Flashcards in Quantitative Analysis in Budgeting Deck (10)
What is the learning effect theory?
As cumulative output doubles, the average time to produce a unit falls by a given rate.
What is the formula for the learning effect?
Y = ax^b
Where b = log r / log 2
What is the high low method?
Used to calculate the amount of variable and fixed cost within a semi-variable cost
What are the 4 steps for the high-low method?
1. Take the highest and lowest output levels
2. Find the difference
3. Calculate the variable cost per unit
4. Calculate the fixed cost.
What conditions must be present for the learning effect to hold?
All must apply:
1. Significant manual element
2. Repetitive Task
3. Early stage of production
4. Consistent workforce
5. No breaks in production
6. Motivated workforce
What is the steady state of the learning effect?
The steady state is reached when no further improvements can be made
The time taken per unit is constant.
What is the experience effect?
The experience effect applies to other costs which may also reduce as the workforce gains experience;
- variable overheads
- fixed overheads
What are the problems with the learning effect?
- How to calculate the rate
- Is the rate really constant?
- When will production reach a steady state.
What is the formula to reverse engineer the learning rate?
batch total hours = first batch hours x r^x x number of batches made
where r^x is the rate to the power of an indice of 2.