Whenever an individual starts a job which is fairly repetitive in nature, and provided that his

speed of working is not dictated to him by the speed of machinery (as it would be on a
production line), he is likely to become more confident and knowledgeable about the work as
he gains experience, to become more efficient, and to do the work more quickly.
Eventually, however, when he has acquired enough experience, there will be nothing more for
him to learn, and so the learning process will stop.
The same principle may apply to a work force as a whole, when it starts to make a new
product.
CIMA Terminology: The learning curve is “The mathematical expression of the phenomenon
that when complex & labour-intensive procedures are repeated, unit labour times tend to
decrease at a constant rate. The learning curve models mathematically this reduction in unit
production time.”
More specifically, the learning curve theory states that the cumulative average time per unit
produced is assumed to decrease by a constant percentage every time total output of product
doubles. For instance, with an 80% learning curve, the cumulative average time per unit of
output will fall to 80% of what it was before, every time output is doubled.
Learning curve theory applies to situations where the work force as a whole improves in
efficiency with experience. The learning effect or learning curve effect describes the speeding
up of a job with repeated performance.

The learning rate and learning effect

Where a learning curve applies, there is a learning rate and a learning effect.
The learning rate is expressed as a percentage value, such as an 80% learning curve or a 70%
learning curve.
The learning effect is that as the work force learns from experience how to make the new
product, there is a big reduction in the time to make additional units.
Specifically, every time that the cumulative output of the product doubles, the average time
to make all the units produced to date is a proportion of what it was before. This proportion is the
learning rate.
So if a 90% learning curve applies, and the labour time to make the first unit is 100 hours:
(a) The average time to make the first two units will be 90% × 100 hours = 90 hours, and the

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 total time for the first two units will be 180 hours. Since the first unit takes 100 hours, the
second unit will take 80 hours.
(b) The average time to make the first four units will be 90% × 90 hours = 81 hours and the
total time for the first four units will be 324 hours. Since the first two units take 180
hours, the third and fourth units together will take 144 hours. This learning process
continues until the learning effect comes to an end and a ‘steady state’ of production is
achieved.
Example:
If the first unit of output requires 100 hours & an 70% learning curve applies, the production
times would be as follows.
Cumulative Cumulative Cumulative Incremental Incremental
number of units avge time per total time number of units total time
unit (hours) (hours) (hours)
1 100 100 [100 x 1] 1 100 [100 ÷ 1]
2* 70 [100 x 70%] 140 [70 x 2] 1 40 [40 ÷ 1 ]
4* 49 [70 x 70%] 196 [49 x 4] 2 28 [56 ÷ 2]
8* 34.3 [49 x 70%] 274.4 [34.3 x 8] 4 19.6 [78.4 ÷ 4]

* Output is being doubled each time.

The cost of the additional time can be calculated by applying the labour hour rate to the number
of labour hours (and variable overhead rate, where variable overheads vary with the number of
labour hours). The learning effect does not affect material costs.

Uses of Learning curve.

Knowledge of learning curve helps in cost predications. Its main uses include :
 L.C. helps in analysing cost-volume profit relationship and is useful for cost estimates
and forecasting
 L.C. helps in budgeting and profit planning.
 L.C. helps in pricing, particularly in a tender when it is known that the tender consists of
several repetitive job.
 L.C. helps design engineers in making decision, based upon expected rates of
improvement.
 L.C. helps in setting standards in learning phase.

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  L.C. knowledge helps in manpower planning for contract of long duration or for
repetitive clerical work.
 LC suggest great opportunities for cost reduction to be achieved by improving learning.
 LC concept provides a means of evaluating the effectiveness of training programs.

