COST ACCOUNTING: LEARNING CURVE

ANALYSIS
Presented By-
RAVI BANSAL (06)
ADITYA JHA (21)
VARUN MEHTA (27)
MANAS SARKAR (40)
ADITI RUIKAR (50)
PRIYANKA PALIWAL (59)
THE CONCEPT
It predicts the reduction in a manufacturing costs or
direct labour hours as cumulative production
increases over time
It is based on empirical evidence rather than theory

HISTORY

First developed in the aircraft industry prior to World War II, when analysts discovered that
the direct labour input per airplane declined with considerable regularity as the cumulative
number of planes produced increased.
A survey of major airplane manufacturers revealed that a series of learning curves could be
developed to represent the average experience for various categories of airframes (fighters,
bombers, and so on), despite the different amounts of time required to produce the first unit
of each type of airframe.
Once production started, the direct labour for the eighth unit was only 80 percent of that for
the fourth unit, the direct labour for the twelfth was only 80 percent of that for the sixth, and
so on.
In each case, each doubling of the quantity reduced production time by 20 percent. Because
of the consistency in the rate of improvement, the analysts concluded that the aircraft
industrys rate of learning was 80 percent between doubled quantities of airframes. For any
given product and company, the rate of learning may be different
GRAPHICAL ANALYSIS
900
810
729
610
0
100
200
300
400
500
600
700
800
900
1000
unit 2 unit 4 unit 8 Unit 16
L
a
b
o
u
r

H
o
u
r

U
s
e
d

No of units produced
Chart Title
1000
APPLICATION
BID PREPARATION
(to estimate the number of units to be produced, and wage rates, labour costs etc. before
bidding)
FINANCIAL PLANNING
(to help the financial planner determine the amount of cash needed to finance operations,to
determine a contract price by identifying the average direct labour costs per unit for the number of
contracted units)
CVP ANALYSIS
LABOUR REQUIREMENT ESTIMATION
(For a given production schedule, to project direct labour requirements)
MATHEMATICAL FORMULATION
K
n
= K
m
(n/m)
b

Where,
m = First no of unit produced
n = Final/total no of unit produced (n>m)
K
m =
Cost of producing unit m (dollar, hours.)
K
n =
cost of producing unit n
b = log R / log 2
R = Rate of learning
Using simple algebra b and R can be calculated as
b = [log K
n log
K
m]
/ [log n log m] = log (K
n
/K
m)/ log (n/m)

R = 10
b log 2


EXAMPLE
A manufacturer of commuter airplanes has started production of a new
intermediate-sized aircraft. The wing assembly is particularly difficult to assemble.
The first unit manufactured takes a total of 5000 labour hours to assemble, while the
fifth takes 3500 hours. What rate of learning is occurring? How much labour time do
you forecast that the hundredth wing assembly will take?
Solution:
m = 1 (first unit)
n = 5 (the total produced to date)
K
1
=

5000 (time to produce first unit)
K
5
= 3500 (time to produce the fifth unit)
Now,
b = [log K
5
log K
1
] / [log 5 log 1]
= [3.54 3.7] / [0.7 0]
= - 0.22

CONTINUED
And the learning Rate,
R = 10
-0.22 log 2

= 10
-0.066

= 0.858
The manufacturer thus has a learning rate of 85.8%. To estimate the cost of the hundredth
unit, we use m = 1 and n = 100, and calculate
K
100 =
K
1
(n/m)
b
= 5000 (100/1)
-0.22
= 1815
Alternatively, we can start with the fifth unit, letting m = 5 and n = 100:
K
100
= K
5
(n/m)
b
= 3500 (100/20)
-0.22
= 1815
In either case, we forecast that the hundredth wing assembly will take only 1815 hours to
assemble.

LIMITATIONS

. 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. in practice it is highly unlikely that there will be a regular consistent rate of decrease, as
exemplified here. Therefore any cost predictions based on conventional learning curves should
be viewed with caution.
3. Considerable difficulty arises in obtaining valid data, which will form basis for computation of
learning effect.
4. Even slight change in circumstances quickly renders the learning curve obsolete.

REFERENCES
http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&cad=rja&sqi=2&ved=0
CCgQFjAA&url=http%3A%2F%2Fwps.pearsoned.co.uk%2Fwps%2Fmedia%2Fobjects%2F8970%2F91853
76%2F65767_30_SuppI.pdf&ei=mJDRUvj0JMitrAfE3oGQCQ&usg=AFQjCNGRk2h_eHBegucee3Da9bvhV
Bzupg&bvm=bv.59026428,d.bmk
http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=3&cad=rja&sqi=2&ved=0
CDQQFjAC&url=http%3A%2F%2Fwww.cna.org%2Fsites%2Fdefault%2Ffiles%2Fresearch%2Fd0006870.a
3.pdf&ei=mJDRUvj0JMitrAfE3oGQCQ&usg=AFQjCNGJQMsCgkWTDSiyxSeXfxP1jtE7aQ&bvm=bv.590264
28,d.bmk
http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=3&cad=rja&sqi=2&ved=0
CDQQFjAC&url=http%3A%2F%2Fwww.cna.org%2Fsites%2Fdefault%2Ffiles%2Fresearch%2Fd0006870.a
3.pdf&ei=mJDRUvj0JMitrAfE3oGQCQ&usg=AFQjCNGJQMsCgkWTDSiyxSeXfxP1jtE7aQ&bvm=bv.590264
28,d.bmk
THANK YOU