Management Forecasts of Costs: Do Managers Accurately Estimate Costs?

Abstract

Virtually all firms listed on Japanese stock exchanges report point forecasts of sales and earnings in their annual press releases. The availability of management forecasts in Japan provides a unique research opportunity to investigate managers’ understanding of the cost behavior of their company. Information regarding the forecasted costs is available by subtracting forecasted earnings from forecasted sales. Using recent “sticky cost” research methods, the forecasted rate of change in costs can be compared with the actual rate of change in costs. The major findings of this paper are that managers accurately predict the rate of increase in costs when sales are expected to increase; however, they tend to slightly overestimate the rate of decrease in costs when sales are expected to decrease.