QUANTITATIVE TECHNIQUES refer to the application of mathematics in actual business operations.

It is also
known as quantitative methods.

OPERATIONS RESEARCH refers to the discipline of applying quantitative methods in organizational planning
and control.

Typical Quantitative Method Applications

 Corporate Planning Models

 Forecasting Mechanism
 Productivity and Efficiency Measure
 Inventory Planning and Control
 Resource Allocation

REGRESSSION & CORRELATION ANALYSIS

What is Regression Analysis? Regression Analysis uses all available data to ESTIMATE THE COST
FUNCTION. It is a statistical method that measures the average amount of change in the dependent variable (costs)
that is associated with a unit change of one or more independent variables (cost drivers such as number of units
produced, machine hours, etc.). Regression analysis is a set of statistical processes for estimating the relationships
among variables. It includes many techniques for modeling and analyzing several variables, when the focus is on the
relationship between a dependent variable and one or more independent variables (or 'predictors'). More specifically,
regression analysis helps one understand how the typical value of the dependent variable (or 'criterion variable')
changes when any one of the independent variables is varied, while the other independent variables are held fixed.

Regression analysis is widely used for __________ and ______________, where its use has substantial
overlap with the field of machine learning. Regression analysis is also used to understand which among the
independent variables are related to the dependent variable, and to explore the forms of these relationships. In
restricted circumstances, regression analysis can be used to infer causal relationships between the independent and
dependent variables. However this can lead to illusions or false relationships, so caution is advisable.

What is the cost function? COST FUNCTION is used to chart how production expenses will change at different
output levels. In other words, it estimates the total cost of production given a specific quantity produced.

__________________ are the costs paid to the variable input. Inputs include labor, capital, materials, power and
land and buildings. Variable inputs are inputs whose use vary with output. Conventionally the variable input is
assumed to be labor.

_________________ are the costs of the fixed assets those that do not vary with production. In example.
Depreciation of a building, manager’s salary, rent expense.

_______________ is the total economic cost of production and is made up of variable cost, which varies according
to the quantity of a good produced and includes inputs such as labor and raw materials, plus fixed cost, which is
independent of the quantity of a good produced and includes inputs that cannot be varied in the short term: fixed
costs such as buildings and machinery, including sunk costs if any. FIXED COST PLUS VARIABLE COST

________________ is the additional cost of one additional output. In example, the additional cost of producing one
additional pizza. (Change in Total Cost vs. Change in Output)
 Fixed
Output Variable Cost Total Cost Marginal Cost
Cost
0 Php 0.00 Php 10.00
1 Php 10.00
2 Php 17.00
3 Php 25.00
4 Php 40.00
5 Php 50.00
6 Php 110.00

HI-LOW Method is a way of attempting to separate out ______ and ________ costs given a limited amount of
data. The high-low method involves taking the highest level of activity and the lowest level of activity and
comparing the total costs at each level.

Highest Cost − Lowest Cost

𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡 =
Highest Level of Activity − Lowest Level of Activity

Example:
Factors January February March April
No. of Units 850 500 300 400
Total Cost 4,675.00 3,400.00 2,925.00 3,040.00

How much is the variable cost per unit?

How much is the fixed cost?

_________________ is the “best guess” at using a set of data to make some kind of prediction. It’s fitting a set of
points to a graph.

Explain briefly the concept of SIMPLE REGRESSION ANALYSIS. This estimates the relationship between the
dependent variable and one independent variable. This analysis uses the following estimated cost function or
equation.
𝑌 = 𝑎 + 𝑏𝑋
Where:
Y = Total cost to be predicted (dependent variable)
X = Independent variable on which the prediction is to be based (e.g., number of units to be produced)
a = Fixed cost
b = Estimated coefficient of the regression model (e.g., variable cost rate)

