Learning Curve Walkthrough

Summary of Course Content

- Different methods of rewarding labour and productivity and the use of learning curve in labour-
intensive industry.

Learning Objective(s)

a) Explain, calculate, apply and compare the different group incentive schemes used, especially in
manufacturing
b) Understand the theory of learning curve and how it is applied in labour-intensive organisations
c) Calculate the effect of learning curve on the cost, price and profitability of products

LEARNING CURVE

The theory of the learning curve or experience curve is based on the simple idea that the time required
to perform the same task decreases as a worker gains experience. The basic concept is that the time, or
cost, of performing a task (e.g., producing a unit of output) decreases at a constant rate as cumulative
output doubles.

The learning curve function is defined as follows:

This graph shows that the cumulative average time is decreasing, not the total time. It is important you
understand the difference.

Y = aXb
Y = abX; Y = aXb – Both of these are wrong.
where:
Y = the cumulative average time (or cost) per unit.
X = the cumulative number of units produced.
a = time (or cost) required to produce the first unit.
b = slope of the function when plotted on log-log paper.
= log %/log of 2.

Now, remember when we went through this in the lecture…when approaching learning curve questions,
you have to pay attention to what they are asking you to calculate. In the above equation, Y is the
cumulative average time per unit produced, not the total amount of time it took to produce “x” amount
of units [it is important to understand the difference between these two].

For an 80% learning curve: b = log 0.8/log 2 = -.09691/.301 = -0.32196

If the first unit required 100 hours, the equation would be:

Y = 100X-0.32196

Now…using the equation above, we can calculate the cumulative average time per unit for 10 units.

Y = 100(10)-0.32196

Y = 47.6474 [This number is the cumulative average time it took produce 10 units, not the total time it
took to produce 10 units. The total time it took to produce 10 units is 10*47.6474 = 476.474 hours].

I want to you to pay attention to something…in the above example, the first unit took 100 hours to make.
If there was no learning curve effect, the total time to make 10 units would have been 100*10 = 1,000
hours. Due to the 80% learning curve, that time has reduced to 476.474. This is why you see the downward
slope in the graph above.

To further demonstrate this point…notice how the cumulative average time is decreasing every time we
add another unit. 80 for 2 units, 74.21037 for 3 units and 64.000 for 4 units. This means – on average –
the time it takes to make another unit is decreasing. However, also notice that for the second unit, the
average time dropped from 100 to 80 [a 20 hour difference], then 80 to 70.21037 [a 9.78963 difference],
and finally 70.21037 to 64.0000 [a 6.21037 difference].

Y2 = 80.0000

Y3 = 70.21037

Y4 = 64.0000

When you are looking at the graph above, that is what is causing the line to curve. The “effect” of the
learning curve is decreasing. That is why the formula is Y = aXb and not Y = aXb [this would mean it is a
straight line].

Now…let’s look at the “b”. The formula for b is b = log % / log 2. As I said in the lecture, the bottom of the
“log 2” always stays the same. When writing the top part of the equation, if the question says the learning
curve is 80% - write log 0.8 not log 80.
Log 0.8 = -0.09691 – this is correct

Log 80 = 1.90309 – this is wrong

Note: If you calculate “b” and it is positive, you have done something wrong. “b” should always be
negative.

For an 80% learning curve: b = log 0.8/log 2 = -0.09691/0.301 = -0.32196

For a 70% learning curve: b = log 0.7/log 2 = -0.1549/0.301 = -0.51457

For a 60% learning curve: b = log 0.7/log 2 = -0.22185/0.301 = -0.73697

The following is a good example for practicing the learning curve concept.

Question

Q.5.2 SafeWork makes safety clothing for industrial use. The company has just purchased
a new design of safety clothing from a renowned clothes designer. It is expected
that the first set of this new design would take 5 hours [this is “a” in the formula]
to complete it. A learning curve of 80% is expected for every additional unit until
the 70th [pay attention to what is being said in the question. Students do not pay
attention to detail and lose easy marks. This means the learning curve applies up
to the 70th unit, after that, the labour hours for every additional unit remain the
same]. Thereafter, the time is expected to remain the same. The company expects
to manufacture 200 units [If the learning curve applies up to the 70th unit, this
means for the remaining 130, the labour hours per unit will be constant] of this
newly designed clothing.

Direct material cost of one set of this new clothing is R450 whilst the direct labour
cost per hour will be R110. Variable overheads are 70% of direct labour cost.

SafeWork normally adds 30% to its direct costs in determining the selling price.

[The two sentences above confused students in the lecture. Again, pay attention
to what the question is asking. We are only dealing with labour in this question,
which means the above information has been put there to test whether you know
what to leave out. Direct materials, variable overheads and selling price have
 nothing to do with labour costs. Now this does not mean this will always be the
case – answer what is being questioned only, don’t waste time in the exam.]

Q.5.2.1 Calculate the expected time to make the 70th unit; (6)

Q.5.2.2 Calculate the expected total labour cost. (4)

Solution

Q.5.2

Q.5.2.1 • Cumulative average time is: Y = aXb (6)

• a = time for the first unit
• X = the number of units being considered
• b = the ratio of the logarithm of the learning curve rate,
calculated as log%/log2
80% learning curve:

l = -0.321928 Notice this is negative! It should always be

negative. If you calculate this and it is positive, go back and correct it.

Time to manufacture 70 units:

5(70)-0.321928

5 * 0.254689639 = 1.273448196

For 70 units = 89.14 hours

1.273448496 is “Y”, the cumulative average time it took to produce 70

units, not the total time. The total time is 70*1.273448196 = 89.1414
hours.

Time for 69 units:

5 (69)-0.321928

1.279361
 88.28 hours

Time for the 70th unit = 89.14 – 88.28

0.86 hours

The expected time to produce the 70th unit is the difference between the
69th and 70th unit. Now…some students were confused as to the order of
the numbers [89.14 and 88.24]. Remember, you cannot take “negative
hours” to produce a unit. It does not make sense to take -0.86 hours to
produce a unit.

Q.5.2.2 Total time = time for 70 units + time for (200 units – 70 units) (4)

89.14 + (130 * 0.86)

200.94 hours

We have already worked out how many hours it will take to produce 70 units
[89.14 hours] – remember, this is taking into account the learning curve of
80%. Now remember, the remaining 130 units will not have the learning
curve effect, therefore we use the time it took to produce the 70th unit [as
this where the learning curve stopped having an effect].

Total cost = total hours * labour rate

200.94 * R110 [this is from the question]

R22,103.4

As always, if there are any errors, please let me know immediately.