ACC 115| Management Science

Module #4 Teacher’s Guide

Lesson title: Learning Curve, Queuing and Materials:

Simulation Theory Pen and non-scientific calculator
Learning Targets: Strategic Cost Management by Cabrera
At the end of this module, you should be able to:
1. Calculate the cumulative time and average References:
time per unit when learning curve is applied. core.ecu.edu
2. Summarize the concepts of queuing and www.accountingcoach.com
simulation theory www.investopedia.com
3.

A. LESSON PREVIEW/REVIEW

Introduction
Learning Curve
A number of cost behavior patterns do not follow a linear pattern. An important non-linear cost
curve is the learning curve or the experience curve. The learning curve shows how labor hours
worked per unit decrease as the number of units produced increases. The basis of learning curve is
almost intuitive – as we perform an action over and over, we improve, and each additional
performance takes less time than the preceding ones until we reach the peak efficiency.

Queuing Theory
Queues are not necessarily a negative aspect of a business, as their absence suggests
overcapacity. Queuing theory is the study of congestion and waiting in line. The theory can help
with creating an efficient and cost-effective workflow, allowing the user to improve traffic flow. It
assesses two key aspects—customer arrival at the facility and service requirements. Often used as
an operations management tool, queuing theory can address staffing, scheduling, and customer
service shortfalls.
The origin of queuing theory can be traced back to the early 1900s, found in a study of the
Copenhagen telephone exchange by Agner Krarup Erlang, a Danish engineer, statistician and,
mathematician. His work led to the Erlang theory of efficient networks and the field of telephone
network analysis.

Simulation Theory
Simulation theory, also called Monte Carlo simulation, is a computerized mathematical
technique that allows people to account for risk in quantitative analysis and decision making. The
technique is used by professionals in such widely disparate fields as finance, project management,
energy, manufacturing, engineering, research and development, insurance, oil & gas,
transportation, and the environment. Monte Carlo simulation furnishes the decision-maker with a
range of possible outcomes and the probabilities they will occur for any choice of action.
The technique was first used by scientists working on the atom bomb; it was named for Monte
Carlo, the Monaco resort town renowned for its casinos. Since its introduction in World War II,
Monte Carlo simulation has been used to model a variety of physical and conceptual systems.

B. MAIN LESSON

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 ACC 115| Management Science
Module #4 Teacher’s Guide

Content Notes and Skill Building

Lesson Objective 1
Learning Curve or Experience Curve
As we learn how to do a task, we become more efficient. The learning curve theory stipulates
that every time the cumulative quantity of units produced is doubled, the cumulative average time per
unit is reduced by a given percentage. If it is assumed that this reduction is 20%, it means that the
second unit requires 80% of the cumulative average time per unit required for the first unit; the fourth
unit is 80% of the second; the eight unit is 80% of the fourth, and so on until the peak efficiency is
reached. So if the rate of reduction of time is 20%, we would have an 80% learning curve.

Illustration
Bebe Co. installs computerized patient record systems in hospitals and medical centers. Bebe has
noticed that each general type of system is subject to an 80% learning curve. The installation takes a
team of professionals to set up and test the system. Assume that the first installation takes 1,000 hours,
and the team of professionals is paid an average of ₱2,000 per hour. The peak efficiency is reached
upon installing 32 systems.

Required
1. Construct a table showing the following:
a. Cumulative number of units (systems) d. Total labor cost for the cumulative number of units
b. Cumulative average time per unit in hours e. Average cost per unit
c. Cumulative total time in hours
2. What if Bebe is budgeting labor cost next year based on the installation of 16 additional systems?
a. Calculate the total budgeted labor cost for a team that had previously completed 16 systems the prior
year
b. Calculate total budgeted labor cost for a new team that had not completed any systems to date.

Solution:
Required 1

Total Labor Cost

Cumulative Cumulative
Cumulative Average for the Average Cost
Number of Total Time:
Time per System Cumulative per Unit
Systems Labor Hours
Number of Units
(a) (b) (c) = (a) x (b) (d) = (a) x ₱2,000 (e) = (d) ÷ (a)
1 1,000.00 1,000.00 2,000,000 2,000,000
2 800.00 (1,000 x 80%) 1,600.00 3,200,000 1,600,000
4 640.00 (800 x 80%) 2,560.00 5,120,000 1,280,000
8 512.00 (640 x 80%) 4,096.00 8,192,000 1,024,000
16 409.60 (512 x 80%) 6,553.60 13,107,200 819,200
32 327.68 (409.60 x 80%) 10,485.76 20,971,520 655,360

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Module #4 Teacher’s Guide

 Observe that the learning curve of 80% applies as the cumulative number of system installed
doubles. The cumulative average time per unit (in column b) is 80% of the previous amount of
time.

