Chapter 11 - Quantitative Techniques Flashcards
What is the high low method?
Analyzing a semi variable cost into its fixed and variable elements based on analysis of historical info about costs and different activity levels
How do you find the variable cost/unit in the high and low calculation?
Cost at high level of activity - cost of low level activity / high level activity - low level activity
How do you calculate the fixed cost in the high- low method?
Total cost at activity level - total variable cost
What are some disadvantages of high-low method?
Assumes that activity is the only factor affecting cost
Assumes historical costs reliably predict future costs
What does wrights law state?
That as cumulative output doubles, the cumulative average time per unit falls to a fixed percentage (learning rate) of the previous average time
What is the learning curve?
The mathematical expression of the commonly observed effect that, as complex and labour intensive procedures are repeated, unit labour times decrease
When are learning curves most likely to be seen?
If:
The process is labour intensive
The product is new
The product is complex
Production is repetitive and there are no breaks in production
What is the calculation for the algebraic approach?
Y=a x x ^b
What does each letter stand for in the algebraic approach?
X= cumulative number of units
Y= cumulative average time per unit to produced X units?
A= time required to produce the first unit of output
B= index of learning (log r /log2, where r= learning rate as decimal)
What alternative calculation should be used in the algebraic approach is we have a specific number of times and number of units has doubled?
Y= a x r^n
What does each letter stand for the in the alternative calculation for the algebraic approach?
R = learning rate expressed as a decimal
Y= cumulative average time per unit to produce x units
A= time required to produce the first unit of output
N= number of times the units have doubled since the first unit was produced
What happens to the learning curve over time?
It will cease and the time to make each successive unit stabilizes at a constant time per unit
What is linear regression?
Performs a similar role to high-low method but it uses mathematical equitations that examine all data in the series in order to improve accuracy
What is the calculation used for linear regression?
Y=a + bx
What does each letter stand for in the calculation for linear regression?
Y= dependent variable
X = independent variable
A= intercept on y axis
B = gradient of the line
What does linear regression calculate?
A straight line relationship between variables
What is correlation?
Concerned with establishing how strong the straight line relationship is. Can be positive or negative
What does positive correlation mean?
That high values of one variable are associated with high values of the other and that low values of one are associated with low values of the other
What does negative correlation mean?
That low values of one variable are associated with high values of the other and vice versa
What is the coefficient of determination?
This squares the correlation in order to express the strength of the relationship between the variables as a percentage
If the correlation coefficient is r=+0.9 what does this mean?
Then r2 = 0.81 and that 81% of the observed changes in y can be explained by the changes in x and that 19% of the changes are due to other factors
What are some limitations of linear regression analysis?
Assumes linear relationship between variables
Only measures relationship between 2 variables
Assumes that historical behaviour continues into foreseeable future
What is time series analysis?
Uses moving averages to create a trend line over time, established from historical data, that, when adjusted for seasonal variations, can then be used to make predictions
What are the 4 components of a time series?
The Trend
Cyclical variations
Season variations
Residual variations
How do we calculate the trend?
Using high low method
By linear regression
Using moving averages
How do we calculate seasonal variation?
Can be estimated by comparing an actual time series with the trend line values calculated from the time series
For each season what is the seasonal variation?
The difference between the trend line value and the actual historical value for the same period
When is the seasonal variation positive?
When the actual value is higher than the trend line value
When is the seasonal variation negative?
When the actual value is lower than the trend line value
What are moving averages?
A set of calculations used to smooth out the variations in a time series to identify a trend
What is the additive model forecast?
= T+S (T is the trend line and S is the seasonal variation
What is the multiplicative model forecast?
=T x S (S is normally represented as a percentage)
What are some limitations of the time series analysis?
There is an assumption that what has happened in the past will happen in the future
Assumption that a straight line trend exists
Assumption that season variations are constant
