16

Learning Curve Theory

Question 1
An electronics firm which has developed a new type of fire-alarm system has been asked to
quote for a prospective contract. The customer requires separate price quotations for each of
the following possible orders:
Order

Number of fire-alarm systems

First

100

Second

60

Third 40
The firm estimates the following cost per unit for the first order:
Direct materials

` . 500

Direct labour
Deptt. A (Highly automatic) 20 hours at ` . 10 per hour
Deptt. B (Skilled labour) 40 hours at ` . 15 per hour
Variable overheads

20% of direct labour

Fixed overheads absorbed:

Deptt. A

` . 8 per hour
` . 5 per hour

Deptt. B

Determine a price per unit for each of the three orders, assuming the firm uses a mark up of
25% on total costs and allows for an 80% learning curve. Extract from 80% Learning curve
table:
X

1.0

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

Y%

100.0

91.7

89.5

87.6

86.1

84.4

83.0

81.5

80.0

X represents the cumulative total volume produced to date expressed as a multiple of the
initial order.
Y is the learning curve factor, for a given X value, expressed as a percentage of the cost of
the initial order.
(8 Marks) (May, 2005); (11 Marks) (May, 2010)

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Learning Curve Theory

16.2

Answer
(i)

Price per unit for first order of 100 units

`
Direct material

`
500.00

Direct labour

Dept A 20 Hrs @ 10 = 200

Dept B 40 Hrs @ 15 = 600

800.00

Variable Overhead

20% of ` 800

160.00

Fixed Overhead

Dept A 20 Hrs @ 8 = 160

Dept B 40 Hrs @ 5 = 200

360.00

Total cost

1,820.00

Profit 25%

455.00

Selling price per unit

2,275.00

(ii) Price per unit for second order of 60 units

Learning will be applicable only in department B.
Cumulative output becomes 100 units + 60 units = 160 units i.e 1.6 times for which
learning is 86.1 % from the tables.
Therefore Total Hrs for 160 units = 160 units 40 .861 = 5,510.4 Hrs
Therefore Hrs for 60 units = Hrs for 160 units less Hrs for 100 units
Or 5510.4 less 40 100 = 1510.4 Hrs
Therefore Hrs per unit =

1510.4
= 25.17
60

Calculation of selling price per unit

Direct materials
Direct labour
Variable Overhead
Fixed Overhead

Dept A 20 Hrs @ 10 = 200

Dept B 25.17 Hrs @ 15 = 377.55
20% of 577.55
Dept A 20 Hrs @8= 160
Dept B 25.17 Hrs @5=125.85

Total cost
Profit 25%
Selling price per unit
(iii) Price per unit for third order of 40 units

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`
500.00
577.55
115.51
285.85
1,478.91
369.73
1,848.64

16.3

Advanced Management Accounting

Cumulative output becomes 100 + 60 + 40 = 200 units i.e. 2 times for which learning is
80% from the table
Total Hrs for 200 units = 200 40 .80 = 6,400 Hrs
Hrs for 40 units = Hrs for 200 units less Hrs for 160 units
Or 6,400 less 5510.4 = 889.6 Hrs
Therefore Hrs per unit =

889.6
= 22.24
40

Calculation of selling price per unit

`
Direct materials

500.00

Direct labour

Dept A 20 Hrs @ 10 = 200.00

Dept B 22.24 @ 15 = 333.60

533.60

Variable Overhead

20% of 533.60

106.72

Fixed Overhead

Dept A 20 Hrs @ 8 = 160

Dept B 22.24 Hrs @ 5 = 111.20

271.20

Total cost

1,411.52

Profit 25%

352.88

Selling price per unit

1,764.40

Question 2
Explain the concept Learning curve. How can it be applied for Cost management?
(4 Marks) (May, 2006)
Answer
The first time when a new operation is performed, both the workers and the operating
procedures are untried. As the operation is repeated and the workers become more familiar
with work, labour efficiency increases and the labour cost per unit declines. This process
continues for some time and a regular rate of decline in cost per unit can be established. This
rate can be used to predict future labour costs. The learning process starts from the point
when the first unit comes out of the production line. In other words Learning curve is a
function that measures how labour hours per unit decline as units of production increase
because workers are learning and becoming better at their jobs.
Cost Management Application:

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Learning Curve Theory

16.4

1.

Learning curve is useful in analysing cost volume profit relationship. The company can
set low price of its product to generate high demand. As the production increases, cost
per unit drops.

2.

It helps in budgeting and profit planning.

3.

It enables the company in price fixation. In particular, the company can fix a lower price
for repeat orders.

4.

It helps the design engineers to take suitable decisions based on expected rates of
improvement.

5.

It helps in price negotiations.

6.

