DEPARTMENT OF ACCOUNTANCY

REFRESHER COURSE
QUANTITATIVE TECHNIQUES Management Advisory Services

QUANTITATIVE TECHNIQUES – refer to the application of mathematics in actual business operations. It is also
known as quantitative methods.

OPERATIONS RESEARCH refers to the discipline of applying quantitative methods in organizational planning
and control.

NETWORK MODELS
NETWORK MODELS involve project scheduling techniques that are designed to aid the planning and control of large-scale
projects having many interrelated activities. These models aid management in predicting and controlling costs that pertain
to certain projects or business activities.
COMMON PROJECT SCHEDULING TECHNIQUES (Network Models)
1. Gantt or bar chart
2. Program Evaluation and Review Technique (PERT)
3. Critical Path Method (CPM)

GANTT OR BAR CHARTS

The project is divided into different sub-projects called activities or tasks. The starting and completion time of activity is
estimated and a bar chart is prepared showing each activity as a horizontal bar along a time scale.

B
TASK
C

APR MAY JUN JUL

a. Which task is the longest in completion time? b. All tasks are being perform in what month?

PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT) – CRITICAL PATH METHOD (CPM)
PERT is developed to aid managers in controlling large-scale, complex problems.
 PERT diagram is a probabilistic diagram of the interrelationship of a complex series of activities; it is a free-form
network showing each activity as line between events.
 EVENTS – discrete moment in time representing the start or finish of an activity; they consume no resources.
 ACTIVITES – tasks to be accomplished; they consume resources (including time)
The following are the common type of activities:
o Series – an activity cannot be performed unless another activity is undertaken
o Parallel – can be performed simultaneously
CPM, like PERT, is a network technique, but unlike PERT, it uses deterministic time and cost estimates; its
advantages include cost estimates plus the concept of crash efforts and costs.
 CRITICAL PATH – is longest path through the PERT network.
 EXPECTED TIME – is the average time an activity would require if it were repeated several times.

te = (to + 4 tm + tp) / 6
Where to –optimistic time; tm – most likely time; tp – pessimistic
 SLACK TIME – the amount of time that can be added to an activity without increasing the total time required on
the critical path; the length of time an activity can be delayed without forcing a delay for the entire project.
 CRASH TIME – the amount of time to complete an activity assuming that, under rush or urgent condition, all
available resources were devoted tot eh task (e.g., overtime, extra labor, etc.); any crash time spent in an
activity normally would incur crash cost.

EXERCISES: NETWORK ANALYSIS

1. Palafox Construciton Firm, Inc. will soon begin to work on a building for US Tea that was initially started by another
firm that has gone out of business. The construction firm’s schedule of activities and related expected completions
times for US Tea project are presented in the following time table:
Activity Code Activity Description Estimated Time (in weeks)
A-B Obtain on-site work permits 1
B-E Repair damages done by vandals 6
B-C Inspect construction materials left on site 1
C-E Order and receive additional construction materials 2
C-D Apply for waiver to add new materials 2
D-E Obtain waiver to add new materials 2
E-F Perform electric work 12
F-G Complete interior partitions 4
a. Prepare the PERT network.
b. Identify critical path and determine the path’s expected time in weeks for the project.
c. Which path requires the shortest time to complete? What is the path’s slack time?
 2. A company is faced with the following PERT network situation (time in days):

START A

L 4.5 – 8 -11.5 I 6 – 8 - 16 S 8 – 10 -12 T

O
REQUIRED:
a. Calculate the expected time (te) each activity to two decimal places. For each activity, the estimates are ,
to, tm, tp in that order.
b. Calculate the total time for each part and identify the critical path(s)

PROBABILITY ANALYSIS
PROBABILITY ANALYSIS is important to decision-making because of the unpredictability of future events.
Decision-making involves:
 RISK – this occurs when the probability distribution of the possible future state of nature is known.
 UNCERTAINTY – this occurs when the probability distribution of possible future state of nature is not
known and must be subjectively determined.
The probability of an event varies from 0 to 1 (0% to 100%). 100% or probability of 1.0 means that event is certain to
occur while zero probability means the event cannot occur under any circumstances.
THE CONCEPT OF EXPECTED VALUE
The expected value of an action is found by multiplying the probability of each outcome by its pay-off and summing
up the products. A decision tree diagram is normally devised to show the several decisions or acts and the possible
consequences (outcome or events) of each act.
 Objective probabilities – calculated from either logic or actual experience.
 Subjective probabilities – estimates, based on judgment, of the likelihood of future events.
 Two events are said to be mutually exclusive if they cannot occur simultaneously.
 Two events are said to be independent if occurrence of one has no effect on probability of another.
 The joint probability of two events is the probability that both will occur.
 The conditional probability of two events is the probability that one will occur given that the other has already
occurred.

