Question

a) Explain the logic, uses and limitatios of the learning curve model.

b)How the learning curve model will affect the calculations

Answer 1

Answer:
a)
Logic:Learning is the process by which an individual acquires skill, knowledge and ability. When a new product or process is started, performance of worker is not at its best and learning takes place. As the experience is gained, the performance of worker improves, time taken per unit reduces and thus his productivity goes up. This improvement in productivity of workers is due to learning effect. As more units are produced, people involved in production become more efficient than before. Each additional unit takes less time to produce the next unit. The amount of improvement or experience gained is reflected in a decrease in man-hours or cost. The application of learning curve can be extended to commercial and industrial activities as well as defence production.
The learning effect exists during a worker’s start up or familiarization period on a particular job. After the limits of experimental learning are reached, productivity tends to stabilise and no
further improvement is possible. The rate at which learning occurs is influenced by many factors including the relative unfamiliarity of workers with the task, uniqueness of the job, the complexity of the process, the impact of incentive plans, supervision, etc.

Uses:-

1) Helps to analyse CVP Relationship during familiarisation phase: Learning curve is useful to analyse cost-volume-profit relationship during familiarisation phase of product or process and thus it is very useful for cost estimates. Learning curve can be used as a tool for forecasting
2)Helps in budgeting and profit planning: Budget manager should select those costs which reflect learning effect and then he should be able to incorporate this effect in process of developing budgets or in the exercises relating to project planning.
3)Helps in pricing: The use of cost data adjusted for learning effect helps in development of advantageous pricing policy.
4)Design makers: It helps design engineers in making decisions based upon expected (predictable from past experience) rates of improvement.
5)Helps in negotiations: It is very useful to Government in negotiations about the contracts.
6)Helps in setting standards: The learning curve is quite helpful in setting standards in learning phase.

Limitations:
1.All activities of a firm are not subject to learning effect. Following types of activities are subject to learning effect:
(a)Those, which have not been performed in this present operational mode.
(b)Those which are being performed by new workmen, new employees or others not familiar with the particular activity. In contrast, activities being performed by experienced workmen, who are thoroughly familiar with those activities will not be subject to learning effect.
(c)Those involving utilization of material not used by firm so far.
2.It is correct that learning effect does take place and average time taken is likely to reduce. But in practice it is highly unlikely that there will be a regular consistent rate of decrease, as exemplified earlier. Therefore any cost predictions based on covernational learning curves should be viewed with caution.
3.Considerable difficulty arises in obtaining valid data that will form basis for computation of learning effect.
4.Even slight change in circumstances quickly renders the learning curve obsolete. While the regularity of conventional learning curves can be questioned, it would be wrong to ignore learning effect altogether in predicting future costs for decision purposes.

b)
In general following costs are affected by learning curve:
1.Direct labour cost.
2.Variable overhead cost.
3.Material cost.

We need an example to understand this:
Suppose XYZ Company Manufacutres launches Product A. Its sale price is $200 per unit. Direct Material cost per unit is $75 and Labour cost is $10 per hour.XYZ Co., has observed that a 90% learning curve ratio applies to all labour related costs each time a new model enters production. It is anticipated that 16 units will be manufactured during the year.The First Unit took 50 hours to produce Product A . Overheads costs are on basis of no. of hours used at rate of $0.5 per hour
Lets Make our calaculations and differentiate if we made 8 units and required 16 units:

From Our calculations We can see that hte next 4 and 8 units are taking less and less time to manufacture.This increased efficiency improves the Labor hours needed to produce the product and the less no. hours used to produce the products ,less will be the direct labor costs and variable manufacture overheads
Also think of a situation when the labour is efficient enough , learning has set in , labour efficiency increases there will be less material wastage and hence Savings in Material Costs