Learning Curve

Conditions for the learning effect to apply:

 The activity is labour intensive
 A repetitive process for each unit
 Low turnover of labour
 Early stages of production
 No prolonged breaks in production
Applications of the learning effect:
 Pricing decisions – prices will be set too high if based on the costs of making the first few units
 Work scheduling – less labour per unit will be required as more units are made
 Limiting factor decisions
 Standard setting
 Budgeting
Cessation of the learning effect (steady state):
 Machine efficiency restricts further improvements
 Machines have reached the limits of safe running speeds
 ‘go slow’ agreements.

Q1. Henry Company (HC) provides skilled labour to the building trade. They have recently been asked by a
builder to bid for a kitchen fitting contract for a new development of 600 identical apartments. HC has not
worked for this builder before. Cost information for the new contract is as follows:
Labour for the contract is available. HC expects that the first kitchen will take 24 man-hours to fit but
thereafter the time taken will be subject to a 95% learning rate. After 200 kitchens are fitted the learning rate
will stop and the time taken for the 200th kitchen will be the time taken for all the remaining kitchens. Labour
costs $15 per hour.
Overheads are absorbed on a labour hour basis. HC has collected overhead information for the last four
months and this is shown below:
Hours worked Overhead cost $
Month 1 9,300 115,000
Month 2 9,200 113,600
Month 3 9,400 116,000
Month 4 9,600 116,800
HC normally works around 120,000 labour hours in a year.
HC uses the high low method to analyse overheads.
Required:
(a) Describe FIVE factors, other than the cost of labour and overheads mentioned above, that HC should take
into consideration in calculating its bid. (10 marks)
(b) Calculate the total cost including all overheads for HC that it can use as a basis of the bid for the new
apartment contract. (13 marks)
(c) If the second kitchen alone is expected to take 21·6 man-hours to fit demonstrate how the learning rate
of 95% has been calculated. (2 marks)

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Q2. BFG Limited is investigating the financial viability of a new product the S-pro. The S-pro is a short-life
product for which a market has been identified at an agreed design specification. The product will only have a
life of 12 months.
The following estimated information is available in respect of S-pro:
1. Sales should be 120,000 in the year in batches of 100 units. An average selling price of $1,050 per batch of
100 units is expected. All sales are for cash.
2. An 80% learning curve will apply for the first 700 batches after which a steady state production time will
apply, with the labour time per batch after the first 700 batches being equal to the time for the 700th batch.
The cost of the first batch was measured at $2,500. This was for 500 hours at $5 per hour.
3. Variable overhead is estimated at $2 per labour hour.
4. Direct material will be $500 per batch of S-pro for the first 200 batches produced. The second 200 batches
will cost 90% of the cost per batch of the first 200 batches. All batches from then on will cost 90% of the batch
cost for the second 200 batches. All purchases are made for cash
5. S-pro will require additional space to be rented. These directly attributable fixed costs will be $15,000 per
month.
A target net cash flow of $130,000 is required in order for this project to be acceptable.
Required:
(a) Prepare calculations to show whether product S-pro will provide target net cash flow.
(b) Calculate what length of time then second batch will take if the actual rate of learning is:
(i) 80%; (ii) 90%.
Explain which rate shows the faster learning.

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Q3. A company is planning to launch a new product. It has already carried out market research at a cost of
$50,000 and as a result has discovered that the market price for the product should be $50 per unit. The
company estimates that 80,000 units of the product could be sold at this price before one of the company’s
competitors enters the market with a superior product. At this time any unsold units of the company’s product
would be of no value.
The company has estimated the costs of the initial batch of the product as follows:
$000
Direct materials 200
Direct labour ($10 per hour) 250
Other direct costs 100
Production was planned to occur in batches of 10,000 units and it was expected that an 80% learning curve
would apply to the direct labour until the fourth batch was complete. Thereafter the direct labour cost per
batch was expected to be constant. No changes to the direct labour rate per hour were expected.
The company introduced the product at the price stated above, with production occurring in batches of 10,000
units. Direct labour was paid using the expected hourly rate of $10 and the company is now reviewing the
profitability of the product. The following schedule shows the actual direct labour cost recorded:
Cumulative number of batches Actual cumulative direct labour cost
$000
1 280
2 476
4 809
8 1,376
Required:
(i) Calculate the revised expected cumulative direct labour costs for the four levels of output given the actual
cost of $280,000 for the first batch.

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(ii) Calculate the actual learning rate exhibited at each level of output.

Chair Co has developed a new type of luxury car seat. The estimated labour time for the first unit is 12 hours
but a learning curve of 75% is expected to apply for the first eight units produced. The cost of labour is $15 per
hour. The cost of materials and other variable overheads is expected to total $230 per unit. Chair Co plans on
pricing the seat by adding a 50% mark-up to the total variable cost per seat, with the labour cost being based
on the incremental time taken to produce the 8th unit.
Required:
(a) Calculate the price which Chair Co expects to charge for the new seat. Note: The learning index for a 75%
learning curve is –0·415. (5 marks)
(b) The first phase of production has now been completed for the new car seat. The first unit actually took 12·5
hours to make and the total time for the first eight units was 34·3 hours, at which point the learning effect
came to an end. Chair Co are planning on adjusting the price to reflect the actual time it took to complete the
8th unit.
Required:
(i) Calculate the actual rate of learning and state whether this means that the labour force actually learnt more
quickly or less quickly than expected. (3 marks)
(ii) Briefly explain whether the adjusted price charged by Chair Co will be higher or lower than the price you
calculated in part (a) above. You are NOT required to calculate the adjusted price. (2 marks)

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Q5. Z plc experiences difficulty in budgeting process because it finds it necessary to quantify the learning curve
effect as new products are introduced. Substantial products changes occur and result in the need for retraining
of labour.
An order for 30 units of new product has been received by Z plc. So far, 14 units of the same product have
been completed for another customer. The first unit required 40 direct labour hours and total 240 direct
labour hours have been recorded for 14 units. The production manager expects an 80% learning effect for this
type of work.
The company uses standard absorption costing. The direct costs attributed to the centre in which the unit is
manufactured and its direct material costs are as follows.
Direct material £30 per unit
Direct labour £6.00 per hour
Variable overheads £0.50 per hour
Required:
(a) Determine the assumption of 80% learning curve is reasonable in this case by using standard formula
(b) Calculate total cost of the order of 30 units assuming that learning will stop at 25 th unit.

(a) Assumption of 80% learning curve is valid as actual time taken for the first 14 units are same as that of
formula.

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(b)
17.1036 239.451
time for first 14 units 6 3
14.1913 354.783
time for first 25 units 5 8
115.332
time from 15 to 25 units   5
14.3790
time for 24 units 8 345.098
9.68583
time for 25th unit   3
184.030
time for remaining 19 units   8
299.363
total time required for the order   4