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STRACOSMAN - Chapter 4

This document summarizes key quantitative techniques used in management accounting for decision making, including regression analysis, Gantt charts, PERT/CPM analysis, learning curves, inventory models, and linear programming. It discusses relevant costs like differential, avoidable, and opportunity costs versus irrelevant costs like sunk costs. Total inventory costs have carrying and ordering cost components. The economic order quantity (EOQ) model and safety stock calculations are presented. Relevant costing considers only costs that differ among alternatives, while total costing considers all costs.

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42 views

STRACOSMAN - Chapter 4

This document summarizes key quantitative techniques used in management accounting for decision making, including regression analysis, Gantt charts, PERT/CPM analysis, learning curves, inventory models, and linear programming. It discusses relevant costs like differential, avoidable, and opportunity costs versus irrelevant costs like sunk costs. Total inventory costs have carrying and ordering cost components. The economic order quantity (EOQ) model and safety stock calculations are presented. Relevant costing considers only costs that differ among alternatives, while total costing considers all costs.

Uploaded by

Rae Works
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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STRACOSMAN: STRATEGIC COST MANAGEMENT

CHAPTER 4: Management Accounting Concepts and Techniques for Decision Making


SUMMARY NOTES BY: Mary Joy C. Nala, CB
BS ACCOUNTANCY 3B | 2nd SEMESTER A.Y. 2022-2023

QUANTITATIVE TECHNIQUES The following are relevant:


• Differential costs – costs that are present in one alternative
in a decision-making case, but are absent in whole or in part
Regression analysis involves identifying the relationship between a in another alternative.
dependent variable and one or more independent variables. A model
• Avoidable costs – costs that can be eliminated, in whole or
of the relationship is hypothesized, and estimates of the parameter
in part, when one alternative is chosen over another in a
values are used to develop an estimated regression equation.
decision-making case.
• Opportunity costs – refers to the contribution to income that
Gantt chart is a type of bar chart, devised by Henry Gantt in the 1910s,
is forgone (or lost) when one action is taken over the next
that illustrates a project schedule. Gantt charts illustrate the start and
best alternative course of action.
finish dates of the terminal elements and summary elements of a
project.
The following are irrelevant:
Program evaluation review technique (PERT) and critical path • Sunk (past / historical) costs – cost that has already been
method (CPM) are tools useful in planning, scheduling, and managing incurred and therefore cannot be avoided regardless of the
complex projects. PERT/CPM (sometimes referred to as network alternative taken by the decision maker. Although past (sunk,
analysis) provides a focus around which managers and project historical) costs are always irrelevant in decision making,
planners can brainstorm. they may serve as a basis for making predictions.
• Future costs that do not differ between or among the
Learning curve is a plot of proxy measures for implied learning alternatives under consideration
(proficiency or progression toward a limit) with experience.

Opportunity cost refers to a benefit that a person could have received,


INVENTORY MODELS
but gave up, to take another course of action. Stated differently, an
opportunity cost represents an alternative given up when a decision is
Carrying and Ordering Costs made. This cost is, therefore, most relevant for two mutually exclusive
COMPONENTS OF INVENTORY COSTS events. In investing, it is the difference in return between a chosen
The total inventory costs are comprised of: investment and one that is necessarily passed up.
o CARRYING COSTS: This cost increases with order size or
quantity of inventory on hand. Example: Storage costs, Relevant Cost Approach
insurance on inventory, normal spoilage, record keeping,
security (DIRECT)
o ORDERING COSTS: This cost decreases with order size or RELEVANT
quantity of inventory on hand. Example: Delivery costs, KINDS OF COSTS COSTS TO
inspection, handling, purchasing receiving, quantity discount Make Buy
lost. (INVERSE)
Cost of ingredients and other variable costs xx

EOQ Model Purchase price xx


EOQ= √((2 D O)/C) Fixed costs avoided if bought xx
Total cost per unit xx xx
Where:
O = costs of placing one order; Level of activity xx xx
D = annual demand or usage in units; Total relevant costs xx xx
C = cost of carrying one unit for one year

Safety Stock Total Cost Approach


Average inventory – (EOQ / 2)
Average inventory – {[(BI + EI) / 2] / 2}
Reorder Point RELEVANT
With safety stock: normal lead time usage KINDS OF COSTS COSTS TO
Without safety stock: normal lead time usage + safety stock = maximum Make Buy
lead time x average usage
Cost of ingredients and other variable costs xx
Purchase price xx
Linear programming (LP) is an application of matrix algebra used to Fixed costs avoided if bought xx
solve a broad class of problems that can be represented by a system
of linear equations. A linear equation is an algebraic equation whose Fixed costs that cannot be avoided if bought xx xx
variable quantity or quantities are in the first power only and whose Total cost per unit xx xx
graph is a straight line.
Level of activity xx xx

Relevant Costing and Differential Analysis Total relevant costs xx xx


Expected future costs and revenues that differ among alternative
courses of action.

SUMMARY NOTES
Prof. Rica M. Quitoriano BSA 3B

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