MANAGEMENT SCIENCE COST

• Management science (MS) has been defined as • Monetary measure of resources used to attain
helping people make better decisions. an objective.
• Management Science (also known as Operational • Value of money that has been used to produce
Research) applies advanced analytical methods
something or to deliver a service.
to business decision problems. Management
COST CONTROL
emphasizes that we’re interested in helping
manage the organization better – that MS is very • A practice of identifying and reducing business
much focused on the practical, real world. Science expense.
means that we’re interested in rigorous, analytical • Cost control is a management strategy aimed
and systematic ways of managing the organization at monitoring and managing expenses to
better. ensure that they align with budgeted
• Management science is the study of problem- expectations. The objective is to prevent
solving and decision-making in organizations. You excessive spending and optimize resource
can think of it as applying the scientific method to allocation while maintaining or improving the
management, enabling managers to make
quality of products or services. Key
decisions for an organization and improve its
components of cost control include
performance.
• The primary goal of management science is to
budgeting, variance analysis, setting cost
improve the efficiency and effectiveness of standards, and implementing measures to
managerial and operational processes. contain or reduce costs.
COST BEHAVIOR
MANAGEMENT SCIENCE APPLICATIONS • Describes how costs change with changes in
• Assignment the level of activity.
• Data Mining • How cost change as volume changes.
• Financial Decision Making IMPORTANCE OF COST BEHAVIOR
• Forecasting • Knowledge of cost behavior is important for
• Logistics – Supply Chain managerial decision making because it helps
• Marketing managers understand how costs change in
relation to various factors such as production
• Networks – or integration
levels, sales volumes, or time.
• Optimization of Profits
MANAGEMENT SCIENCE APPROACH • Understanding cost behavior is crucial for
management accounting, as it helps
• Problem Recognition
businesses predict and manage expenses. It
• Problem Structuring and Definition
allows businesses to make informed choices
• Modeling & Analysis
based on the expected impact of changes in
• Solution and Recommendation
activity on their cost structure.
• Implementation
MODELS & TECHNIQUES FACTORS OF COST BEHAVIOR
• Linear Programming
• Volume
• Transformation and Analysis • Price
• Network Models • Efficiency
• Project Management
• Sales
• Inventory Model
• Mix And
• Queuing Models • Production Changes
• Simulation
• Decision Analysis
• Multi-criteria Analysis
• Non-linear Programming
• Forecasting Dynamic Programming
• Mark or Process Models
Cost behavior patterns can be broadly categorized
into several types. The main types include:
1. Variable Costs
• Definition: Variable costs change
proportionally with the level of activity or
production.
✓ Example: Direct materials, direct labor, and
variable portions of utility bills.
2. Fixed Costs
• Definition: Fixed costs remain constant
within a certain range of activity or
production levels.
✓ Example: Rent, salaries of permanent staff,
and insurance.
3. Mixed Costs
• Definition: Mixed costs have both fixed and
variable components.
✓ Example: Utility bills that have a fixed base
charge plus a variable component based on
usage.
4. Step Costs
• Definition: Step costs remain fixed over a
range of activity levels but change abruptly
when the activity crosses a certain threshold.
✓ Example: Costs associated with adding a
new production line or hiring additional staff.
COST ESTIMATION
Cost estimation is the process of forecasting the
expenses associated with a particular project, activity,
or operation. This crucial aspect of financial
management involves predicting the costs that will be
incurred based on available information, historical
data, and analysis.
IMPORTANCE
• It helps organizations plan, budget, and make
informed decisions.
ESTIMATION
• Calculation on something ; a guess or
calculation about the cost, size, value
BREAKEVEN
• Hindi lugi, bawi puhunan
SUNK COST
• The amount of money that has already been
spent but cannot be recovered.
1. DIRECT LABOR
2. DIRECT COST
3. DIRECT MATERIALS
TECHNIQUES AND METHOD ARE USED TO
ESTIMATE FIXED AND VARIABLE COST
High Low Method (most used in accounting)
• The high-low method is a technique used to
estimate the fixed and variable components of
a mixed cost by analyzing data from the
highest and lowest activity levels. It helps in
separating fixed costs from variable costs,
which is useful for cost estimation and
decision-making.
• Formula: Y = a + bx
Least Square Regression Method
• A statistical techniques which is often used in
separating mixed costs into their fixed and
variable components is least-square
regression.This statistical technique is used in
industrial engineering to analyze the
relationship between two or more variables,
such as production output and input factors
(e.g., labor hours, machine hours). It helps in
developing predictive models and
