MANAGEMENT ADVISORY SERVICES

MANAGEMENT SCIENCE
&
QUANTITATIVE TECHNIQUES
 MANAGEMENT ADVISORY SERVICES
 1 Basic Considerations in MAS  Basic Considerations in MAS
 2 Variable and Absorption Costing  Strategic Cost Management
 3 CVP-BEP  Strategic Cost Management
 4 Financial Statement Analysis  Financial Management
 5 Budgeting  Strategic Cost Management
 6 Standard Cost Variance Analysis  Cost Accounting and Control
 7 Performance Evaluation  Cost Accounting and Control
 8 Pricing  Managerial Economics
 9 Relevant Costing  Cost Accounting and Control
 10 Quantitative Techniques  Management Science
 11 Financial Markets  Financial Markets
 12 Working Capital Management  Financial Management
 13 Short-Term Financing  Strategic Cost Management
 14 Long-Term Financing  Strategic Cost Management
 15 Capital Budgeting  Strategic Cost Management
 16 Risk and Leverage  Financial Management
 17 Economics  Managerial Economics
 18 Strategic Costing  Strategic Cost Management
 QUANTITATIVE TECHNIQUES
CPALE Syllabus Covered
 1.2Management accounting concepts and techniques for planning &
control
 1.2.1.3 Splitting mixed cost (high-low, scatter graph, least-squares regressions)
 1.2.1.4 Cost prediction techniques (correlation and regression learning curve)
 1.4Management Accounting Concepts and Techniques for Decision
Making
 1.4.1.5 Probability analysis (expected value concept)
 1.4.1.6 Decision tree diagram
 1.4.1.7 Linear programming (graphic method; algebraic method)
 QUANTITATIVE TECHNIQUES
 Management accounting concepts and techniques for planning & control

 Quantitative Techniques/ Operations Research

 is the process of collecting and evaluating measurable and
verifiable data such as revenues, market share, and wages in
order to understand the behavior and performance of a
business. The ultimate goal is to create a mathematical model
that simulates real-world processes and systems so that optimal
solutions can be found.

 Objective of Quantitative Techniques

 to create a mathematical model that simulates real-world processes and
systems so that optimal solutions can be found.
 Helps in evaluating performance, assessing financial instruments, and
making predictions.
 MANAGEMENT ADVISORY SERVICES
 USES OF QUANTITATIVE TECHNIQUES
1. Project Management
 For optimizing the allocation of manpower, machines, materials, money and time (Linear
Programming) Discussed in relevant costing (PERT CPM was removed)
2. Production Planning and Scheduling
 Evaluating multiple proposals for costs, timing, location and availability of transportation.
 Product mix and scheduling get analyzed to meet customer demands and maximize profits
3. Purchasing and Inventory
 Determines how many materials they need to purchase, the level of inventory to maintain, and the
costs of ordering, carrying, and stock-out. (Financial Management)
4. Marketing
 Set budgets, allocate media purchases, adjust product mix and adapt to customers’ preferences.
(derivatives)
5. Finance
 Measure risk of investment proposals.
6. Research and Development
 Measures probability of success and eventual profitability of products to make investment
decisions.
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)

 REGRESSION ANALYSIS
 is a statistical technique used to find the relations between two or
more variables, the dependent and independent variable.
 In regression analysis one variable is independent and its impact
on the other dependent variables is measured.

Independent variables Cause

Dependent variables Effect
 Simple/Simple vs. Multiple regression
Single 2 or more
Independent Independent
variables variables
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)

 Linear regression
 Studies the relationship between continuous variables.
The linear regression equation
Y=a+bX
Accounting application
TC=FC+VCU (Q)
Ke=rf+b (market risk premium)
 Three commonly used Linear Regression Method
1. High-low points method (Simplest)
2. The Method of least Squares and linear Programming (Most accurate)
3. Scatterplot/Scatter graph (estimate)
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)

 High-low points method Exclude outliers

Highest Activity Cost-Lowest Activity Cost
Variable Cost Per Unit =
Highest Activity Units-Lowest Activity Units

Fixed Cost = Highest Activity Cost-(Variable Cost/U x HAUs

OR
Lowest Activity Cost-(Variable Cost/U x LAUs
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)

 Linear Programing Equations

∑y=na+b∑x
∑xy= ∑xa+b∑x2

Where:
Y = total cost sample size
n = total samples
X = total quantity of sample size
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)
 Illustration

Answer Answer
a = .40/ unit a = .389/ unit
B = P160 B = P167.82
C = P720 C = P712.42
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)

 Scatterplot/Scatter graph
 Plots activity level along x-axis and corresponding
total cost along y-axes to segregate mix cost.

