Advanced : Estimat ion of costs and incremental hours using the learning curve (a) Z p.l.c. experiences
Question:
Advanced : Estimat ion of costs and incremental hours using the learning curve
(a) Z p.l.c. experiences difficulty in its budgeting process because it finds it necessary to quantify the leam1ng effect as new products are introduced. Substantial product changes occur and result in the need for retraining.
An order for 30 units of a new product has been received by Z p.l.c. So far, 14 have been comple ted; the first unit required 40 direct labour hours and a total of 240 direct labour hours has been recorded for the 14 units. The production manager expects an 80%
learning effect for th1s type of work.
The company uses standard absorption costing. The direct costs attributed to the centre in which the unit is manufactured and its direct material costs are as follows:
There are ten direct employees working a five-day week, eight hours per day . Personal and other downtime allowances account for 25% of the total available time.
The company usually quotes a four-week delivery period for orders.
You are required to (i) determine whether the assumption of an 80% learning effect is a reasonable one in this case, by using the standard formula y = axb where y = the cumulative average direct labour time per unit (productivity)
a = the average labour time per unit for the first batch x = the cumulative number of batches produced b = the 1ndex of learning (5 marks)
(ii) calculate the number of direct labour hours likely to be reqUired for an expected second order of 20 umts; (5 marks)
(iii) use the cost data g1ven to produce an estimated product cost for the initial order. examining the problems which may be created for budgeting by the presence of the learning effect. (10 marks)
(b) It is argued that in many areas of modem technology. the 'learning curve' effect is of diminishing significance. An experience curve' effect would still be present and possibly strengthened in importance. However, the experience curve has little to do with short -term standard setting and product costing.
You are required to discuss the validity of the above statement, in particular the assertion that the experience curve has little relevance to costing.
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