Instructional Case: Estimating Learning-Curve Functions for

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Accounting Information for Planning and Control

THE PROBLEM

In the instructional case about Elora Electronics, Limited (EEL), Stout & Juras (2009) describe a business that is mystified about losing bids. They have been using average costs to estimate job costs and bidding using those average costs. In the past, the labor costs were below budget and so they have been assuming that "all is well" and costs are under control. Using "over or under budget" as a signal of cost control is not a bad plan and EEL was likely served well using this as an overall measure of general fiscal control. However, EEL's failure to follow up on variances prevented them from learning an important aspect of their business - a learning curve. By ignoring the learning curve, some jobs were estimated with costs too high and some too low. Those with costs too high were lost in the bidding. Addressing the learning curve's influence on job costs would improve their understanding of job costs, delivery better information to the division managers, potentially improve their compensation plans, and restore their ability to bid competitively.

BUDGET VARIANCES

It is not unusual for firms to relax when costs are below budget. That's good right? But failing to investigate why they are continually below budget is a failure to understand the dynamics of cost behavior. Why is labor always under? Are those that create budgets intentionally adding extra so that they always look good? Are standards out of date? Or, as is the case in the EEL case, are learning curves leading to a cost per unit for labor that shifts as workers get better at processing each batch or job? And there are ways to evaluation variances even when learning curves impact costs per unit (Harvey & Solimon, 1983). ...