Performance Management

Learning curves

 Learning Curve Theory is concerned with the idea that when a new job,
process or activity commences for the first time it is likely that the
workforce involved will not achieve maximum efficiency immediately.
Repetition of the task is likely to make the people more confident and
knowledgeable and will eventually result in a more efficient and rapid
operation. Eventually the learning process will stop after continually
repeating the job. As a consequence the time to complete a task will initially
decline and then stabilize once efficient working is achieved. The
cumulative average time per unit is assumed to decrease by a constant
percentage every time that output doubles. Cumulative average time refers
to the average time per unit for all units produced so far, from and including
the first one made.

 As workers become more familiar with the production of a new product,

average time (and average cost) per unit will decline.

 Areas of consequence:
 A Standard Costing system would need to set standard labor time after the learning curve
had reached a plateau (peak).
 A budget will need to incorporate a learning cost factor until the plateau is reached.
 A budgetary control system incorporating labor variances will have to make allowances
for the anticipated time changes.
 Identification of the learning curve will permit the company to better plan its marketing,
work scheduling, recruitment and material acquisition activities.
 The decline in labor costs will have to be considered when estimating the overhead
apportionment rate.
 As the employees gain experience they are more likely to reduce material wastage.

Limitations:
 The stable conditions necessary for the learning curve to take place may not be present
– unplanned changes in production techniques or labor turnover will cause problems and
affect the learning rate.
 The employees need to be motivated, agree to the plan and keep to the learning
schedule these assumptions may not hold.
 Accurate and appropriate learning curve data may be difficult to estimate.
 Inaccuracy in estimating the initial labor requirement for the first unit.
 Inaccuracy in estimating the output required before reaching a ‘steady state’ time rate.
 It assumes a constant rate learning factor.

The learning curve effect

Wrights Law: as cumulative output doubles, the cumulative average time per unit falls to a fixed
percentage (referred to as the learning rate) of the previous average time.

Learning Curves 1
Performance Management

As can be seen, the curve will eventually become horizontal when more units have been produced as
the learning effect is lost and production time per unit becomes constant.

Formula for average time per unit (y) = a.xb

Where;
‘a’ is time taken by first unit/batch
‘x’ is number of units/batch
‘b’ = log (learning rate)
Log2

An 80% learning curve

Conditions for the learning effect to apply:

 the activity is labor intensive
 a repetitive process for each unit
 low turnover of labor
 early stages of production
 no prolonged breaks in production.

Applications of the learning effect:

 pricing decisions - prices will be set too high if based on the costs of making the first
few units
 work scheduling - less labor per unit will be required as more units are made
 limiting factor decisions
 standard setting
 budgeting.

2 Learning Curves
 Performance Management

Cessation of the learning effect (steady state):

 machine efficiency restricts further improvements
 machines have reached the limits of safe running speeds
 ‘go slow’ agreements.

Example
Data relating to the production of the fi rst 12 units of a new product are as follows:
Time taken to produce the first unit 15 hours
Cumulative time taken to produce first 12 units 81 hours
What is the learning rate?

Solution

Learning Curves 3
Performance Management

Example
Derive the learning curve formula for a 90 per cent learning rate, and apply it to calculate the
cumulative average time per unit for 64 units

Solution

4 Learning Curves
 Performance Management

Practice Questions
Question One
(a)
A manufacturing company has developed a new product. The time taken to manufacture the first
unit was 24 minutes. It is expected that an 80% learning curve will apply for the first three months
of production and that by the end of that period the total number of units produced will have reached
1,024. It is then expected that the time taken for each subsequent unit will be the same as the time
taken for the 1,024th unit.

Required:
th
(i) Calculate the expected time taken for the 8 unit.

th
(ii) Explain two reasons why the time taken for the 1025 unit may be more than expected.

Note: The value of the 80% learning index is -0·3219

(b)
Explain the importance of considering the learning curve when deciding on the terms for a gain
sharing arrangement with employees.

Question 2
A company has developed a new product that it will manufacture in its workshop. The product is
highly specialised and initially will be produced to order only. The product will be manufactured in
batches. The estimated labour time required for the first batch is 40 hours, but due to the nature of
the product and the manufacturing method to be used, it is expected that an 80% learning curve will
apply.

Required:
(a) Calculate the expected time for the eighth batch. (3 marks)

(b) When production commenced the first batch took 45 hours. The actual learning rates
observed were as follows:

Month Total batches produced Actual learning

to date rate
1 1
2 2 75%
3 4 75%
4 8 90%

For each of months 2 and 4, state possible reasons why the actual learning rates
differed from the expected rates. (3 marks)

(c) The total time taken to produce the first eight batches was 182⋅25 hours.
Calculate the cumulative learning rate up to the end of Month 4. (Remember that
the first batch took 45 hours). (4 marks)

(Total = 10 marks)

Learning Curves 5
Performance Management

Question Three
ZTG, a manufacturing company, has developed a new product. This required an initial capital
investment of $5m. At the end of the product’s life the capital equipment is expected to have
a value of $3m. ZTG requires an annual return (ARR) of 20% on its average investment in
products of this type. The new product has an expected life of one year before it will be
replaced by a more advanced product.

