Revision Questions

9
Question 1
1.1 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 first 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.

1.2 A production operation operates on an 85 per cent learning curve. It takes 100 hours
to produce the first 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.

1.3 Data relating to the production of the first twelve 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

The percentage learning effect is closest to

(A) 45%
(B) 55%
(C) 70%
(D) 80%
(E) 90%.

247
248 REVISION QUESTIONS P2

LEARNING CURVES 1.4 A company is preparing a quotation for a new product. The time taken for the first
unit of the product was 30 minutes and the company expects an 85% learning curve.
The quotation is to be based on the time taken for the final unit within the learning
period which is expected to end after the company has produced 200 units.
Calculate the time per unit to be used for the quotation.
Note: The learning index for an 85% learning curve is – 0.2345 (4 marks)

Question 2
‘The learning curve is a simple mathematical model but its application to management
accounting problems requires careful thought.’

Requirements
Having regard to the above statement:
(a) explain the ‘cumulative average-time’ model commonly used to represent learning
curve effects.
(b) sketch two diagrams to illustrate, in regard to a new product, the relative impacts of
70, 80 and 90 per cent learning curves on:
● cumulative average hours per unit,
● cumulative hours taken.
(c) explain the use of learning curve theory in budgeting and budgetary control; explain
the difficulties that the management accountant may encounter in such use.
(d) explain the circumstances in which the use of the learning curve may be most relevant.
Solutions to
Revision Questions 9
Solution 1
1.1 Answer: (A)

Average time
No. of per unit Total time Incremental time
units hours hours hours
1 4.000 4.000
2 3.600 7.200
4
8
3.240
2.916
12.960
23.328 } 10.368

1.2 Answer: (D)

In the learning curve formula Y  ax b
log 0.85 0.0706
b, the learning index, is given by b  
log 2 0.30010
 0.2345

) average time per unit for 14 units  100  140.2345

 53 .856
) time for a batch of 14 units  53.856  14  753.984 hours
1.3 Answer: (D)
81
Cumulative average time taken per unit   6.75 hours
12
Using the learning curve formula, Y  ax b
6.75  15(12 )b
(12 )b  0.45
Taking logs, b log 12  log 0. 45
log 0. 45
b
log 12
0. 3468

1. 0792
 0.3213

249
250 SOLUTIONS TO REVISION QUESTIONS P2

LEARNING CURVES
log of learning
Since b 
log 2
log of learning
0.3213 
0.3010
)ll og of Learning  0.0967
Using tables, or the log 10x button on a scientific calculator, the log of the learn-
ing rate converts back to 0.8.
1.4 y  ax b
At 200 units: y  30  20002345  8.660
Total time  8.660  200  1, 732.000 minutes
At 199 units: y  30  1990.2345  8.670
Total time  8.670  199  1, 725.33 minutes
The time for the 200th unit to be used for the quotation is 6.67 minutes

Solution 2
● Explaining anything usually requires that it be set in context. In the present situation,
the CAT model is most fully explained when compared with alternatives such as the
‘incremental’ model.
● It is critical to appreciate that the cumulative average hours per unit declines more rap-
idly with output if the learning curve effect is greater. It should be understood that a 70
per cent learning curve effect is ‘greater’ than a 90 per cent effect.
● Similarly, it is critical to appreciate that cumulative hours taken increases less rapidly
with output if the learning curve effect is greater. There is a simple logic behind the
mathematics that you must understand.

(a) The ‘cumulative average time’ model commonly used to represent the learning curv-
effects is demonstrated below for a 70 per cent learning curve:
Cumulative average Incremental time
Number of time required Total time required for
units produced per unit required additional units
1 100.0 100.0 0.0
2 70.0 140.0 40.0
4 49.0 196.0 56.0
8 34.3 274.4 78.4

In this model, the cumulative average time required to produce a unit of produc-
tion is reduced by a constant proportion of the previous cumulative average time,
every time the cumulative output doubles.
In the above example, unit 1 requires 100 hours, but units 1 and 2 require only
140 hours, unit 2 being produced in 40 hours due to labour having learned how to
perform more efficiently. Units 3 and 4 require only a further 56 hours’ work, etc.
 PERFORMANCE MANAGEMENT 251

This may be modelled mathematically by the equation

LEARNING CURVES
Y  ax n
where Y  cumulative average hours per unit, x  cumulative demand, and a and n
are constants.
This is only one of the several models that may be used to predict the relationship
between output and labour requirements.
(b)

The question required only a sketch of the general shape of the curves, no
calculations were required. However, the following calculations might have
been made by candidates unsure of the general shape of the curves.

80 per cent learning curve

Cumulative average
Number of time required Total time
units produced per unit required
1 100.0 100
2 80.0 160
4 64.0 256
8 51.2 410
90 per cent learning curve
Cumulative average
Number of time required Total time
units produced per unit required
1 100.0 100
2 90.0 180
4 81.0 324
8 72.9 583

100
Cumulative average hours taken

600
Cumulative hours taken

90%
90
500
80
90%
70 80%
400
60

50 80% 300
70%
40
70%
30 200

20
100
10

1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8
Total units produced Total units produced
252 SOLUTIONS TO REVISION QUESTIONS P2

LEARNING CURVES (c) Budgeting, budgetary control and project evaluation all rely upon the preparation of
accurate forecasts of production capacity and operating costs. Learning curve theory
may be used in such forecasts.
In particular, the learning curve theory may be used when repetitive manual tasks
are introduced into a production process. Under these circumstances, application of
this theory may result in more accurate prediction of labour time, labour costs, varia-
ble overhead costs that are driven by labour usage, and possibly material usage savings.
Furthermore, if absorption costing is used, then this theory will enable the relationship
between fixed overhead recovery and production rate to be accurately included in the
budgeting process.
For budgetary control to be effective, the variances calculated must be based on real-
istic targets. A constant standard for labour, materials and variable overhead variances
is not appropriate when the learning curve effect is present. By incorporating the learn-
ing curve theory into the targets, meaningful variances may be calculated and used in
budgetary control.
Problems may be experienced in obtaining data on the rate of the learning curve
until significant production has taken place. High labour turnover and changes in
motivation levels may have significant effects upon the learning process. If there are
extensive periods of time between batches of a particular product then the learning
effect may be lost. The learning curve does not model long-term behaviour when there
are no further productivity gains due to the learning process.
(d) The learning curve models the speeding up of a relatively new production process that
involves repetitive manual operations due to labour learning from the experience. It
was first documented in the 1920s and 1930s in the aircraft industry in the United
States.
It is unlikely to be noticeable in well-established organisations that operate in static
markets (growth, technology, etc.) and use standardised production facilities and
mainly promotional marketing strategies.