QUANTITATIVE TECHNIQUES

Linear regression
Linear regression is a method that studies the relationship between continuous variables. The
variables are plotted on a straight line. The linear regression can be calculated using the following
formula:

Y= a + bx

Where:
Y is the dependent variable
X is the independent variable
b is the slope of the regression line
a is the intercept of the regression line

The equation is usually used to compute for Total Cost. The formula is
TC = FC + VC/UxQ

Where
TC is total cost
FC is fixed cost
VC/U is variable cost per unit
Q is quantity

 High-low points method

In cost accounting, the high-low method is a way of attempting to separate out fixed and variable
costs given a limited amount of data. The high-low method involves taking the highest level of
activity and the lowest level of activity and comparing the total costs at each level.

This method assumes linear relationship of costs and quantity, or the Relevant Range. The
method assumes that variable cost is a fixed charge per unit and total fixed costs is constant in any
production level. It is then possible to determine the fixed and variable costs by using a series of
equations

Variable Cost Per Unit = Highest Activity Cost-Lowest Activity Cost

Highest Activity Units—Lowest Activity Units

To compute for fixed cost, you have the option of using either the highest or lowest quantity. The
equation presented below assumes the highest activity cost

Fixed Cost = Highest Activity Cost — (Variable Cost/U x HAUs)

Then compute for the total cost using the regression equation.

The high-low method does not consider small details such as variation in costs. It assumes that fixed and unit
variable costs are constant, which is not always the case in real life. There are also other cost estimation tools
that can provide more accurate results. The leastsquares regression method takes into consideration all data
points and creates an optimized cost estimate. It can be easily and quickly used to yield significantly better
estimates than the high-low method.
 The Method of Least Squares and Linear Programming

The least squares method is a statistical procedure to find the best fit for a set of data points by minimizing the
sum of the offsets or residuals of points from the plotted curve. Least squares regression is used to predict the
behavior of dependent variables. Of the cost estimation methods, this is the most accurate. It uses the
following equations to compute for the constant and variable coefficient:

Program (Project) Evaluation and Review Technique

Three Time Estimates in PERT
1. Optimistic Time (TOPT)
This is the fastest time an activity can be completed. For this, the assumption is made that all
the necessary resources are available and all predecessor activities are completed as planned
2. Most Likely Time (TLIKELY)
The completion time having the highest probability. Most of the times, project managers are
asked only to submit one estimate. In that case, this is the estimate that goes to the upper
management.
3. Pessimistic Time (TPESS)
This is the maximum time required to complete an activity. In this case, it is assumed that many
things go wrong related to the activity. A lot of rework and resource unavailability are assumed
when this estimation is derived.

Equations used in PERT

PERT utilizes the BETA probability distribution in computing for the expected completion time (E).
It is calculated as follows:
E = (TOPT + 4 x TLIKELY + TPESS) / 6

The variance (V) of an activity can be computed as

V = [(TPESS — TOPT)/6]2

Total Project variance

PV = total of variances in the critical path

Standard Deviation (SD) of the Project

SD = Square root of PV

Expected Value (EV)

The expected value (EV) is an anticipated value for an investment at some point in the future. In
statistics and probability analysis, the expected value is calculated by multiplying each of the possible
outcomes by the likelihood each outcome will occur and then summing all of those values. By
calculating expected values, investors can choose the scenario most likely to give the desired outcome.
The company sells the dolls at P5.20 each. The cost of each doll is P3.20.
Compute for Serito's expected incremental profit, if the advertising campaign is adopted.

Forecasting- Exponential smoothing

Exponential smoothing is a forecasting technique that uses a weighted moving average of past data
as the basis for a forecast. The procedure gives heaviest weight to more recent information and smaller
weight to observations in the more distant past. The reason for this is that the future may be more
dependent upon the recent past than on the distant past. The method is effective when there is random
demand and no seasonal fluctuations in the data. It is a popular technique for short-run forecasting by
business forecasters. The New forecast is computed as follows:

New Forecast = (Actual x a) + (Old Forecast x 1-a)

where Alpha (a) is a percentage, known as a smoothing constant