does not influence the degree of cost stickiness, 2) employee intensity ratio affects the degree of cost stickiness, 3) free cash flow does not affect the degree of cost stickiness, and 4) firm size of control variable affects the degree of cost stickiness. Keywords: selling, general and administrative cost, capital intensity ratio, employee intensity ratio, free cash flow, sticky cost I. INTRODUCTION In decision making, a manager should have knowledge of the cost behaviour. If the manager understands the concept of the cost, they will be able to optimize costs and increase efficiency in managing company’s resources. According to Dunia and Abdullah, based on the cost behaviour with respect to changes in the level of activity or volume, the costs can be categorized into three types, namely variable costs, fixed costs and semi-variable costs [1]. In order to facilitate the management in planning or operating budgets and controlling costs sufficiently, semi-variable costs must be broken down accordingly into variable and fixed elements, combined with variable costs or fixed costs afterwards, therefore there are only two types of costs namely variable costs and fixed costs. Based on these assumptions it implies that a 1% increase in the level of activity results in a 1% increase in costs, and a1% decrease in the level of activity results in a 1% decrease in costs [2]. However, Anderson et al. states that the cost does not change proportionally to changes in activity, but increases higher when activity rises compared to the decrease when activity falls, and such behaviour is known as cost stickiness [3]. Disproportionate change in costs is a cost behaviour which amount of the changes depends on the changes in activity. The changes in costs of increased activity and decreased activity is disproportionately caused by imbalance response to the costs towards the changes in activity. This imbalance response is referred as sticky cost behaviour. A cost is said to be sticky when cost increases greater than the decline in activity changes by an amount equivalent [4]. A. Traditional Cost Behavior Traditional cost behavioural theory divides the costs into two categories: fixed costs and variable costs [5]. Fixed costs are assumed to be independent to changes in activity, while the variable costs are assumed to change proportionally to the changes in activity. Cost behaviour will react or change as changes take place in the level of business activity [6]. Pichetkun and Panmanee say that information on costs is critical because this information can help managers to predict accurate future costs in order to be able to create cost planning and decision-making [7]. B. Sticky Cost Asymmetric behaviour of costs leads to cost stickiness. Cost stickiness is a cost behaviour that is incurred if the increase in costs due to the increase in activity is greater than the decrease in costs due to a decrease in activity during declining sales conditions [3]. The concept of cost stickiness, is an asymmetric behaviour of costs that depends on the changes in sales decisions, especially when sales decline [8]. The same thing about the sticky costs is also defined by Serdaneh as an asymmetrical behaviour of costs where the rigid cost incurred in effect of the changes of activity [9]. Ratnawati and Nugrahanti define that sticky cost will be indicated in disproportionate cost changes when sales activity increase and decrease [4]. Ghaemi and Nematollahi define sticky cost as the cost that swiftly increases when the sales revenues increase than when the sales revenues decrease; for instance, when the sales revenue increases by 10%, the cost would increase by 9%,however when the sales revenue decreases by 10%,the cost would only decrease by 8% [10]. Advances in Economics, Business and Management Research, volume 127 Annual International Conference on Accounting Research (AICAR 2019) Copyright © 2020 The Authors. Published by Atlantis Press SARL. This is an open access article distributed under the CC BY-NC 4.0 license -http://creativecommons.org/licenses/by-nc/4.0/. 143