ACCO 330 - Value of perfect information

ACCO 330 - Value of perfect information - ACCO 330 Cost...

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ACCO 330 – Cost Accounting Value of Perfect Information 1 Expected Value of perfect Information

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ACCO 330 – Cost Accounting Value of Perfect Information 2 Value of Information The expected cost of a prediction error is the average of all possible prediction errors weighted by their probability of occurrence This is called the expected value of imperfect information
ACCO 330 – Cost Accounting Value of Perfect Information 3 Expected Cost of the Prediction Error Estimated following regression equations Process A = \$40,000 + \$9 per unit Process B = \$100,000 + \$4 per unit Estimated average (mean) demand: 11,000 units Indifference demand level: 12,000 units Expected cost of prediction error formula: S x V x L Se: standard error of 1,500 units V: variable cost per unit for the prediction error L: loss factor (Linear Normal Loss table) deviation (indifference demand– mean demand)/ std error

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ACCO 330 – Cost Accounting Value of Perfect Information 4 Expected Cost of the Prediction Error Example - Demand Normally Distributed

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