EXERCISES: PROBABILITY ANALYSIS

1. Tamansky Sports Club sells cold sodas at Far East College’s home basketball games. In the year 2006, the frequency
of distribution of the demand for cups of sodas per day is presented below: (2006 had 360 operating days)
Sales Volume in Cups Frequency
2,000 48 days
5,000 80 days
6,000 144 days
8,000 32 days
10,000 16 days
REQUIRED:
Determine next years’ estimated daily demand for cups of sodas at Far East College’s home games using:
a. Deterministic approach (based on most likely event) b) Expected value approach
2. Pet Company is taking into account the introduction of a new product. If the product becomes successful, the total
present value of this flow is estimated at P200. The needed investment is P440.
REQUIRED:
a. Assuming the company thinks that probability of success is 70%, what is the value of act “to invest”
b. What are the probabilities that would have to be assigned to the events success and failure to make
Pet Company indifferent between two actions “to invest” and “not to invest”?

LEARNING CURVES
LEARNING CURVES describes the effeciecies arising from experience, because with experience comes increased
productivity. This productivity increases with production size, but at decreasing rate as diagrammed below:

The time required to perform a given task becomes progressively

shorter, but this is applicable only to the early stages of production
Units or any new stages
produced
per day The curve is expressed as a percentage of reduced time (usually
between 60% and 80%) to complete a task of each doubling of
cumulative production. Hence, the time required is reduced by 20%
to 40% each time cumulative production is doubled.

Cumulative Production
  The cumulative average time per unit is reduced by a certain percentage each time production doubles
 Incremental unit time (time to produced the last unit) is reduced when production

EXERCISES: LEARNING CURVES

1. A particular manufacturing job is subject to an estimated 80% learning curve. The first unit required 20 direct 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 2 units?
c. How many hours are required to produce the second unit
2. Which of the following unfavorable variances would be directly affected by the relative position of a production process
on the learning curve?
a. Material price c. Labor rate
b. Material usage d. Labor efficiency

INVENTORY MODELS
INVENTORY MODELS are usually devised to minimize the cost associated with inventory while maintaining certain level of
inventories needed to sustain smooth operations.
COMPONENT OF INVENTORY COST
The total inventory costs are comprised of:
 CARRYING COSTS: This cost increases with order size or quantity of inventory on hand
Example: Storage cost, insurance on inventory, normal spoilage, record keeping cost, etc.
 ORDERING COSTS: This cost decreases with order size or quantity of inventory on hand
Example: Delivery costs, administrative costs – inspection, purchasing and receiving

THE CONCEPT OF ECONOMIC ORDER QUANTITY (EOQ)

EOQ is the quantity to be ordered that minimizes the sum of ordering cost and carrying cost. EOQ tries to answer the
question “How many units should be ordered (and when to order) to minimize inventory costs?”
2 Do Where: o = Cost of placing one order (ordering cost)
EOQ =
k D = Annual demand in units
K = Annual cost of carrying one unit for one year
At EOQ, a firm incurs the minimum total inventory costs computed as follows:

EOQ D
TC  (k )  (o )
2 EOQ
Average inventory is computed as follows:
 No safety stock: EOQ/2
 With safety stock: EOQ/2 + safety stock
 If EOQ is not available: (beginning inventory + Ending Inventory)/2
Assumptions of EOQ models:
 Annul determinable demand for inventory is spread evenly throughout the year.
 Lead time does not vary and each order is delivered in a single delivery.
 The unit costs of the time ordered are constant; thus, there can be no quantity discounts.

