DY MANUAL

C)N

rl

ECONC)Mtcs
&
STATISTICS

lntermediate : Group-A

Volume ll-statistics

::-::.-:.:::

Trrc lrusnruTE oF CnnnrrRED AccouNTANTs or BAN.LADE'H

 "---

ICAB Library
llllllllll llllll
7942

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ICAB STATISTI(IC

Syllabus (Cont'd) Weight Content

10 Regression analysis-scatter diagrams, line, correlation,

confidence and prediction. Time series. Forecasting techniques
l0 Decision analysis- nature of decisions, pay decision ruler
subjective and objective proexpected values, decision trees,
sensitivity Limitations of expected value techniques.
50

J. Manual coverage and Lesson Time Topies

time allocation (hours)
1 6 Introduction
2 5 Frequency distributions and average
J 5 Dispersion and skewness
4 5 lndex numbers
5 5 Probability
6 J Normal distribution
7 5 Sampling theory
8 6 Regression forecasiting
9 5 Decision analysis
45 TOTAL

List A-comprises basic reading and general coverage the syllbus

4. Reading list

List B-comprises specialist and supplementary reading

ListA

(i) Bangladesh bureau of Statistics-"Statistical Yearbook of

Bangladesh" (annually) -"Statistical Bulletin Bangladesh"
(monthly).

4
I(ICAB STATISTICS

4. Reading list (Cont'd) (2) Md. Ali Khan "and Md Alimtrlla Mirja " An Introduction to
Statistics" Ideal Library
s
3) J.P Dickinson "Statistic for Business Finance and Accouritrrg"
Macdonald and Evans

4) F. Owen R. Jones "statistics for Business" Pblytech

5) M.G. Mostafa "Methods of Statistics" Anwari Publication Dhaka

List B
l) Leonard J. Kasmir Business Statistics" Sohaum out line series
McGraw Hill

2) W. Harper " Statistics" Macdonald Evans

5. Study Guidance In using the manual, the following procedure should be followed:

(l ) read the Lesson to obtain an overview.

(2) girre a second reading exhaustively to have a clear under

standing and knowledge ofthe sections

(3) read as much ofttre supplimentary readingas you can maage

(4) work through the self-assessment questions before you

proceed to the next lesson.

This manual is written as a self contained text rvhich com-

6. Prior Knowledge prehgnsively covers the subject areas. This may be used without
additional text books. However, it is important that students have
access to as many reference, books (latest editions) as possible.

There is no doubt that the best method of pre-examination

7. Pre-examination revision is attendance on a coaching course. In the absence of
Revision such course the student must devise his own revision programme.
 ICAB
STATISTICS

7. Pre-examination The best approach is tc *'ork through past exarnination questions

Revision (Cont'd) cicck rhis hlghlights any lack of knowledge anc
papers against the
develcps:

(a) familiarin rritJl st-vle of questions.

(b) ability ia problem solving.

(c) speed and examination technique.

8. Examination (a) In marking the answer scripts consideration is given to the cluality
of laerguage, expression, and the way in w.hich materiar presented.
candidates must also be numerate if they are to succeed in the
examination.

(b) Candidates should tr1.' to de'elop the ability to analyses

situation or to dra\^, conciusions from a set of facts.
I

(c) candidates should take all questions at their dce value

,
effort is made to avoid ambiguities and no questions designed to"r"l
tric{
candidates are ever set.
I

(d) candidates should carefully note the requirements of eachlI

question, and shourd rernernber which paper they are taki,g. al
display of irrelevant knowledge or an answer which ho.,vever pertinentl
it may be in generar terms, bears no relation to the sub.lect of thJ
paper being taken, will gain no marks. I

(e) candidates should avoid verbosity: marks are awarded for

th
quality and not the quantity of work subrnitted.

9. The subject one of the problems of the accounting st*dent studyiflg statistics i
the apparently theoretical nature of the subject. This impression i
increased by ttretendency fortext books to use simple examples
whict
rarely relatE to husiness situations.
Yet this impression is false, Increasingly statisticar techniques
art
employed to dea.r with a variety of busiiless protrlerns, eg inde>
nurnbers in inflation accounting, probability in resk anarysis
sampling in auditing regressiorr in forecasting and so on.

6
SC.q.B STATISTICS

9 The Subject (Cont'd.) Nor is statistics as difficult as students often belive. It is not
to study the often complex mathematics underlying the techniques
only an ability to apply the techniques to practical problems.

lO. Acknowledgement: Grateful acknowledgement is made to Chart Foulbs Lynch (London

Chart Foulbs Lynch for permission to include study material developed by that compa
in some sections of the manual.
ICAB STATISTICT IC

Areas of Standard Normal Distribution

L

Z oo .01 .o2 .03 .o4 .05 .o6 .07 .o8 .o9

o.o .oooo .oo40 .0080 .0120 .0160 .0199 .a239 .(w9 .0319 .0359
o.1 .0398 .0438 .0478 .0517 .0557 .0596 .0636 .0675 .0114 .0753
o.2 .0793 .0832 .0871 .0910 .094E .0987 .1026 .1064 .1103 .ll4l
o.3 .1179 .1,217 .125s .1293 .1331 .1368 .1406 .1443 .1480 .1517
4.4 .1s54 .1591 .1628 .1664 .1700 .1736 .1772 .1808 .1844 .1879
o.5 .1915 .1950 .1985 .2019 .2054 .2088 .2123 .2157 .2190 .2224
0.6 .2257 .2291 .2324 .2357 .2349 .2422 .245,4 .2486 .2517 .2549
o.7 .2580 .26t\ .2642 .2673 .2103 .2734 .2764 .2794 .2823 .2852
o.8 .2881 .2910 .2939 .2961 .2995 .302s .3051 .s078 .3106 .3133
o.9 .3159 .3186 .3212 .3238 .3264 .3289 .3315 .3340 .3365 .3389
1.O .3413 .3438 .3461 .3455 .3508 .3531 .3554 .3577 .3599 .3621
1.1 3643 .3665 .3686 .3708 .3729 .3749 .3770 .3790 .3810 .3830
1.2 .3849 .3869 .3888 .39W .3925 .3944 .3962 .3980 .3997 .4015
1.3 .4432 .4049 406,6 .4042 .4099 .4115 .4131 .4147 .4162 .4177
7.4 .4192 .4207 .4222 .4236 .4251 .4265 .4279 .4292 .4306 .4319
1.5 .43s2 .4345 .4357 .4370 .4382 "4394 .44,0,6 .4418 .4429 .4441
1.6 .4452 .4463 .4474 .4UA .4495 .4505 .4515 .4525 .4535 .4545
1.7 .4554 .4564 .4573 .4582 .4591 .4599 .4608 .4616 .4625 .4633
1.8 .4641 .4649 .4656 .4664 .4671 .4678 .46A6 .4693 .4699 .4706
1.9 .4713 .4719 .4726 .4732 .4738 .4744 .4750 .4756 .4761 .4167
2.O .4772 .4778 .47a3 .4788 .4193 .4798 .4803 .4808 .4812 .4817
2.1 .4821 .4826 .4830 .4A34 .4838 .4A42 .4846 .4850 .4854 .4857
,) .4A61 .4864 .4E68 .4871 .4875 .4878 .4881 .4884 .4887 .48eO
2.3 .4893 .4896 .4898 .4901 .4904 .49t6 "4909 .491t .4913 .4916
2.4 .4918 .4920 .4922 .4925 .4927 .4929 .4931 .4932 .4934 .4936
2.5 .4938 .4940 .4943 4945
.4941 .4946 .4948 .4949 .4951 .4952
2.6 .4953 .4955 .4956
.4957 .4959 .4960 .4961 .4962 .4963 .4964
2.7 .4965 .4966 .4967
.4968 .4969 .4970 .4971 .4972 .4973 .4974
2.4 .4974 .4975 .4976
.4977 .4977 .4918 .4979 .4979 .4980 .4981
2.9 .4981 .4982 .4983 .4944
.4942 .4944 .4985 .4985 .4986 .4986
3.O .4987 .4987 .4947 .4988 .4988 .4989 .4949 .4989 .4990 .499A
TICI ICAB LEVEL 1 STATISTICS

