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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 ti
me 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
(Total for Question One
= 10 marks)
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