It is useful in setting standards and in performance evaluation.

Question 3
Discuss the application of the learning curve.

(4 Marks) (May, 2007)

Answer
Application of Learning curve: Learning curve helps to analyse cost-volume profit
relationships during familiarisation phase of product or process to arrive at cost estimates.
It helps in budgeting and profit planning.
It helps in pricing and consequent decision making e.g. acceptance of an order, negotiations
in establishing contract prices etc. with the advantage of the knowledge of decreasing unit
cost.
It helps in setting standards in the learning phase.
Question 4
What are the distinctive features of learning curve theory in manufacturing environment?
Explain the learning curve ratio.
(9 Marks) (Nov., 2007)
Answer
As the production quantity of a given item is doubled, the cost of the item decreases at a fixed
rate. This phenomenon is the basic premise on which the theory of learning curve has been
formulated. As the quantity produced doubles, the absolute amount of cost increase will be
successively smaller but the rate of decrease will remain fixed. It occurs due to the following
distinctive features of manufacturing environment:
(i)

Better tooling methods are developed and used.

(ii)

More productive equipments are designed and used to make the product.

(iii) Design bugs are detected and corrected.

(iv) Engineering changes decrease over time.

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16.5

Advanced Management Accounting

(v) Earlier teething problems are overcome.

(vi) Rejections and rework tend to diminish over time.
In the initial stage of a new product or a new process, the learning effect pattern is so regular
that the rate of decline established at the outset can be used to predict labour cost well in
advance. The effect of experience on cost is summarized in the learning curve ratio or
improvement ratio.
Learning curve ratio

Average labour cost of first 2N units

Average labour cost of first N units

For example, if the average labour cost for the first 500 units is ` 25 and the average labour
cost for the first 1,000 units is ` 20, the learning curve ratio is (` 20/25) or 80%. Since the
average cost per unit of 1,000 units is ` 20, the average cost per unit of first 2,000 units is
likely to be 80% of ` 20 or ` 16.
Question 5
M Ltd. Manufactures a special product purely carried out by manual labour. It has a capacity
of 20,000 units. It estimates the following cost structure:
Direct material

30 ` / unit

Direct labour (1 hour / unit)

20 ` / unit

Variable overhead
10 ` / unit
Fixed overheads at maximum capacity is ` 1,50,000.
It is estimated that at the current level of efficiency, each unit requires one hour for the first
5,000 units. Subsequently it is possible to achieve 80% learning rate. The market can absort
the first 5,000 units at ` .100 per unit. What should be the minimum selling price acceptable
for an order of 15,000 units for a prospective client?
(7 Marks) (May, 2008)
Answer
5,000 units

20,000 units

Material

1,50,000

6,00,000

Direct Labour

1,00,000

2,56,000
Refer to W Note i

Variable Overhead

50,000

2,00,000

Total Variable Cost

3,00,000

10,56,000

Fixed Cost

1,50,000

1,50,000

Total Cost

4,50,000

12,06,000

90

60.3

5,00,000

5,00,000

Total cost / unit

Sales 100 5,000

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Learning Curve Theory

15,000 x(assumed selling price)

16.6

15,000 x

(Total Sales less Total Cost) = Profit

50,000

15,000 x 7,06,000

Or minimum selling price = 50.4(refer to Working Note ii)

Working Note: I
Units

Hours

5,000

5,000

10,000

10,000 1 .8 = 8,000 hours

20,000

20,000 1 .8 .8 = 12,800 hours

Working Note: II
15,000 x 7,06,000 > 50,000
15,000 x > 7,56,000
or x > 50.4
Alternative Solution:
Total cost / unit of capacity 20,000 = 60.3
Weighted average selling price > 80.4
i.e.

5,000 100 15,000 x

> 60.3
20,000

= 5,00,000 + 15,000 x > 60.3 20,000

= 15,000 x > 12,06,000 5,00,000
Or
15,000 x > 7,06,000
x > 47.06
Minimum price to cover production Cost = 47.06
Minimum price to cover same amount of profit = 50.40 (refer to Working Note 1)
Working Note 1
( 47.06 + 50.04) 15,000 units = ` 50,000
Question 6
A company which has developed a new machine has observed that the time taken to
manufacture the first machine is 600 hours. Calculate the time which the company will take to
manufacture the second machine if the actual learning curve rate is (i) 80% and (ii) 90%.

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16.7

Advanced Management Accounting

Explain which of the two learning rates will show faster learning.

(3 Marks) (Nov., 2008)

Answer
(i)

Actual learning curve rate is 80%.

Time taken to produce the first machine

= 600 hours

Average time taken to produce two machines

= 600 80% hours

= 480 hours.

