Reference no: EM132537254

Focus on Ethics CISCO SYSTEMS, WALMART, TACO BELL, STARBUCKS, U-HAUL, GENERAL DYNAMICS, AND FARMERS INSURANCE: IS DIRECT LABOR A VARIABLE COST?

• The question as to whether direct labor is a variable cost is interesting from a cost estimation perspective, but it also presents an interesting ethical issue. Direct material is always a variable cost. At the other extreme, depreciation on fixed facilities and infrastructure typically is not. What about direct labor? Here it depends on the ability and willingness of management to adjust the labor force to current needs. If management is able and willing to hire workers as needed and lay them off when activity declines, direct labor would be a variable cost. The contemporary trend at many companies seems to be in this direction. "Companies are looking first to bring in contract workers that they can quickly tap and zap without paying any benefits or severance." In fact, the temps have recently been the fastest-growing sector of employment. "And they aren't accounted for as regular employees. This helps companies that use a lot of them, like Cisco Systems Inc., to drive up revenue per employee." "The growing use of the just-in-time workforce is not the only means by which companies are priming the productivity pump. Workers complain that many employers are taking advantage of outdated labor laws by misclassifying them as salaried-exempt so they can skirt overtime pay. Walmart, Taco Bell, Starbucks, and U-Haul, among others, have been slapped with class actions. In the case of General Dynamics Corp., this resulted in a $100 million award that is now on appeal. At Farmers Insurance, employees got $90 million. Some employers are so worried about the issue that they are now doing wage-and-hour audits." Is it ethical to "tap and zap" employees? What do you think? (For more on this issue, see Management Accounting Prac tice: Is Direct Labora Variable or a Fixed Cost?, page 240.) Related to this issue is the ongoing debate about raising the U.S. federal minimum wage. Some have suggested that $15 per hour is an appropriate level, citing the need for a "living wage." Others argue that raising the minimum wage could actually be detrimental to those it strives to help.

After reading the above case please answer the following questions:

Problem 1: What is the central ethical conflict in this case?

Problem 2: How would you have responded to the conflict in question?

Problem 3: What complications or "gray areas" do you identify?