INTRODUCTION TO MANAGEMENT • Forecasting

SCIENCE
• And a whole lot more!
What is Management Science?
SCIENTIFIC METHOD APPROACH
 According to Bernard Taylor (2013),
it is a scientific approach to solving
management problems
 Encompasses a number of
mathematically oriented techniques
and a logical approach to problem
solving
 Can be used in a variety of
organizations to solve many MODEL CONSTRUCTION:
different types of problems
Price per Sack – Cost per Sack = Profit
 Also referred to as operations
research, quantitative methods, Thus, we can expand this further into:
quantitative analysis, and decision Price per Sack – (Cost per Sack + Freight
sciences Charge) = Profit

How does Management Science relate to MODEL CONSTRUCTION:

Accounting?
 Price per Sack – (Cost per Sack + Freight
Charge) = Profit
Management Science – It is discipline
whose application to resolving business We can let:
problems is of great significance. a = Price
• Accounting – Accounting provides b = Cost per Sack
financial information that are useful
c = Freight Charge
in decision making.
d = Profit
Tools and Techniques in Management
Science? MODEL CONSTRUCTION:

 Breakeven analysis Substituting,

Price per Sack – (Cost per Sack + Freight

• Linear Programming
Charge) = Profit
• Forecasting
We will have: a – (b + c) = d
• Queuing Theory

• Monte Carlo Simulations

CONCEPT OF COSTS • According to Nature or Traceability

What is cost? • According to Function

 According to Kinney and Raiborn • According to Behavior

(2010), cost reflects the monetary
• According to Normality
measure or value of resources used
to attain an objective such as • According to Controllability
making a good or performing a
According to Elements
service.
Under this classification, costs are:
 A cost is an expenditure or
• Material cost
monetary resource needed to
produce or sell a product or get an Example: Cost of flour when making
asset ready for normal use. bread, cost of lumber when making
furniture
Basic Concepts
• Labor cost

Example: Daily wage of a laborer

 Overhead
Example: Electricity used in the
production

According to Nature or Traceability

Examples of Costs
Under this classification, costs are:
 Costs of materials and supplies used
 Direct Costs
in the production
Example: Costs of lumber in making
• Salary and wages paid to admin tables, cost of sugar in making
personnel milktea

• Costs paid to laborers  Indirect Costs

Example: Costs of electricity
• Costs paid to utilities such as
consumed in baking
electricity and water
HINT: Indirect costs are also overhead costs.
• Finance costs paid to banks

Classification of Costs
Costs may be classified into different ways:

• According to Elements
According to Function
Under this classification, costs are:
 Production costs
Example: Cost of Materials and
Labor used in the production
• Administration costs
Example: Salary of the manager and
accountant, office supplies, etc.
• Finance Costs
Example: Interests and dividends.
• Selling Costs
Example: Advertising and marketing
costs.
According to Behavior
Under this classification, costs are:
 Fixed Costs
Example: Monthly depreciation of
equipment, fixed monthly rentals
 Variable Costs
Example: Cost of flour and sugar in
making pastries (as the units
produced increases, the costs of
flour and sugar also increase.
• Mixed Costs
Example: Taxi Fare, Water bills,
commissions, etc.
According to Reporting
Under this classification, costs are:
 Product Costs
Example: Cost of Materials, Labor
and overhead used in the
production are all product costs.
Materials + Labor = Prime Costs
Labor + Overhead = Conversion
Costs
 Period Costs
Example: Salaries paid to
accountants, office supplies, all costs
not related to the production.
According to Normality
Under this classification, costs are:
• Normal Costs or Unavoidable Costs
Example: Depreciation, Rentals,
Fuel, Taxes, etc.
• Abnormal Costs or Avoidable Costs
Example: Losses due to theft,
Damage, Casualty Losses, Penalties,
etc.
According to Controllability
 Controllable costs
Example: Costs of Materials and
Labor are also controllable costs.
 Uncontrollable costs
Example: Costs beyond the control
of one department, but may be
controllable by the higher
management or other department.
Scatter Graph & High-Low Method
 Fixed Costs
Example: Monthly depreciation of
equipment, fixed monthly rentals
 Variable Costs
Example: Cost of flour and sugar in
making pastries (as the units
 produced increases, the costs of
flour and sugar also increase.
• Mixed Costs
Example: Taxi Fare, Water bills,
commissions, etc.
Techniques in Segregating Mixed Costs
• Scatter Graph or the Graphical
Method
• High-Low Method
• Simple Linear Regression Analysis

Why do we need to account for Fixed and
Variable Costs?
 Variable costs increases or
decreases depending on the
production level.
 Fixed costs do not change regardless
of the production level in a relevant
range or period.
 They will stay the same during a
relevant range or period.
Scatter Graph or the Graphical Method
• It uses a graphical solution in
separating mixed costs.
• It is used to determine
relationship between two
variables (x and y).
• The x- variable is the
independent variable.
• The y-variable is the dependent
variable.

Why do we need to account for Fixed and

Variable Costs?

 This means, whether the

organization is producing more or
less, the fixed costs will be at the
same level.
 This is where production managers
need to focus on.
 How many should they produce and
sell to recover the fixed costs

But, what about mixed costs?