COS'f ACCOUNTING AND STATISTICS: VOLUME, 2 _ STATISTICS

IABLE OT'CONTENTS

LESSON 1 Page

INTRODUCTION TO STATISTICS 1,100

SOI.TRCES OF STATISTICAL DATA AND COLLECTION METHODS 1.200
INTRODUCTION 1:O SATTAPi-TNC 1,300
MATT{EMAIICAL LANGUAGE OF STATISTICS 1,400
09 TABI]LAIION OF DATA 1,500
59 DIAGRAMMAIIC REPRE,SENTATION OF DATA 1,600
53 GRAPI{CAL REPRE.SENTATION OF DATA 1,700
47
17
79
|
LESSON2
24
49 )

MEASIJRES OF CENTRAL TENDENCY 2,700

52 ;

33 i
AILITHMETIC ME,AN 2,200
8e I MEDIAN 2,300
21
I

i
MODE 2,4OO
so I GEOMETRIC MEAN 2,500
1s I
tr-LIJSTR,{TION AND CONCLUSIONS 2,600
77 |
s I
I

41 I LESSON 3
4s I

ss I

s I
MEASLIRES OF DISPERSION 3,100
et I RA}iGE 3,200
r' I
S EMI-INTERQUARTILE R-ANGE 3,300
sz I ]\4EAN DEVIAIION 3"400
o I STANDARD DE\IIATION 3,500
e I
S
\A4METRY AND SKEWNIiSS 3,600
r I

=, I
LESSON 4
t I
I\DEX NLIIVIBERS 4,100
a I
7 I I\DEX NIIMBE.RS AND INFI.AIION 4,200
cI
oI

-/.'
ICAB LEYEL 1 STATISTICS
i

LESSON 5 Page

51. PROBABILIT}' 5,1 00

52. LAWS OF PROBABILITY 5,2OO
53. BAYES THEOREM 5,300
54. CONCLUSIONS AND ILLUSTRATION 5,400

LESSON 6

61. NORMAL DISTRIBIJTION 6,100

62. CONCLUSIONS AND ILLUSTRATION 6,200

LESSON 7

7t. THEORY OF SAMPLING : POINT ESTIMATFS 7,loo

72. THEORY OF SAMPLING : ETIMATION OF PROPORTIONS 7,200
73. CONCLUSIONS AND II,LUSTRATIONS 7,300
74. QUALITY CONTROI-, 7,400

LESSON 8

81. SCATTE,R DIAGRAMS 8,100

82. REGRESSTON 8,200
83. CORRELAIION 8,300
84. CONFIDENCE INTERVALS AND PREDICTION INTERVALS 8,400
85. TIME SERTES 8,500
86. FORECASTING TECHNIQT]ES 8,600

LESSON 9

91. DECISION ANALYSIS-SINGLE DECISIONS 9,100

92. DECISION ANALYSIS-MULIIPLE DECISIONS 9,200

lO (next page IOOO)

S
I(_-{B LEVEL 1 ST-ATIS'TTCS

INTERMEDIATE

COSTING AND STATISIruCS : VOLIIME 2 _ STATISTICS

LE,SSON 1

i1 INTRODUCTION TO STATISTICS Page

- . 1 DEFINITION OF STATISTiCS 1,100

) NAIIfRE, OF STAIISTICS 1,100
. -T NEED FOR ME,ASIIREMENT 1,101
: LIMITAIIONS OF STATISTICS 1,101
, 5 DISTRUST OF STATISTICS 7,102
:, SELF ASSESSMENT QIIESTIONS 1,103

1] SOURCES OF' STATISTICAL DAIA A]YD COLLECTION METHODS

: ] 1 INTRODUCTION 1,200
.: ] SECbNDARY SOURCE.S OF STAIISTICAL INFORMATION i,200
.: ] INTE,RVIEWS AS A METHOD OF GAIHERTNG DATA '
t,zar
. ] .+ OBSERVATION AS A METHOD OF GATHERTNG DATA 1,201
- r" 5
posrAl- QIIESTTONNAIRE AND LOCAL CORRESPONDENCE AS A
METHODS OF GAIHERING DATA. 1,203
.]i OTHER METHODS OF GAIHERING DATA 1,203
.-- FRAMING A QTIESTIONNAIRE 1,203
.] -q SELF-ASSE,SSME.NT QUESTIONS I ?O5

13 INTRODUCTION TO SAMPLING

P(IPIJ'I-AIION AND SAMPLE 1.300

R.A.ND OM SAN{PLING NLIN4BERS 1.30i
SYSTEMAIIC SAMPLING 1.301
STR*{TIFIE,D SAMPLING 1.301
\ILLTI - STAGE SAMPLING 1.301
CLI;STER SAMPLING 7.302
QUOTA SAMPLING 1.302
S T.\TI S TICAL ENQIIIRIES 1.302
SqI F-.\SSESSMENT QI'ESTION 1.303

