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 time 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.
(b) Explain the importance of learning curves in the context of Target Costing.
Note: The learning index for a 90% learning curve is -0.1520