Quantitative Analysis in Budgeting

Question 1

What is the learning effect theory?

Answer 1

As cumulative output doubles, the average time to produce a unit falls by a given rate.

Question 2

What is the formula for the learning effect?

Answer 2

Y = ax^b

Where b = log r / log 2

Question 3

What is the high low method?

Answer 3

Used to calculate the amount of variable and fixed cost within a semi-variable cost

Question 4

What are the 4 steps for the high-low method?

Answer 4

1. Take the highest and lowest output levels
2. Find the difference
3. Calculate the variable cost per unit
4. Calculate the fixed cost.

Question 5

What conditions must be present for the learning effect to hold?

Answer 5

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

Question 6

What is the steady state of the learning effect?

Answer 6

The steady state is reached when no further improvements can be made

The time taken per unit is constant.

Question 7

What is the experience effect?

Answer 7

The experience effect applies to other costs which may also reduce as the workforce gains experience;

• materials
• variable overheads
• fixed overheads

Question 8

What are the problems with the learning effect?

Answer 8

• How to calculate the rate
• Is the rate really constant?
• When will production reach a steady state.

Question 9

What is the formula to reverse engineer the learning rate?

Answer 9

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.

Question 10

How do we find the nth batch?

Answer 10

use y = ax^b

for the nth batch and the n-1 batch and calculate the difference.