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Sir ,
i am confused in answering this question part b how to go through this question and answer ?3 Mic Co produces microphones for mobile phones and operates a standard costing system. Before production
commenced, the standard labour time per batch for its latest microphone was estimated to be 200 hours. The
standard labour cost per hour is $12 and resource allocation and cost data were therefore initially prepared on this
basis.
Production of the microphone started in July and the number of batches assembled and sold each month was as
follows:
Month No of batches assembled and sold
July 1
August 1
September 2
October 4
November 8
The first batch took 200 hours to make, as anticipated, but, during the first four months of production, a learning
effect of 88% was observed, although this finished at the end of October. The learning formula is shown on the
formula sheet and at the 88% learning rate the value of b is –0·1844245.
Mic Co uses ‘cost plus’ pricing to establish selling prices for all its products. Sales of its new microphone in the first
five months have been disappointing. The sales manager has blamed the production department for getting the labour
cost so wrong, as this, in turn, caused the price to be too high. The production manager has disclaimed all
responsibility, saying that, ‘as usual, the managing director prepared the budgets alone and didn’t consult me and,
had he bothered to do so, I would have told him that a learning curve was expected.’
Required:(b) Discuss the implications of the learning effect coming to an end for Mic Co, with regard to costing, budgeting
and production.thanks in advance
Part (b) does not require any calculations at all.
The problem is that the costings (and therefore the selling price) were based on the assumption that every batch would take 200 hours of labour.
In fact, because of the learning effect, once they get past October (and are in full production) each batch will take less than 200 hours. Therefore what they should have done was estimate the time per batch once they are in full production (i.e. once the learning has finished) and base the costs (and therefore the selling price) on this time.
Obviously this would result in a lower selling price, which is the point that the production manager is making.You presumably have a printed answer to the question (in the same book in which you found the question) and you should read and learn from it.
I would also suggest that you watch our free lectures on learning curves. Our free lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.
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