MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual

CHAPTER 18

APPLICATION OF QUANTITATIVE TECHNIQUES IN

PLANNING, CONTROL AND DECISION MAKING -
II

I. Questions
1. PERT is superior to Gantt Charts in complex projects because:
a. PERT charts are flexible and can reflect slippage or changes in
plans, but Gantt charts simply plot a bar chart against a calendar
scale.
b. PERT charts reflect interdependencies among activities; Gantt charts
do not.
c. PERT charts reflect uncertainties or tolerances in the time estimates
for various activities; Gantt charts do not.
2. The use of PERT provides a structured foundation for planning complex
projects in sufficient detail to facilitate effective control.
A workable sequence of events that comprise the project are first
identified. Each key event should represent a task; then the
interdependent relationships between the events are structured.
After the network of events is constructed, cost and time parameters are
established for each package. Staffing plans are reviewed and analyzed.
The “critical path” computation identifies sequence of key events with
total time equal to the time allotted for the project’s completion. Jobs
which are not on the critical path can be slowed down and the slack
resources available on these activities reallocated to activities on the
critical path.
Use of PERT permits sufficient scheduling of effort by functional areas
and by geographic location. It also allows for restructuring scheduling
efforts and redeployment of workers as necessary to compensate for
delays or bottlenecks. The probability of completing this complex
project on time and within the allotted budget is increased.
3. Time slippage in noncritical activities may not warrant extensive
managerial analysis because of available slack, but activity cost usually
increases with time and should be monitored.

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4. The critical path is the network path with the longest cumulative
expected activity time. It is critical because a slowdown along this path
delays the entire project.
5. Crashing the network means finding the minimum cost for completing
the project in minimum time in order to achieve an optimum tradeoff
between cost and time. The differential crash cost of an activity is the
additional cost of that activity for each period of time saved.
6. Slack is the amount of time an event can be delayed without affecting
the project’s completion date. Slack can be utilized by management as a
buffer against bottlenecks that may occur on the critical path.
7. Unit gross margin are typically computed with an allocation of fixed
costs. Total fixed costs generally will not change with a change in
volume within the relevant range. Unitizing the fixed costs results in
treating them as though they are variable costs when, in fact, they are
not. Moreover, when multiple products are manufactured, the relative
contribution becomes the criterion for selecting the optimal product mix.
Fixed costs allocations can distort the relative contributions and result in
a suboptimal decision.
8. This approach will maximize profits only if there are no constraints on
production or sales, or if both products use all scarce resources at an
equal rate. Otherwise management would want to maximize the
contribution per unit of scarce resource.
9. The opportunity cost of a constraint is the cost of not having additional
availability of the constrained resources. This is also called a shadow
price.
10. The feasible production region is the area which contains all possible
combinations of production outputs. It is bounded by the constraints
imposed on production possibilities. The production schedule which
management chooses must come from the feasible production region.
11. The accountant usually supplies the contribution margin data that is used
in formulating a profit-maximizing objective function. In addition, the
accountant participates in the analysis of linear programming outputs by
assessing the costs of additional capacity or of changes in product mix.
12. a. Hourly fee for inventory audit (C)
b. Salary of purchasing supervisor (N)
c. Costs to audit purchase orders and invoices (P)
d. Taxes on inventory (C)
e. Stockout costs (P)
f. Storage costs charged per unit in inventory (C)
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g. Fire insurance on inventory (C)
h. Fire insurance on warehouse (N)
i. Obsolescence costs on inventory (C)
j. Shipping costs per shipment (P)
13. Although the inventory models are developed by operations researchers,
statisticians and computer specialists, their areas of expertise do not
extend to the evaluation of the differential costs for the inventory
models. Generally, discussions of inventory models take the costs as
given. It is the role of the accountant to determine which costs are
appropriate for inclusion in an inventory model.
14. Cost of capital represents the interest expense on funds if they were
borrowed or opportunity cost if funds were provided internally or by
owners. It is included as carrying cost of inventory because funds are
tied up in inventory.
15. Costs that vary with the average number of units in inventory:
Inventory insurance P 2.80
Inventory tax 2.05 (P102.25 x 2%)
Total P 4.85
Costs that vary with the number of units purchased:
Purchase price P102.25
Insurance on shipment 1.50
Total P103.75
Total carrying cost = (25% x P103.75) cost of capital + P4.85 = P25.94
+ P4.85 = P30.79
Order costs:
Shipping permit P201.65
Costs to arrange for the shipment 21.45
Unloading 80.20
Stockout costs 122.00
Total P425.30

II. Problems

Problem 1 (Solution is found on the next page.)

