Solution manual managerial accounting by cabrera 2010 chapter 18 answer

PERT charts reflect uncertainties or tolerances in the time estimates for various activities; Gantt charts do not.. Time slippage in noncritical activities may not warrant extensive mana

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

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

c Costs to audit purchase orders and invoices (P)

f Storage costs charged per unit in inventory (C)

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:

Costs that vary with the number of units purchased:

Insurance on shipment 1.50

Total carrying cost = (25% x P103.75) cost of capital + P4.85 = P25.94 + P4.85 = P30.79

Order costs:

Costs to arrange for the shipment 21.45

II Problems

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

Problem 2

Requirement (a)

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

0 - 1 - 3 - 4 - 7 - 8 2 + 8 + 7 + 5 + 3 = 25

* 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

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

_

X Dead Time

Requirement (b)

28 days are required for the four orders

Problem 4

a Carrying costs:

Order costs:

b Economic order quantity:

Carrying costs:

Order costs:

Problem 5

Order costs = Insurance + Other order costs

AP

Q = 1,500 x P878250

AP

1,500 x P878 155

= P 5,268.00

= P 8,496.77

P18,943.00

P16,975.27

Carrying costs =

Total

Total

Out-of-pocket costs

Cost of capital

on inventory

Q* =

+

2 x 1,500 x P878 P109.40

= 24,077 = 155 units

QS

250 x P109.40

QS

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

Stock Carrying Costs of Safety Stock Expected Stockout Costs Total Costs

0 0 0.50 x 15 a x P1,650 = P12,375 P12,375

150 150 x P24.40 = P3,660 0.20 x 15 a x P1,650 = P 4,950 8,610

175 175 x P24.40 = P4,270 0.05 x 15 a x P1,650 = P 1,273.5 5,507.5 (optional)

250 250 x P24.40 = P6,100 b 0.01 x 15 a 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