Learning curve theory….

Feb 2020

Introduction
When new working practices or products are introduced, the theory is that as a workforce
gains experience in a task, it will come to perform that task quicker.
This means that labour costs and variable overheads (if labour hour driven) will be lower in
later periods of production than when the new product or production technique is introduced.

Theory
The theory of learning curves will only hold if the following conditions apply:
(a) There is a significant manual element in the task being considered.
(b) The task must be repetitive.
(c) Production must be at an early stage so that there is room for improvement.
(d) There must be consistency in the workforce.
(e) There must not be extensive breaks in production, or workers will 'forget' the skill.
(f) Workforce is motivated.

Rule
As cumulative output doubles, the cumulative average time per unit falls to a given
percentage of the previous cumulative average time per unit.
Cumulative average time is the average time for all units produced so far.

Ex 1 A firm's workforce experiences a 75% learning rate.

If the budgeted time for the first batch is 100 hours, calculate the time to produce
eight batches in total.

Cumulative average Total time

Output time (hrs) (hrs)
1 100 100
2 75 150
4 56 225
8 42 338
Formula
Y = ax b
where Y is the cumulative average time per unit taken to produce X units
a is the time taken to produce the first unit
X is the cumulative number of units
b is the index of learning (calculated as log r / log 2 where r is the learning rate)

Ex 2 (With the formula)

A firm's workforce experiences a 75% learning rate.
The budgeted time for the first batch is 100 hours.
Required
Using the formula , calculate the time to produce:
(a) the first 10 batches in total
(b) the 10th batch only.
 (a) a = 100 X = 10
b = log 0.75/log 2 = – 0.125/0.301 = –0.415
Y = 100 x 10 – 0.415
= 38.459 hrs
Total time taken to produce 10 batches: 10 × 38.459 = 384.59 hrs

(b) a = 100 X=9

b = –0.415
Y = 100 x 9 – 0.415
= 40.1781 hrs
Total time to produce 9 batches = 9 x 40.1781 = 361.60 hrs
∴ Time to produce 10th batch = 384.59 – 361.60 = 22.99 hrs

You may be given the formula relating to cost not time

Exactly the same process applies.
now Y is the cumulative average cost per unit taken to produce X units

Ex 3 A firm's workforce experiences a 75% learning rate.

The budgeted cost for the first batch is Rs 200
Required
Using the formula Y= aXb , calculate the cost of producing:
(a) the first 10 batches in total
(b) the 10th batch only.

(a) a = 200 X = 10
b = log 0.75/log 2 = – 0.125/0.301 = –0.415
Y = 200 x 10 – 0.415 76.92
Total cost to produce 10 batches: 10 × 76.92 = 769.20

(b) a = 200 X=9

b = –0.415
Y = 200 x 9 – 0.415 80.36
Total cost to produce 9 batches = 9 x 80.36 = 723.24

∴ Cost to produce 10th batch = 769.20 – 723.24 = 46

Cessation of learning effect

Practical reasons for the learning effect to cease are:
(a) when machine efficiency restricts any further improvement.
(b) the workforce reach their physical limits.
(c) there is a ‘go-slow’ agreement among the workforce.
Q1 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 Rs 90 per unit.
The direct material and other non-labour related costs will be Rs 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 Rs 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.
(ii) Calculate the direct labour cost of the 4th batch.
(iii) Calculate the contribution earned from the product over its lifetime.
Note: The learning index for a 90% learning curve = -0.152

Q2 Dench manufacturing has received a special order from Sands to produce 225
components to be incorporated into Sand’s product. The components have a high cost,
due to the expertise required for their manufacture. Dench produces the components in
batches of 15, and as the ones required are to be custom-made to Sands’ specifications,
a “prototype” batch was manufactured with the following costs:
$
Materials 4 kg of A, $7.50/kg 30 30
2 kg of B, $15/kg 30 30

Labour 20 hrs skilled, $15/hr 300

5 hrs semi-skilled, $8/hr 40
Variable Overhead 25 labour hours, $4/hr 100
500

Additional information with respect to the workforce is noted below:

Skilled: virtually a permanent workforce that has been employed by Dench for a long period
of time. These workers have a great deal of experience in manufacturing
components similar to those required by Sands, and turnover is virtually nonexistent.
Semi-Skilled: hired by Dench on an “as needed” basis. These workers would have had
some prior experience, but Dench management believe the level to be relatively
insignificant. Past experience shows turnover rate to be quite high, even for short
employment periods.
Dench’s plans are to exclude the prototype batch from Sands’ order. Management
believes a 80% learning rate effect is experienced in this manufacturing process, and
would like a cost estimate for the 225 components prepared on that basis.

