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Lecture 4

OPMA 407 Lecture Notes - Lecture 4: Learning Curve

Operations Management
Course Code
OPMA 407
David Roberts

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Budgeting, Costs
Material Review Question #1
Top Down- money is handed down to lower levels (easier to aggregate budget)
Advantage: certainty in amount, senior management approval
Disadvantage: lower level conflict, not enough
Bottom Up-
Advantage: lower level has a better idea of costs, active stakeholder.
Disadvantages: lack of senior management support, lacks of "big picture"
Material Review Question #2
Indirect Costs
An indirect cost is a cost that cannot be directly traced back to the production of an output. For
accounting purposes, two rules of thumb are often used when classifying a cost as direct or
indirect. In order to fall into the direct cost category, the cost must be physically observable (it
can be seen and measured when an output is made) and it must be economically feasible to
track the cost during production of each output. If this is not true, then the cost will usually be
captured in bulk as an indirect cost and allocated back to the units of output that were created
during a fixed period of time (accounting period, for example). Examples of indirect costs that a
project manager should consider include:
Sales expense
General administration
Contingency- 3 level, how much certainty there is, if you're very certain about it, It's about 5% to
Turnover/ training
Material Review Question #6 (include some numbers, or a diagram on exam!!)
Learning curves (curve downwards)
You get faster as volume doubles
There is a cliché that “practice makes perfect.” In the basic learning curve, each time the
number of repetitions for a task is doubled, a predictable percentage of improvement in
productivity will be observed. If 100 hours were required to complete task “A” on the first
cycle, a 90% learning curve would mean that only 90 hours would be necessary on the
second cycle. On the fourth cycle, only 81 hours would be needed to complete that
repetition of task “A.”
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