1,000
TC16-B
S1ATISTICS

14. IVIA'f,IIEMATICAL LANGUAGEOF'STATISTICS Page

141 VARIABLES i,400

14.2 ACCLIRACY AND APPRO>(IMATION 1,400
14,3 ERRORS 1,400
t4.4 S.TN4BOLS 1,401
14.5 STATEMEN'|S AND RI,IANTONSHIPS 1,403
14.6 REVIS]ON OF ELEMENTARY ALGEBRA 1,403
14,7 ALGEBRAICRELATIONSHIPS t,406
i4.8 SELF'-ASSESSIVE.NT eIJESI]ONS 1,407

15. TAEULATIOF{ OF DAIA

!5.1 CLASSIFICATION OF DATA 1.500

15.2 PzuNCIPLES OF TABLE, CONSTRUCTION 1,500
1s.3 cROtIpED FREQTIENCY DrSTR{BUTTON 1,501
15.4 CLASS INTERVALS AND CLASS LIMITS 1,502
1s.5 SELF-ASSESSMENT Q{jESTTONS 1"505

16. DIAGRAMMATICREPRESENTATIONOF'DATA

16.I INTRODUCTION 1,600

16.2 CONSTRUCTION OF DIAGRAMS AND GRAPHS 1,600
76.3 ADVANTAGES OF DIAGRAMS AND GRAPFIS 1,600
16.4 TYPES OF DIAGRAM 1,600
16.5 PICTOGRAMS AND STATISTICAL MAPS 1,601
16.6 BAR CI{ARTS t,602
16.7 PIE CHARTS 1,603
i6.8 DIAGRAMS AND CHARTS COMPA.RED 1,605
76.e SELF',-ASSESSMENTS QUESTTON 1,605

1.7. GRAPHICAL REPRESE,I{TATION OF DATA

17.1 HISTOGRAMS 1,700

17.2 FREQIJENCYPOLYGONS 1,703
17.3 FREQITENCY CURVES 1,703
17.4 CIlMtrLArroN FREQITENCY ctrR\ES 1,704
17,5 Z CHARTS t,705
17.6 LORENZ CIIRVE.S 7,708
17.7 SEMI-LOG GRAPHS 1,7tO
17.8 REPRESENTATION OF DATA : CONCLUSIONS 1,713
t7.e SELF-ASSESSMENT QUESTTONS 1,7t3

1,001
 IC{B STATISTICS
CS

11. INTRODUCTION TO STATISTICS

11.1 Definition of statistics
0
0
00 -:ie terms Statistics has been derived from the Italian word Statista or the Latin word Status
01 ::,;aning a political state. Initially the term Statistics was used to refer to the information relating to
--:e activities of a political state. At present it covers much wider field and is used in two different
A3
03 ::'-anings. In the first place, it is used in plural sense to refer to the numerical information or data. In
06 -:-: second place, the term is used in singular sense to refer to a Sub-iect embracing the theories and
O7 ::^ethods of dealing with numerical data.

l:.'iessor Horace Secrist has given the most exhaustive definition in plural sense. According to him
::ttstics are aggrettes of facts affected to a marked extent by multiplicity of causes numerically
:t:ressed, enumerated or estimated according to reasonable standards of accuracy, collected in a
:" -riefiIotic manner for a predetermined purpose and placed in relation to each other".

11.2 Nature of statistics

--:. analysis of the above definition reveals following basic characteristics of statistics (statistical
:r::i

. Statistics are aggregates or population of facts-statistics refer to a large number of numerical

facts. A single sale or purchase may be of interest to a particular seller or buyer but is not
important from the statistical point ofview, However, aggregate of all the sale transactions in
a particular town at a particular date are statistics. Similarly price figures of a commodity at
different places will form price statistics.

: Statistics must be numerically expresse&qualitative expreSsing like good, fair, bad are not
statistics. To be statistics the facts must be expreS*ed in numerical terms. Statistics are
numerical statements whichmay be the outcome of enumeration, measurement or estimation
by an observer. Moreover mere numerical figures like 5.7. 10 are rlot statistics. 'r.

To be statistics they must be expressed in specific units of measurement. F-or example age of
three boys 5 years, 7 days and 10 years are statistics. \
Statistics are affected to a marked extent by multiplicity of causes. Statistics are not the effect
of a single factor. They are affbcted by a large number of causes. For example the statistics on
saving are affected by income family size, expenditure pattern, etc.: production statistics are
a-ftbcted by climate, rainfall, fertility of the soil, etc.

1,i 00
 ICAR
.CS

(d) Statistics should be homogeneous

and capable of comparison :-one
purpose of statistics is to permit of the important
cr)mparison between two or more
pre-requisite of comparability phenomena. An essentiar
is homogeneity. price of 3 cows,2
combined together will not form goats and 1o hens
statistics. Because price of cows
of goats or hens. But price,ata are not comparable to that
of any of these species w,r be statislics.
(e) statistics are to be enurnerated
with reasonabre accuracy:- usefulness
de pends upon their accurac\r' Thelr of statlstical data
are not 1ikely to be absolutely
be made to minimise the crror accurate, but attempt shourd
a,d m:rintain a fair degree of accuracy
Reasonable degree of accurac-v in the enumeration.
depenrls on the type for which
of accuracy is cleciciect upo". should they are collected whatever
be maintained throughout the
:lrlirfit process of

(f) Statistics should be collected in

a systematic manner fcrr predetermined
a purpose .- statistics
should be the results of an enquiry
with predetermineci purpose. purpose
determined before the enquiry of enquiry must be:
is begun. In the absence of predetermined
may be useless Purpose of enquiry purpose the data
must be clear. The data srrourd
because haphazardly collected be coliected systematicary
stutistics may read to e.,oneous
conclusions
11.3 Need fbr Measurement

The necessity for measurement

was first felt in the physical
nearly all branches of knowledge sciences, but it has now spreacl,
Measurement has played a readingpart into
precise statemenls of fzrcts'
Desil for precision has ternpted us in the formuration of
fiom Atomic physics to the econonrics to *"u.rr" alr kinds of phenomena
and comm"r"". N.."ssity
manifold now a clays ancl has of measurement has increased
becoure unavoidable. Neecr
unclerstood fiom its importance for statisticar measure can better be
as criscrrssed berow.

