learning curves Flashcards
what are the assumption in regards to the relevant range of activity?
costs display linear characteristics
- this assumption does not always hold
why is the assumption of linear characteristics incorrect?
as you become more familiar with what you are doing, less time is required to produce each unit
- it therefore impacts labour efficiency (think about labour efficiency variances) - it becomes more efficient
- if a job takes less time then it also incurs less cost
explain the theory of the learning curve
as total output increases, direct labour used declines
- the first time a new task is performed labour is UNFAMILIAR with the operating procedures (e.g. having to keep referring to the instructions)
- as the process is repeated labour becomes more familiar with it and becomes quicker at their tasks, efficiency increases and therefore the labour cost per uni reduces
- effectively the job speeds up with repeated performance
- we can establish a rate of decline
- we can then use this rate of decline for establishing FUTURE COSTS
steady rate of decline
this rate of decline will continue until we have a steady-state production level
-e.g. origami figure example: whilst constantly reducing the amount of time it took to make the origami figures, as you become more familiar with how to make them, there will be a point where you know what you are doing and thus do not have to refer to the guidance, and cannot get any quicker !!!!
what is the learning curve effect?
concerns the cumulative production over time it recognises that:
- each time the number of units produced is DOUBLED, the cumulative average time per unit is reduced by a constant %
- e.g. if we have a 70% learning curve effect the cumulative average time per unit falls to 70% of what it was before, every time output is doubled
- it is not concerned with the reduction in unit costs when there is an increase in production (that is economies of scale)
where will the learning curve apply?
in the production of items where any or all of the following apply:
- the process is largely a labour process
- it is a new process or a short lived process
- the process is complex and made in small quantities for special orders (the simpler the process the less marked the learning curve)
- as we replace labour with automation the learning rate will alter
what is the formula for the learning curve
Yx = aX^b
where:
Yx = average time per unit of cumulative production units
X = cumulative number of units
a = time for the first unit
b = ratio of the logarithm of the learning curve / learning factor
how to calculate the ratio of the logarithm of the learning curve/learning factor?
= log of the learning curve factor expressed as a decimal / log 2
so how can mgt accountants use the learning curve?
- there are consequences for budgeting, standard costs and pricing and impacts on decision making
- budgeting and standard costs (budgetary control) - there will only be a reliable and realistic measure if the standards and budgets take account of the LC
- think about what will happen with a labour efficiency if we do not take into account of the LC
- we can overcome these by introducing a launch cost budget whilst the LC is impacting and then establishing standards once the LC has worn off
the impact of the learning curve
- production capacity impacts upon sales capacity and projections
- determining costs for potential contracts - the calculation of marginal (incremental) costs of production
- selling prices when based on cost
- cash projections need to allow for the reduction in variable costs
- working schedule and overtime decisions
- pay and productivity bonuses - need to allow for the LC effect
- when labour changes/new labour is recruited the LC assumption needs to be reviewed
limitations of the theory
- it is not always present
- assumes stable conditions i.e. labour force and labour mix . what about labour turnover?
- assumes at least a certain degree of motivation
time between repetition must be short otherwise workers will forget and learning will have to start again - how do you establish what the learning curve will be?
