19 Learning Curves and the Learning Effect

Question 1

What is a learning curve

Answer 1

• A mathematical model to predict reductions in direct labour times and associated costs which are produced by improved labour efficiency
• People become better at a task when it is repeated
• Learning curve model developed during WWII with the building of fighter planes and ships

Question 2

What is the learning effect

Answer 2

• During the construction of war armaments it was discovered that with each doubling of production the cumulative average time (note it is cumulative average time) to produce the total output was 80% of the cumulative average time for the previous doubling of output
• 80% learning seemed a natural learning rate

Question 3

What is the cumulative average time

Answer 3

Cumulative average time is the average time to produce each unit or batch for a given number of units (batches) produced. Eg. If 10 units are produced and the cumulative average time is 2.5hrs it means that each of the 10 units produced has an average time of 2.5hrs to give a total time of 25 hours

Question 4

What are the applications of the learning curve

Answer 4

• Production scheduling
  o For example JIT production system
   Essential to have precise ordering schedules
   Improve ability to predict the need for labour and materials and therefore ordering of materials, employment of labour
• Standard setting
  o Including any learning effects will ensure that standards are accurate and up-to-date
  o Variances more meaningful
  o Performance evaluation
• Payment systems
  o Ensure incentives realistically related to outputs
• Capital budgeting

Question 5

What is the learning equation

Answer 5

Y=aX^b
* Y is the cumulative average time
* a is the time taken for the first unit/batch
* b is the index of learning, a number which corresponds to the rate of learning (see next slide)
* X is the total (cumulative) number of units/batches

Question 6

How do you find the learning index (b)

Answer 6

b = (log⁡(learning rate)) / (log⁡(2))
As the learning rate is the time for production to double it is always over 2 to find the index of learning

Question 7

How do you determine the total time taken

Answer 7

• Cumulative average time for each unit for a given total time is
  Y=aX^b
• Thus, total time is
  (Cumulative) average time for each unit times the number of units (XY)
  XY=aX^b X

Question 8

What are the accounting implications of the learning effect

Answer 8

• Expected reductions in labour-related costs should be incorporated in planning, control, decision making
• Constant cost and price assumptions of CVP analysis and budgeting will no longer be valid when learning reduces the labour costs for each successive unit produced
• Impact on the cash flows reported in the master budget and need to incorporate improved labour times when scheduling production and delivery times for finished products
• Improved standard costing- standards for labour will be a truer reflection of labour time and costs, thus leading to less slack and better control
• Firms which are early entrants into a market may benefit from the lower labour costs from learning by lowering market prices, thus making it difficult for new entrants. An aggressive price strategy for competition may be difficult to combat.

Question 9

What considerations need to be given when applying the learning effect

Answer 9

• Recognition of the learning effect is most appropriate when direct labour and its costs are a significant feature of production
• Learning may not always occur
• Obtaining valid data may be a problem, that is accurately identifying the learning effect.
  o Reductions in labour usage may not be due to learning but, for example, use of a better machine or better materials
• Changing a manufacturing process will change the learning effect
• When skilled labour is scarce, poorer quality labour may have to be used from which there may be little learning benefits