The following variances have been calculated in respect of a new product:

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)