ACCA Performance Management (F5) Certification Practice Exam

What is the relevant cost of labor when there is spare capacity?

1. High due to the potential overtime

2. Nil, as the capacity is unused

3. The market rate of labor

4. The total cost including overheads

The correct answer is: Nil, as the capacity is unused

When considering the relevant cost of labor in a scenario where there is spare capacity, the focus is on the cost that will be directly incurred as a result of utilizing this spare capacity. In this context, when there is unused capacity, the relevant cost of labor is considered to be nil. This is because there are no additional costs that will arise from using the spare capacity; no extra labor or costs are incurred since labor is already in place and not currently being employed to its full extent. In a situation with spare capacity, the existing workforce is being paid regardless of the additional output, so this does not introduce any new costs. If the labor is already available and not engaged, utilizing that labor does not increase total labor costs. Therefore, the cost associated with the available labor does not contribute to relevant costs in decision-making. The other options do not accurately reflect the situation involving spare capacity. In particular, suggesting that the cost is high due to potential overtime does not apply when there is capacity that is not being utilized, as the current labor does not require additional payments for overtime unless explicitly engaged to do so. The market rate of labor and total costs including overheads represent ongoing costs that do not change with the decision to utilize spare capacity. Thus