Limitations to the usefulness of the learning curve:

Learning curve theory has some limitations.
(a) The learning curve phenomenon is not always present.
(b) It assumes stable conditions at work which will enable learning to take place. This is not
always practicable, for example because of labour turnover.
(c) It must also assume a certain degree of motivation amongst employees.
(d) Breaks between repeating production of an item must not be too long, or workers will
'forget' and the learning process will have to begin all over again.
(e) It may be difficult to obtain accurate data to decide what the learning curve is.
(f) Production techniques may change, or product design alterations may be made, so that it
takes a long time for a 'standard' production method to emerge, to which a learning effect
will apply.
(g) For purposes of planning and control, production management and workers may resist
attempts to plan for reductions in the average production time ,because this will put them
under pressure to achieve the expected reductions. The work force may demand some form of
bonus as a reward for achieving reductions in time.

Factors affecting Learning Curve:

 When labour turnover rate is high management has to train new workers frequently. In
such situations the company may never reach its maximum efficiency potential. One of
the important requisites of the learning curve concept is that there should be
uninterrupted flow of work. The fewer the interruptions, the grater will be the
improvement in efficiency.

 Changes in a product or in the methods of production, designs, machinery, or the

tools/used affect the slope of the learning curve. All these have the effect of starting

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 learning a fresh because of new conditions If the changes are frequent, there may be no
learning at all.

 Also other factors influencing the learning curve are labour strikes, lock outs and shut
downs due to other cause also/affect the learning curve. In each such case there is
interruption in the progress of learning.
Q#1. Explain the concept ‘Learning curve’. How can it be applied for Cost Management?
Answer: The first time when a new operation is performed, both the workers and the operating
producers 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 further 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:
 Learning curve is useful in analyzing 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.
 It helps in budgeting and profit planning.
 It enables the company in price fixation. In particular, the company can fix a lower price
for repeat orders.
 It helps the design engineers to take suitable decisions based on expected rates of
improvement.
 It helps in price negotiations.
 It is useful in setting standards and in performance evaluation.
Q#02: What are the distinctive features of learning curve theory in manufacturing
environment? Explain the learning curve ratio.
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

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successively smaller but the rate of decrease will remain fixed. It occurs due to the following
distinctive features of manufacturing environment:
 Better tooling methods are developed and used.
 More productive equipments are designed and used to make the product.
 Design bugs are detected and corrected.
 Engineering changes decrease over time.
 Earlier teething problems are overcome.
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 Rs. 25 and the average labour
cost for the first 1,000 units is Rs. 20, the learning curve ratio is (Rs. 20/25) or 80%. Since the
average cost per unit of 1,000 units is Rs. 20, the average cost per unit of first 2,000 units is
likely to be 80% of Rs. 20 or Rs. 16
Q#03. Discuss the application of the learning curve.
Answer: Application of Learning Curve: Learning Curve helps to analyse cost-volume profit
relationships during familiarization 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.

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Q#04: Captain Kitts has designed a new type of sailing boat, for which the cost of the first boat
to be produced has been estimated as follows:

Materials 5,000
Labour (800 hrs @ $5 per hr) 4,000
Overhead (150% of labour cost) 6,000
15,000
Profit mark-up (20%) 3,000
Sales price 18,000
It is planned to sell all the yachts at full cost plus 20%. An 80% learning curve is expected to
apply to the production work. The management accountant has been asked to provide cost
information so that decisions can be made on what price to charge.
 What is the separate cost of a second yacht?
 What would be the cost per unit for a third and a fourth yacht, if they are ordered
separately later on?
 If they were all ordered now, could Captain Kitts quote a single unit price for four yachts
and eight yachts?

Q#05: Bortamord anticipates that a 90% learning curve will apply to the production of a new
item. The first item will cost $2,000 in materials, and will take 500 labour hours. The cost per
hour for labour and variable overhead is $5.
You are required to calculate the total cost for the first unit and for the first 8 units.

The algebraic approach

The formula for the learning curve is Y = axb
where Y is the cumulative average time per unit to produce x units
x is the cumulative number of units
a is the time taken for the first unit of output
b is the index of learning (log LR/log2)
LR is the learning rate as a decimal
Use of algebraic approach
Calculating the time for a specific unit
The formula approach is used to calculate the incremental time for any unit where a learning
curve applies.
Suppose that we want to know the time that it will take to make the third and the fifth units,
where a learning curve applies.
(a) To calculate the time to make the third unit:
– Calculate the cumulative average time for the first three units and the total time for the first
three units.
– Calculate the cumulative average time for the first two units and the total time for the first
two units.

