STRATEGIC MANAGEMENT ACCOUNTING

Anushka De Silva

What is Linear Programming

• The most common application of LP is allocating limited resources among competing activities in a best possible way ie; the optimal way

• The adjective linear means that all the mathematical functions in this model are required to be linear functions

• The word programming does not refer to the computer programming, rather a synonym for planning

1. Development of a production schedule that will satisfy future demands for a firm’s product and at the same time minimize total production and inventory costs.

2. Establishment of an investment portfolio from a variety of stocks or bonds that will maximize a company’s return on investment.

3. Allocation of a limited advertising budget among radio, TV, and newspaper spots in order to maximize advertising effectiveness.

4. Determination of a distribution system that will minimize total shipping cost from several warehouses to various market locations.

5. Selection of the product mix in a factory to make best use of machine and man hours available while maximizing the firm’s profit.

Examples of Using Linear Programming

Methods of Using Linear Programming

• Graphical MethodUse a graphical method to identify the optimum

solution.

• Simplex MethodUse of a computer programme to identify the

optimum solution

Difference between Graphical Method & Simplex Method

Graphical method is applicable only for solving an LPP having two variables in its constraints , but if more than two variables are used, then it is not possible to use graphical method. In those cases, simplex method helps to solve such problem.

In simple, in graphical method is used when the constraints contain two variables only.

But simplex method can be used to solve constraints having more than two variables.

Zero Based Budgeting

• Start each budget period afresh-not based on historical data

• Budgets are zero unless managers make the case for resources-the relevant manager must justify the whole of the budget allocation

• It means that each activity is questioned as if it were new before any resources are allocated to it.

• Each plan of action has to be justified in terms of total cost involved and total benefit to accrue, with no reference to past activities.

• Zero based budgets are designed to prevent budgets creeping up each year with inflation

Advantages of ZBB

• Forces budget setters to examine every item.• Allocation of resources linked to results and needs.• Develops a questioning attitude.• Wastage and budget slack should be eliminated.• Prevents creeping budgets based on previous year’s figures with an added on percentage.• Encourages managers to look for alternatives.

Disadvantages of ZBB

• It a complex time consuming process• Short term benefits may be emphasised to the detriment of long term planning• Affected by internal politics - can result in annual conflicts over budget allocation

Zero Based Budgeting