Quantitative techniques are usually applied in management accounting particularly in the areas of analyzing risk and uncertainty in decision making.
The following are examples of how quantitative techniques are usually applied in management accounting:
1. Sensitivity Analysis:
This is a technique whereby decision options are tested for their vulnerability to changes in any variable such as expected sales volume, sales price per unit, material costs, labour costs etc.
2. Assessing Probabilities:Expected Values:
Probabilities can be assigned to the various possible outcomes. When faced with a number of alternative options, each with a range of possible outcomes, the optimum decision will be the one which gives the highest expected value.
Eg A production manager wishes to estimate the estimated amount of costs in his factory during the next month. The expected volumes of production and their associated costs are as follows:
The expected value of the volume of production for the next month can be computed as follows:
(Note: Expected value (EV) = estimated production outcome x probability)
The expected value (EV) of the production costs can as well be computed as shown below:
EV = Estimated cost x probability
3. Measurement of Risk (Standard Deviation):
Risk is measured by the possible variations of outcomes around the expected value. One useful measure of such variation is the standard deviation of the expected outcome. When two projects have the same expected value of profit, the risk averse manager would choose the project with the smaller standard of deviation. A useful measure of risk for project comparison is the coefficient of variation which is = STD deviation X 100% Ev of Profit
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