71.4 LimitzrtionsStatistics

statistics in spite of its varieci

use and application, has limitations
:

(a) Statistics studies, mass phenomena

and throws light on the result
example' per capital saving in of colje;rir.e actions. For
Bangladesh only gir*" ,, an
peopre in general. Tiris does iclea of avera-se
,ot revear rhe saving ;;;;;;;"*',r*.,auarsi-\.lng made by the
preclude the existe,ce of indebt"dr"r,
situation' Thus a situation where
by;;; ffir:uar. Sratistics cannr-,r rer.ear or does not
this kind of
a study of the individuals
constituting the group is required,
:T"J,;Jl":IijljlT,:J"":$or,t,ay r,_;;;.;;;;;;";. il.:...,". averase rvithout

(b) Laws o1'statistics are true only

in tire lo,g run. Laws in ,atural
nature but statistical laws are sciences are invaria,t in
vcriant in nature.

I ,10i
 I(. \B STATISTICS
Statistical expressions are in tr:rms of averages, approxima.tions
and probabilities. .l.he nature
of the sub-ject does not allow it to be exact. The laws hold good when
a fairly large number of
cases are involved.

statistics is applicable only in quantitive study. Statistics cannot sturly

clualitative
phenomena like civilization, friendship, skill and intelligence
unless these are reduced to
precise quantative fonns. In such situations statisticzrl melhods
turns to be lirnitecl only to
studies of quantitative naturc or to phcnorrena which can be expressed
i1 exact terrns.
Statrstics may produce faulty conclusion either due to cleliberate tnanipulation
or to
inappropriate use. Deliberate llranipulation lnay be made both
at the time o{. collection as
f rvell as at subsequent interpretatiotr. An adverLiser of product nright quote
faulty figures to
serve his own end, Fallacious conclusions may also result fiorn
the use of statistics without
their proper context. Data collected for one purpose, if usecl fbr anotirer purpose,
will lead to
faulty conclusions.
e
a Statistical methods provide only one approach to the stucly of-a phenomenon.
There are other
y :nethods or ways of looking to a phenomenon; statistics is only
one of the lnany ways.
Statistical evidences give only approximate idea of a situation
in general. fhe statistical
L-\-idence, to be valid, should be supplemented by other
eviclences.

Lrke other sciences, statistics may be misusecl. Statistical methods

neecl to bc carefully and
o :rudentlv used' otherwise, there application will result irr misleading
conclusions.
of I' on-experts might make hell out of statistics.
na
ed >-':ttstics only provides the raw material ancl lool fbr rnaking
be -judgement and inferelces but
,jJ' do not constitute inf'erences for any study. They
are only the means to an end, not the
:r--::n itself.

- - e paragraphs the main limitations of statistics have

' been outlined. An user or ,tutilic,
- '-':: c"gnizance of these limitations befbre nraking any tangrble conclusion, Inspite of these
' ' 'l;tistics has got wide utility trnd importance in many sphere of human activity. In fact,
the
For - : : : nance of statistics much outweighs the limitations.
_

he
"._jl_[g:t o f Statistics
not
of -:-. 1-r-l the r'vide
applications of statistics in difTerent branches of human knowledge,
ed, ' some
I : :l:r distrust towards statistics is observe<,1.. As have been said, statistics in
out themselves
:r=i--e S ' they only prepare the ground for making inferences.
Sometimes inf'erences
- - :'l;i1Stical analysis ate taken as guaranteed
ancl too much reliance is placed on the
t in .: - ' i er-enthusiasm. Wrile this is not desirable on the one hand, on the olher
hand it
:itg: Csllrlot prove an)4hing

1,102
I

ICAB ST.{TISTICS

Statistical rnethods provide useful tools for any inductive type of stucr a::: ::.:;:e:..-i l.rl\.ed from
the proper application of statistical methods hold good to a large exren! S,-- ;a,:,: --:. iurh the user,
not with statistics. It has been rightly observed, statistics are like cla;- of rr'hr.;r ! ---* ;;:: rnake a god or
a devil, as you please.

Fallacious conclusions and false arguments rnay result from the ignorance of the raerht-ds or due to
deliberate manipulation of the methods. Unscientific methods of collection ma\.resu1r rn faulty
conclusions. As a tool statistics can equally support true as well as false conclusions. Statistics only
describes a quantitive phenomenon.

One of the main shortcornings of statistics is that they do not always indicate their qualitv on face,
unrepresentative and crude table prepared without any regard to principles may appear to be a
informative as the one prepared with strict adherence to statistical principles. To properly evaluate a
table the reliability of the source of information should be kept in mind. Another problem arises
owing to the nature of expression. Statistics expresses facts quantitatively in definite forms and as
such looks precise and people have a psychological attachment to accept them as true. But the
reliability of and expression does not depend upon preciseness; it depends upon the methods oftheir
compilation.

11. 6 Sclf-assessment questions

(a) Define Statistics. Describe its nature ancl scope (11.1)

(b) Discuss the importance of statistics in planning and control of business
activities (11.3)
(c) What are the uses and limitation of statistics (11.5)

1,10: (next page 1,200)

ICAB STATISTICS

12. SOURCES OF. STATISTICAL DATA AND COLLECTION METIIODS

l2.l Introduction

.An essential preliminary step in statistical work is the assembling of data. The collection of data is
done through enquiry. The type of enquiry to be undertaken depends on the sources of data. There are
two sources of data-primary sources and secondary sources. In a particular enquiry the data may be
collected both from tlre Primary and secondary sources, Primary sources of data are thdields of
rnvestigation from where the basic data are collected, such as households business entqrises
etc. The secondary sources may be Government. Semi-Government or non-Govemment organisations
''r'hich publish data. Besides Government and semi-Government organisation, a number of local
::dies, universities, etc., published statistical data. Private agencies suchas business houses, tratle
--isLrciations, chambers of commerce. Private research organization as well as individual scholars
;.-saged in research work provide statistical information in published form. International organisations
<e UNO, FAO, ECAFE,, IBRD, IMF and UNE,SCO have statistical publications containing
. - ;able statistical infornation.

I LI Secondary sources of statistical Information

- : . I the problems in Bangladesh is a shortage of published statistical data. However, the position
-:roving and the following contain much information :

: :1'lladcsh Bureau of statistics

Statistical Year-book of Bangladesh.