When applied to production operations, the EOQ formula is used to compute the Economic Lot Size (ELS)
Where: o = Set-up cost
2 Do D = Annual production requirement
ELS = K = Annual cost of carrying one unit for one year
k

EOQ-RELATED TERMINOLOGIES
 LEAD TIME is period between the time the order is placed and received
 NORMAL TIME USAGE is derived by multiplying normal lead time with average usage
 SAFETY STOCK = (maximum lead time – normal lead time) x average usage or demand
 ORDER (Reorder) POINT is the inventory level that automatically calls for a new order
When to order is a stock-out problem; the objective is to order at a point in time so as not to run out of stock before
receiving the inventory ordered but not so early that an unnecessary quantity of safety stock is maintained. When order
point is computed, there may be stock-out situation if:
 Demand is greater than expected during the lead time, or
 The order time exceeds the lead time
 RE-ORDER POINT (without safety stock) = Normal lead time usage
 RE-ORDER POINT (with safety stock) = Normal lead time usage + safety stock
= Maximum lead time x average usage

EXERCISES: INVENTORY MODELS

1. Shirley Company requires 40,000 shells for its P500-signature product, “pearly Shirl”. The shells, which are purchased
from outside suppliers, will be used evenly throughout the year. The cost to place one order is P20, while the cost to
carry the shells in inventory for one year is P0.40

REQUIRED:
 a. The optimal order (economic order quantity)
b. The number of times the company should place orders within a year.
c. The average inventory.

2. Based on EOQ analysis, the optimal order quantity is 3,000 units. Annual inventory carrying cost equal 30% of the
average inventory level. The company pays P 5 per unit to buy the product, selling for P 12. The company pays
P112.50 to place an order. The monthly demand for the product is 5,000 units.
REQUIRED:
a. Annual inventory carrying cost
b. Annual inventory ordering cost
c. Total inventory costs

3. Bonitafe subsidiary purchases 45,00 units of bleaching soap per annum. The average purchase lead time is 10 working
days. Maximum lead-time is 16 working days. The company works 300 days per year.
REQUIRED:
a. Safety stock in units
b. Reorder point for bleaching soap
c. Assume that the lead time is always 10 days and the company has experienced no delay in delivery. What
is the reorder point? How many units of safety stock the company must keep in this case?

4. Each stock-out of a product sold by Georgee Company costs P2,000 per occurrence. The carrying cost per unit of
inventory is P 5 per year and the company orders 1,500 units of product 18 times a year at a cost of P 200 per order.
The probability of a stock-out at various levels of safety stock is:
Units of Safety Stock Probability of a Stock-out
0 50%
200 30%
400 14%
600 5%
800 1%
The optimum safety stock level for company is
a. 200 units b. 400 units c. 600 units d. 800 units

5. Kanan publishes a book about accounting. Set up cost is P10. Kanan prints 675 copies of the book evenly throughout
the year. If the optimal production run (economic lot size) is 30, how much is the unit carrying cost per year?

LINEAR PROGRAMMING
LINEAR PROGRAMMING is a mathematical technique that helps managers to determine the volume of various products to
produce when resources are limited or scarce in order to maximize net income. It is a technique used to optimize an
objective function (maximize revenue of profit function, or minimize a cost of function), subject to constraints (such as
scarce resources, minimum/maximum levels of production, performance, etc.)
Maximize revenue
OBJECTIVE Maximize net profit
Minimize costs and expenses

Limited resources must be allocated to the company’s most profitable products so that net income is maximized. Linear
programming models are extremely helpful in the analysis and solution of resource allocation problems.

Simplex method is a more complex linear programming technique especially useful if there are more than two variables in
a linear programming problem.

EXERCISES : LINEAR PROGRAMMING

1. Following are the data about Maximin Company’s two products that it produces through its production facilities:
Product A Product B
Contribution Margin Per Unit P3 P4
Materials Used: Material X 2 units 5 units
Material Y 4 meters 2 meters
Available Quantity of Materials: Material X 120 pieces
Material Y 80 meters
REQUIRED:
a. Objective function – involving maximization of the company’s contribution margin.
b. Constraint function for Material X
c. Constraint function for Material Y
d. The optimal mix of products that must be produces by Maximin Company.

3.Erin ‘n Neo Corporation produces a product in 50-gallon batches. The basic ingredients used for material B are costing
P.20 per gallon and for Material A, costing P10 per gallon. No more than 1 gallon of A can be used, and at least 15
gallons of B must be used.
REQUIRED : How would the objective function (minimization of product cost) be expressed?