 A regression line is then drawn

on the graph by visual
inspection. The point where the
line intercepts y-axis is the
estimated fixed cost and the
slope of the line is the average
variable cost per unit.
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)
 Scatterplot/Scatter graph
 Illustration

Fixed cost
=Y-intercept
=P18,000

Variable C/U
=Slope of
regression
=P14.286
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)
 CORRELATION
 Correlation shows the strength and direction of a relationship
between two variables and is expressed numerically by the
correlation coefficient. The correlation coefficient's values range
between -1.0 and 1.0. (Greater than 1 is invalid)
 Measures the strength and direction of a relationship between
the dependent and independent variable. It does not measure
causation (Granger Test).
 QUANTITATIVE TECHNIQUES
 Splitting mixed cost (high-low, scatter graph, least-squares regressions)
 CORRELATION
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 As unit produced doubles, the recurring cost per unit decreases at
the learning curve rate.
 AKA experience curve, cost curves, efficiency curves, and
productivity curves
 The learning curve also is referred to as the experience curve, the
cost curve, the efficiency curve, or the productivity curve. The idea
behind this is that any employee, regardless of position, takes time to
learn how to carry out a specific task or duty. Learning curve theory
states that as the quantity of a product produced doubles, the
recurring cost per unit decreases at a fixed rate or constant
percentage.
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 The original model was developed by T.P. Wright in 1936 and is
referred as the Cumulative Average Model or Wright’s Mdel.
 A second model was developed later by a team of researchers at
Stanford. Their approach is referred to as the Incremental Unit Time
(or Cost) Model or Crawford’s Model
 Remember, Understand, Apply, Analyze, Evaluate, Create
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 QUANTITATIVE TECHNIQUES
 Cost prediction techniques (correlation and regression learning curve)
 Learning Curve (Labor cost)
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Probability analysis (expected value concept)

 Probability
• is a measure of the likelihood of an event
to occur.
• Is a measure of the likelihood of
happening of an event.
• Values range from 0 to 100%
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Probability analysis (expected value concept)

 Expected Value (EV)

• Anticipated value for an investment of some point in the future
• Calculated by multiplying the probability of an event with its outcome,
and then summing it all up.
• The expected value (EV) is an anticipated value for an investment at
some point in the future. In statistics and probability analysis, the
expected value is calculated by multiplying each of the possible
outcomes by the likelihood each outcome will occur and then
summing all of those values.
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Probability analysis (expected value concept)
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Probability analysis (expected value concept)

 Cost of Perfect Information=

• Expected Value of Perfect information
• Less: Expected Value of the best act under uncertainty
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Probability analysis (expected value concept)
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Forecasting

 Exponential smoothing
• Exponential smoothing is a forecasting technique that uses a weighted
moving average of past data as the basis for a forecast. The method is
effective when there is random demand and no seasonal fluctuations
in the data. The New forecast is computed as follows:
• Combination of past trends (Historical Analysis) and current events
(Markov analysis)

New Forecast
= (Actual x a%) + (Old Forecast x 1-a%)
where
Alpha (a) is a percentage, known as a smoothing constant
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Forecasting
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Decision tree diagram

 A decision tree is a diagrammatic representation of a problem and

on it we show all possible courses of action that we can take in a
particular situation and all possible outcomes for each possible
course of action.
 It is particularly useful where there are a series of decisions to be
made and/or several outcomes arising at each stage of the
decision-making process.
 There are two stages to making decisions using decision trees, the
first stage is the construction stage, the second stage is the
evaluation and recommendation stage.
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Decision tree diagram

Two Stage Process

 First stage is the construction stage, where the decision tree is
drawn and all of the probabilities and financial outcome values are
put on the tree.
 Second stage is the evaluation and recommendation stage.
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Decision tree diagram
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Decision tree diagram
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Decision tree diagram
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Linear programming (graphic method; algebraic method)

 Used to determine the optimal mix of

products with multiple limited resources
to maximize profits or minimize costs.
 If a company is faced with multiple product
and multiple limited resources issue, it is wise to
use linear programming to determine the best
combination of products that will maximize
profits. Linear programming utilizes matrix
algebra to simultaneously compute for two
missing variables. The missing variables are the
product combination needed to maximize
profits. The same can be computed using the
graphical approach.
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Linear programming (graphic method; algebraic method)
 Objective function is the variable you
are trying to maximize. It is denoted as
Zmax meaning maximum possible profit
and is expressed as Zmax= CM1+ CM2+
CMn..
 Constraints are the limited resources.
(3x+4y</=200)
 Feasible solution is any combination of
products being produced and sold. The
feasible region in a linear program is the
set of all possible feasible solutions. It is
usually expressed as X20; Y≥0. Where X
and Y are the products produced.
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Linear programming (graphic method; algebraic method)
Shadow Price
 is the cost of relaxing a constraint.
 It is the opportunity cost of not having
one more unit of your limited resource.
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Linear programming (graphic method; algebraic method)

 Simplex method
 Solving the problem
using R
 Solving the problem
by employing the
graphical method
 Solving the problem
using an open solver
 QUANTITATIVE TECHNIQUES
 Management Accounting Concepts and Techniques for Decision Making
 Linear programming (graphic method; algebraic method)
-END-