Statement showing computation of cost of making 4 machines & 8 machines: Material R) Fixed cost R) Total R) No of Average time Labour cost) Machines Hours 1 1,000 15,000 2 900 13,500 4 810 12,150 8 729 10,935 Average cost of making 4 machines 1,77,150 Average cost of making 8 machines 1,68,435 1,50.000 1.50,000 1,50,000 1.50,000 60,000 30,000 15,000 7,500 2.25,000 1,93,500 1.77.150 1.68,435 Illustration 3 Z.P.L.C experience difficulty in its budgeting process because it finds it necessary to qualify 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 has been recorded for the 14 units. The production manager expects an 80% learning effect for this type of work. The company use standard absorption costing. The direct costs attributed to the centre in which the unit is manufactured and its direct materials costs are as follows: p50 Direct material Direct Labour Variable overhead Fixed overhead R) 30.00 per unit. 6.00 per hour. 0.50 per direct labour hour. 6,000 per four-week operating period. There are ten direct employees working a five-day week, eight hours per day. Personal and other downtime allowances account for 25% of total available time. The company usually quotes a four-week delivery period for orders. You are required to: (0) Determine whether the assumption of an 80% learning effect is a reasonable one in this case, by using the standard formula y = axt 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 index of learning. (ii) Calculate the number of direct labour hours likely to be required for an expected second order of 20 units. (ii) Use the cost data given to produce an estimated product cost for the initial order, examine the problems which may be created for budgeting by the presence of the learning effect