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ACCA F5

Performance Management (PM)

业绩管理

ACCA Lecturer: Kimberley Gong

Copyright © ACCAspace.comACCAspace 中国ACCA特许公认会计师教育平台 2

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Analyzing fixed and variable cost—high-low method

Expected values in budgeting

Content of chapter 13

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Learning curve theory

Using spreadsheets in budgeting


Quantitative analysis in budgeting

Analysing fixed and variable cost—high-low method

Approach

1.Select the highest and lowest activity level and their costs.

2.Find the variable cost / unit

4.Find fixed cost using either the high or low activity level.

5.Fixed cost = total cost at activity level –total variable cost

6. Use the variable and fixed cost to forecast the total cost

for a specified level of activity.


Lecture example 1

Required

Calculate the variable cost per unit and the fixed labor

cost.

units 10000 12000 14000

Labour costs$ 27000 31000 35000



Advantages:

•It is simple.

•It is easy to understand and easy to use.

Disadvantages:

•It assumes the only factor on costs is activity.

•It assumes the historical costs are reliable to

predict future costs.

•It only uses highest and lowest value.

•This assumes fixed costs remain unchanged and

variable costs per unit are constant . However, this

will not always be the case



Learning curve theory

When new working practices or products are

introduced, the theory is that as a workforce gains

experience in a task, it will come to perform that

task quicker.

This means that labor costs and variable overheads

(if labor hour driven) will be lower in later periods

of production than when the new product or

production technique is introduced.



Principles:

As cumulative output doubles, the cumulative

average/unit falls to a given percentage of the previous

cumulative average time per unit.



Method 1 -tabular approach

A firm‘s workforce experiences a 75% learning

rate.

Required:

If the budgeted time for the first batch is 100 hours,

calculate the time to produce eight batches in total.



Method 1 -tabular approach

Output(batches)

Total time(hours)

Cumulative average Time

(hours)

Incremental number of units

Incremental total

time (hr)

Incremental average time (hr)

1 100 100

2 150 75 1 50 50

4 225 56.25 2 75 37.5

8 337.5 42.1875 4 112.5 28.125



Method 2 –The algebraic approach

Y = a Xb

where Y is the cumulative average time per unit

taken to produce X units.

a is the time taken to produce the first unit.

X is the cumulative number of units.

b is the index of learning (log LR/log 2 ).

LR = the learning rate as a decimal



Example

A firm‘s workforce experiences a 75% learning

rate. The budgeted time for the first batch is 100

hours.

Required

Using the formula Y = a Xb, calculate the time to

produce:

(a) the first 10 batches in total

(b) the 10th batch only.



Answer:

(a) Y = a Xb

a = 100

X = 10

b = log 0.75/log 2 = -0.125/0.301 = -0.415

Y = 100×10-0.415

=38.459 hrs

Total time taken to produce 10 batches:10×38.459

= 384.59 hrs



(b) Y = aXb

a = 100

X = 9

b = -0.415

Y = 100×9-0.415

=40.1781 hrs

Total time to produce 9 batches:9×40.1781 =

361.60 hrs

∴Time to produce 10th batch = 384.59 –361.60=

22.99 hrs



Steady state production

Eventually the learning curve will reach a steady

state where no further improvements will be made.

reasons for the learning effect to cease are:

(a) When machine efficiency restricts any further

improvement.

(b) The workforce reach their physical limits.

(c) There is a ‘go- slow ’ agreement among the

workforce.



Example

(a)Flogel Co has just produced the first full batch of

a new product taking 200 hours . Flogel has a

learning curve effect of 85%.

Required

•How long will it take to produce the next 15

batches?



Answer:

b = log 0.85/log2 = -0.2345

•To produce the next 15 batches:

Find time to produce 16 and deduct time to make 1:

y = 200×16-0.2345= 104.4 hours = average time per

batch, thus 16 batches will take

16×104.4 = 1,670.4 hours

Less time for first batch 200.0 hours

Time for the next 15 batches 1,470.4 hours



Example

(b) Flogel expects that after the 30th batch has

been produced, the learning effect will cease.

From the 31st batch onwards, each batch will take

the same time as the 30th batch.

What time per batch should be budgeted?



Answer:

Time for 30 batches:

y = 200×30-0.2345= 90.08×30 = 2,702

Time for 29 batches:

y = 200×29-0.2345= 90.80×29 = 2,633

Time for 30th batch = 2,702 –2,633 = 69 hours , so

this should be the budgeted hours once the steady

state has been achieved.



Practical application

a. Calculate the marginal cost of making extra units

of a product

b. Quote selling prices for a contract

c. Prepare realistic production budget

d. Prepare realistic standard costs for cost control

*Material costs and fixed overhead should be

unaffected by the learning curve



Limitations

Breaks in production may result in losing the learning

effect.

The learning effect will not apply if machines limit the

speed of labor in a machine intensive manufacturing

environment.

Learning curve effect will be reduced if the process is

not repetitive.

The more complex the product , the more probable

that the learning effect will be significant and longer.

The introduction of a new product makes it more

probable that there will be a learning effect.



Expected values in budgeting

Probabilistic budgeting

It assigns probabilities to different conditions to der

ive an EV of budgeted profit

Advantage Disadvantage

Combine several outcome into one

More time consuming than fixed budget

Easy to calculate and understand

Represent a weighted average outcome rather than an actual one

Assist decision making Little practical value



Using spreadsheets in budgeting

A spreadsheet is a type of general purpose software

with many business application , not just

accounting ones.

It contains many techniques (eg. “ what if“

analysis). It can be used to build a model and can

present information in various forms.

The most widely used spreadsheet packages are

lotus 1-2-3 and Excel



Advantage Disadvantage

Managers can prepare budgets away from office

The validity of data throughout the spreadsheet

Budget can be prepared quicker and more accurately

Over-dependence on spreadsheets

Enable managers to consider different options and perform sensitivity analysis

Take no account of qualitative data

Security problems

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