Learning Curve Theory

Faculty: Prof. C. P. Gupta

Final Course; Paper 5 Advanced
Management Accounting - Chapter 16

Objectives:

Understanding the concept of Learning Curve and its

dynamics.
Applications of the Learning Curve thats the conditions
where the ideas of Learning Curve can be applied.

Situations where the Learning Curve can not be applied

First an old WISDOM

Practice makes a man

perfect.

Learning Curve Theoryits DYNAMICS!

Learning Curve Theory

The Basic Premise of the Learning Curve Theory is

People and organizations become better and

efficient at their tasks as the tasks are repeated.

1
2
3

Repeat the tasks

Learn the tricks of tasks
Become efficient

Learning Curve Theory says

A firm takes less time to complete each
additional unit it produces as shown below.

Understanding the Learning Curve

A Learning Curve has two phases one, during
which there is learning, called Learning Phase
and second, there is no-learning and it is
called Steady State Phase.

Learning
Phase

Steady State
Phase

Learning Curve Theory - Defined

Every time the production quantity doubles, we can expect a more

or less fixed percentage decrease in the effort required to build a
single unit or in the average time required to build a group of units.

The curves used to estimate efficiencies gained when an activity is

repeated are called Learning Curve.

Please remember that

Learning Curve Theory
talks about the relation
between

Repetitions (in
Volume or
Production); and

Time taken to
produce per unit
of production or
cost per unit.

While Learning Curves

are mathematical
models to model such
relationship.

Learning Curves
The learning curve is an analytical tool that can be used
to estimate the rate at which cumulative experience
allows workers to do tasks faster and with less cost.
They are mathematical models used to estimate
efficiencies gained when an activity is repeated.
Learning Curves models the relationship - each time
cumulative production double, the total manufacturing
time and cost fell by a constant and predictable amount.

Learning Curve has different names!

Experience
Curve
Other names
of Learning
Curve are -

Progress
Curve
Improvement
Curve

What for should we estimate Learning Curve?

The most important use of learning curves is to estimate

the labor hours, and thereby much of the cost, of a
manufactured good that is built in significant quantities.

Learning Curve Ratio or Rate

Learning Curve Ratio is the building block of a
Learning Curve and is defined as

For example, if it takes 50 Labor Hours per unit while producing

1,000 units and 40 Labor Hours per unit while producing 2,000,
then the Learning Curve Ratio will be 40/50 = 80%.
This 80% Learning Curve Ratio means that every time whenever
the output is doubled, the labor hours will be 80% of the earlier
ones or the labor hour will be reduced by 20%.

Assumptions of Learning Curve

The amount of time required to complete a given task or unit

of a product will be less each time the task is undertaken.
The unit time will decrease at a decreasing rate.
The reduction in time will follow a specific and predictable
pattern, such as an exponential function.

Learning Curves are known by their

Learning Curve Ratio!

80% - Learning Curve

means that every time the output is doubled the labor
hours needed to produce one unit or the cost per unit
will be 80% of labor hours or cost before the output is
doubled; or in other words, 80%-Learning Curve
means that whenever the output is doubled, the labor
hours or the cost per unit will be reduced by 20%.

Learning Curve Graphs

Now, lets look at

Mathematics of Learning Curve

There are three ways to handle

Mathematics of Learning Curves:

Arithmetic Approach

Logarithmic Approach

Learning-Curve Coefficient Approach

Mathematics of Learning Curve - Arithmetic Approach

Simplest approach to learning-curve problems.

Each time production doubles, labor per unit declines by a constant

factor, known as the learning rate.

For example, if we know that the learning rate is 80% and that the
first unit produced took 100 hours, the hours required to produce the
second, fourth, eighth, and sixteenth units will be as follows:

Nth Unit Produced

Hours for Nth Unit

100

80.00 = (100 x .80)

64.00 = (80 x .80)

51.20 = (64 x .80)

16

40.96 = (51.20 x .80)

32

32.77 = (40.96 x .80)

Arithmetic analysis does not tell us how many hours will be needed
to produce other units not in the range, say between 8-16.

Mathematics of Learning Curve - Logarithmic Approach

The Learning Curve can be expressed as mathematical function. And, we

can express the relationship between the amount of time it takes an
organization with a learning rate percentage of r to produce the nth item as
an equation:
Tn = T1 (nb)

Where:
Tn = time required to complete the nth task
r = learning rate percentage
b = ln(r)/ln(2)

Example:
Consider the information given in the aircraft part manufacturing:
T1 = 100 minutes
T2 = 80 minutes
T4 = 64 minutes
What would be the time required to produce the eighth part?
T8 = (100)(8-0.322) = 51.2 minutes
since b= ln(0.80)/ln(2) = -0.322

Which base should we take for Logarithm?