I'fonthly Statistical bulletin of Bangladesh.
1.lonthly economic indicators of Bangladesh.
). f rnthly economic situations of Bangladesh.
-l a ne lad esh Standard Trade classifi czrtion I 9 8 0.
i,ngladesh Standard Industrial classification 1 980.

i:r j -:-icshBank

-r:-ual report

: .--.i.rdesh Bank bulletin (monthly)

: :r,ie of payments (quarterly and annual)

1,200
 IC.\B
ST\TISTICS

12.3 Inten iervs as a methotl of gathering data

Interviewing is an interpersonal process in which one person (the interviewer)

endeavours to elicit
data or attitudinal responses from another person (the respondent).
Afler establishing sulficient
rapport or level of understanding with the respondent, the interviewer
put questions to obtain a
response that provides the needed data. The interviewer should
use a questionaire tbr recording the
responses' For effective interview the interviewer needs to have a
clear understancli.g the
implication of each question and the way in rvhich the information is to be
sough. Much of the
success of this method depends upon the standarcl of the questions
and the ability of the interviewer.
The interviewer interprets and codes the responses in to pre determined
categories on the
questionnaire.

Advantages <lf interview methotl

(a) aims at large response rate :

(b) permits explanation of questions concerning dililcult sub"ject

matter:

(c) permits, evaluation of respon<lents;

(d) increases reliability

(e) useful where spontaneity of response is required;

(o personal rapport may help to overcome reluctance to respond;

(g) permits probing to explore questions in depth.

Disadvantages of interview methorl;

(a) an expensive type of investigation;

(b) takes a lot of time to train the investigators, to

contact the respondents and to hold interviews;

(c) reliable data cannot be obtairred if the investigators

are biasecl.

12.4 Observations as a method of gathering data

The observer should make his observations at the place

and time designated ; observe that which is
pertinent to the studies purposes and record ob"jectly
and faithfully that which he observes.

1,207
 ICAB
STATISTICS

.\.
d r.urrt:rgcs of obset-vtrtional m cth otl

reliable data can be collected as 1he investigators personally obscrvc the phenomenon
;

there is little chance o1'non-response antl misreporting as the invcstigators may check the
sittratirrn hilnsell:

easy to prepare and adminislcr the the schedulc or {orm use in this rtrcthod :

- the investigators can use his.iudgenrent, skill and intelligence to irrrprovc thc quality ol'the
data ;

I r r.;r rlr-antagcs of obscrv:rtion mcthotl :

- it is a costly and tirnc concerning tnethod :

- lt nccds ilrralilicd and tnrincd invcsligators:

- rcliabilit;z ot'the data deprcnds on the sincerily of the invcstigators ;

- '-llcre is a chancc of misunderstanding of tltc situzrtion on thc part ol'investigators partie ularly
.:t thc case of sub.jectivc type ol'data.

:: Postzrl questionnaire as :r methotl of gathering tlata.

- ::rctirod tl-rc qrrestionnairc is scnt to the respondents through rnail with a recluest to lill up
':r:rrire and rcturn it to the originator. An instruction
rnanual is also attachcd with the
' j.r-c lls an aid
to the rcspitndent.

- ..tb1e influencing o1're511s11dgnt by interviewcr;

:r j.,st arc much lowcr than thc costs of perscnal visits ;

---::-.rcal1\, dispersed respondents can be cluickly rcachcd :

--rl:i .ln be reached without appointrnent or conccrn fbr when they will be available;

..Jurrl ttr rcrttairt anonymotts:

ups irrclrrding those where personal solicitation is not possible

1,202
ICAB ST.{TISTICS

Diszrtlvantages :

(a) high rate of non-response'the respondents do not r urrl rhe fiei,i up quesrlL.lnnaire.

(b) the cluestionnaires are very often incomplete and fi1led up rn a harha,ard

(c) there is a chance is misunderstanding the questions;

(d) low literacy rate is a barrier in adopting this methods;

Sttccess of this method depends upon the efficient preparation of rhe Q..ir-S--i.'ll;rr; .r: *.ell as the
responsiveness of the informants.

12.5 Local correspondents method gathering data

Governrnent organizations very oIlen collect data through local correspondenr Unr..i council office
and schools in rural area are usual sources fiom where the data of agricultural productl.:n. education,
birth and death etc. are collected. Data obtained by this method are not reliable an; should not be
used without further checking. However it is a cheap rnethod of coliecting dala altJ. rr rs a useful
method when quick and appropriate data is needed.

12.6 Other methorls of gathering data

Some other methods are also used in collecting data. A large mass ol ciara aie rabtained as a by
product of administration. e.g. trade data are obtained from the records of pon rusr Data on various
aspects of communication and education are obtained from the records of rhe dar11' activities of the
respective ministries. In advanced countries the telephone is used in collectrng data Registration of
vital statistics e.g. birth, death, marriage, divorce, migration provides a lot ol data.

12.7 Frzrming the Questionnaire

A questionnaire is a form containing the questions to be asked for collecrion cf data. Framing a
suitable questionnaire is an essential pre-requisite for successful application of interview method
and mailing method. Questions should be ffarned carefully of tactfdll]'so that responclents are not
annoyed or irritated but gladly provide the just and correct information. The following points should
be kept in mind while, framing a questionnaire :

(a) 'fhe questions asked should be as few as possible. Jnnecessary and irrelevant questions
should be avoided. The number of questions should not be too cause irritation on the part of
the respondent.

1,203
 ICAB
STA't.IST'IC]S
{b) Questions should be such that they can be understood
and answerecl b;z tlie lc.;rst educaiecl
and intelligent respondents. This will of course,
depend upon the cotnltt:siLion c j. thc
population.

c) The questions should be carefully worded. They

should be precis and unambiguous. Any
technical word included in the questions must
be sub.ject to clear explanatory note- words
colloquial origin in a origin may be inclu<led in of
the question for better understandins

J) Q,estions should be capable of being ansrvered readily in a simple

way. Ansr.ver to questions
should be usually of '1'es' or 'no' type.
Questions entaiiing the need of elaborate answering
may irritate the respondent' To avoid the problern,
sometimes possible alternative answers
are given with the questionnaire and the
respondent is required to given his opinion
of either of the quoted alternative answers. in favour

Questions should be such that they can be answered without

any bias, 'fhe respondents nright
be based in answering a cluestion' unmarried
girls are hesitant to quota their actual age
might quote and
a lower figure than the actual.
Questions involving bias or prejudice in
answering should be avoided as far as possible.

i framing questions due regard shouicl be paid to the religious,

cornmunal and poiitical
beliefs of the respondents ,
Questions should not be unnecessary inquisitorial.

Questions shoulil be so farrned that they will exactiy

cover the infbrmation requirecl the
study. Each question should have:ur
ob"jective be and clear in meaning.

There must not be anlthing in the question

which might give rise the suspicion in the rnind
of the respondents. If the respondent has got
the srightest suspicion that the inf-onatton
might be usecl against his interest, he will
be reructant to answer.

