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
Examples of Using Linear Programming
1.
2.
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.
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.
Methods of Using Linear Programming
• Graphical Method
Use a graphical method to identify the optimum
solution.
• Simplex Method
Use 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
Zero Based Budgeting
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