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:

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

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