Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 40

Manufacturing Direct Labor: Fixed or Variable?

To retain skilled employees instead of letting them go when demand falls, Lincoln Electric trains employees for other tasks in the company. The Cleveland-based manufacturer of welding and cutting parts has integrated the approach in all its operations, so that it can guarantee employment for all employees who have been with the company for three or more years. This policy has worked for 60 years.

Other companies such as Nestle and Apex Precision Technology accomplish the same goal of keeping their employees as demand fluctuates by using part-time arrangements with the employees.

Required Discuss whether manufacturing labor should be considered a fixed or a variable cost at these companies.

Step 1 of 3

Fixed Cost: Fixed costs are those cost which remain same with the level of output. i.e. these costs are not affected by the production quantity. In other terms it can be said that these costs will be incurred even if no production happens during the given period of time.

Example of fixed costs are rent, depreciation etc