CIMA defines Learning Curve as The mathematical expression of the phenomenon that, when complex and labour intensive

e processes are repeated for multiple times or cycles, then time taken to complete one cycle tend to decrease. The learning curve model mathematically captures this reduction in cycle time over cumulative cycles. The theory of the learning curve is based on the simple idea that the time required to perform a task decreases as workers gain experience. The basic concept is, that the cumulative average time of a performing task decreases at a constant rate as cumulative output doubles. It is also known as Learning Rate or Experience Curve. Example In a 80% Learning curve, the cumulative average time will drop to 80% of the previous value ( Drop by 20% of the previous time) each time the Cumulative output doubles. A company always want to have a lower learning curve. A 70% Learning curve is always better than a 90% learning curve. However, Learning curves are inherent in different industries.

Y=

Y = The cumulative average time or cost per unit X = The cumulative number of units produced from 1st unit a = Time or cost required to produce the first unit b = Learning co-efficient (Log of learning rate / Log of 2) The formula to calculate cumulative total hours or cost is:

Total Time (Y)=

1+

 It is useful to note the following coefficients which are frequently tested. Learning Curve 90% 80% 70% Learning Coefficient (b) -0.1520 -0.3220 -0.5146 0.8480 0.6780 0.4854 b+1

A process has a learning curve of 80%. The first unit of production took 10 Hours.
Calculate : 1) Cumulative Average time taken for 15 units. 2) Cumulative time for 20 units.

1)

Y= Y= 10 150.3220 Y = 4.181 Hours

Y= +1 Y= 10 200.6780 Y = 76.225 Hours

2)

 The Theory of Learning Curve is based on the following Assumptions: Same Working Conditions through out the put.

No Labour Turnover.
No changes in Material and other Tools. Constant employee moral. The drop in efficiencies during breaks is negligible (When breaks are taken, the Learning Curve takes a jerk). If the above assumptions are not there, the Learning Curve Calculation will be incorrect.

 Preparing Cost Estimates Bidding Special Orders Setting Labour Standards Scheduling(Planning) labour requirements

Evaluating labour performance Performance Appraisal

Setting Incentive Wages Budgeting

 Problems in determining the accurate learning rate ? Not having continuous output

Design Changes
Output processes being less labour intensive Non existence of stable conditions Effects on motivation Product redesign and re-development If any of the above takes place, the Learning curve will be wrong again.

 When the learning curve reaches maturity, the time taken for each unit remains constant. Time Taken Per Unit Learning Curve

Post Learning

Cumulative Production

 If an incorrect learning curve is used for budgeting purposes, there will either be negative or positive labour efficiency variances which can distort the real picture.

It is important first to correct the planning errors in these situations before real operational variances are calculated.
If a learning curve of 70% is used when a realistic rate would have been 80%, it will obviously give an adverse variance without it being the inefficiency of labour. If a learning curve of 80% is used when a realistic rate would have been 70%, it will obviously give a favorable variance without it being the improved performance of labour.

Industry Aerospace Shipbuilding Complex Machine tools

Learning Curve 85% 80-85% 75-85%

Repetitive electronic Manufacturing

Repetitive Machining Repetitive Electrical operations

90-95%
90-95% 75-85%

Repetitive welding operations

90%

MAY 2012 QS 1
A company is developing a new product. During its expected life it is expected that 8,000 units of the product will be sold for $90 per unit. The direct material and other non-labour related costs will be $45 per unit throughout the life of the product. Production will be in batches of 1,000 units throughout the life of the product. The direct labour cost is expected to reduce due to the effects of learning for the first four batches produced. Thereafter the labour cost will remain at the same cost per batch as the 4th batch. The direct labour cost of the first batch of 1,000 units is expected to be $40,000 and a 90% learning effect is expected to occur. There are no fixed costs that are specific to the product. Required: (i) Calculate the average direct labour cost per batch of the first four batches. (2 marks) (ii) Calculate the direct labour cost of the 4th batch. (2 marks) (iii) Calculate the contribution earned from the product over its lifetime. (2 marks) Note: The learning index for a 90% learning curve = -0.152

(i) Average cost for 4 batches: y = axb y = $40,000 x 4-0.152 = $32,400 (ii) The total cost for the 4 batches = 4 x $32,400 = $129,600 Average cost for 3 batches: y = axb y = $40,000 x 3-0.152 = $33,848 The total cost for 3 batches = 3 x $33,848 = $101,544 Cost for 4th batch = $28,056 (iii) Total labour cost over the products life = $129,600 + (4 x $28,056) = $241,824 Sales less non labour related cost over the products life = 8,000 x ($90-$45) = $360,000 CONTRIBUTION $118,176

P2 March 13