Major areas within management accounting where learning curve theory is likely to have consequences and suggest potential limitations of this theory.
Areas of consequence:
- A standard costing system would need to set standard labour times after the learning curve had reached a plateau.
- A budget will need to incorporate a learning cost factor until the plateau is reached.
- A budgetary control system incorporating labour variances will have to make allowances for the anticipated timechanges.
- Identification of the learning curve will permit the company to better plan its marketing, work scheduling, recruitment and material acquisition activities.
- The decline in labour costs will have to be considered when estimating the overhead apportionment rate.
- As the employees gain experience they are more likely to reduce material wastage.
- The stable conditions necessary for the learning curve to take place may not be present – unplanned changes inproduction techniques or labour turnover will cause problems and affect the learning rate.
- The employees need to be motivated, agree to the plan and keep to the learning schedule these assumptions may not hold.
- Accurate and appropriate learning curve data may be difficult to estimate.
- Inaccuracy in estimating the initial labour requirement for the first unit.
- Inaccuracy in estimating the output required before reaching a ‘steady state’ time rate.
- It assumes a constant rate learning factor.
ABC Motors Ltd has designed a radically new concept in racing bikes with the intention of selling them to professional racing teams. The estimated cost and selling price of the first bike to be manufactured and assembled is as follows:
Assembly Labour (50 hours at $10 per hour) 500
Fixed Overheads (200% of Assembly labour) 1,000
Profit (20% of total cost) 500
Selling Price $ 3,000
ABC Motors Ltd plans to sell all bikes at total cost plus 20% and the material cost per bike will remain constant irrespective of the number sold.
ABC Motors Ltd’ management expects the assembly time to gradually improve with experience and has estimated an 80% learning curve. A racing team has approached the company and asked for the following quotations:
- If we were to purchase the first bike assembled, and immediately put in an order for the second, what would be the price of the second bike?
- If we waited until you had sold two bikes to another team, and then ordered the third and fourth bikes to be assembled, what would be the average price of the third and fourth bikes?
- If we decided to immediately equip our entire team with the new bike, what would be the price per bike if we placed an order for the first eight to be assembled?