Quantitative Analysis Part4

ACCA F5 - Performance Management 

Average growth models

This model is applicable in many different scenarios. From forecasting, budgeting, contract pricing, valuing company, determining interest and many more. In simple term, this model is just a compound interest formula tailored to the need of cost and financial management.

Mathematical presentation of average growth model:

1+g = (Most recent figure / Earliest figure)^1/n

g = average growth rate, as a decimal

n = number of period

Earliest figure replacement for Principle

Most recent figure replacement for Principle + Compound interest

Learning curve

Learning curve applies to new products and processes, which are labor intensive and repetitive. It is used in pricing, planning work, budgeting cost, forecasting, and standard setting.

Note: The learning curve to different employees may vary to some extent.

The article "The learning rate and learning effect" depicts all aspects of learning effect and provides alternative approaches to calculate learning rate and learning effect.

A synopsis from the article:

In practice, it is often found that the resources required to make a product decrease as production volumes increase. It costs more to produce the first unit of a product than it does to produce the one hundredth unit. In part, this is due to economic of scale since costs usually fall when products are made on a larger scale. This may be due to bulk quantity discounts received from suppliers, for example. The learning curve, effect however, is not about this; it is not about cost reduction. It is a human phenomenon that occurs because of the fact that people get quicker at performing repetitive tasks once they have been doing them for a while. The first time a new process is performed, the workers are unfamiliar with it since the process is untried. As the process is repeated, however, the workers become more familiar with it and better at performing it. This means that it takes them less time to complete it.

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ACCA Article: The learning rate and learning effect