- 20 Marks
PM – Nov 2019 – L2 – Q4 – Cost Management Strategies
Calculate the learning curve rate, forecast shut-down costs for year 2 and 3, and discuss potential errors in the forecast.
Question
Akoko plc. has recently developed a new product called “EKO” which has been in production for the past year. The plant producing “EKO” shuts down for routine inspection and maintenance every three months, and during the first year’s operation, the costs of shut-down have been as follows:
| Quarter | Shut-Down Cost (₦) |
|---|---|
| I | 36,000 |
| 2 | 28,800 |
| 3 | 27,000 |
| 4 | 25,200 |
The management accountant attempts to forecast maintenance costs for the coming year. On examining the data, it appears that these costs have steadily decreased, which may be due to maintenance engineers becoming more efficient or the plant settling down after initial operational issues. The learning curve might explain this trend.
Required:
a. Explain the concept of a learning curve. (4 Marks)
b. Estimate the rate of learning inherent in the data and explain its meaning. (4 Marks)
c. Using the learning rate determined, forecast the total cost of shut-down for routine maintenance during the coming year. (5 Marks)
d. Assume learning ceases at the end of the second year; forecast the total cost of shut-down for routine maintenance during the third year. (4 Marks)
e. State TWO specific reasons why this forecast may be inaccurate. (3 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Cost reduction, Forecasting, Learning Curve, Maintenance
- Level: Level 2
- Topic: Cost Management Strategies
- Series: NOV 2019