QUANTITATIVE TECHNIQUES

BSA 21A1
 RATIONALE IN USING QUANTITATIVE
TECHNIQUES
• Management accountants use
quantitative techniques in developing
the necessary information needed by
management in carrying out their
functions that include planning,
organizing, directing, controlling and
decision making.
 SIMULATION
• Simulation- a technique for experimenting with
quantitative/mathematical/logical models using a
computer.
• Steps in Simulation Procedure
– Defining the objective
– Formulating the Model
– Validating the Model
– Designing the experiment
– Conducting the simulation
– Evaluation of the results
 COMMONLY USED QUANTITATIVE
MODELS
• PROBABILITY ANALYSIS
• DECISION TREE
• GANTT CHART
• FORECASTING
• PROGRAM EVALUATION AND REVIEW TECHNIQUE(PERT)-CRITICAL
PATH METHOD(CPM)
• LINEAR PROGRAMMING
• QUEUING
• LEARNING CURVES
• SENSITIVITY ANALYSIS
• REGRESSION ANALYSIS
• PRESENT VALUES
• INVENTORY MODELS
 PROBABILITY ANALYSIS
• Probability analysis is commonly used in
planning, as well as decision-making under
uncertainty.
• Decision-making under certainty-for each
decision alternative, there is only one event, and
therefore only one outcome. The event has a
100% chance of occurrence.
• Decision-making under conditions or risk- the
probability distribution of the possible future
states of nature is known.
 PROBABILITY ANALYSIS
• Decision-making under conditions
of uncertainty- each decision
alternative has several events or
outcome. The probability distribution
of the possible future states of nature
(events) is not known and must be
determined subjectively
 PROBABILITY ANALYSIS
• Probability Distribution- specifies the values of
the variables and their respective probabilities.
• Probability- a mathematical expression of doubt
or assurance about the occurrence of a chance
event. Its value varies from zero(0) to one(1) or
100%
– Probability of 0- the event cannot occur
– Probability of 1 or 100% the event is certain to occur
– Probability between 0 and 1- indicates the likelihood
of the event occuring
 TYPES OF PROBABILITIES
• OBJECTIVE PROBABILITIES- calculated from
either logic or experience. Ex. The probability
that a coin will yield heads is 0.50 or 50% on
any single toss.
• SUBJECTIVE PROBABILITIES- estimates of the
likelihood of future events are based on
judgment and past experience. Ex. The
likelihood that a passer in CPALE will become a
successful CPA practitioner.
 BASIC TERMS
• Mutually exclusive- it two events cannot occur
simultaneously.
• Joint probability-both events will occur.
• Conditional probability- one event will occur given that
the other event has already occurred.
• Independent events- the occurrence of one event has
no effect on the other event.
• Dependent events- the occurrence of one event has an
effect on the other event.
• Payoff- the value assigned to the different outcomes
from a decision.
 EXPECTED VALUE
• Expected value of an action is calculated by
multiplying the probability of each outcome
by its payoff and summing the products. It
represents the long-term average payoff from
expected trials
• Example:
• X sells a product in the market. For this day
the probability distribution of the demand for
the product is as follows:
 EXPECTED VALUE
ESTIMATED SALE IN UNITS PROBABILITY RESULTS
1,000 UNITS 0.20 1,000X.20=200
1,500 UNITS 0.25 1,500X.25=375
2,000 UNITS 0.55 2,000X.55=1,100
EXPECTED VALUE=1,675 UNITS