Base 10 or Base e?
We may take any base and we can prove that

Ln( LearningRate) Log10 ( LearningRate)

=
Ln(2)
Log10 (2)

Mathematics of Learning Curve - Logarithmic Approach

(CONTINUED)

The value of b is different for different Learning Rates and

b is also called SLOPE of the Learning Curve.
Different values of the slope for different learning rates are
given in the following table:
VALUES OF LEARNING CURVE SLOPE
LEARNING RATE

SLOPE

99.00%

-0.0145

90.00%

-0.1520

95.00%
85.00%
80.00%
75.00%
70.00%
65.00%

-0.0740
-0.2345
-0.3219
-0.4150
-0.5146
-0.6215

Mathematics of Learning Curve - Logarithmic Approach

(CONTINUED)

The following
Tn = T1 (nb)
can be written as log Tn = log T1 + b log n
The most important advantage of the
Logarithmic Approach is
The logarithmic approach allows us to determine the
hours required for any unit produced.

Mathematics of Learning Curve - Learning-Curve

Coefficient Approach

The Learning-curve Coefficient Approach is based on

Learning Curve Coefficient Tables. These tables provide
value of Learning Curve Coefficient for every unit
produced for different Learning Rates.

The equation under this approach is

TN = T1C
where TN = number of labor-hours required to produce the Nth unit
T1 = number of labor-hours required to produce the first unit
C = learning-curve coefficient from Table

The learning-curve coefficient, C, depends on both the

learning rate (70%, 75%, 80%, and so on) and the unit of
interest.

70%
UNITS UNIT TIME

75%

80%

85%

90%

TOTAL TIME

UNIT TIME

TOTAL TIME

UNIT TIME

TOTAL TIME

UNIT TIME

TOTAL TIME

UNIT TIME

TOTAL TIME

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

0.700

1.700

0.750

1.750

0.800

1.800

0.850

1.850

0.900

1.900

0.568

2.268

0.634

2.384

0.702

2.502

0.773

2.623

0.846

2.746

0.490

2.758

0.563

2.946

0.640

3.142

0.723

3.345

0.810

3.556

0.437

3.195

0.513

3.459

0.596

3.738

0.686

4.031

0.783

4.339

0.398

3.593

0.475

3.934

0.562

4.299

0.657

4.688

0.762

5.101

0.367

3.960

0.446

4.380

0.534

4.834

0.634

5.322

0.744

5.845

0.343

4.303

0.422

4.802

0.512

5.346

0.614

5.936

0.729

6.574

0.323

4.626

0.402

5.204

0.493

5.839

0.597

6.533

0.716

7.290

10

0.306

4.932

0.385

5.589

0.477

6.315

0.583

7.116

0.705

7.994

11

0.291

5.223

0.370

5.958

0.462

6.777

0.570

7.686

0.695

8.689

12

0.278

5.501

0.357

6.315

0.449

7.227

0.558

8.244

0.685

9.374

13

0.267

5.769

0.345

6.660

0.438

7.665

0.548

8.792

0.677

10.052

14

0.257

6.026

0.334

6.994

0.428

8.092

0.539

9.331

0.670

10.721

15

0.248

6.274

0.325

7.319

0.418

8.511

0.530

9.861

0.663

11.384

16

0.240

6.514

0.316

7.635

0.410

8.920

0.522

10.383

0.656

12.040

17

0.233

6.747

0.309

7.944

0.402

9.322

0.515

10.898

0.650

12.690

18

0.226

6.973

0.301

8.245

0.394

9.716

0.508

11.405

0.644

13.334

19

0.220

7.192

0.295

8.540

0.388

10.104

0.501

11.907

0.639

13.974

20

0.214

7.407

0.288

8.828

0.381

10.485

0.495

12.402

0.634

14.608

25

0.191

8.404

0.263

10.191

0.355

12.309

0.470

14.801

0.613

17.713

30

0.174

9.305

0.244

11.446

0.335

14.020

0.450

17.091

0.596

20.727

35

0.160

10.133

0.229

12.618

0.318

15.643

0.434

19.294

0.583

23.666

40

0.150

10.902

0.216

13.723

0.305

17.193

0.421

21.425

0.571

26.543

45

0.141

11.625

0.206

14.773

0.294

18.684

0.410

23.496

0.561

29.366

50

0.134

12.307

0.197

15.776

0.284

20.122

0.400

25.513

0.552

32.142

THE LEARNING-CURVE COEFFICIENT

Challenges of Learning Curve - #1

Estimation of Learning Rate from the Actual
Data

Lets look at the data collected from the production

department of a company

Production

Man-Hours - Man-Hours Total

Average

15

36,750

2,450

25

55,750

2,230

85

1,45,750

1,715

115

1,84,750

1,607

165

2,44,750

1,483

A Non-Linear Relation may be converted to a linear

relation by taking LOG
Log of
Production(X)

Log of Man-Hours
- Average(Y)

2.7081

7.8038

3.2189

7.7098

4.4427

7.4470

4.7449

7.3818

5.1059

7.3020

We use Regression
to estimate the line
of best fit to our
data!

