Advanced: Estimation 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 quan¬ tify the learning 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 completed; 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 this 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.

(b) It is argued that in many areas of modern technology, the ‘learning curve’ effect is of diminishing significance. An ‘experience curve’ effect would still be present and poss¬ ibly 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. (6 marks)
(Total 26 marks) CIMA Stage 4 Management Accounting -
Control and Audit

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Direct material Direct labour Variable overhead Fixed overhead 30.00 per unit 6.00 per hour 0.50 per direct labour hour 6000 per four-week operating period