Fixed labour cost & ABC

@rainbow1020 said:
Hi,
Would anyone kindly explain the relevence of labour cost “being regarded, by ABC, as fixed in the short run? I can’t see the link between the two though I feel I do understand the ABC reasonably well..

Thank you

I do not know where you are quoting this from. ABC does not normally regard labour as a fixed cost (that is throughput accounting), unless it is indirect labour and therefore part of overheads.

@princeacid That is simply not true.

There is certainly a good argument in many businesses to regard labout as a fixed cost in the short-term, but this is not part of the thinking behind ABC itself.
ABC is dealing with the overheads – pooling them into the separate activities and then absorbing them according to the cost driver for that activity.
If it is decided that labour is effectively fixed, then it becomes part of the overheads and therefore would be dealt with within the ABC approach. However only if it were regarded as fixed – not automatically.
If it is direct labour and variable then it is charged to the products in the normal way and it not part of the ABC arithmetic.
More importantly, look at any past exam question – the direct labour has always been treated as a variable cost and has been charged to the products. ABC has only been applied to the overheads (which obviously include any indirect labour).

ABC is only dealing with overheads – not with direct labour costs.

The answer in the BPP Revision Kit that I think you are referring to is not to an old exam question (and therefore is not an examiners answer). The point they are trying to make (although it is written extremely badly) is that these days, for many businesses, labour is indeed a fixed cost. If that IS the case then two things result – firstly labour does then become more of an overhead rather than a direct cost, and secondly (which is what they go on to say) it become even more unrealistic to simply absorb overheads on the basis of labour hours (the ‘traditional’ way of dealing with them).

ABC does NOT simply assume that labour is a fixed cost. It is just the fact that for many businesses it does tend to be fixed in the short-term gives even more of an argument for using ABC instead of traditional approaches.

Again….look at any ‘numbers’ questions from the examiner and you will see that direct labour has been charged directly to the units and that ABC has only been applied to the overheads.

You are welcome 🙂

You have only quoted part of the article.

I helped Ken to write that article, and it says exactly what I have said above.

I do not intend to keep repeating the point that ABC deals with overheads. For many businesses labour is indeed a fixed cost in the short term, in which case (by definition) it becomes an overhead. However this is not the case in all businesses.