2. a. Budgeted labor cost for experienced team = (10,486.4 – 6,553.60) x ₱2,000

= ₱7,865,600

 If the team had previously completed 16 systems, learning curve for the installation of the next
16 systems will apply. In our table above, what is shown is the installation of the next 32
systems. What we should get is only the installation of additional 16 systems (32 – 16).

b. Budgeted labor cost for new team = 6,553.60 x ₱2,000

= ₱13,107,200

 If the team had not previously completed any systems, no learning curve will apply so the
cumulative time at producing 16 units of 6,553.60 will be used.

When graphed, the learning curve will look like this:

Lesson Objective 2
Queuing Theory
Queuing theory is the mathematical study of the congestion and delays of waiting in line. Queuing
theory (or "queueing theory") examines every component of waiting in line to be served, including the
arrival process, service process, number of servers, number of system places, and the number of
customers—which might be people, data packets, cars, etc. It can also help users make informed
business decisions on how to build efficient and cost-effective workflow systems. Real-life applications
of queuing theory cover a wide range of applications, such as how to provide faster customer service,
improve traffic flow, efficiently ship orders from a warehouse, and design of telecommunications
systems, from data networks to call centers.

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How Queuing Theory Works

Queues happen when resources are limited. In fact, queues make economic sense; no queues would
equate to costly overcapacity. Queuing theory helps in the design of balanced systems that serve
customers quickly and efficiently but do not cost too much to be sustainable. All queuing systems are
broken down into the entities queuing for an activity.

At its most elementary level, queuing theory involves the analysis of arrivals at a facility, such as a bank
or fast food restaurant, then the service requirements of that facility, e.g., tellers or attendants.

Benefits of Queuing Theory

By applying queuing theory, a business can develop more efficient queuing systems, processes, pricing
mechanisms, staffing solutions, and arrival management strategies to reduce customer wait times and
increase the number of customers that can be served. Queuing theory as an operations management
technique is commonly used to determine and streamline staffing needs, scheduling, and inventory,
which helps improve overall customer service.

Simulation Theory / Monte Carlo Simulation

Monte Carlo simulation performs risk analysis by building models of possible results by substituting a
range of values—a probability distribution—for any factor that has inherent uncertainty. It then
calculates results over and over, each time using a different set of random values from the probability
functions. Depending upon the number of uncertainties and the ranges specified for them, a Monte
Carlo simulation could involve thousands or tens of thousands of recalculations before it is complete.
Monte Carlo simulation produces distributions of possible outcome values. It shows the extreme
possibilities—the outcomes of going for broke and for the most conservative decision—along with all
possible consequences for middle-of-the-road decisions.

By using probability distributions, variables can have different probabilities of different outcomes
occurring. Probability distributions are a much more realistic way of describing uncertainty in variables
of a risk analysis. Common probability distributions include:

 Normal – Or ―bell curve.‖ The user simply defines the mean or expected value and a standard
deviation to describe the variation about the mean. Values in the middle near the mean are
most likely to occur. It is symmetric and describes many natural phenomena such as people’s
heights. Examples of variables described by normal distributions include inflation rates and
energy prices.
 Lognormal – Values are positively skewed, not symmetric like a normal distribution. It is used
to represent values that don’t go below zero but have unlimited positive potential. Examples of
variables described by lognormal distributions include real estate property values, stock prices,
and oil reserves.
 Uniform – All values have an equal chance of occurring, and the user simply defines the
minimum and maximum. Examples of variables that could be uniformly distributed include
manufacturing costs or future sales revenues for a new product.
 Triangular – The user defines the minimum, most likely, and maximum values. Values around
the most likely are more likely to occur. Variables that could be described by a triangular
distribution include past sales history per unit of time and inventory levels.

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Module #4 Teacher’s Guide

 PERT- The user defines the minimum, most likely, and maximum values, just like the triangular
distribution. Values around the most likely are more likely to occur. However, values between
the most likely and extremes are more likely to occur than the triangular; that is, the extremes
are not as emphasized.
 Discrete – The user defines specific values that may occur and the likelihood of each. An
example might be the results of a lawsuit: 20% chance of positive verdict, 30% change of
negative verdict, 40% chance of settlement, and 10% chance of mistrial.
 During a Monte Carlo simulation, values are sampled at random from the input probability
distributions. Each set of samples is called an iteration, and the resulting outcome from that
sample is recorded. Monte Carlo simulation does this hundreds or thousands of times, and the
result is a probability distribution of possible outcomes. In this way, Monte Carlo simulation
provides a much more comprehensive view of what may happen. It tells you not only what could
happen, but how likely it is to happen.