Required
Prepare the cost estimate, assuming an 80% learning rate is experienced
Q3 The budget for the production cost of a new product was based on the following assumptions:
(i) Time for the 1st batch of output = 10 hours
(ii) Learning rate = 80%
(iii) Learning will cease after 40 batches, and thereafter the time per batch will be the
same as the time of the final batch during the learning period, i.e. the 40th batch
(iv) Standard direct labour rate per hour = Rs 12·00

An extract from the out-turn performance report based on the above budget is as follows:
Budget Actual Variance
Output (batches) 60 50 10 adverse
Direct labour hours 163·53 93·65 69·88 favourable
Direct labour cost 1,962 1,146 816 favourable
Further analysis has shown that, due to similarities between this product and another
that was developed last year, the rate of learning that should have been expected was
70% and that the learning should have ceased after 30 batches. Other budget assumptions
for the new product remain valid.

Required:
Prepare a revised out-turn performance report for the new product that
(i) shows the flexed budgeted direct labour hours and direct labour cost based
on the revised learning curve data, and
(ii) shows the variances that reconcile the actual results to your flexed budget
in as much detail as possible.

Q4 The standard direct labour cost of one batch of 100 units of a product is $50.40. This
assumes a standard time of 4.2 hours, costing $12 per hour. The standard time of 4.2
direct labour hours is the average time expected per batch based on a product life of
12,800 units or 128 batches. The expected time for the first batch was 20 hours and an
80% learning curve is expected to apply throughout the product’s life.
The company has now completed the production of 32 batches of the product and the
total actual direct labour cost was $3,493. The following direct labour variances have
also been calculated:
Direct labour rate $85 Adverse
Direct labour efficiency $891 Adverse

Further analysis has shown that the direct labour efficiency variance was caused solely
by the actual rate of learning being different from that expected. However, the time taken
for the first batch was 20 hours as expected.

Required:
(a) Calculate the actual rate of learning that occurred. (6 marks)
(b) Assuming that the actual rate of learning and the actual labour rate continue throughout
the life of the product, calculate the total direct labour cost that the company will incur
during the life of the product. (4 marks)
(Ans: Learning Curve 85% Total Cost $ 10,092)
Q5 Hi-Tech Engineering (Pvt.) Limited is planning to introduce a new motorcycle in the
Feb/18 market and due to capacity constraint, they will outsource the final assembly of the
product to Bela Autos. All the sub-assemblies, parts, components, and packing materials
will be provided by Hi-Tech Engineering. It is estimated that 100 units of motorcycles will
be assembled in each batch. It will take 220 labour hours to produce first batch. Industry
learning curve is 89.7%.
From the 100th batch onward, each batch will take the same time as the 100th batch.
Labour cost per hour for Bela Autos is Rs. 500.
Overheads are estimated at two third of labour cost and Bela Autos desires one third of
cost as mark-up for assembling contract.

Required:
Calculate the following:
(i) Labour hours required to produce first 100 batches. 01
(ii) Labour hours required to produce 100th batch. 01
(iii) Bid amount for one motorcycle assembly based on labour hours required for 100th
batch and onward. 03
Hint:The learning curve formula is shown on formula sheet and at the 89.7% learning rate,
the value of `b' is -0.1568.
(Ans: bid amount Rs.1000 per motorcycle)

Q6 Hamid (Private) Limited (HPL) has received an order for supply of a new product.
The planning department has estimated that for the first batch of 500 units, the per
unit revenue/costs would be as follows:
Selling price Rs. 450
Direct material 1 kg @ Rs. 180 per kg.
Direct labour 2 labour hours @ Rs. 100 per hour
Variable production overheads 25% of direct labour costs
Fixed production overheads Rs. 30
Selling expenses Rs. 20
HPL has a learning curve of 80% for all new products. The units are produced in
batches of 500 units and the learning effect applies to the first 8 batches only.
Note: log 0.8/log 2 = –0.322
Required:
Compute the minimum quantity that would allow HPL to earn a contribution margin
of 20% of sales.
(Ans : 2000 units )

Q7 After years of research, Hamid (Private) Limited (HPL) has developed a new product
‘CRISP’. The planning department has provided the following estimates related to the
production cost of first batch of 5,000 units of CRISP:
Particulars Cost per unit (Rs.)
Material (100 kg @ Rs. 8 per kg) 800
Direct labour (10 hours per unit @ Rs. 250 per hour) 2,500
Variable overheads (60% of direct labour) 1,500
Fixed overheads – allocated costs 200
– specific costs 100
 Rate of learning is estimated at 80% but the learning effect is expected to apply to
the first 5 batches only.
The marketing department has informed that the demand for CRISP would be around
50,000 units per annum for the next 5 years and HPL can charge a price of Rs. 3,200 per
unit. Selling expenses are estimated at Rs. 200 per unit.
Required:
Based on the above data, recommend whether it would be feasible to produce and sell
CRISP. (15) Note: log 0.8/log 2 = – 0.322
(Ans : profit Y-1 2.27% of sale Y-2 13.36% )

