Cost Estimation

Question 1

Cost elimination techniques

Answer 1

1. Engineering methods = analyses technological relationships between inputs and outputs
2. Inspection of accounts = review of accounts for a period and classification of expenses as fixed, variable or semi- variable
3. Graphical method = inspecting a graph of total cost against activity level
4. High low method = calculating fixed and variable costs using periods with highest and lowest activity levels

Question 2

Learning curve

Answer 2

-> is a mathematical management tool used by manufacturing companies to evaluate productivity gains caused by organisational learning

Question 3

Theory

Answer 3

-> as cumulative output doubles, the cumulative average time per unit produced falls to a fixed percentage of the previous cumulative average time per unit

Question 4

The learning curve applies when

Answer 4

-> products are made largely by labour effort
-> products are brand new or have a relatively short life (learning will eventually stop)
-> products are complex

Question 5

Importance of the learning curve effect

Answer 5

-> planning, control, and decision making based on labour hours and labour driven overheads
-> calculation of realistic production budgets and more efficient production schedules
-> calculation of realistic standards for control purposes
-> setting selling prices where prices are calculated on a cost-plus basis

Question 6

Managerial considerations in the use of the learning curve effect:

Answer 6

-> estimating the learning rate using industry averages may not be appropriate due to type of work and competitive niches
-> the simpler the process the less pronounced the learning rate
-> total quality management will affect learning curves
-> learning curves are dynamic and affected by various factors
-> approximation of actual experience

Question 7

Limitations of using learning curve theory

Answer 7

1. Assume stable conditions for learning to take place
2. Assume employees are motivated
3. Long breaks will limit learning effect
4. Obtain accurate data to derive learning effects
5. Learning effect is not always evident

Question 8

Possible problems associated with ignoring the learning curve when estimating costs

Answer 8

• capacity problems based on incorrect labour requirements
• pricing problems based on incorrect cost estimates
• motivational problems
• inventory valuation issues

Question 9

Budgeting problems by the presence of the learning effect

Answer 9

-> unit production costs and labour hours will not be consistent per unit of output
-> significant variation occur at lower output levels