Monte Carlo simulation provides a number of advantages over deterministic, or ―single-point estimate‖
analysis:
 Probabilistic Results: Results show not only what could happen, but how likely each outcome
is.
 Graphical Results: Because of the data a Monte Carlo simulation generates, it’s easy to create
graphs of different outcomes and their chances of occurrence. This is important for
communicating findings to other stakeholders.
 Sensitivity Analysis: With just a few cases, deterministic analysis makes it difficult to see
which variables impact the outcome the most. In Monte Carlo simulation, it’s easy to see which
inputs had the biggest effect on bottom-line results.
 Scenario Analysis: In deterministic models, it’s very difficult to model different combinations of
values for different inputs to see the effects of truly different scenarios. Using Monte Carlo
simulation, analysts can see exactly which inputs had which values together when certain
outcomes occurred. This is invaluable for pursuing further analysis.
 Correlation of Inputs: In Monte Carlo simulation, it’s possible to model interdependent
relationships between input variables. It’s important for accuracy to represent how, in reality,
when some factors go up, others go up or down accordingly.

Procedure for Monte Carlo Simulation:

Step 1: Establish a probability distribution for the variables to be analyzed.
Step 2: Find the cumulative probability distribution for each variable.
Step 3: Set Random Number intervals for variables and generate random numbers.
Step 4: Simulate the experiment by selecting random numbers from random numbers tables until the
required number of simulations are generated.
Step 5: Examine the results and validate the model.

Skill-building Activities
Encircle the letter of your answer:

1. A quantitative technique that deals with the problem of supplying sufficient facilities to meet the
needs to production lines or individuals that demand service unevenly is

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 ACC 115| Management Science
Module #4 Teacher’s Guide

a. Learning curve b. Queuing theory c. Monte Carlo Simulation

2. The modeling technique that would be used to solve such problems as the number of check-out
counters in a store
a. Learning curve b. Queuing theory c. Monte Carlo Simulation

3. Using this method, a random number generator is used to produce numbers with a uniform
probability distribution (equal likelihood of occurrence).
a. Learning curve b. Queuing theory c. Monte Carlo Simulation

4. A learning curve of 80% assumes that production unit costs are reduced by 20% for each doubling of
output. What is the cost of the sixteenth unit produced as an approximate percent of the first unit
produced?
a. 30 percent b. 51 percent c. 41 percent d. 64 percent

5. Tofte has a target total labor cost of ₱1,500 for the first four batches of a product. Labor is paid ₱10
an hour. If Tofte expects an 80% learning rate, how many hours should the first batch take?
a. 150 hours. b. 58.6 hours. c. 96.0 hours. d. 73.2 hours.

Check your answers against the Key to Corrections found at the end of this SAS. Be sure to complete
each activity before looking. Write your score on your paper.

Check for Understanding

A manufacturing job is subject to an estimated 80% learning curve. The first unit required 30 labor
hours to complete.

Required:
a. What is the cumulative average time per unit after four units are completed?
b. What is the total time required to produce two units?
c. How many hours are required to produce the second unit?

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Module #4 Teacher’s Guide

C. LESSON WRAP-UP

Thinking about Learning (5 mins)

How do you feel today?

I feel (unsatisfactory/satisfactory/excellent) because_________________________________________
__________________________________________________________________________________

What are your challenges in learning the concepts in this module? If you do not have challenges, what
is your best learning for today?
__________________________________________________________________________________
_______________________________________________________________________________

What are the questions/thoughts you want to share to your teacher today?
__________________________________________________________________________________

ANSWER KEY
Skill Building Activity
1. B 2. B 3. C 4. C 5. B

Check for Understanding

a. 30 hrs x 80% x 80% = 19.2 hours per unit

b. 30 hrs x 80% x 2 = 48 hrs

c. The first unit took 30 hrs to be produced. It takes 48 hours to produce two units. So the second unit
takes 18 hrs (48 hrs – 30 hrs) to be produced.

ADDITIONAL NOTES FOR TEACHERS

In this portion, you may include:

● Additional exercises that teachers may give to students during face-to-face classes or
during remote coaching sessions
● Additional reading materials or references that teachers may use
● Instructions for activities during face-to-face classes
● Answer Keys for quizzes and exams

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