Q22RQ - Horngren'S Financial And Managerial Accounting

Question

What is cost stickiness? Why do managers need to be aware of cost stickiness?

Step-by-Step Solution

Answer

Answer

 

Variable cost and contribution margin have an inverse connection. 

 

Step 1: Meaning of cost stickiness

When the ratio of increase in cost due to increased sales is higher than the ratio of decrease in cost to reduce in sales is known as cost stickiness.

Step 2: Why do managers need to be aware of cost stickiness?

Due to cost stickiness, costs can behave differently than expected from their CVP analysis; that’s why managers need to be aware of cost stickiness.