understanding the underlying patterns in data.
• Equation 1 – Σy = na + bΣx
Equation 2 – Σxy = Σxa + bΣx²
Scatter Graph Method
• Known as scatter plot analysis, this method
involves plotting data points on a graph to
visually examine the relationship between two
variables. It helps in identifying trends,
patterns, correlations, and outliers in data,
which can inform decision-making and
problem-solving in industrial engineering
applications.
• Formula: y= mx + b
𝒚𝟐 −𝒚𝟏
𝒎=
𝒙𝟐 −𝒙′
Industrial Engineering Method
• The industrial engineering method estimates
cost function by analyzing the relationship
between inputs and outputs in physical forms.
Engineering estimates in the indicate what
cost should be.
• Most expensive kasi ginagamitan ng specialist
Account Analysis
• The most common starting point for
estimating fixed costs and variable costs.
• Count analysis is considered a very useful and
easier way to estimate cost. It makes use of
 the experience and judgment of managers and
accountants who are familiar with company
operations and the way cost reacts to changes
in activity level.
• Formula: TC = F + Vx
Strengths and Weaknesses of Cost Estimation
Methods
High-Low Method
➢ Strength: Simple to Apply
➢ Weakness: Uses only two data points which
may not produce accurate results.
Least-squares Regression Method
➢ Strength: Uses all the observations of cost
data. The line is statistically fit to the
observations.
➢ Weakness: The regression model requires
that several relatively strict assumptions be
satisfied for the result to be valid.
Scatter Graph Method
➢ Strength: Uses all the observations of cost
data. Relatively easy to understand and apply.
➢ Weakness: The fitting of the line to the
observations is subjective. Difficult to do
where several independent variables are to be
used.
Industrial Engineering Method
➢ Strength: Based on studies of what future
costs should be rather than what past costs
have been.
➢ Weakness: Not particularly useful when
basically when the physical relation between
input and output is indirect.
Account Analysis
➢ Strength: Provides a detailed expert analysis
of the cost behavior in each account.
➢ Weakness: Subjective or bias
CONFERENCE METHOD
• Under the conference method, cost functions
are estimated based on the analysis and
opinions about costs and their drivers
obtained from various department of
organizations such as purchasing, process
engineering, manufacturing, employee
relations and so on this information is used to
determine the selling price of the product
optimum product mix and electronic cost
improvements overtime.
CORRELATION ANALYSIS
• Is the process of estimating and controlling
cost management must be evaluate whether
the factor selected for estimating behavior
suitable for that purpose. Cost may or may not
react with the changes in the factors that that
for cost analysis.
• If r ⟨ 0, means its Positive
If r ⟩ 0, means its Negative
If r = 0, means its no Correlation
Decision Making Process
• Is the process of studying and evaluating two
or more available alternatives which lead to
final choice.
Identifying Relevant Costs
• Relevant costs are expected future costs
which differ between the decision
alternatives.
• Irrelevant costs are costs that would not be
affected by a manager’s decision.
• Avoidable Costs are cost that can be
eliminated as a result of choosing one
alternative over another in a decision-making
situation.
All costs are considered avoidable except:
• Sunk Costs
• Future costs that do not differ between
alternatives at hand.
• Unavoidable Costs are irrelevant costs, they
are generally fixed in nature and cannot be
eliminated.
• Differential (or Incremental) Costs is the
difference in total relevant cost between two
alternatives.
• Sunk or historical costs are never relevant
because they are not avoidable.
• Opportunity costs are the benefits foregone
by not choosing an alternative course of
action.
 • Out-of-pocket costs involve either an
intermediate or near future cash outlay; they
are usually relevant to decisions.

• Depreciation is irrelevant only if it relates to

a sunk cost.

Approaches in Analyzing Alternatives in Non-

Routine Decision Making

NON-ROUTINE DECISION
A non-routine decision refers to the decision that is
unusual complex and typically requires a significant
degree of judgment.

• Make or Buy
• Add Or Drop a Product
• Sell Now or Process Further
• Special Sales Pricing (Non-Routine)
• Utilizations Of Scarce Resources
• Shut Down or Continue Operation
• Pricing

Alternatives
• These are the options that you will have to
consider and choose from in making
decisions.

Approaches
• Methods or ways of dealing with something.

The two commonly used approaches in evaluating

alternative courses of action are:

1. Incremental or Differential Analysis

Approach
Incremental or differential analysis approach
contrast choices by comparing differential
revenues, differential cost and differential
contribution margin.

2. Project Analysis Approach or Comparative

Statement Approach
Total project analysis approach shows all the
items of revenue and cost data (whether they
are relevant or not) under the different
alternative and compares the net income
results.