Harry Draco Ltd manufactures laboratory equipment that requires a highly skilled labour force.

The management has been experiencing inexplicable variances in terms of labour efficiency for quite some time and is interested when they hear that other, similar manufacturers, have implemented the learning curve which potentially provides better costing than that used currently.

Management has decided to test the potential of the learning curve on a particular product, which is relatively new to the organisation.

The current standard cost is specified in the table below:

Material costs per unit	5,000
Standard hours per unit	140
Standard wage rate per hour	22
Standard variable overhead rate per labour hour	5
Total Fixed production cost for May	10,000

Detailed records have been kept on the production of this item of equipment so the management accountant can extract the following information:

Cumulative production units	Cumulative average hours per unit	Cumulative total hours
1	160	160
2	152	304
4	144.4	577.6

During the eighth month of production (May), the following data was recorded:

Cumulative production at the beginning of May	50 units
Production within May	10 units
Total Material costs	49,500
Total labour cost	28,000
Total Variable cost	6,000
Total fixed cost	10,000

The management of Harry Draco Ltd would like to achieve profit maximisation but is unsure of how to achieve this and has currently set the price for this item of equipment based on a profit margin of 25%.

Required:

2. Calculate the expected costs for May based upon:
4. the current standard cost
6. applying the learning curve formula.
8. If the learning curve effect stops after 60 units, with the 60^th unit representing the standard cost, prepare a standard cost for once the learning curve ends.

Answer rating: 100% (QA)

1 Calculate the expected costs for May based upon the current standard cost According to the data you provided the standard costs per unit are as foll... View the full answer