Cumulative time taken to produce two machines

= 480 2 hours
= 960 hours.

Time taken to produce the second machine

= (960 600)hours
= 360 hours.

(ii)

Actual learning curve rate is 90%.

Time taken to produce the first machine

= 600 hours

Average time taken to produce two machines

= 600 90% hours

= 540 hours.

Cumulative time taken to produce two machines

= 540 2 hours
= 1080 hours.

Time taken to produce the second machine

= (1080 600) hours

= 480 hours.

The time taken to produce the second machine is lower at 80% learning rate and hence
80% learning rate shows faster learning rate.
Question 7
The Gifts Company makes mementos for offering chief guests and other dignitaries at
functions. A customer wants 4 identical pieces of hand-crafted gifts for 4 dignitaries invited to
its function.
For this product, the Gifts Company estimates the following costs for the 1st unit of the product

` /unit
Direct variable costs (excluding labour)
Direct labour (20 hours @ ` 50 hour)

2,000
1,000

90 % learning curve ratio is applicable and one labourer works for one customers order.
(i)

What is the price per piece to be quoted for this customer if the targeted contribution is `
1,500 per unit?

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Learning Curve Theory

(ii)

16.8

If 4 different labourers made the 4 products simultaneously to ensure faster delivery to

the customer, can the price at (i) above be quoted? Why?
(6 Marks)(Nov., 2009)

Answer

` /u

(i)
1st unit

Avg/u after 4th at

Variable Cost

2000

2000

Labour

1000

810

Target Contribution

1500

Price to be quoted

4310 (` /u)

(ii) No, the company cannot quote this price for varying products because the learning curve
Ratio does not apply to non-repeated jobs. Each product will carry a different price
according to its direct labour hours.
Question 8
Explain distinctive features of learning curve theory in manufacturing environment.
(4 Marks)(Nov., 2010)
Answer
The production quantity of a given item doubled the cost of that item decrease at a fixed rate. This
phenomenon is the basic premise on which the theory of learning curve has been formulated.
The distinctive features of a learning curve are:
1.

Better tooling methods are developed and used

2.

More productive equipments are designed and used to make the product.

3.

Design bugs are detected and corrected.

4.

Better design engineering reduces material and labour costs.

5.

Early teething problems are overcome. As production progresses management is

prompted to achieve better planning and better management.

6.

Rejections and rework tend to diminish over time.

7.

As quantity produced increases the Cost per unit decreases, since each unit entails:

(i) Lesser labour (ii) Greater productivity of material and labour (iii) Fewer delays and lesser
time losses.
Question 9
What are the limitations of the learning curve theory ?

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(4 Marks)(Nov., 2011)

16.9

Advanced Management Accounting

Answer
Limitations of Learning Curve Theory
1.

All activities of a firm are not subject to learning effect. (Activities that have not been
performed in the present operational mode, those performed by new or unfamiliar
employees are subjected to learning effect, while those performed by familiar or
experienced workmen will not be subjected to learning effect)

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. Therefore any cost prediction based on conventional 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 costs for decision purposes.

Question 10
What are the distinctive features of learning curve theory in manufacturing environment?
Explain the learning curve ratio.
(4 Marks)(Nov, 2012)
Answer
Learning curve ratio:
=

Average Labour cost of first 2N units

Average Labour cost of first N units

As the production quantity of a given item is doubled, the cost of the item decreases at a fixed
rate. It occurs because of the following distinctive features of manufacturing environment.
(i)

Better tooling methods are developed and used

(ii)

Design bugs are detected and corrected

(iii) More productive equipment is designed and used.

(iv) Engineering changes decrease over time.
(v) Earlier teething problems are overcome.
(vi) Rejections and rework tend to diminish overtime.
Question 11
Bring out the main applications of Learning Curve.

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(4 Marks)(May, 2013)

Learning Curve Theory

16.10

Answer
Knowledge of learning curve can be useful both in planning and control. Standard cost for new
operations should be revised frequently to reflect the anticipated learning pattern. The main
applications are summarised below:

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.

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.

Helps in pricing: The use of cost data adjusted for learning effect helps in development
of advantageous pricing policy.

Design makers: It helps design engineers in making decisions based upon expected
(predictable from past experience) rates of improvement.

Helps in negotiations: It is very useful to Government in negotiations about the

contracts.

Helps in setting standards: The learning curve is quite helpful in setting standards in
learning phase.

Question 12
State whether the learning curve theory can be applied to .the following independent situations
briefly justifying your decision:
(i)

A labour intensive sculpted product is carved from the metal provided to the staff. The
metal is sourced from different suppliers since it is scarce. The alloy composition of the
input metal is quite different among the suppliers.

