CHAPTER 4:LEARNING & EXPERIENCE CURVE THEORY

A learning curve is a visual representation of the change in production efficiency over time. The basic
theory behind the concept of a learning curve is that there will usually be an initial period in which the
amount invested will be greater than the return, but after the learning curve has been overcome, the
return should be greater than the investment.

For example, imagine you've just started a new job. At first, the company will need to spend time training
you, and you'll need some time to get used to the new tasks you're responsible for. However, after this
initial period of high cost and low output, you'll have the experience necessary to perform the same tasks
faster and better.

Requirements for learning curve models

To develop an accurate learning curve model, you need to make sure you have all the variables that go
into the formula. The data required to plot a learning curve and then interpret what it means for your
company's performance includes the following:

 A measurable unit of output

 A defined unit of cost (in time, dollars, effort, etc.)
 Either a fixed time frame or a fixed productivity target

Why are learning curve models important?

Learning curve models are useful because they help you understand whether the processes and
employees at your company are performing well enough to match the resources put into improving
them. The shape of the learning curve can tell you whether performance is improving, declining,
stagnating or fluctuating. This can then bring awareness to the potential influences on this performance
so you can make decisions that help amplify the positive influences on your company and mitigate the
negative influences.

The advantages and disadvantages of the learning curve model

The learning curve model is very useful for monitoring various aspects of company performance and
identifying areas in need of improvement. It can provide a lot of great insights, but there are some
limitations. In this section, we examine some of the key advantages and disadvantages of the learning
curve model.

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Advantages of the learning curve model

Using a learning curve model to track the progress of various aspects of your company can help you in
the following tasks:

 Strategic planning to improve the output of employees or even whole departments

 Motivating company staff by creating a culture of ongoing learning and progress-tracking
 Identifying trends that can be used for more accurate forecasting and better business decisions

Disadvantages of the learning curve model

As valuable as it can be to a company, there are some important limitations to understand so the
learning curve isn't misinterpreted or misused. Here are some of the key disadvantages and limitations:

 Learning progress is influenced by a number of variables, including time, previous experience,

quality of training and so on. As a result, tracking only one of these variables might give you
misleading data.

 Some performance or progress is difficult to quantify and measure. If there is no specific

deliverable, such as a product or a sale, it can be hard to define a single unit of output for the
purpose of measuring progress.

 It's incomplete on its own. Because there are so many variables that can impact performance, it's
important that you use the learning curve model in combination with other methods of tracking
company performance for a more complete picture.

How to use the learning curve theory to improve performance

The learning curve theory—which states that the more time spent doing something equates to a more
efficient output—can be used to improve the performance of your company as a whole as well as
specific departments and even individual employees. Here's a quick overview of how to use it for that
purpose:

1. Establish clear and precise terms. The learning curve theory only works if your data is defined and
consistent.

2. Measure multiple variables at the same time. For the most complete picture of how your company
is performing, you want to apply the learning curve model to as many areas as possible and see
how they compare and influence each other.

3. Double-check your data. Before you make a decision based on the results, make sure you haven't
overlooked any variables. This is especially true if the results are not what you expected to see. If it's
unexpected, it may be because you're missing a key piece of data.

4. Make informed decisions. If the data shows that your current training process is not very effective,
for example, make some modifications and measure it again. In some cases, the best decision to
make will be immediately clear. In other cases, it may take a few rounds of trial and error to find
the change that actually improves performance.

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 5. Continue monitoring. Don't just apply the learning curve theory during times of change or
difficulties in your company. Monitor year-round. Continuous monitoring will alert you to problems
as soon as they appear so you can correct and modify your approach quickly.

How to use the learning curve formula

The learning curve, expressed as an algebraic formula, is as follows:

y = cumulative average time per unit

x= cumulative output
a = time taken for 1st
log r
b = a learning factor which is given by the formula =
log 2

r= learning rate expressed as a %.

The variable Y is the average time per unit of output. a is the time it took to complete the task the first
time. X is the total number of attempts or units of output. b represents the slope of the function.

