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Learning Curve Theory

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 stabilise 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.

Major areas within management accounting where learning curve theory is likely to have consequences and suggest potential limitations of this theory.

Areas of consequence:
  • A Standard Costing system would need to set standard labour times after the learning curve had reached a plateau.
  • A budget will need to incorporate a learning cost factor until the plateau is reached.
  • A budgetary control system incorporating labour variances will have to make allowances for the anticipated timechanges.
  • Identification of the learning curve will permit the company to better plan its marketing, work scheduling, recruitment and material acquisition activities.
  • The decline in labour 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.

  • The stable conditions necessary for the learning curve to take place may not be present – unplanned changes inproduction techniques or labour 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 labour 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.
I am posing a simple problem, please reply by pressing on comments for answer

ABC Motors Ltd has designed a radically new concept in racing bikes with the intention of selling them to professional racing teams. The estimated cost and selling price of the first bike to be manufactured and assembled is as follows:

Materials 1,000
Assembly Labour (50 hours at $10 per hour) 500
Fixed Overheads (200% of Assembly labour) 1,000
Profit (20% of total cost) 500
Selling Price $ 3,000
ABC Motors Ltd plans to sell all bikes at total cost plus 20% and the material cost per bike will remain constant irrespective of the number sold.

ABC Motors Ltd’ management expects the assembly time to gradually improve with experience and has estimated an 80% learning curve. A racing team has approached the company and asked for the following quotations:

  1. If we were to purchase the first bike assembled, and immediately put in an order for the second, what would be the price of the second bike?
  2. If we waited until you had sold two bikes to another team, and then ordered the third and fourth bikes to be assembled, what would be the average price of the third and fourth bikes?
  3. If we decided to immediately equip our entire team with the new bike, what would be the price per bike if we placed an order for the first eight to be assembled?

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where is the solution to the posed question

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