(ii)

Pieces of hand-made furniture are assembled by the company in a far off location. The
labourers do not know anything about the final product which utilizes their work. As a
matter of further precaution, rotation of labour is done frequently.

(ill) Skilled workers have been employed for a long time. The company has adequate market
for the craft pieces done by these experts.
(iv) A company funds that it always has an adverse usage of indirect material. It wants to apply
learning curve theory to improve the way standards have been set.
(4 Marks)(Nov., 2013)
Answer
(i)

Learning Curve Theory will not be applicable as alloy combination of the input metal is
quite different among the suppliers hence learning experience with one type of metal may
not be beneficial for the workers to deal with other metal with separate alloy composition.

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16.11

Advanced Management Accounting

(ii) Learning Curve Theory will not be applicable as in this situation rotation of labour is
done frequently, labours will not be able to get the benefit of learning and apply their
learning. Hence, learning curve theory can not be applied.
(iii) Learning Curve Theory will not be applicable as in this situation as workers are skilled
and employed for a long time, they have already achieved maximum level of expertise by
taking advantage of learning. Hence, at this point of time learning curve theory can not
be applied.
(iv) Learning Curve Theory will not be applicable as indirect materials are the materials
which are not used directly in the production (not directly proportionate with volume of
output) and usually used machines (e.g. lubricants, spares parts etc.) with less human
interactions. Adverse usage of indirect materials can be controlled through proper
monitoring and appropriate standard settings and not from applying learning curve
theory.
Question 13
A labour intensive product is made and sold by XY Ltd. Its labour force has a learning rate of
80%, applicable only to direct labour and not to variable overheads.
The cost per unit of the first product is as follows:
`

Direct Materials

20,000

Direct Labour (@ `8 per unit)

16,000

Variable Overheads

4,000

Total Variable Cost

40,000

XY Ltd. has received an order from P Ltd. for 4 units of the product. Another customer, Q Ltd.
is also interested in purchasing 4 units of the product. XY Ltd. has the capacity to fulfill both
the orders. Q Ltd. presently purchases this product in the market for `34,400 and is willing to
pay this price per unit of XY Ltd. product. But P Ltd. lets XY Ltd. choose one of the following
options:
(i)

A price of `33,000 per unit for the 4 units it proposes to take from XY Ltd.
OR

(ii)

Supply P Ltd.'s idle labour force to XY Ltd. for only 4 units of production, with XY Ltd.
having to pay only ` 2 per labour hour to P Ltd.' s workers. P Ltd.'s workers will be
withdrawn after the first 4 units are produced. In this case, XY Ltd. need not use its
labour for producing P Ltd.'s requirements. P Ltd. assures XY Ltd. that its labour force
also has a learning rate of 80%. In this option, P Ltd. offers to buy the product from XY
Ltd. at only 28,000 per unit.
P Ltd. and Q Ltd. shall not know of each other's offer.

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Learning Curve Theory

16.12

If both orders came before any work started, what is the best option that XY Ltd. may choose?
Present suitable calculations in favour of your arguments.
(9 Marks) (November, 2014)
Answer
Workings
Units

Average LabourHrs. /unit

2,000 (`16,000 `8) [for first unit of production]

1,600 (80% of 2,000 hours)

1,280 (80% of 1,600 hours)

1,024 (80% of 1,280 hours)

Variable Cost per unit excluding Labour Cost:

(`)
Material Cost

= 20,000

Variable Overheads

Variable Cost

= 24,000

4,000

If both the orders came together, learning rate 80% applies and 8 units can be made, with
average time of 1,024 hours per unit.
Cost to XY

(`)

Variable Cost excluding Labour

= 24,000

Labour Cost (1,024 hrs. `8/hr)

8,192

= 32,192
Option-I
In this case,
Particulars

Selling Price p. u. (`)

34,400

33,000

Variable Cost p. u. (`)

32,192

32,192

Contribution p. u. (`)

2,208

808

8,832

3,232

No. of Units
Contribution (`)

Total

12,064

Option- II
If P Ltd supplies its labour. 80% learning curve will apply to 4 units each of XY Ltd. & P Ltd.
Hence: hrs / unit = 1,280 (as calculated in the working note)

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16.13

Advanced Management Accounting

Particulars

Selling Price p. u. (`)

34,400

28,000

Variable Cost p. u. (`)

24,000

24,000

1,280 hrs. ` 8

10,240

--

1,280 hrs. ` 2

--

2,560

34,240

26,560

160

1,440

640

5,760

Total

(Excluding Labour cost)

Labour Cost p. u. (`)

Total Variable Cost p. u. (`)

Contribution p. u. (`)
Units
Contribution (`)
Decision

XY Ltd. should not take labour from P Ltd. It should choose Option-I.

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6,400