ACC 550 Module 2 Cost Behavior Short Paper Example

Up the Stairs, Down the Elevator? Estimating Cost Behavior at a Seasonal Pecan Shelling Plant

[Student Name]

Southern New Hampshire University

ACC 550: Cost Accounting

Module Two Short Paper

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[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Up the Stairs, Down the Elevator? Estimating Cost Behavior at a Seasonal Pecan Shelling Plant

Introduction

The pecan sheller's plant runs at very different levels through the year. From October to January, as growers deliver the new crop, it cracks and grades more than 4 million pounds a month; from June to August, working from cold storage, it processes under 1 million. Management wants to know how plant operating costs, everything except the nuts themselves, respond to volume, so that it can budget for a smaller crop and price shelling services for other growers. This paper estimates cost behavior with two methods, explains why they differ and examines how costs behaved when volume fell after the export downturn.

The Data

The data are 24 months of plant operating cost, including wages, utilities, maintenance, supplies, depreciation and plant management, and pounds of in-shell pecans processed. Volume ranged from 0.9 million to 4.1 million pounds a month; cost from $0.66 million to $1.62 million. Wages are the largest component, and the plant adds seasonal crews in the fall. A scatter plot shows a strong upward relationship, with fall months clustered at the high end and summer months at the low.

High-Low and Regression Estimates

Table 1. Cost Estimates

High-low takes the cost gap between the busiest and quietest months and spreads it over the volume gap between them: $0.96 million over 3.2 million pounds is $0.30 a pound, and fixed cost is the remainder. It is quick but uses only two months. November included unusual overtime because a cracker line broke down during peak deliveries, so the high point overstates cost at that volume and the slope it produces. Regression uses all 24 months, is less influenced by one unusual month and reports how well the line fits. Its estimate of $0.28 a pound and $430,000 a month is the better basis for planning (Datar & Rajan, 2021).

Do Costs Fall as Fast as They Rise?

Last year, after export buyers cut orders, the plant processed 15 percent fewer pounds than the year before. If costs followed the regression line, plant cost should have fallen by about 9 percent. It fell by only 6 percent. Anderson et al. (2003) showed that overhead costs climb more when sales grow than they drop when sales shrink by an equal amount, a pattern they called sticky costs, and later research has found similar behavior in other cost categories.

The reason here is a management choice. The plant's graders and sorters, who inspect nuts by eye and by machine, take a season or two to train well, and the owners decided to keep the core crew through a slow year rather than lose them to a competing sheller. They also kept both cracker lines in service in case volume recovered. Those decisions raised cost per pound in the short run but preserved capacity the company expects to need as it shells more of its crop for retail. Had the owners laid off half the graders, costs would have tracked the regression line more closely, but the plant would have entered the next season with inexperienced sorters, higher grading errors and more halves downgraded to pieces, a cost that would not appear in the plant cost line at all but would show up as lower revenue. Stickiness, in other words, is sometimes the visible price of avoiding a larger hidden one, and a controller who simply flags it as inefficiency misses the tradeoff.

What the Fixed Cost Contains

A fixed cost of $430,000 a month is an estimate of what the plant costs when it processes nothing, but no month in the data comes close to zero, so the figure is better read as the cost of being ready to operate. It includes depreciation on two cracker lines and the grading equipment of about $95,000 a month, salaried plant management and maintenance of about $120,000, the core crew of graders and sorters retained year-round of about $150,000, and insurance, property taxes and baseline utilities for the cold storage rooms that keep nuts fresh between seasons. Some of these could be reduced over a longer period, for example by idling one cracker line or letting the core crew shrink by attrition, which is why cost behavior depends on the time horizon as well as on volume. Within a single season they are effectively fixed.

Implications for Planning

Three implications follow. First, budgets for a smaller year should not assume costs will fall along the regression line; the regression describes average behavior across months, while a deliberate decision to retain staff makes costs stickier in a downturn. Second, the estimates hold only within the observed range of 0.9 to 4.1 million pounds a month; a season that pushed volume beyond that would require a third shift and new fixed costs. Third, the fixed cost of about $430,000 a month, over $5 million a year, is large relative to variable cost, which makes the plant's profitability very sensitive to volume. Balakrishnan et al. (2012) note that when much of cost is capacity-related, product costs depend heavily on assumed volume, so the cost per pound used for pricing should be based on practical capacity rather than on a bad year's actual volume.

Conclusion

Plant operating cost at the sheller is best described as about $430,000 a month plus $0.28 a pound, based on regression; the high-low method overstates the variable rate because of one unusual month. Costs fell less than the regression predicts when volume declined, reflecting a choice to keep trained crews. Budgets and prices should use the regression estimate within its range, recognize that downturns will not reduce costs proportionally and base unit costs on practical capacity. The estimates should be refreshed after each season, since a new cracker line or a change in the core crew would shift both the fixed and variable components.

References

Anderson, M. C., Banker, R. D., & Janakiraman, S. N. (2003). Are selling, general, and administrative costs "sticky"? Journal of Accounting Research, 41(1), 47-63. https://doi.org/10.1111/1475-679X.00095

Balakrishnan, R., Labro, E., & Sivaramakrishnan, K. (2012). Product costs as decision aids: An analysis of alternative approaches (Part 1). Accounting Horizons, 26(1), 1-20. https://doi.org/10.2308/acch-50086

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.