Q8 Quality Plastics Limited (QPL) produces plastic bodies of various appliances

according to the customers’ specifications. It has received an order for supply of
10,000 plastic bodies of a washing machine. The supply is to be made within 30 days.
The following information is available:
(i) QPL carries out production process in batches of 100 units each. Cost of the
first batch is estimated as under: Rupees

Direct material (inclusive of 10% input losses) 1,100 kg 66,000

Direct labour cost at normal rate 200 hours 44,000
Overheads at normal rate 200 hours 30,000
(ii) It is estimated that due to learning curve effect, completion of the first, second,
third and fourth batch would require 200, 160, 148 and 140 hours respectively.
This learning effect would continue till completion of 64 batches only.
Learning effect at various learning levels is as under:
80% 85% 90%
-0.322 -0.235 -0.152
(iii) It is estimated that after completion of the first 16 batches, material input losses
would be reduced from 10% to 6%.
(iv) QPL works a single shift of 8 hours per day. For the above order, QPL can
spare 8,000 direct labour hours. Overtime hours can be worked at 1.5 times the
normal rate. During the overtime hours, overheads would be 1.25 times the
normal rate.
Required:
Compute the price that QPL should quote in order to earn a margin of 25% of the
selling price. (12)
(Ans : price Rs.13.91m )

Q9 An engineering company has launched a new product. The production is carried out in
batches of 250 units and the first batch took 800 labour hours. Production manager has
estimated that there will be 90% learning curve on labour hours that will continue till 128
batches after which the learning curve effect will cease.
Cost of production consists of material cost of Rs. 2,400 per unit, labour wages of Rs. 230
per hour and applied overheads of Rs. 450 per labour hour based on annual capacity of
1 million hours.
Fixed cost of production is estimated at Rs.180 million per annum.
According to the projections of the marketing department, demand would be for 15,000 and
 20,000 units respectively in the first two quarters at selling price of Rs. 3,500 per unit.
Note: The learning index for a 90% learning curve is -0.152
Required:
(a) Prepare the profit and loss account for the first two quarters. (10)
(b) The company's marketing department is worried about the prospects of the product
next year, when the costs of material, labour and overheads would rise by 5%.
Compute the learning curve rate at which the company can make sure that it earns a
contribution margin of 20%, next year, assuming that the price of the product can be
increased by a maximum of 5%. (05)

Q 10 Decor Furniture (Pvt.) Limited makes specialized furniture for offices. The company
Aug has accepted an order to make 15 unique sets of office furniture at a fixed price of
2019 Rs. 200,000 per set, to be completed within a period of 4 months, otherwise a penalty
of Rs. 50,000 for each late delivery will be imposed as mentioned in the `contract'. All the
raw material required is readily available but the company's skilled craftsmen have
already been engaged in the completion of another order that has bounded them with
limited space and time for the new order and only one set of new order can be made
at a time.

Normally, there are 23 working days in a month at Decor Furniture (Pvt.) Limited. During
the normal working hours, the craftsmen were able to complete first 4 sets of new order
and the time consumed for completing each set is given below:
Set number 1 2 3 4
Completion time (Days) 10.0 8.1 7.4 7.1

Management of the company is concerned about completing the new contract on time.
Direct cost of making a set of furniture, excluding direct labour, is as follows:
Rs. per set
Wood sheets 80,000
Other materials 20,000
Other direct expenses 7,500

Additional Information:
• Direct labour cost is Rs. 10,000 per normal working day.
• Weekends can also be arranged as working days upto maximum 7 days per month at a
direct labour cost of double than the normal pay rates.
• Overheads will be allocated at a rate of Rs. 3,000 per normal working day and no overhead
will be allocated for overtime working.
Required:
(a) Using the completion time information, calculate the learning rate for making first
4 sets of specialized furniture. 08
Hint: Use the value of `b', in the learning curve formula [YX= axb], as -0.3220 at 80%, -0.1520
at 90% and -0.1360 at 91 % learning rates.
(b) Calculate whether it would be beneficial for Decor Furniture (Pvt.) Limited to continue
its operations, recommending the best option, with the following:
(i) Work for normal working days 08
(ii) Avail weekends in addition to normal working days 07