Estimation of the Learning Rate

Regression Model gives the estimate of
log Tn = log T1 + b log n
In this, equation b is the slope of the line and
we know that the value of b is
b = ln(r)/ln(2)

From this, we can estimate the Learning Rate,

r, as

Estimation of the Learning RateExample

We get the following estimate of Regression
Model for our example Y = 8.380 0.210 X
In this, equation b, the slope of the line is
b = -0.210 = ln(r)/ln(2)

Using

, we get the Learning Rate, r, as

r = e-0.210 x ln 2 = e-0.1456 = 0.8645 = 86.45% = Learning

Rate

Challenges of Learning Curve - #2

Application of Learning Curve for solving

problems

RevisitLearning Curve

The theory of Learning Curve says that every time the production quantity doubles,
we can expect a more or less fixed
percentage decrease in the effort required to
build a single unit or in the average time
required to build a group of units.

Ways of handling Mathematics of

Learning Curve

1
2
3

Arithmetic Approach
Logarithmic Approach
Learning-Curve Coefficient Approach

Example No.1

A company has observed that a 90% Learning Curve Ratio applies to all
labour related costs each time a new model enters production. It is
anticipated that 320 units will be manufactured during 2013. Direct labour
hours for the first lot of 10 units are 1,000 hours at Rs. 8 per hour. Variable
overheads costs is assigned to products at the rate of Rs. 2 per direct labour
hour. Determine Total Labour related costs to manufacture 320 units of
output.

Using Arithmetic Approach, we get the following table.

Incremental
Quantity

Cumulative Average Time

Quantity
per unit

Total time
taken

10

10

100.00

1,000.00

10
20
40
80
160

20
40
80
160
320

90.00
81.00
72.90
65.61
59.05

1,800.00
3,240.00
5,832.00
10,497.60
18,895.68

Therefore, the total

labour related cost to
manufacture 320 units
will be 18,895.68
hours x Rs. 10 = Rs.
1,88,956.80.

Example No.1

A company has observed that a 90% Learning Curve Ratio applies to all
labour related costs each time a new model enters production. It is
anticipated that 320 units will be manufactured during 2013. Direct labour
hours for the first lot of 10 units are 1,000 hours at Rs. 8 per hour. Variable
overheads costs is assigned to products at the rate of Rs. 2 per direct labour
hour. Determine Total Labour related costs to manufacture 320 units of
output.

Using Logarithmic Approach, we get the following:

As per the Logarithmic Approach, we get

Tn = T1 (nb) where b = ln(r)/ln(2). For this example,
b = ln(.9)/ln(2) = -0.152. Further, note that in every
lot, we are producing 10 units and to get 320 units
we should have 32 lot; thats to say that n = 32
and T1 = 100. Then, we get T32 = 100 (32-0.152) =
59.049 and for 320 units, it will be 59.049 x 320 =
18,895.68.

Therefore, the total

labour related cost to
manufacture 320 units
will be 18,895.68
hours x Rs. 10 = Rs.
1,88,956.80.

Example No.1

A company has observed that a 90% Learning Curve Ratio applies to all
labour related costs each time a new model enters production. It is
anticipated that 320 units will be manufactured during 2013. Direct labour
hours for the first lot of 10 units are 1,000 hours at Rs. 8 per hour. Variable
overheads costs is assigned to products at the rate of Rs. 2 per direct labour
hour. Determine Total Labour related costs to manufacture 320 units of
output.

Using Learning-Curve Coefficient Approach, we get the hours per unit

corresponding to 32 lot as 59.049 per unit and for 320 units, it will be
18,895.68.
Therefore, the total
labour related cost to
manufacture 320 units
will be 18,895.68
hours x Rs. 10 = Rs.
1,88,956.80.