THE ESTIMATED DEMAND FOR THE PRODUCT FOR THIS DAY USING THE EXPECTED
VALUE APPROACH IS COMPUTED BELOW.
 DECISION THEORY
• A decision is the act of deciding what single act
among all alternatives is to be taken into account.
• Steps in decision-making
– Clearly define the problem
– Identify the possible alternatives and their outcomes
– List the profit for each combination of alternatives
and outcomes
– Select one mathematical decision theory model
– Apply the model and make your decision.
 DECISION THEORY
• Making use of quantities in decision-making helps
a great deal in minimizing mistakes and failures.
• Mathematical Expectation(ME)/Expected Value
(EV)
– ME/EV depends on the probability that the event will
happen and the quantity of money to acquire.
– Probability is a measure of sureness. The value of
probability ranges from 0 to 1. if the event is sure to
happen the probability is 1 or 100%, otherwise it is
zero. The probability of either success or failure is 1 or
100%.
 DECISION THEORY
Probability Concept
Examples:
1. The probability that the election will be
peaceful for this year is 65%, the probability
that it will not be peaceful is 65%. The
probability that the inflation rate will rise after
the election is 70%; the probability that it will
rise is 30%.
 HOW TO COMPUTE FOR THE ME OR
EV
• Let P=be the probability value
• Let X= be the amount of money
• EV=P(X)
• For several events that are expected to
happen, the amount of probability is,
• EV= P1(X1) + P2(X2)+………Pn(Xn)
• Expected value is sometimes negative, when it
will tend to lose than to gain
 HOW TO COMPUTE FOR THE ME OR
EV
Example 1:
1. A fair coin will be tossed. If the coin lands head, Fred
will get P 6, and pay P 4 if it lands tail. Find the EV.
Solution:
There are only two possibilities, Head or Tail, so the
probability of Head is ½ and that of tail is also ½.
Hence:
P1=1/2 X1=P 6
P2=1/2 X2=P 4
EV=1/2(6) + ½(-4)=3-2=1
This means that the game is fair for the person.
 HOW TO COMPUTE FOR THE ME OR
EV
Example 2: Mr. X, the manager of XYZ company has to
decide whether to accept a bid or not. If he accepts,
the firm may gain P 2.5 million if it succeeds, or lose P
1.5 million if it fails. The probability that it will succeed
is 40%. Find the EV if he accepts the bid.
Solution:
P1=40% X1=2.5
P2=60% X2=-1.5
EV=40(2.5) + 60(-1.5)=1.00-0.90=0.10
This means that the company will gain.
 EXERCISES
1. Jenn, a college student has to decide whether
to stop her studies and work for a job paying P
15,000 a month or continue her studies after
which a job paying P 25,000 will be offered to
her if she passes her remaining subjects. The
probability that she can pass her remaining
subjects is 45%. Find the EV, if she decides to
continue her studies.
 EXERCISES
2. Lawrence sells a raffle coupon for P 100 that has
a 95% chance of winning P 1 million. Find the EV.
3. If the ballroom dinner party is to be held in an
open air garden, we stand to lose P 3,000 if it
rains. If it will not rain, we gain P 18,000. If it will
be held in the gymnasium, we gain P 10,000 if it
rains and loses P 1,500 if it will not rain. The
probability that it will rain is 40%. Which has the
higher EV, the dinner in the garden or in the gym?
 EXERCISES
4. In rolling a single die, the following rules have
been agreed upon: Mutya will pay P100 for
each roll of the die. If a 5 comes out she will
receive P 300; if a 6 comes out she will receive
P 600 and if 4 or 2 comes out she will receive
nothing but for 1 or 3 she will receive P 400.
Find her EV.
 VALUE OF INFORMATION
• The information for a decision is often
summarized in a payoff table which shows the
expected payoffs for each alternative under
the various possible states of nature. These
tables facilitate comparison of alternatives.
ALTERNATIVES POSSIBLE FUTURE DEMAND

LOW INADEQUATE HIGH

SMALL FACILITY P 350 P 350 P 350

MEDIUM FACILITY 245 420 420

LARGE FACILITY -140 70 560

 VALUE OF INFORMATION
For a decision maker, evaluation of alternatives
differs depending on the degree of certainty
associated with possible future conditions
namely: complete certainty, risk and uncertainty.
1. Decision under Certainty- when one knows with
certainty which of the future possible conditions
will actually happen, he simply chooses the
alternative with the highest payoff under the
state of nature.
 VALUE OF INFORMATION
• Decision under Certainty-Example:
• What is the best alternative in the previous
payoff table, if it is known with certainty that
demand will be: low, moderate and high.
• Solution: Choose the alternative with the highest
payoff. Thus, if we know that demand will be low,
we would choose to build a small facility with a
payoff of P 350T.For moderate demand , medium
facility, P 420 T, and for high demand, largest
facility with P 560 T.
 VALUE OF INFORMATION
2. Decision under Uncertainty- the opposite of certainty where there is
no available information on how likely the various states of nature
are. There are four possible decision criteria, namely:
a. Maximin-takes into account only the worst possible outcome for
each alternative. This approach establishes a “ guarantee
minimum”.
b. Maximax- takes into account only the best average possible
outcome for each alternative.
c. Laplace- takes into account only the best average possible
outcome for each alternative.
d. Minimax Regret- determines the worst regret for each alternative,
and chooses the alternative with the “best worst”
 VALUE OF INFORMATION
• Decision Under Uncertainty- Example:
• Referring to the previous table, determine which
alternative would be chosen under each of the these
strategies:
• Solution
a. Maximin- the worst payoff for the alternatives are:
1. Small Facility: P 350 T
2. Medium Facility: P 245 T
3. Large Facility: P 140 T
Since P 350 T is the best; it leads to building a small facility.
 VALUE OF INFORMATION
b. Maximax- the best overall payoff is the P
560T, which leads to building a large facility
under this criterion.
c. In the laplace criterion, find the row totals and
divide each of the amounts by the number of
states of nature. Thus, we have:
ROW TOTAL ROW AVERAGE
SMALL FACILITY P 1,050T P350T
MEDIUM FACILITY P 1,085 P 361.67
LARGE FACILITY P 490 P 163.33
Since P 361.67T is the highest average, then the medium facility would be chosen under
 VALUE OF INFORMATION
d. Minimax Regret- prepare a table of opportunity
losses, or regrets. To do this, subtract every
payoff in each column from the largest positive
pay off in that column. For instance, in the first
column, the largest positive payoff is P 350, so
each of the three numbers in that column must
be subtracted from 350 and so on. Determine the
worst regret for each alternative which is the
highest payoff per row, and then choose the best
of these “worst” under minimax regret. The
results are placed in the regret table.
 VALUE OF INFORMATION
THE REGRET TABLE

LOW MODERATE HIGH WORST

SMALL FACILITY 0 70 210 210

MEDIUM 105 0 140 140

FACILITY

LARGE FACILITY 490 350 0 490

THE LOWEST REGRET IS 140 WHICH IS FOR A MEDIUM FACILITY. HENCE, THE
ALTERNATIVE WOULD BE CHOSEN.
 VALUE OF INFORMATION
• Decision Under Risk- in developin the