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Ama query: learning curve theory...

CA D. Singhal (CA ) (490 Points)

13 October 2011

Learning Curve theory relates the increase in experience with reduction in cost (generally Direct Labour) with every repetition of same Work or Job,
This increased experience also results in reduction in wastage of Direct Material.So,
Shouldn't the direct material cost be altered with increasing experience?
{Since Material in also saved with progression of Learning Phase}

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8 Replies

Roshan Thomas (C.E.O ) (356 Points)
Replied 14 October 2011

The equation that we learn establishes the relation b/n labour hours and output that for twice the qty of output the labour hour reduces at a fixed rate. So we can use the equation only for labour hours.

Direct material may exhibit a different kind of relationship with increasing output. We cannot apply the same equation here

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CA Deepak Joshi (TaxTalk) (178 Points)
Replied 14 October 2011

Hi devya...

Consider an example where 2 kgs of Raw material is needed per unit of FG. Also 10 Hrs are needed for first unit produced......

Now when we produce second unit, third unit, 4th unit, fifth unit etc.... the labour force becomes akin to the work they are doing... hence there is learning curve....

That is, they consume less time than the time they consumed on the previous unit.

But the ratio of input to output remains constant. How can input experience a learning curve when the ratio is fixed as min.... 2 kg of RM is needed in any condition to produce 1 unity of FG...

@ Roshan... Learning curve also applies even when the the next output is less than twice of the previous one..:)

1 Like

CA D. Singhal (CA ) (490 Points)
Replied 14 October 2011

Thanks for the quick reply Roshan & Deepak, I am convinced now that learning curve theory isn't applicable on material costs currently....
A learning curve can't be established on the same parameters as those of Direct Labour costs
But how should a manager deal with the reduction in Direct Material wastage due to increaed learning and experience while making a budget?

CA Deepak Joshi (TaxTalk) (178 Points)
Replied 14 October 2011

from what i could gather from your query is that u r talking about reduction in scrap and not the input quantity itself(as that wud be impossible)... if the above stated is correct then u can understand as follows- every prodn activity encounters normal loss. to that extent wastage can't be reduced. but any abnormal loss can be reduced with help of standard variance analysis... it wud be pertinent to note that THE SPIRIT OF LEARNING CURVE APPLIES TO MATERIAL in only 1 case... when new prodn facility is setup then abnormal loss is bound to happen..bt as labour becomes more experienced the loss tends to be reduced to normal levels. THIS NOT WRITTEN IN ANY BOOK BUT THIS WHAT I HAVE UNDERSTOOD IN MY ARTICLESHIP DOING AUDITS OF DIFF TYPES. i hope the doubt is resolved..

CA D. Singhal (CA ) (490 Points)
Replied 14 October 2011

Thanks for the explanation Deepak, you got my querry right...

Deepti (Article) (54 Points)
Replied 14 October 2011

If we apply Learning Curve theory on cost items other than Labour (e.g. Material) then it is known as Experience Curve (Source https://vimeo.com/27288408 & Last question of Learning Curve of Book of Parag Gupta Sir).

2 Like

CA Deepak Joshi (TaxTalk) (178 Points)
Replied 15 October 2011

Hey deepti tnx a lot fr dat info!!!!.......a very important update regarding the subject...n it feels gud when sumthing u've recognised practically is already in the books of some select authors...yo!!! :)

CA D. Singhal (CA ) (490 Points)
Replied 15 October 2011

Thanks a ton Deepti, At last my querry got a legitimate answer..... That is; Yes Experience/Learning results in reduction of Cost per unit and it is governed by "Experience Curve"...