Example No.2

Given the following data, determine the cost of producing 8

machines:

Direct Labour Hours to produce the First Unit: 1,000 hours

Learning Curve: 80%
Direct Material Cost per machine: Rs. 40,000
Direct Labour Cost per hour: Rs. 50
Fixed Cost: Rs. 5,000

Using the Arithmetic Approach, we get the direct

labour hours required to produce one machine
given the production of 8 machines is 512 hours
(from the below table)
UNITS
1
2
4
8

AVERAGE TIME PER

UNIT
1000
800
640
512

Direct Material
Cost
Direct Labour
Cost (512 x 8 x
50)
Fixed Cost
Total

Rs.

40,000

Rs. 2,04,800
Rs.
5,000
Rs. 2,49,800

Example No.2

Given the following data, determine the cost of producing 8

machines:

Direct Labour Hours to produce the First Unit: 1,000 hours

Learning Curve: 80%
Direct Material Cost per machine: Rs. 40,000
Direct Labour Cost per hour: Rs. 50
Fixed Cost: Rs. 5,000

As per the Logarithmic Approach, we

get
Tn = T1 (nb) where b = ln(r)/ln(2). For
this example, b = ln(.8)/ln(2) = 0.3219. Further, to get 8 machines we
have n = 8 and T1 = 1000. Then, we
get T8 = 1000 (8-0.3219) = 512 per
machine given the production of 8
machines.

Direct Material
Cost
Direct Labour
Cost (512 x 8 x
50)
Fixed Cost
Total

Rs.

40,000

Rs. 2,04,800
Rs.
5,000
Rs. 2,49,800

Example No. 3
A company has 10 direct workers, who work for 25 days a month for 8 hours
each day. The estimated down time is 25% of the total available time. The
company received an order for a new product. The first unit of the new
product requires 40 direct labour to produce the product. The company
expects 80% Learning Curve for this type of work.
The company uses Standard Absorption Costing whereby the overheads are
absorbed on the basis of direct labour hour. The necessary cost data is
given below:

Direct Material

Rs. 60 per unit; and 12 units are

required for one new product.

Direct Labour
Variable Overheads
Fixed overheads

Determine the cost for the first 30 units.

Rs. 6 per hour

Rs. 1 per direct labour hour
Rs. 7,500 per month

Example No. 3 Absorption Rate

Total hours in a month (10 men x 25 days x 8 hours)

Less: Down Time (25%)
Total Effective Hours
Total Fixed Overheads for month
Fixed Overheads Rate per labour hour

2,000
500
1,500
Rs. 7,500
Rs. 5

Example No. 3 Labour hours per unit

As per the Logarithmic Approach, we get
Tn = T1 (nb) where b = ln(r)/ln(2). For this example, b = ln(.8)/ln(2) = 0.3219. Given n = 30 and T1 = 40. Then, we get T30 = 40 (30-0.3219) =
13.3824 and for 30 units, it will be 13.3824 x 30 = 401.47.

Direct Material Cost (30 x 12 x Rs. 60)

Direct Labour Cost (401.47 x Rs. 6)

Rs. 21,600.00
Rs. 2,408.82

Variable Overheads (401.47 x Rs. 1)

Fixed Overheads (401.47 x Rs. 5)

Rs.
Total

401.47

Rs. 2,007.35
Rs. 26,417.64

Where should I use Learning Curve ?

in labour oriented
industry.

in industries where the

jobs are repetitive in
nature.

where the changes in

the product design and
production processes
are not very frequent.

where the workforce is

stable and does not
have very high rate of
attrition.

Areas of Applications of Learning Curve

Helps in
determining labour
standards

Helps in strategic
planning through
better volume-cost
relationship

Helps in pricing

Helps in budgeting
and profit-planning

Helps in
negotiations

Limitations of the Learning Curve Theory

May not necessarily apply

to supervisory personnel,
skilled craftsmen or any
job that has non repetitive
job tasks or very large
cycle times.

A change in the mix of

indirect labor or
supervisory talent to direct
labor could alter the
Learning Curve.

Institution of incentive
system, bonus plans, zero
defect programs may
improve efficiency.

Change of product design,

raw materials, and/or
production process may
significantly alter the
learning curve.

Limitations of the Learning Curve Theory

A contract phase out may

result in a lengthening of
production times for the last
units. Employees want to
prolong their income period.

The condition of tools and

equipment:
a) the lack of proper maintenance of
tools and equipment
b) the non replacement of tools
c) the aging of equipment resulting in
greater maintenance and time
required for adjustment

The transfer of personnel may

result in:
a) the interruption or the regression
of the learning curve
b) the necessity to start upon a new
learning curve

Trust that you have understood the dynamics of Learning Curve

Trust that you have understood the dynamics of Learning Curve

Thank you