And the learning curve effect labour efficiency

Hexagon ltd commenced production of the Gen3 earlier this year. The actual results for the first production run of 250 units of the Gen3 included the following information:

• Labour: 200 hours were worked, costing a total of £2,000

• Commentaries on the calculations which discuss whether Jack was correct in his response to the original variances.

Step by Step Answer with Explanation

Introduction

This report provides a detailed analysis of the labour and materials variances arising from the first production run of 250 units of the Gen3 component. The analysis incorporates new information regarding market price changes, regulatory impacts on material usage, and the learning curve effect on labour efficiency. The report also assesses the validity of the initial responses to these variances.

• Original Standard Cost:
– Standard Quantity: 250 units × 4 kg/unit = 1,000 kg – Standard Price: £5/kg
– Total Standard Cost: 1,000 kg × £5/kg = £5,000• Actual Cost:
– Actual Quantity: 1,250 kg
– Actual Price: £7,500 / 1,250 kg = £6/kg
– Total Actual Cost: £7,500
• Total Materials Variance:
– Total Variance: £7,500 - £5,000 = £2,500 Adverse

ii. Price Variance Split

2

• Learning Curve Calculation:
– Learning Curve Formula: Y = aXb
∗a = Time for first unit = 5 hours
∗X = Cumulative units = 250
∗b = log 0.8/ log 2 = −0.3219
– Cumulative Average Time per Unit: 5 × 250−0.3219= 0.845 hours/unit
• Revised Standard Hours:
– Total Revised Standard Hours: 0.845 hours/unit × 250 units = 211.25 hours
• Revised Standard Labour Cost: 211.25 hours × £10/hour =£2,112.50
• Planning Variance:
– Calculation: (Revised Standard Cost - Original Standard Cost) – Variance: £2,112.50 - £12,500 = £10,387.50 Favourable• Operational Variance:
– Calculation: Actual Cost - Revised Standard Cost
– Variance: £2,000 - £2,112.50 = £112.50 Favourable

3

• Usage Variance:
– The planning usage variance of £1,875 adverse arises from new regulations increasing material usage from 4 kg to 5.5 kg per unit. – The operational usage variance of £812.50 favourable suggests efficient material usage by production, using less material (1,250 kg) than the revised standard (1,375 kg).

Evaluation of Jack's Response:

• Planning Variance:
– The substantial favourable planning variance (£10,387.50) is due to the initial standard being set without considering the 80% learning curve.

• Operational Variance:

– The actual performance was only marginally better than the revised standard.

Conclusion

• Communication:
– Ensure that all departments are informed of changes that affect standards to align expectations and performance metrics.

Prepared by: