In performance management, when material is scarce and you can't replace it, then the relevant cost that is taken is opportunity cost alone. But when labour is scarce and you can't hire more staff, then the relevant cost that is taken is opportunity cost and the variable cost of labour. Why so?
As per my understanding its the opportunity cost used where labour is scarce and can't hire more staff,
opportunity cost is earning capacity forgone when selecting one of the alternative project
for material which is in hand cost is already paid. (sunk cost) - irrelevant - cost already incurred before the project is selected
but for labor unlike fixed cost variable cost is paid when they are used . - relevant - cost is not incurred at the time project is selected
Look at this point for labor:
For example, currently we are producing product A which has contribution (C) = Sale price - Variable cost (excluding labor) - Labor cost
After carrying the decision, we lost some of product A because of switching labor time to another product. Actually, the labor cost (if not any
extra rate paid) is unchanged! What we lost here is the sale price and what we save here is the Variable cost. Therefore, the loss we have
is (Sale price - Variable cost), which also equal Contribution + Labor cost.
So, relevant cost of labor could be calculated in 2 ways as above, and if we see it as a loss in sale + a saving in variable cost, it would be somehow easier then?