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– The time for the third unit is the difference in these two totals.
(b) To calculate the time to make the fifth unit:
– Calculate the cumulative average time for the first five units and the total time for the first
five units
– Calculate the cumulative average time for the first four units and the total time for the first
four units
– The time for the fifth unit is the difference in these two totals.
This approach can be used to calculate the time required to make any unit where a learning curve
applies.
Example:
Suppose that an 80% learning curve applies to production of a new product item ABC. To date
(the end of June) 30 units of ABC have been produced. Budgeted production in July is 5
units.The time to make the very first unit of ABC in January was 120 hours. The labour cost is
$10 per hour.
Required
(a) Calculate the time required to make the 31st unit.
(b) Calculate the budgeted total labour cost for July.

Q: BL is planning to manufacture a new product, product A. Development tests suggest that

60% of the variable manufacturing cost of product A will be affected by a learning and
experience curve. This learning effect will apply to each unit produced and continue at a constant
rate of learning until cumulative production reaches 4,000 units, when learning will stop. The
unit variable manufacturing cost of the first unit is estimated to be $1,200 (of which 60% will be
subject to the effect of learning), while the average unit variable manufacturing cost of four units
will be $405.
Required
Calculate the rate of learning that is expected to apply.

Q: XX is aware that there is a learning effect for the production of one of its new products, but
is unsure about the degree of learning. The following data relate to this product.
Time taken to produce the first unit 28 direct labour hours
Production to date 15 units
Cumulative time taken to date 104 direct labour hours
What is the percentage learning effect?

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Learning curves and steady state production
As long as a learning curve effect applies, the time to produce each additional unit is less than the
time for the previous unit. This means that it is not possible to determine a standard time or
standard labour cost for producing the item.
A time will be reached, however, when the learning effect no longer applies and ‘steady state’
production is reached for the product. When a steady state is reached, a standard time and
standard labour cost for the product can be established. The learning curve formula can be used
to calculate the expected labour time and labour cost when a steady state is reached.

Q: A company needs to calculate a new standard cost for one of its products. When the product
was first
manufactured, the standard variable cost of the first unit was as follows.
Cost per unit
$
Direct material 10 kg @ $4 per kg 40
Direct labour 10 hours @ $9 per hour 90
Variable overhead 10 hours @ $1 per hour 10
Total 140
During the following year, a 90% learning curve was observed in making the product. The
cumulative production at the end of the third quarter was 50 units. After producing 50 units, the
learning effect ended, and all subsequent units took the same time to make.
Required
What is the standard cost per unit for the fourth quarter assuming the learning curve had reached
a steady state ie peak efficiency was reached after the 50th unit was produced?

The practical application of learning curve theory

What costs are affected by the learning curve?
(a) Direct labour time and costs
(b) Variable overhead costs, if they vary with direct labour hours worked.
(c) Materials costs are usually unaffected by learning among the workforce, although it is
conceivable that materials handling might improve, and so wastage costs be reduced.
(d) Fixed overhead expenditure should be unaffected by the learning curve (although in an
organisation that uses absorption costing, if fewer hours are worked in producing a unit of
output, and the factory operates at full capacity, the fixed overheads recovered or absorbed
per unit in the cost of the output will decline as more and more units are made).

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The relevance of learning curve effects in management accounting
Learning curve theory can be used to:
(a) Calculate the marginal (incremental) cost of making extra units of a product.
(b) Quote selling prices for a contract, where prices are calculated at cost plus a percentage
mark-up for profit. An awareness of the learning curve can make all the difference between
winning contracts and losing them, or between making profits and selling at a loss-making
price.
(c) Prepare realistic production budgets and more efficient production schedules.
(d) Prepare realistic standard costs for cost control purposes.

