Fixed vs Variable Wage Expense
Our company is operating in aircraft maintenance, repair and overhaul (MRO) sector. Wages are paid to the direct&indirect blue collar employees on monthly basis, regardless of how much man/hour spent. But overtime is paid for the excess time charged.
Regarding the classification of wages paid to the blue collar as fixed and variable, what do you think the classification will be? Should we assume that these wages are related with the level of production, and totally assumed as variable, although the payment is fixed on monthly basis; or only the overtime paid is variable and the rest is fixed?
This is rather management accounting question.
I would go for reporting it all as fixed including overtime.
The variable should vary with the level of output (production).
This is not the case in your operations.
Look at the text of IAS 2 Inventories:Costs of Conversion
12. The costs of conversion of inventories include costs directly elated to the units of production, such as direct labour. They also nclude a systematic allocation of fixed and variable production overheads hat are incurred in converting materials into finished goods. Fixed roduction overheads are those indirect costs of production that remain elatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour.
The production volume will be rather stable but it can still vary with actual usage (i.e. when busy less non-productive time and meetings/courses etc, all labor cost are therefore variable cost.
Please note that:
Whether the wages are direct or indirect it could have a fixed and variable portion (i.e.whithin the relavant range of activity there will be no need for wages per production so it is all fixed)
While if extra hours(over time) were needed that means the basis of payment became linked to hour usage (PER hour) wages only will be treated as variable while the fixed monthly amout of wages will remain fixed as it used to be.
So I disagree with other couleagues who mentioned that according to IFRS all wages will become variable.
Please contact me for any help, i have joined your discussions few days back only
I would like to support Mohammed view.
As mentioned before in my previous mail in this case a
ll wages (including overtime) are fixed.
here i would to like add some comments that WAGES are always paid to direct labour, whether fixed or variable, therefore wages are considered as variable. . . plz dont be confused with the term “WAGES”. With reference to cost accounting “direct material” & “direct labour” are always considered as variable, whether fixed or variable.
need your valued comments nad plz correct if i m wrong.
Could you pls. tell me the reason you mentioned the WAGES as variable expenses while it is not connected directly to the production process?
Cost accounting treats variable expenses as changing directly with the level of production?
the term WAGES is related to only and only direct labour; direct labour is never paid salaries. the term salary is connected with indirect labour e.g. supervisor, peon/sweeper for production.
while using marginal/variable costing for decision making purposes, direct material & direct labour are considered as variable costs always. . .
Variable is not 100% variable with every varation in the production utilization level, variable is about whether a company is able (whether it does is something different) to adjust their labor force to adjust to an longer change in the production utiulisation level (increase = employ more people, decrease = dismiss people after certain procedures have been met (i.e. regulatory/governmental standards)).
I would like to add something that it is an order based service organization (where job costing is implemented by considering cost centers & specefic specialized job). you are just considering production oriented organization.
plz clear your understanding. . . .
Our case – if we refer to the original text is the company is paying montly wages(direct&indirect)
so the point is not whether the company called it WAGES or salary, the point is the there is a wage paid on monthly basis- linked to period-not to production level.
So please refer back to the first e mail and my first reply to the e mail in order to reach a coordinated solution and whether the company mistakenly called it WAGES or they really consider it wages that will not affect the cost accounting classification of it remembering that the fixed expenses is changing also by the reduction and increase in the level of capacity while variable expenses is 100% variable in terms of production changes and variations.
GAAP defines variable expenses as constant per unit while changing in total.
Here is another point that constant per unit doesn’t mean that it is partially fixed, so by the production line moving up and down also fixed will change per unit and variable might also change per unit , at the end fixed will remain fixed 100% and variable will stay variable absolutely 100%.
plz be practical & have pprofessional approach, what are your comments regarding service organization. . .???? its a case of management/cost accounting.
In ths case, job costing is implemented and wages are charged to job/cost center, that become variable on the basis of labour hours.
sir, just forget the level of production to sort out the case. In service sector, employees are not paid wages but salaries, either direct labour or indirect labour, & their salaries are charged to the specific department/cost center. am i right . . . . .?? & for decision making purposes their salaries are considered as direct & on that basis accounted for as varible, used for decision making purposes.
I think you are taking things to black and white. Calling something wages or salary may be dependent on culture, business or history, it does not say anything about applying IFRS. You jave to look at the facts in this company and whether they make a proper and clear decision on fixed and variable. And then still it remains, variable is not about 100% variable with every production unit variance, then everything would be fixed ’cause nothing is that flexible.
Ok, then it is even more simple, it is all about writing service time spend to orders, the hourly rate has to be based on ‘normal’ service hours and ‘normal’ wages.
We are talking about international standards for reporting then how can we use variable cost method which is not GAAP, not IRS and not IFRS.
Normal hours! Normal wages!
That is for management control system which is not the case presented at all.
Normal costing method -s used to allocated overhead costs as follows:
Budgeted total cost/budgeted cost driver*actual hours used.
That is not our case because normal cost is used when the problems in actual cost are :
1-Timeliness of information (the actual cost for direct labor are readily available but the actual costs for overhead can take some time to gather.-that is not in our case here-
2-Less fluctuations in costs from period to period, and that is to avoid some of the problems in pricing and performance evaluations that exist with actual cosst.- Not at all related to the case
Please note that standard , normal and actual costs are not linked to the case above at all.
Instead of that we have to do the following:
Actual monthly costs /actual work done(whether job orders finished or hours spent)
It is a simple straight- none manufacturing-method for allocation
while it is fixed operating salaries paid for the financial reporting information.