• Mixed costs add complications in

the accounting of costs.
• They are partially variable, and
partially fixed.
• Hence, we need to separate the
variable and fixed components of
the mixed costs.
Step 2: Use the y-Intercept Equation to
Estimate Costs
High-Low Method
• Does not necessarily need for
graphical solution.
• It selects and uses the highest and
lowest values of x (production level)
to compute for the slope and the y-
intercept.
LINEAR PROGRAMMING
Concepts and Business Applications
Price per unit = P 100.00
Price per unit = P 75.00
How many pizzas and burgers have to be
produced and sold?
- 7 Pizzas and 9 Burgers
What is Linear Programming?
• Is a model that consists of linear
relationships representing a firm’s
decision(s), given an objective and
resource constraints.
• A linear relationship means the
interdependence of one variable
(called the independent variable)
and another variable (called the
dependent variable).
• This means a change in the
independent variable will affect the
dependent variable.
Helps managers determine solutions
(i.e., make decisions) for problems
to achieve some objective in which
there are restrictions, such as
 limited resources or a recipe or
perhaps production guidelines.
Applications and Limitations of Linear
Programming
Applications
• Production of complimentary
goods
• Sell now or process further
• “Which to produce; how many
to produce” decision-making
Limitations
• High reliance on the linear
relationship of the variables.
• Does not consider other
unknown variables and
contingencies such losses,
shrinkages and wastes
• Does not consider increases and
decreases of demand
Techniques in Linear Programming
Step 1: Define the decision variables
• How many pizza and burgers to
produce?
Step 2: Define the objective function
• Maximize profit
Step 3: Define the constraints
• The resources (dough, meat, veggies
and cheese) available
Step 1: Defining the decision variables
• Decision variables are mathematical
symbols that represent levels of
activity
• The decision one has to make in the
activity is how many pizza and
burgers to produce and sell.
• The quantities to be produced can
be represented symbolically as:
x= the number of pizza to produce and
sell
y= the number of burgers to produce
and sell
Step 2: Define the objective function
• Objective function is a linear
mathematical relationship that
describes the objective of the
firm in terms of the decision
variables.
• The objective function always
consists of either maximizing or
minimizing some value (e.g.,
maximize the profit or minimize
the cost of production).
In the activity, to derive with the objective
function, we must first calculate the profit
per pizza and per burger. Thus,
•
Each pizza is sold at P 100.00, thus
profit per unit of pizza produced and
sold would be P 25.00
Meanwhile, the cost per burger is Step 3: Define the constraints
computed as follows:

Each burger is sold at P 75.00, thus the

profit per burger is P 21.00

With the given variables of:

x= the number of pizza to produce and sell

y= the number of burgers to produce and

sell

Step 3: Define the constraints

• Constraints are the restrictions or Final Restriction

limitations in achieving our objective • The number of pizza (x) and burger
that is to maximize profit and (y) sold must be equal to zero or any
minimize costs. positive number because it is
• In the activity, four resources are impossible to produce negative
used for production—the dough, items.
meat, veggies and cheese—all of
which are limited. • These restrictions are referred to as
non-negativity constraints and are
Production of pizza and burger requires expressed mathematically as:
all four resources.
x ≥ 0, y ≥ 0
The complete linear programming model
for this problem can now be summarized as
follows:
Let us say, the value of x = 5 and y = 7, thus Thus, let’s say:
using the dough constraint:
(Dough) 2x + 1y ≤ 23
(Dough) 2x + 1y ≤ 23
(Meat) 3x + 1y ≤ 30
2(5) + 1(7) ≤ 23
First, we will convert the ≤ sign to = sign.
10 + 7 ≤ 23
(Dough) 2x + 1y =23
17 ≤ 23
(Meat) 3x + 1y = 30
While, it is true that x = 5 and y = 7 could be
Next is to compute for either x or y using
the solution to the problem, still it will not
the given equations, for both equation.
achieve our objective to maximize profit
since there are still 6 dough remaining.  2x + 1y = 23
y = -2x + 23
Let us say, the value of x = 8 and y = 11,  3x + 1y = 30
thus using the dough constraint:
y = -3x + 30
(Dough) 2x + 1y ≤ 23
The next step is to solve the problem
2(8) + 1(11) ≤ 23 simultaneously through substitution:

16 + 11 ≤ 23 -2x + 23 = -3x + 30
-2x + 3x = -23 + 30
27 ≤ 23
x=7
• The values we assigned are false  Number of pizza to be produced and
because the total number of dough sold
that should be used must not
To determine whether the values of x and
exceed the total number of dough
y are correct, we will test the values with
available.
the constraints equations:

Solutions: Substitution Method (Dough) 2x + 1y ≤ 23

Under this method, constraint
(Meat) 3x + 1y ≤ 30
equations are solved simultaneously
at the optimal extreme point to (Veggies) 1x + 2y ≤ 25
determine the variable solution (Cheese) 2x + 3y ≤ 41
values.
Final Restriction x ≥ 0, y ≥ 0
• We will use two constraints to
calculate the possible value of our x The above are the constraint equations.
and y.
Let’s try each constraint.
(Dough) 2x + 1y ≤ 23

2(7) + 1(9) ≤ 23

14 + 9 ≤ 23

TRUE

(Veggies) 1x + 2y ≤ 25

1(7) + 2(9) ≤ 25

7 + 18 ≤ 25

TRUE

(Meat) 3x + 1y ≤ 30

3(7) + 1(9) ≤ 30

21 + 9 ≤ 30

TRUE

(Cheese) 2x + 3y ≤ 41

2(7) + 3(9) ≤ 41

14 + 27 ≤ 41

TRUE

Since the constraints are all satisfied, it is

now time to compute the maximum profit:
Objective Function:

 Maximize z = 25x + 21y

z = 25(7) + 21(9)

z = 175 + 189

z = P 364