I have previously written about the learning curve and its use in management accounting practice. The learning curve effect refers to a possible tendency for tasks to be performed quicker as employees learn them and become more efficient. Thus, over time, costs may decrease. The term experience curve is also used to describe this effect – have a look at the previous post for detail on how to calculate the learning curve effect.
In October 2012, CIMA reported some research on two cases of actual use of the learning curve. The full details can be found here , but I will summarise them briefly here. Pricing was a key issue for one case, so they used the learning curve in their cost and pricing calculations to ensure they were giving customers the most competitive price. In the second case, the learning curve effect was used in investment evaluation to obtain the best future cash flow projections.
If you studied management accounting in the past, do you remember this formula:
Y= average hours to produce product, t= time to produce first unit, X= cumulative units produced and l= rate of learning.
Of course, you don’t remember this – it’s the formula for a learning curve. A what? A learning curve, which is the relationship between the time taken to complete a task as an employee learns how to do the task. Management accountants learn this formula as it can be used to predict how costs might behave when production tasks are changed or new tasks introduced. I have to say I have never had to use a learning curve in my time in industry, and forgot the formula until I had to teach it to students again in recent years.
A CIMA research report recently shed some light on the use of learning curves. According to the research, about 6% of respondents to a survey actually used learning curves in some way, but a vast majority of management accountants considered the technique appropriate for the organisation they worked in. What’s interesting is that the main reason for not using learning curves is a lack of knowledge on the part on management accountants. I suppose this does not surprise me as if you don’t use any particular accounting technique, you’ll quickly forget it. Which is exactly what I done! Until now that is. The research report does not give detailed findings on the specific uses of the learning curve, but top of the list of uses in planning/budgeting and costing of products/services.