Problem 2

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Requirement (a)

The critical path through each of the three alternative paths calculated as the
longest is 0 - 1 - 6- 7- 8.

0-1-2-5-8 2 + 8 + 10 + 14 = 34
0-1-3-4-7-8 2+8+7+5+3 = 25
0-1-6-7-8 2 + 26 + 9 + 3 = 40*
________
* critical

Requirement (b)

40 - 3 - 5 = 32

Requirement (c)

If path 4 - 7 has an unfavorable time variance of 10, this means it takes a

total time of 15 to finish this activity rather than 5. This gives the path 0 - 1
- 3 - 4 - 7 - 8 a total time of 35, but since this is less than the critical path of
40, it has no effect.

Requirement (d)

The earliest time for reaching event 5 via 0 - 1 - 2 - 5 is 20, the sum of the
expected times.

Problem 3

No, they didn’t make a right decision, since they included fixed costs which
do not differ in the short run. If they had used contribution margin instead
of gross margin, they would have had P5 for G1 and P6.50 for G2, therefore
they would have decided to produce G2 exclusively.

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Problem 1

Requirement (a)
TASKS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Hobbing Order 1 Order 3 Order 4 Order 2

Machini X X X X Order 1 X X Order 3 X X X Order 4 Order 2

ng

___________
X Dead Time

Requirement (b)

28 days are required for the four orders.

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Problem 4

Order costs = Insurance + Other order costs

P = P860 + P18 = P878

Carrying costs = Out-of-pocket Cost of capital

+
costs on inventory
S = P65 + 20% x P222 = P119.40

a. Carrying costs:

QS = 250 x P109.40 = P13,675.00

2 2

Order costs:
AP = 1,500 x P878 = P 5,268.00
Q 250

Total P18,943.00

b. Economic order quantity:

Q* = √ 2 x 1,500 x P878
P109.40
= √ 24,077 = 155 units

Carrying costs:

QS = 155 x P109.40 = P 8,478.50

2 2

Order costs:
AP = 1,500 x P878 = P 8,496.77
Q 155

Total P16,975.27

Problem 5

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It is necessary to evaluate the annual carrying costs and expected stockout
costs at each safety-stock level. The carrying cost will be P24.40 for each
unit in safety stock. With the given order size, there are 15 orders placed a
year (i.e., 39,000/2,600 = 15). Based on these computations, we prepare the
following schedule:

Safety Carrying Costs Expected Stockout Total

Stock of Safety Stock Costs Costs
0 0 0.50 x 15a x P1,650 = P12,375 P12,375
150 150 x P24.40 = P3,660 0.20 x 15a x P1,650 = P 4,950 8,610
175 175 x P24.40 = P4,270 0.05 x 15a x P1,650 = P 1,273.5 5,507.5 (optional)
250 250 x P24.40 = P6,100b 0.01 x 15a x P1,650 = P 247.5 6,347.5

Additional computations:
a
15 is the number of orders per year.
b
It should be evident that at this level the carrying costs alone exceed the total
costs at a safety stock of 175 units. Therefore, it is not possible for this or any
safety-stock level larger than 250 to be less costly than 175 units. Indeed, given
a total cost at 175 units of P5,507.5, stockout costs would have to occur with
probability zero for any safety stock greater than 225.72 units (i.e., P5,507.5 /
P24.40 = P225.72).

III. Multiple Choice Questions

1. C 11. D 21. D 31. C

2. B 12. C 22. C 32. D
3. D 13. A 23. C 33. A
4. B 14. A 24. D 34. C
5. D 15. A 25. D 35. D
6. C 16. C 26. B 36. C
7. A 17. C 27. D 37. D
8. A 18. D 28. E 38. D
9. A 19. C 29. B
10. C 20. D 30. A

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