Question

The company uses a job cost system and has specialized labour for its jobs. The Human Resources department has done a great job recruiting talent for each job but there is a lot of competition for this labour. The forecast above is the best guess of what it will cost to attract and retain talent. This is reflected in the labour cost line. Some jobs are new to the company and the training budget will also be important. Sales in 2021, in particular, are very highly dependent on well-trained labour.

In 2020, a new president of the company is named and believes the 3.75% net income as a percentage of sales is too low. He wants to cut your labour budget. He in particular, wants to cut the training budget, which is in labour costs.

How would you explain to the new president the benefits of staying with the budget of $105,000 in 2020?

Answer 1

As mentioned Sales of the company is directly dependent on well trained labour. Hence the budget of 105000 in 2020 for labour costs is actualy an investment which helps to train the labourers which in turn helps to increase sales. Net income of 3.75% on sales is low. Sales can only be incresed by good labour which results in high income. Reducing the labour costs cannot be used to increses net income since if labourers are not trained properly sales will decrease and hence will result in lower income.

Hence it is ideal not to reduce labour cost as a means to increase income.