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Introduction to Management
Accounting Graphical Method . Linear Programming
Functions of Management
Accounting Topic Contents
1. Introduction 2. Steps 3. Example
Management Accounting Concepts
Opportunity Cost
Introduction
Introduction to Variance Analysis Graphical method of linear programming is used to solve problems by finding the highest
or lowest point of intersection between the objective function line and the feasible region
Direct Material Price Variance on a graph.
Direct Material Usage Variance This process can be broken down into 7 simple steps explained below.
Direct Material Mix Variance
Direct Material Yield Variance Steps
Direct Labor Rate Variance
Direct Labor Efficiency Variance Step 1 Define Constraints
Direct Labor Idle Time Variance All constraints relevant to a linear programming problem need to be defined in the form of
Sales Price Variance inequalities.
Variable Overhead Spending The objective of solving a problem is expressed in the form of a mathematical equation.
Variance
For example, if the objective is to maximize contribution from the sale of Products A and B
Variable Overhead Efficiency having contribution per unit of $10 and $5 respectively, the objective function shall be:
Variance
10A + 5B = Maximum Contribution
Fixed Overhead Total Variance
Fixed Overhead Spending Variance What this means is that the objective of solving the problem is to maximize the total
contribution of the business by selling the optimum mix of products A and B.
Fixed Overhead Volume Capacity &
Efficiency Variance The problem with the above equation is that we cannot simply plot it on a graph (as
required in step 5). To work around this problem, we define a random number in place of
Limitations of Standard Costing & 'Maximum Contribution'. Since we only require the slope (gradient) of the objective
Variance Analysis function, we can plot the Objective Function on a graph using any random value in place of
maximum contribution.
Relevant Cost and Decision Making
Using the earlier example, the objective function could be re-written as:
Relevant Cost of Labor 10A + 5B = 100
Relevant Cost of Materials
Note that the 100 above is just a random number. Any other value could also be used
instead.
Limiting Factor Analysis
Single Limiting Factor Analysis Step 3 Plot the constraints on a graph paper
Graphical Method You may plot the constraints in the same manner as you would plot an equation.
Graphical Method - Example Example
Equation Method Constraint : 1A + 2B ≤ 100
Budgeting For the purpose of plotting the above constraint on a graph, you may convert the inequality
into an equation:
High Low Method
1A + 2B = 100
Investment Appraisal Now you need the co-ordinates of any 2 points from the above equation.
Once you have plotted the constraint inequalities on the graph, you need to shade the area
of the graph which is outside the constraint limits, i.e. which is not feasible.
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The area on graph which lies on or below the constraint limit line is feasible and therefore
left un-shaded. Once all constraint limit lines have been similarly shaded, the non-shaded
portion of the graph will represent the feasible region.
It can be confusing at times knowing which side of a constraint line to shade. In such
cases, it is useful to consider whether a specific combination (e.g. 0 units of A, 0 units of B)
above or below the line is possible or not considering that constraint only. If the
combination is feasible, you must shade the opposite side of the line and vice versa.
Objective Function line may be drawn on the graph in the same way as the constraint lines
except that you may choose to differentiate it from constraint lines, e.g. by drawing a
dotted line instead of the usual line.
Working
Point A:
10(0) + 5B = 100
B = 100 ÷ 5
B = 20
(0, 20)
Point B:
A = 100 ÷ 10
A = 10
(10, 0)
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Optimum point of a linear programming problem always lies on one of the corner points of
the graph's feasible region.
To find the optimum point, you need to slide a ruler across the graph along the gradient of
objective function. Where the objective is to maximize (e.g. contribution), you must slide
the ruler up to the point within the feasible region which is furthest away from the origin.
Conversely, where the objective is to minimize (e.g. cost) you must slide the ruler up to the
point within the feasible region that is nearest to the origin. In both cases, you must
remember to slide the ruler along the gradient of the objective function line.
Example
Note that the ruler is parallel to the dotted line (i.e. the objective function line). The red
point marked on the graph (100, 0) is the last point that the ruler touches while still
remaining in the feasible region and is therefore the optimum point.
In the above example, the co-ordinates of the optimum point can be identified easily
because the point lies on the X-Axis.
If the optimum point of a linear programming problem does not lie on either x or y axis, you
can find its co-ordinates by drawing vertical and horizontal lines from the optimum point Ask a Question
towards the two axis.
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Graphical Method Example
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Related Topics
Linear Programming Single Limiting Factor
Analysis
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