Production
The new product will be manufactured in batches of 1,000 units using a just-in-time
production system.

The first batch is expected to incur a direct labour cost of $100,000 but a 75% learning curve
is expected until the cumulative production equals 30 batches. Thereafter, each batch is
expected to incur the same direct labour cost as that of the 30th batch.

The expected direct materials cost for the first batch is $50,000. However, an experience
curve is expected to apply to the first ten batches produced; thereafter no further savings in
material costs per batch are expected.

Other production costs are expected to be $10,000 per batch.

Sales
Sales of the new product are expected as follows for each of the four stages of the product life
cycle:
Stage Units sold Selling price
per unit
Introduction 10,000 120
Growth 30,000 100
Maturity 60,000 80
Decline 30,000 50

Note: The learning index for a 75% learning curve is -0.4150

Required:
(a) Prepare calculations to show the total direct labour cost of the product for each of
the four stages of the product life cycle.
(b) Assuming that there is no experience curve in relation to the product's direct
material cost, prepare a statement that shows the profitability of the new product
for each of the four stages of the product life cycle individually and in total for the
product's life.
(c) Assuming that the direct material experience curve applies, calculate the average
direct material cost per batch that must be incurred in order for ZTG to meet its
ARR target over the life cycle of the product.
(d) Discuss the concept of life cycle costing and its effect on product pricing
strategies at different stages of the product life cycle. Use the ZTG scenario to
illustrate your answer.

6 Learning Curves
 Performance Management

MCQ 1
R Ltd has been investigating the time taken to produce one of its products, and found that a 90 per
cent learning curve appears to be applicable. If the time taken for the fi rst unit is 4.000 hours, the
total time taken for units 5–8 only is:
A) 10.368 hours
B) 11.664 hours
C) 12.960 hours
D) 23.328 hours
E) 36.000 hours.

MCQ 2
A production operation operates on an 85 per cent learning curve. It takes 100 hours to produce the fi
rst unit in a batch. To produce a 14-unit batch takes:
A) 1,400 hours
B) 962 hours
C) 114 hours
D) 754 hours
E) 521 hours.

MCQ 3
Data relating to the production of the fi rst twelve units of a new product are as follows.
Time taken to produce the fi rst unit 15 hours Cumulative time taken to produce fi rst 12 units 81
hours
The percentage learning effect is closest to
A) 45%
B) 55%
C) 70%
D) 80%
E) 90%.

Learning Curves 7
Performance Management

Answer to Question One

(a)
b
(i) The average time for seven units is given by the formula Y = ax

–0⋅3219
Y = 24 x 7

Y = 12⋅828 minutes
b
The average time for eight units is given by the formula Y = ax

–0⋅3219
Y = 24 x 8

Y = 12⋅289 minutes

Total time for 8 units (using average above) = 98⋅31 minutes

Total time for 7 units (using average above) = 89⋅80 minutes
Time for the eighth unit = 8⋅51 minutes
th
(ii) The expected time for the 1025 unit relies on the actual learning being the same as that
expected. There are two aspects to the learning curve:

• the rate at which the learning occurs may be worse than expected; and

• the length of the learning period may be shorter than expected.

These will both be affected by a number of factors which include:
• the motivation of the employees to learn the new task;

• the motivation of the employees to continue to improve even after they have
reached what they feel is an acceptable level of efficiency;

• the complexity of the task;

• the number of changes in the workforce during the learning period.

(b)

A gain sharing arrangement is an arrangement whereby the gains of a particular activity are
shared between the parties to that activity. In the context of employees being one party to the
agreement, the gain would be a cost saving associated with manufacturing the item in a shorter
time than that originally expected.

If the learning curve were to be ignored when agreeing the target production time, then all of the
benefits of learning would accrue to the employees with no benefit being received by the company.
Equally, if the target is based on a post-learning position, then no credit would be given to the
efforts of the employees during the learning period.

It is thus important to recognise the learning effect and set target times for different phases of the
learning period. In this way both the company and the employees can share the gains to be made
from efficient working in a fair manner.

8 Learning Curves
 Performance Management

Answer to Question Two

(a)

Average time for 8 batches:

b
Y = ax
Y = -0⋅3219
40(8 )
= 20⋅481

Total time = 8 x 20⋅481 163⋅848 hours

Average time for 7 batches:

b
Y = ax
Y = -0⋅3219
40(7 )
= 21⋅381

Total time = 7 x 21⋅381 149⋅667 hours

th
Time for the 8 batch 14·181 hours

(b)
The rate of learning may be different for a number of reasons, these include:

• initial enthusiasm for the new product leading to greater motivation to learn new skills;
• changes in the membership of the workforce;
• lack of incentives leading to de-motivation of the workforce;
• the passage of time between the production of batches due to only producing the items to
order, rather than as a continuous process.
(c)
The average time per batch for the first 8 batches = 182⋅25 hours/8 batches = 22⋅78 hours

This is equal to 51% of the time taken for the first batch (22⋅78 hours/45 hours). This represents
the third root of the learning rate so the learning rate is 80%. (80% x 80% x 80% = 51%

Learning Curves 9
Performance Management

MCQ1

MCQ 2

MCQ 3

10 Learning Curves