Simply put, the equation helps you understand the average cost, usually in time, of reaching maximum
efficiency. The more attempts that are included in the formula, the lower the average time will be.

To use this formula, you'll need to track the time and output data for whatever you're trying to measure.
Follow these steps to do so:

1. Define your unit of output. If you are measuring a new employee's efficiency, this might be a
certain deliverable. If there is a shortage of regular or useful deliverables for the purpose of
measuring output, you will have to get creative about finding a way to quantify the employee's
output.

2. Define your cost. As mentioned above, in most applications, your cost is measured in time. In some
cases, however, you might be measuring actual financial cost, such as the cost of a reorganization
of a department's structure or the renovation of a new storefront.

3. Establish your time frame. Depending on what kind of information you're looking for, you will need
to establish a time frame. For example, if you're implementing a new training method, you might
set your time frame as the average time it took to reach maximum efficiency with your older
method. If the new method has achieved better results in the same amount of time, you know that
it's an effective change.

4. Establish your target. Other applications might be more open-ended in regard to time frame.
Rather than trying to see what level of productivity you can achieve within a certain period, you
might be trying to find out how long it takes to reach an ideal level of productivity. In this case,
leave the time frame open-ended and then establish a specific, measurable target you're trying to
achieve.

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 5. Begin measuring. For the most accurate data, you will ideally measure the very first attempt, which
will likely have the highest cost per unit of output. Having this first attempt measured will give you
the most accurate depiction of progress and total cost.

6. Keep your data organized. You can use a spreadsheet program to model your data as you go.
However you choose to do it, make sure you're recording measurements in a single place and in a
clear and consistent manner so it will be easy to translate those results into a visual representation.

QUESTION 1:

Flogel Ltd has just produced the first full batch of a new product taking 200 hours.Flogel has a
learning curve effect of 85%.
(a) How long will it take to produce the next 15 batches?
(b) Flogel expects that after the 30th batch has been produced, the learning effect willcease.
From the 31st batch onwards, each batch will take the same time as the 30th batch.
What time per batch should be budgeted?

QUESTION 2

The time to make a new model of a sailing boat is 100 days. It has been established that in the boat
building industry, there is an 80% learning curve.

Calculate:

(a) The cumulative average time per unit for the first 2 units, first 4 units, first 8 units, first 16 units of the
boat.
(b) The time required to make the first 2 units, the first 4 units, first 8 units and the first 16 units
(c) The additional time required to make the second unit, the 3rd and 4th units, units 5 – 8 and units 9-16.

QUESTION 3

Akoko plc. has recently developed a new product called “EKO” whĺch has been ĺn productĺon for the
past year. The plant producĺng „EKO‟ ĺs shut down for routĺne ĺnspectĺon and maĺntenance every three
months, and durĺng the fĺrst year's operatĺon the costs of shut- down have been as follows:

Quarter Shut-Down Cost

I 36,000

2 28,800

3 27,000

4 25,200

The management accountant attempts to forecast maĺntenance costs for the comĺng year and
on examĺnĺng the above data, ĺt appears that these costs have been steadĺly decreasĺng.
The plant engĺneers has suggested that thĺs ĺs probably due tothe fact that the maĺntenance
engĺneers are becomĺng more used to the proceduresĺnvolved and also the fact that the
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 plant ĺtself ĺs gradually settlĺng down after ĺnĺtĺal operatĺonal problems. If thĺs ĺs the case, an
approprĺate learnĺng curve couldexplaĺn the sĺtuatĺon whĺch has been observed.

