Dear Ali,

It is very nice for me to see your name in our group since I have remember our past in Arthur Andersen.

 

Referring to your question, I think the fixed part should be evaluated as fixed and the overtime part as variable.

 

Kind regards,

 

Alper


Hello All …

This is an interesting question – but I would argue that the simple ‘variable – v – fixed’ cost focus is constrained if one doesn’t take a broader view of these costs.
As clearly the (“blue-collar”) labour involved is a ‘Cost of Sales’, the amount of labour engaged is relative to the level of sales.  As such it is a variable cost; – i.e. variable relative to sales.  The time frame in which it is ‘relative to sales’, and hence ‘variable’, may be longer than in other industries (e.g. construction); – but nevertheless ‘variable’ within the timeframe of a set of annual accounts.

This perspective applies to the “hands-on” direct labour; – i.e. those people directly involved in aircraft maintenance. Other “blue-collar”, but indirect labour (e.g. stores, ‘housekeeping’, and similar operations support services) would be treated as fixed costs, because their “variability” is less sensitive to volume of sales in the medium term.

Comments?

Michael.


Hi all,

I do not believe that the overtime part is variable with the level of production.

As you put the question it is possible that the existence of overtime is due to bad planning, not an increased level of production.

 The fact that the company does not employ more workers should mean that it is expecting that in peak season accepts some overtime and in low season does not mind to pay salary even if the workers are not 100% used.

Fixed expenses do not stay fixed forever, they may change if the company choses to expand capacity. For example, this particular company can at any time fix 3 planes with the workers it has. If at any moment it has more than 3 planes it generates overtime.
However, if the company hired more workers to be able to fix 4 planes at any time, we have to assume that expenses would be higher than keeping the current capacity (otherwise they would do it). However, the fact that fixed expenses increase with capacity does not necessary mean that they are variable.

I would treat the overtime as a fixed expense. I would however try to determine the exact link between the expenses and the production level. The determinant factor is that fixed expenses increase in steps and variable expenses increase/decrease with every unit of production.

 PS sorry for the long winded e-mail

Stelian