Advanced. A company has developed a new product. The following information was prepared by the trainee accountant for presentation at the first performance review meeting for the new product.

Standard labour wage rate $12 per labour hour Standard labour hours per unit 25 hours Output to date 32 units Actual labour hours worked 460 hours Labour efficiency variance $4080 favourable The management accountant pointed out that this analysis ignored the learning curve and that 25 hours was the time taken for the first unit. The management accountant said that a better representation of the performance would be obtained by splitting the variance into planning and operating elements and calculated them to be as shown below:

$4320 favourable

$240 adverse Labour efficiency planning variance Labour efficiency operating variance Required:

(a) Calculate the learning rate that the management accountant assumed when recalculating the variances.

(6 marks)

(b) Explain TWO reasons why it is important for production planning and control purposes to identify the learning curve. (4 marks)

(10 marks)

CIMA P2 Performance Management