Note that this type of regression analysis is that each of these deterministic relationships, the
equation exactly describes the relationship between the two variables. In example, for every degree Celsius, there is
an exact relative change in Fahrenheit. (0°C × 9/5) + 32 = 32°F)
Explain briefly the concept of ____________________ . It is an extension of simple linear regression. It is used
when we want to predict the value of a variable based on the value of two or more other variables. This estimates the
relationship between dependent variable and multiple independent variables. This is used when dependent variable
(i.e. cost) is caused by more than one factor. This analysis uses the following equation:

Y = Cost to be predicted (dependent variable)

X, X1, X2, … = Independent variables on which the prediction is to be based
a = Fixed cost
b, b1, b2, … = Estimated coefficient of the regression model
U = Residual term that includes the net effect of other factors not in the model and
measurement errors in the dependent and independent variables

For example, you could use multiple regression to understand whether exam performance can be predicted based on
revision time, test anxiety, lecture attendance and gender. Alternately, you could use multiple regression to
understand whether daily cigarette consumption can be predicted based on smoking duration, age when started
smoking, smoker type, income and gender.

Illustrate the application of the least-squares regression in separating mixed cost into their variable and fixed
components.
Your data shows a linear relationship between the X and Y variables, you will want to find the line that
best fits this linear relationship. That line is called a _______________. The Least Squares Regression Line is the
line that makes the vertical distance from the data points to the regression line as small as possible. It’s called a
“least squares” because the best line of fit is one that minimizes the variance or sum of residuals (the sum of
squares of the errors). Another name for the line is “Linear regression equation” (because the resulting equation
gives you a linear equation).
The equation for the determination of a straight line is:

𝑌 = 𝑎 + 𝑏𝑋

The two linear equations that are used to solve for a and b are:
Equation (1) ∑Y = Na + b∑X
Equation (2) ∑XY = ∑Xa + b∑X2

Where:
Y = Total cost
a = Fixed cost
b = Variable cost rate
X = measure of activity (e.g., hours, units)
N = number of observations
∑ = ______________________

Using the date below for Predictors, Inc., determine the variable cost rate and the fixed cost under the least-squares
regression method.

X Y XY X2
20 P 50 1,000
40 110
60 150
20 70
30 80
40 100
50 150
10 60
30 110
50 120
∑X=350 ∑Y=1,000 ∑XY= ∑X2=

Equation (1) 1000 = 10a + b350

Equation (2) _________ = 350a + b _______

To eliminate one unknown (a), and solve for b, multiply equation 1 by 35 (least common denominator) and subtract
the new Equation 3 from Equation 2:

Equation (2) __________= 350a + b ________

Equation (3) 35,000 = 350a + b ________
_______ = 0 + b2,250

Variable cost rate or b =

To solve for a (Fixed cost) substitute the value of b to Equation 1. Thus,

Equation (1) 1000 = 10a + b350
1000 = 10a + (______)350
a = _________

General Linear Model (GLM) = MODEL + ERROR

Where MODEL = (Y = MX+B)
ERROR = Deviation from our model, meaning variables we did not consider in or model
 GLM Model
Variables
Included in our
Model

Variables we
failed to
include in our
Model

Regression Line is the line that’s as close as possible to all the data points at once.

What is meant by correlation analysis? Correlation analysis involves the evaluation of whether or not the factor
selected for estimating cost behavior a suitable for that purpose. The degree of correlation between the level of
activity and costs may be measured by the “coefficient of determination”, most frequently designated as r2.

To compute for this, the equation is:

(Estimated conditional standard deviation measured from line of regression) 2

r2 = 1 - (Standard deviation measured from the average of all data)2

a. Estimated conditional standard deviation measured from line of regression:

∑(Y- Y)2
n-2

Y = actual cost
Y = line of regression cost
n = number of items of data

b. Standard deviation measured from the average of all data:

∑(Y- Y)2
n

Y = actual cost
Y = average cost
n = number of items of data

If r2 expressed as a percentage will be relatively high, the correlation is good. It means that the costs follow
the factor selected.
 Using the data in Predictor’s, Inc.), evaluate the degree of correlation between the direct labor hours and
suppliers cost by solving for r2 or coefficient of determination.

(Php _______ )2
r2 = 1 - (Php ________)2

= _________