Requĺred:

a. Explaĺn the concept of learnĺng curve. (4 Marks)

b. Estĺmate the rate of learnĺng whĺch ĺs ĺnherent ĺn the data. Explaĺn themeanĺng of
the value you have calculated. (4 Marks)

c. Usĺng the learnĺng rate that you have determĺned, forecast the total cost of shut-down
for routĺne maĺntenance durĺng the comĺng year. (5 Marks)

d. Assume that learnĺng ceases at the end of the second year, forecast the totalcost of
shut-down for routĺne maĺntenance durĺng the thĺrd year.
(4 Marks)

e. State TWO specĺfĺc reasons why thĺs forecast may be wrong. (3 Marks)
(Total 20 Marks)

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CHAPTER 5: QUALITY AND QUALITY COSTS

Costs of quality or quality costs does not mean the use of expensive or very highly quality materials to
manufacture a product. The term refers to the costs that are incurred to prevent, detect and remove
defects from products. Quality costs are categorized into four main types. Theses are:

1. Prevention costs
2. Appraisal costs
3. Internal failure costs and
4. External failure costs.

These four types of quality costs are briefly explained below:

Prevention costs:

It is much better to prevent defects rather than finding and removing them from products. The costs
incurred to avoid or minimize the number of defects at first place are known as prevention costs. Some
examples of prevention costs are improvement of manufacturing processes, workers training, quality
engineering, statistical process control etc.

Appraisal costs:

Appraisal costs (also known as inspection costs) are those cost that are incurred to identify defective
products before they are shipped to customers. All costs associated with the activities that are performed
during manufacturing processes to ensure required quality standards are also included in this category.
Identification of defective products involve the maintaining a team of inspectors. It may be very costly for
some organizations.

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Internal failure costs:

Internal failure costs are those costs that are incurred to remove defects from the products before
shipping them to customers. Examples of internal failure costs include cost of rework, rejected products,
scrap etc.

External failure costs:

If defective products have been shipped to customers, external failure costs arise. External failure costs
include warranties, replacements, lost sales because of bad reputation, payment for damages arising
from the use of defective products etc. The shipment of defective products can dissatisfy customers,
damage goodwill and reduce sales and profits.

THE SIGNIFICANCE OF QUALITY COSTS

Cost of Quality is an important business practice. By knowing your Quality Costs it can help business’s find
and correct problems and the costs to attain quality. Quality is nearly 20-40 percent of a company’s sale.
The basic model of quality costs are divided into four categories, but it is equally important to include
hidden costs that may affect quality. A small business should frequently revisit and restructure their quality
control process to uncover opportunities for improvement.

QUESTION
a. Explaĺn the FOUR classĺfĺcatĺons of cost of qualĺty wĺth examples of each.
(6 Marks)
b. Benson Dĺnka ĺs the management accountant of Dynamĺc Plc. Mr. Dĺnka realĺses that the
present performance reportĺng system does not hĺghlĺght qualĺty costs. The reports contaĺn the
ĺnformatĺon below, but he wants thĺs tobe reported ĺn an approprĺate format.
The followĺng ĺnformatĺon ĺs avaĺlable ĺn respect of the year ended August 31, 2018.

1. Productĺon data:
Unĺts requĺrĺng rework 1,500
Unĺts requĺrĺng warranty repaĺr servĺce 1,800
Desĺgn engĺneerĺng hours 66,000
Inspectĺon hours (manufacturĺng) 216,000

2. Cost data: N
Desĺgn engĺneerĺng cost per hour 1,500
Inspectĺon cost per hour (manufacturĺng) Rework cost 800
per heatĺng system unĺt reworked(manufacturĺng)
60,000
Customer support cost per repaĺred unĺt (marketĺng) 4,000
Transportatĺon costs per repaĺred unĺt (dĺstrĺbutĺon) 4,800
Warranty repaĺr costs per repaĺred unĺt 64,000

2. Staff traĺnĺng costs amounted to N3,000,000 and product testĺng costswere

N980,000.

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 3. The marketĺng dĺrector has estĺmated that sales of 1,400 unĺts were lost as a result of
bad publĺcĺty ĺn trade journals. The average contrĺbutĺonper heatĺng system unĺt ĺs
estĺmated at N120,000.

Requĺred:
Prepare a cost of qualĺty report for Dynamĺc plc. that shows ĺts costs of qualĺty (usĺng
approprĺate headĺngs) for the year ended August 31, 2018. (14
Marks)
(Total 20 Marks)

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