HUMAN RESOURCE DECISIONS 145
There is at present a shortage of work for partners, but this is a temporary situation.
Managers are fully utilized and if they are used on this project, other clients will
have to be turned away, which will involve the loss of revenue of £100 per hour.
Other staff can be hired and fired on a temporary basis. Fixed costs are £100,000
per annum.
The relevant cost of labour to be used when considering this project can be
calculated by considering the future, incremental cash flows:
Partners 120 hours – irrelevant as unavoidable
surplus labourNilManagers 350 hours @ £100 – this is the
opportunity cost of the lost revenue
from clients who are turned away£35,000
Support staff 150 hours @ £20 cost 3,000Relevant cost of labour £38,000The fixed/variable cost approach would have identified the cost of labour as:
Hours Hourly labour cost Total labour cost
Partners 120 £60 £7,200
Managers 350 £45 £15,750
Support staff 150 £20 £3,000Variable cost of labour £25,950The relevant cost approach identifies the future, incremental cash flows associated
with acceptance of the order. This ignores the cost of partners as there is no future,
incremental cash flow. The cost of managers is the opportunity cost – the lost
revenue from the work to be turned away. The support staff cost is due to the need
to employ more temporary staff. Fixed costs are irrelevant as they are unaffected
by this project.
Chapter 9 introduced outsourcing as a business strategy that has been in favour
to reduce the cost of labour and increase capacity utilization. The example given
for the make versus buy decision in Chapter 9 related to an in-house computer
processing service in which the relevant costs are shown in Table 10.2.
Table 10.2 Make versus buy – relevant costs
Relevant cost to make Relevant cost to buy
Stationery 10,000 @ £0.50 5,000
Labour 10,000 @ £2 20,000
Outsourcing cost 20,000Total relevant cost £25,000 £20,000