Labor can be a fixed cost or a variable cost depending on the situation. This can be confusing, so it is important that accountants, managers and anyone else working on a budget understand when labor costs are fixed and when they are variable. In order to understand this a person should understand the difference between fixed and variable costs and be aware of how they apply with respect to labor.
Fixed and Variable Costs
Fixed costs are all the costs that remain constant for a business regardless of production levels. Variable costs are all the costs for a business that vary depending on production levels. Fixed costs and variable costs are mutually exclusive, meaning that a cost cannot be both fixed and variable. There can, however, be fixed and variable components of a cost, as is the case with labor costs.
Fixed Labor Costs
Fixed labor costs are any labor costs that will remain constant no matter what the production level of the business. An example of fixed labor costs is management salaries. Manager are typically paid salaries that do not vary with the number of hours they work. A salaried manager earns the same money whether he works 15 hours in a given week or 60 hours (if a a manger receives overtime wages, that portion is considered variable pay).
Variable Labor Costs
Variable labor costs are any labor costs that go up or down with production levels. Examples of variable labor costs include overtime wages and temporary staff wages. These are costs that increase when production increases and drop when production decreases.
Recognizing the Difference
A good rule of thumb for understanding whether a labor cost is variable or fixed is to ask whether the cost would be incurred if the business closed operations for the day. Any labor costs that would need to be paid (such as salaries) are fixed costs while any costs that would not need to be paid (such as overtime wages) are variable costs.
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