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ACCA Applied Knowledge · Management Accounting · Analytical techniques in budgeting and forecasting

The first unit of a product takes 125 labour hours. An 80% learning curve applies (cumulative average time model) and labour costs $15 per hour. What is the expected labour cost of units 5 to 8 inclusive?

The labour cost of units 5 to 8 is $2,880. Four units take 320 hours (80 hour average) and eight units take 512 hours (64 hour average). The difference is 192 hours, which at $15 per hour costs $2,880.

  1. A$3,840
  2. B$2,880Correct
  3. C$4,800
  4. D$7,680

Explanation

Average for 4 units is 125 x 0.8 x 0.8 = 80 hours, so total is 320 hours. Average for 8 units is 80 x 0.8 = 64 hours, so total is 512 hours. Units 5-8 take 512 - 320 = 192 hours, costing 192 x $15 = $2,880. $3,840 wrongly applies the 8-unit average of 64 hours to just four units.

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