The arritngement of the cluestions in

the questionnaire is also important.
arranged in logical secluence. One question QuestiOns slroulcl bc
shoulcl be corroboratory to thc other. Easier
questiolls shoulcl be askecl initially.
Al1 q.estions relati,g to one aspect shoultl
undcr one heading' Questions involving be grorrpecl
chccks
sho,lcl tre put intermittdntlv. Arrangc'c,t
questio,s should uraintain 1he flow .f
of through in the mrnd of the respo,<1crrt.

--'-1i dcsig'of the cluestionnaire should be altractive.

sufricie,t space is t. bc pro'icled ibr
L_retailed instructions shor:ld accomp,ny
' the questiorrnaire. 'I-hc succes:; i)t.in1,g51igatiori
- '.e subsecluent classillcation and analysjs of infbr*nation
arising out of in,cstigiiti.rr ro a
" ' -erable extent depentis upon the intelligent frarning
of the question*iiirc.

1,204
ICAB STATISTICS

12.8 Self-AssessmentQuestions

1. (a) Explain the difl'erent methods generally used in the collection of statistical data and
state briefly their merits and demerits.

(b) What is a questionnairc ? \lzhat precautions should be taken in drafting a ques-

ticrnnaire ? (12.3 to 13.5)

2. What arc the points to be taken into consideration while selecting the enumerators ?
How Would you train them in field work ? (12.6)

1205 (next 1,300)

ICAB
STATIS'I]ICS

13. INTRODUCTION TO SAMPLING

f 3.1 Population and sample

These are two terms which are frequently usecl in statistics

:rnti they are de1-rned at this stage so tha.t
confusion and misunderstanding can be avoidecl.

The term popttlation is used when referring to ail the items

under consicleration in a particular
enqtriry' A sample is a group of items drawn fiom that population.
The population rnay consist of
rtems such as metal bars, invoices, packets of tea, etc.;
it_!e-qd Lo1bafreople
-
i'he purpose of sampling is to gain as such inflormation as possible
about the population by observi.q
-'nly a small proportion of that population, i. e. by observing the sampre.

' or example, in order to ascertain which television programrxes are most popular
a sample oI. the
:'rtal viewing public is interviewed and, based on thcir replies,
the programmes can be listed in orclcr
i popularity with all viewers.

- here are three main reasons why sampling is necessary.

:

r) The u'hole population may not be knovn, e. g. it is not known exactiy who r.vatched
television on any particular evening of tl-re r.veek.

r) Tbsting't'ery item c:an be extrente-l.v costl.v irt lirne ancl rnoney,

e. g. checking tlre -rveight oi-
every packet of tea coming of , production ri,e would be a lengttry
proccss.

The items being tested nmy be completelv rlestrovecl itt the process,
e.g. in orcler to chc:ck the
lifetime of an electric light bulb it is necessary to leave the bulb
on until it burns oLrt.

lc- characteristics of a population can be ascertain

by investigating only a sample of that popuiation
:..r,ided that tlre following two rules are observecl :

(i) The sample must be of a certain size. In general tems the larger
the sample the more
reliable will be the results.

The sample must be chosen in such a way that each member

of the populatio, has an
equal chance of being selected. This is known asrandom sampling
and it arzoicls bias
in the results.

1,300
ICAB ST..\TISTICS

"I'hcre are sevcral methods of obtaining a random sample and these are considered rn rurn

13.2 R:rntlom szrmpling numbers

Evcry item jn 1he popuiation must be numbered in order. If a sample of, sa1,, 20 items rs re cluired, then
20 numbers I'rom a table of random nurlbers are taken and the corresponding item.'s are extracted
fiom population to lirnn the sample (an example of a table of rarrdom numbers rviil be lound in this
r-nanual), c. g. in sele cting a sarnple oI- invoiccs for an audit. Since the invoices are alrea,l'.' nr-rmbered
this methods cau be applied with a minimum of difficulty.

The methods iras obvious Iirnitations when either the population is extremely large or. in Iact, not
known. The lollowrng nrethods are mbre applicable in these cases.

13.3 Systematicsampling

Is the population is knorv to contain 50 ll0(l items rind a sample of size 500 is required, then one in
cvery 100 items is selcctcd. The first rtern is deternrined b1'closing from randorn numbertables a
nuntberbetr'vcenlandl(io.e g.6T.rhenthesecondw,illbethel6th,thethirdwillbetire20Tth..up
to the 49, 167th itern.

Srictiy speaking, systematic sampling is not truly random as only the first item is so selected,.
Flowever, it gives a very close approximation to random sampling and it is very widely used e. g. in
selecting a sample of bags of sugar coming of a conveyor belt.

13.4 Str:rtifiedsampling

I1-the population under consideration contains several well-definecl groups (called strata), e. g. men
and wotnen, smokers and non-srnokers, dilTerent size of metal bars, etc. .... than random sa.mple is
laken l'rom each group. fhjs is done in such a away that the number in each sample is proportional to
the size of that group in the population.

In sclecting a sample olpeople in clrder to ascertain their leisure habits, age could be an irnportant
lactor. Sc-1, if 20% of the population are over 60 years of age andl5o/o are under 18, than sample of 20O
per-rple shoulil contain 40 who are over 60 years old, 30 under 1 8, and 130 people betrx,,een 18 an<l 6O
years ofage.

13.5 Nlulti-stagcsam;rling

If a nationtvicle surrzey is to be carried out, thcn this method is often applied.

1,301
 ICAB
STATISTICS

Step 1: The country is divided into areas and a random sample of areas is
taken.
t
Step 2: Each are chosen in Step 1 is then subdi,idecl into towns an<l cities and a randorn sarnple of
there is taken.

Step 3: Each town or city chosen in Step 2 in further divided into roads
and a random sample of roads
is then taken.

Step 4:From each road chosen in Step 3 a random sample of house is

taken and the occupiers
interviewed.

An example would be the selection of a sample for a national opinion poll of the type carried out
prior to a gcneral clcction.

13.6 Cluster sampling

This method is srmilar to the previous one in that the country is split into
areas and a ranclorn sample
taken trurther sub-divisions can be made unitl the recluired nurnber of small
areas have been
determined' Then every hot:se in each area will be visrtecl instead of.just
a ranclom sample ol.houses.
In many ways this is a sinrpler atrd less costly proceclure as no tirne
is wasted finding p,rticular
houses.

13.7 Quota szrmpling

with quota sampling, the interviewer will be given a list comprising the diflerent types of people
to
be questioned and the number or quota of each type, e. g. 20 males,
aged 20 to 3o years, manual
workers ; 15 females,25 to 30, housewifes, (not working); 10 males
55 to 6o, prof'essional men .,..
etc' The interviewer will then stop people at random in the street
until the various quotas are 1illed.
This is very sitrilar to stratified sampling.