Considerations to bear in mind include:

(a) Sales projections, advertising expenditure and delivery date commitments. Identifying a
learning curve effect should allow an organisation to plan its advertising and delivery
schedules to coincide with expected production schedules. Production capacity obviously
affects sales capacity and sales projections.
(b) Budgeting with standard costs. Companies that use standard costing for much of their
production output cannot apply standard times to output where a learning effect is taking place.
This problem can be overcome in practice by:
(i) Establishing standard times for output, once the learning effect has worn off or become
insignificant, and
(ii) Introducing a 'launch cost' budget for the product for the duration of the learning period.
(c) Budgetary control. When learning is still taking place, it would be unreasonable to compare
actual times with the standard times that ought eventually to be achieved when the learning effect
wears off. Allowance should be made accordingly when interpreting labour efficiency
variances.
(d) Cash budgets. Since the learning effect reduces unit variable costs as more units are
produced, it should be allowed for in cash flow projections.
(e) Work scheduling and overtime decisions. To take full advantage of the learning effect, idle
production time should be avoided and work scheduling/overtime decisions should pay regard
to the expected learning effect.

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(f) Pay. Where the workforce is paid a productivity bonus, the time needed to learn a new
production process should be allowed for in calculating the bonus for a period.
(g) Recruiting new labour. When a company plans to take on new labour to help with
increasing production, the learning curve assumption will have to be reviewed.
(h) Market share. The significance of the learning curve is that by increasing its share of the
market, a company can benefit from shop-floor, managerial and technological 'learning' to
achieve economies of scale.

Limitations of learning curve theory

Learning curve theory has some limitations.
(a) The learning curve phenomenon is not always present.
(b) It assumes stable conditions at work which will enable learning to take place. This is not
always practicable, for example because of labour turnover.
(c) It must also assume a certain degree of motivation amongst employees.
(d) Breaks between repeating production of an item must not be too long, or workers will
'forget' and the learning process will have to begin all over again.
(e) It may be difficult to obtain accurate data to decide what the learning curve is.
(f) Production techniques may change, or product design alterations may be made, so that it
takes a long time for a 'standard' production method to emerge, to which a learning effect will
apply.
(g) For purposes of planning and control, production management and workers may resist
attempts to plan for reductions in the average production time ,because this will put them under
pressure to achieve the expected reductions. The work force may demand some form of bonus as
a reward for achieving reductions in time.

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Q:

11
12
Q: Data relating to the production of the fi rst 12 units of a new product are as follows:
Time taken to produce the fi rst unit 15 hours, Cumulative time taken to produce first 12 units 81
hours.
What is the learning rate?

Q: Moosa Butt Incorporation builds boats. Earlier this year the company accepted an order of 15
specialized boats at a fixed price of Rs. 100,000 each. The contract allows four months for
building and delivering of all the boats and a penalty of Rs. 10,000 for each boat delivery late.
The boats are built by using purchased components and internally manufactured parts all
of which are already available. However there is a small team of skilled labor and boatyard space
is limited so that only one boat can be built at a time. Four boats now have been completed and
as Moosa Butt Incorporation has no previous experience of this particular boat, the building
times have been carefully monitored as follows:
Boat Number Completion time Days
1 10.0
2 8.1
3 7.4
4 7.1
Moosa Butt Incorporation has 23 normal working days in every month and the first four boats
were completed with normal working.
Management is now concerned about completing the contract in time.
The Management Accountant’s estimate of direct costs per boat excluding labor cost is as
follows:
Rs. (, 000)
Purchased Components 40
Manufactured Parts 15
Other Direct Expense 05
60
Direct labor costs are Rs. 2500 per day for the normal 23 working days per month. Additional
weekend working days at double the normal working pay rate can be arranged up to a maximum
of 7 days per month (and thus making 30 working days in total).
Overheads will be calculated to the contract at a rate of Rs. 3,000 per normal working day and no
overheads will be allocated for overtime working.

Required:
a) Using the complete information provided calculate learning rate also show full
calculations.
b) Discuss the limitation of learning curve theory in this type of application.
c) Calculate whether it would be preferable for Moosa Butt Incorporation to continue
normal working or to avoid penalties by working weekends. Support your calculations
with explanation you consider appropriate.

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