This enables them to run deterministic simulations or 'what if' modelling to see the impact of price, cost or quantity changes on profitability.
Another example is modelling labour variances with learning curve corrections and stock level changes.
Mattessich's model,[1] while large, does not include many costing techniques such as learning curves and different stock valuation methods.
Its form, of starting with the basic definition of profit and becoming more elaborate, may make it more accessible to accountants.
This format, though useful when communicating with humans, can be difficult to translate into an algebraic form, suitable for computer model building.
Mepham [4] extended the algebraic, or deductive, approach to cost accounting to cover many more techniques.
The profit model comes out of Mephams work, extending it but only in a descriptive, linear form.
To show cost of good sold, the opening and closing finished goods stocks need to be included The profit model would then be: Presenting the profit calculation in this form immediately demands that some of the costs be more carefully defined.
If the modeller has access to the details of non-linear cost curves then w will need to be defined by the appropriate function.
Thus the variable cost v * q can now be elaborated into: If the production quantity is required the finished goods stock will need to be added.
In a simple case two materials can be accommodated in the model by simply adding another m * μ.
The marginal versus absorption costing debate, includes the question of the valuation of stock (w).
This is better seen by remem¬bering q — x= go—g1 so it could be written The model form with 'q' and 'x' in place of' g0 and g1 allows profits to be calculated when only the sales and production figures are known.
A spreadsheet could be prepared for a company with increasing then decreasing levels of sales and constant production.
Other examples include calculation of break-even points, productivity measures and the optimisation of limited resources.
If a model can be developed that only uses such percentage changes then the cost of collecting absolute quantities will be saved.