13.8 Statisticalenquiries

Many of the problems met in a business situation are capable of

being treated statistically, Thc steps
in a statistical encluiry are as follows :

Stcp 1: Define the ;rrotrtem

The population to be investigated must be clearly, clefinecl at this

stage as well as the problern itsefl.

1.302
ICAB STATISTICS

Step 2:'select the sample to be examined

The size of the sample ancl the methodused to select the sample will have to be determined, and wiil
depend on the degree of accuracy and budgeted cost of the enquiry.

Step 3: l)ralt thc questionnaire

Usually a pitot survey will have been done frrst in order that a satisfirctory questionnaire can be
drafted.

Step 4: Collect the data

Data is collected in various ways where it has not already been collected for some other statistical
purpose.

Step 5: Checkthe questionnaire

Questionnaries are checked and sometimes coded before data tabulation can take place.

Stcp 6: Organizethe data

Sone d:rta will need to be reorganized befbre it can be tabulated, i. e. items counted or values
iotailcii

Stc;r it: rlii;,i;j'i41j i;rlri interpret thc da&t

lnforrnatiorr collected has to be presented in a lbrm that is easy to understand, i. e. tables charts and
graphs from which conclusions can be reached about the sample collected.

Step 8: Write the report

The conclusions arrived at in (7) above will fbrm the basis of a report which will recommend a
certain course of action.

1 3.9 Sclf-assessment question

A survcy requires the selection of a smple of 60 children from a largc school. Stratified sampling
according to age is to be used. If 407o of children in the school are aged 1 3 or under, 45Yo arc 14 to I 6
inclusive, anct l6Yo are over 16, how rnany of each age group shouldte included in the sample ?

Solution 13 and under 24

14 to 16 27
Over 16 9
16

1,3O3 (next page 1 ,400)

ICAB ST[fISTICS

14. MATHE}\{ATICALLANGUAGEOF'STATISTICS
l4.l Variahlcs

These are the characteristics that are being rneasured. They can be classified in two different and
distinct ways:

(a) Varibles can be eithercontinlrou.s of discrete.

A continuous variqble is ntea.vured (e. g. height, weight, length) whereas adiscreqte vqriqble
is counted ( e. g. number of children in the family, shoe sizes).

(b) Variables can alternatively be classified asincieoendent or deperyknt.

An indepertdent variable is a variable which is not affected by changes in another variable,

whereas dependent vatiable is affected by changes in another, e. g. changes in advertising
expenditure in a year can be expected to affect sales, but a change in sales will not directly
affect advertising expenditure. F{once, adv,:rtising is the independent variable and sales the
dependent.

\4.2 Accurzrcy and approximation

No tneasurement of a continuous variable is ever exact. If the length of a page of a book is measured,
tlre answer is given as 21.6 cm when, in fact, the length could lie between 2l .55 and2l.O5 because
21 .6 cm could have been rounded up or down to one decimal place. Measurement should only be
given correct as far irs they go and in this case the answer is said to be correct to three significant
figures. -,{nother method oI' indicating the accuracy of a number is to quota the limits of possible
error, e. g. a boy's height is 163 cm to the nearest cm means that his height lies between 162.5 and
163.5 and may be written as 1631.0.5 cm.

14.3 Error

These can be divi<led into two groups :

(tr) Biesed antl unbiased crrors

Iliased errors arise whencver individual items are rouncled in the same direction. Thcy arc
cumulative which meilns the total error will increase as more iterns are added together. For
exarnplc, f, IO.3O, , 11.4O, L 14.60 and 115.90 rounded up to the nearest pound becorncl l l,
[. 12, L I 5 and I l6 reslpectively. When added together they givei 54 compared with t]rc lrue
answer of 52.20.

i,400
ICAB STATIS'TICS

Unbiased errors arres r.vhen individual items are rounded in either direction. They tend to cancel each
other out so that the total error decreases as more item r,'* added together. For example, using the data
of the previous example, but rounding to the nearest:,,)llrld, the figures become10, i11, t15, and
116 respectively. When added together they givet52 compared with the true answet of:52.20.

Atrsolute and relative errors

An absolute error is the difference between the actual, or true, value and the approximate
(rounded or estimated) value. For exampl e, 3 ,7 52.9 kgs, becomes 3,80O kgs r.vhen rounded to
the nearest hundred kilograms.

Absolute error : (3,800-3,752.9) kgs.

: 47.I kss.

A relative error is the absolute error expressed as a percentage ofthe actual, or true, value. (If
the actual value is not known, the absolute error is expressed as a percentage of the estimated
value.) For example, using the data of the previous example ;
47.1
Relativeerror: xl0O
3.52.9

: l.26Yo

14.4 Symbols

Mathernatical symbols are used in order that people can exchange ideas rvith a minimurn of effort and
maximutn clarity. They are a lbnn of shorlhand. Mathematics has its own language ; its vocabulary
being symbols, some of which are explained below :

x Lhe collective syrnbol meaning all the individual values of a variable,

i. e. x' x", x3, etc.
y is an alternative syrnbol to x, and is used to denote one set of variables where trvo sets of
variables are involved, x being used for the other set.

n
v.. (Sigma x) means the sum of the individual values of the variable x from
usually writteni-1 as Ix.
f to x,.. This is

Ix : X. + X^ i- x^ i- .... -.t- X
t:.Jn

1,401
 ICAB
S'IA*fIS'l-ICS

rxy (sigrna xy) means the sum of the products of

corresponding x and y values.

So
: Xr Yr * \yr* *, * .. * *,, Yo
I.I
rx2
Y.
(sigma x2) means the sum of the squares of the individual
x values.

