Activity-based costing measures resources used for an activity by the cost driver. The resources supplied to an activity are the expenditures or the amounts spent on the activity. The difference between resources supplied and resources used is unused capacity. Labor costs have caused both confusion and controversy in costing circles. Labor costs were originally flexible costs, because workers were paid in proportion to the hours they worked, scheduling and union considerations have changed most labor costs into capacity-related costs, because even though many workers are paid on an hourly basis, their wages are guaranteed to be paid, at least in the short run, regardless if work is available. For this reason, most organizations now treat labor costs as capacity related rather than flexible.
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