Page 239 - BA2 Integrated Workbook STUDENT 2018

Short-term decision making

1.2 Relevant cost of labour

As with material, it can be difficult to determine the relevant cost of labour. With
questions involving labour costs, the key question is whether spare capacity exists.
The following decision tree can help to determine the relevant cost of labour.

Does spare capacity Yes
exist? Nil

No
No Opportunity cost
Can extra labour be
hired?
Yes
Cost of hiring

Note: When there is no spare capacity and no alternative labour can be hired, labour
must be taken from existing projects. The contribution from alternative products
which must be abandoned to create spare capacity is the opportunity cost. To work
out the relevant cost, take the lost contribution per hour and add on the direct labour
rate per hour:

Relevant cost = Contribution forgone from alternative product PLUS direct labour
cost.

Illustrations and further practice

Now try TYU 3

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