Question

how can labor affect selling and general administration expense with walmart. Give a brief explanation.

Answer 1

As per the Structure of Cost Sheet we know that the Direct Labour usually forms part of the Factory Cost. The Selling and General Overhards mainly consist of the Workers or Employees which are of Fixed nature, Advertisement Cost, Delivery Channels & does not involve directly in the process of Production, although the same helps indirectly to reach the product to the end customers.

In case where the organisation follows method of absorption costing and calculate the Recovery Rate of its Variable Overheads (which includes General and Selling Overheads) on a single recovery rate i.e.. on labour to allocate the cost of Selling & General Overheads to the Products.

Although absorption costing a obsolete method, organisation should use Activity based Costing & identify the cost driver on which such overheads shall be allocated.

In case of Walmart, the structure of Organisation is such that it works on a reselling method i.e it does not involve in manufacturing process so the use of direct labour is not significant. Though other departmental labour such as cleaning worker, security guards etc, the cost of such can be allocated to product on the basis of Activity Based Costing.

Therefore, the Product Price at Walmart is inclusive of the the general administration and selling overheads. So change in Costing of Indirect Labour will have a Direct Relation with price of the products.