The following variances have been calculated in respect of a new product:
Direct labour efficiency variance $14,700 Favourable
Direct labour rate variance $ 5,250 Adverse
The variances were calculated using standard cost data which showed that each unit of the
product was expected to take 8 hours to produce at a cost of $15 per hour. Actual output of
the product was 560 units and actual time worked in the manufacture of the product totalled
3,500 hours at a cost of $57,750.
However, the production manager now realises that the standard time of 8 hours per unit was
the time taken to produce the first unit and that a learning rate of 90% should have been
anticipated for the first 600 units.
Required:
(a) Calculate planning and operating variances following the recognition of the
learning curve effect.
(6 marks)
(b) Explain the importance of learning curves in the context of Target Costing.
(4 marks)
Note: The learning index for a 90% learning curve is -0.1520
