Importance of Sales Forecasts that Affect Profits through the Cost of Retaining Extra Resources: Empirical Analysis

Abstract

Recent management accounting research has revealed that costs increase in response to the increase in sales, but costs do not decline proportionately with decrease in sales. This phenomenon is named “sticky costs”. Costs stickiness is considered to be a result of deliberate decision by managers. When managers facing decline in sales consider that sales temporally decrease and expect that sales increase in near future, they would deliberately retain organizational resources. According to this hypothesis, it can be considered that sales forecasts affect profits through the cost of retaining extra resources. This paper examines the hypothetical relationship among sales forecasts, the change of cost level under the certain sales forecasts and profit. When managers have optimistic sales forecasts, that is, forecasted sales are larger than reported sales, companies cannot earn enough profit from the future sales recovery because of the cost of retaining too much resources. This paper provides an empirical evidence of the importance of sales forecasts that affect the profit via change of cost.