Advanced: Estimation of costs using a learning curve A company is asked to quote for a contract

Question:

Advanced: Estimation of costs using a learning curve A company is asked to quote for a contract taking account of an 80% learning curve which is normal for its industry.

There are three variations to the contract:

Variation 1: A single order for 200 units Variation 2: An initial order for 200 units followed by a succession of orders totalling 600 units altogether

(including the initial order)

Variation 3: A first order for 200 units A possible second order for 1 00 units A possible third order for 1 00 units A possible fourth order for 80 units There is no obligation on the customer to place the second, third or fourth orders but he requires a separate price quotation for each of them now.

Based on standards for comparable work the company's cost estimates per unit for variation 1 of the contract are:

Direct materials: 15 metres at £8.00 per metre Direct labour:

Dept AA 8 hours at £3.00 per hour Dept AS 100 hours at £3.60 per hour Dept AT 30 hours at £2.40 per hour Variable overhead: 25% of direct labour Fixed overhead absorption:

Dept AR £5.00 per direct labour hour Dept AS £3.00 per direct labour hour Dept AT £2.00 per direct labour hour The three departments differ in their work composition. Dept AA is highly automated and its output, predominantly machinecontrolled, is little influenced by operator efficiency. By contrast, output in Depts AS and AT is almost exclusively influenced by operator skills.

You are required to:

(a) calculate prices per unit for each of the three variations to the contract, allowing a profit margin of 3% on direct materials cost and 10% on conversion cost; (20 marks)

Note: Variation 3 calls for four separate prices.

(b) list three major factors that would influence you against taking account of the teaming curve when setting labour standards in a standard costing system. (5 marks)

Note: An 80% learning curve on ordinary graph paper would show the following relationship between the x axis (volume) and the y axis (cumulative average price of elements subject to the learning curve):

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