ACCA Performance Management (F5) Certification Practice Exam

What is the relevant cost of labor in full capacity that cannot be hired more?

1. Opportunity cost of diverting labor

2. Extra cost of labor

3. Current market wage

4. Variable cost of labor

The correct answer is: Opportunity cost of diverting labor

The relevant cost of labor in a scenario where labor resources are fully employed and cannot be increased is primarily represented by the opportunity cost of diverting labor. Opportunity cost refers to the benefits that are foregone by not utilizing resources in their next best alternative use. In the case of labor, if a business is operating at full capacity, hiring additional workers is not an option. Therefore, any decision to reallocate existing labor from one task to another involves weighing the benefits lost from the original task against the benefits gained from the new task. This understanding underscores why the opportunity cost is crucial in decision-making regarding labor. It helps managers assess the true economic cost of reallocating labor resources, guiding them to make more informed choices about how to best utilize their existing workforce. Factors like extra costs, current market wage, and variable costs provide useful information but do not specifically account for the economic implications of reallocating current labor resources when full capacity is reached. These may represent other financial considerations but do not capture the lost opportunities associated with potential alternatives that could have been pursued if labor was not fully engaged.