So
Ix2 : *,'* *r, * *r, * ... **n,

(zx)z (Sigma x all squared) means the square of the

sum of the individual x varues

So
(Xx-y;z : (xr *A + x, + ... +
1,)2

(rx-y; (sigma x minus y) means the sum of the difference

between corresponding x and y values

So
Z(x-y): (x,-y,) + (xr-yr) + 1xr-y.) + ............ + (x,,_yn)

Example:

x, : 4 xr:6 x.,:10 and y, :2 yr:l 1 y3:2O

2x, Iy, Xr.y, Z*', Zy, (:x)r, (Iy)2, I(x_y) wiil be calculated
:

lx:{+6+10
:20

2y :2 + tl +20
-J5

Xxy:4x2+6xll+10x20
8+66+200
:274

Ix,:4r+62a1gz
F,

: 16 + 36 + 16L1
:152

1,402
ICAB STATISTICS

Xy' - + 112 +2o2

22
:4+121+4O0
:525

(Ix;2:(4+6+10f
: (2O)?
:400

(Xy)2=(2+11 +zo;2
: (33)2
: 1,089

X(x-y): (4*2) + (6-11) + (10-20)

*2+(-5)+(-10)
ia
--lJ

14.5 Statements and relationships

approximately equal to
x( y x is less than or equal to y
x)y x is greater than y
x*y x is not equal to y
z<x(y x lies between z and y and inay be equal to either
z(x(y x lies between z and y but cannot be equal to either
x+ y the truth of statement x implies the truth of statement y

{xorx 1

7 square foot ofx

14.6 lLevisinn of elementarlr algebra

(a) Order is irrelevant in addition and multiplication :

1,403
ICAB
STATISTICS

x+y:y+x
xy: yI(
e. g. if x :4 aud y 8, then
=
4 + g:12
=g*4
4x8;32
:gx4

(b) Addition and subtraction rules

x+(_y):x_y
x-(-Y)=x*y
9, g. ifx : 5 and y * I, then :

+ (-l) :4
= 5-l
5-(-1; = 6
=5*l

(e) Multiplication rules :

x(-Y): - xY
(-x) (-Y) - +xy
e. g. if x: y: 12, then:
9 and
9x-lZ: _ 10g
:-9x12
-9-12: l0B
=9x12

(d) Items outside brackets multiply everything within

a(x+Y+2;-ax+ ay*az
e.g.ifa-3,then:
3(x+y+7):3x+3y+32

1,404
X -\]t STATISTIC

1e) Signs outside brackets multiply everything within :

-a(x+Y-z):-ax-ay+az
e. g. if a: 7, then :

-7 (x+y-z): -'la-y+'/z

(i; Fractions may be added when reduced to a common denominator :

a b ay+bx
xyxy
e. g. if a:2,b: l, X:7, and y:3, then :

2 1 2x.3+1x7
7 3 7x3
13

2l

(g) V'rhen multiplying fiactions, numerators and denominators are dealt with separately

o h" ab
-v---n
nyxy
e. g. ifa: 3, b : 4,x: 5 and y : 7,then :

3 4 3x4
-/\_-_
5
-.v-
7 5x7
12
35

(h) When dividing lractiorrs, invert tfr" Olriro. and multiply :

a.h a y
-+-:-x_
Yy.rb
_ay
xo
e. g. if a:2,b:11, x:5 and y:9, then:
211
-:+-:_x; 29
5 9 5 t]

1,405
 ICAB
STATISTICS

-18
55

Students who frnd any clifficulty with

the above elementary fbflns will probably
textbook'of basic algebraic relationship to find they need a
hand as they work through this manual.

14.7 Algebraicrclationships

in a business situation it is often possible

to "develop an algebraic relationship (or
two varitrbles such asi4<lye$is-ing expencliture equa-tion) between
and sales. This relationship wiil be
experience and it will cnable management based on past
to predict the likely volu,re of sales fbr
expenditure' If shoulci be stressecl that any given level of
tlle values so calcurated will onry be
may or nlay not prove to be reliahle' estimates of the sales ancl
If is u,likely that rnanagement wilr make
:;tr-reaching decisio,s"based on these expensive ancr
estimates .lone. lhe act*al derivation
be dealt with laler in the manual (Lessons of these relationships
"viil 1 3 -and l4). Such relationship
are olten reflbrecl to as
:nctdels' oi'a particular situation.

i.:.;:rru;llt 2 :

-he time in hotrs (t)

taken to produce batchcs of an itern
is found to be relateri
rvru(vu to
('1 the number
: the batch (r) byan cxpression of the frrrm l:3 olitems
5 x r/5O.
lhe time taken to produce batches of'50,100
and 200 items will rrow be calculaterl.

'.\'hen
r: 50 t : 3.5 + 30/50
:3.5+1
." t: 4.5
.i.'hen r = I 00 t: 3.5 + 100/50
:3.5 +2
.'. t: 5.5

','hen r:200 t:3.5 + 2OO/50

:3.5+4
." t:7..5

re times for batches of 50, 10o and 200

items ac 4jnorrs, 5] hours ancl 7); ho.rs
':spectively. ancl

" rte: r (the number of items

in the batch; is the inclependent variabre
--'; dependent and t (6re procruction lime) is
variabre since the tirne crepends on the
batch size.

1,406
ICAB STATISTICS

14.8 Self-assessmentquestions

(a) Of the two variables, crop yield and rainfall, which is the independent variable and which is
the dependent variable ?

Solution:

Independent - rainfall

Dependent - corp yield.

(b) A measurement of 732.46 metres is rounded to 130 metres. What is :

(i) the absolute error ;

(ii) the relative error ?

Solution:

(i) 2.46 metres.

2.46
(ii) x 10O7o = 1.860/o
I,nA6

(c) Il'x, : 2r*r- 3 and X3 : 5, find the value of :

(i) I x2

(iii) (Ix)2

Solution:

(i) 22+32+52:38
(r) (2+3+5f:169.

1,407 (next page 1,500)

 ICAB
STATISTICS

15. TABULATION OI? DATA

15.1 Classification of data

Before data can be tabulated and interpreted it must be classified.

since in its raw fbrm data is
irnpossible to handle quickly and easily. Classification is the bringing
together of items with a com_
mon characteristic.

Example 3:

50 university students were selected at random and their heights

were measured to the nearest inch
The following values were found and recorded :

67 71 61 70 66
68 72 71 76 72
77 77 66 70 72
7t 64 70 72 66
70 it 71 66 69
73 74 68 70 73
67 69 69 70 77
69 74 68 72 70
70 65 69 74 67
72 70 68 ta 67

3y inspection of the above raw or unclergrouped data

it is possible to ascertain the height of the tallest
'--udent (77") and tltaL of the shortest student (61") butvery little
else. It is necessary, therefbre, to
::range the data in a tabular form. This will involve a loss of detail but will result in a gain in
- :mprehensibility.

- 5,2 Principles of table construction

rl simplicity : the material must be classitied and detail kept to a minimum

^) Titlc : the table rnrrst havc a cornprehensive and self-explanatory title.
_l Sourcc : the source of the material used in drawing up the table
should always be stated
(usrnrllv by way of a fbotnote).

1,500
ICAB STATISTICS

(d) Unite : the units of measurement that have been used rnust be stated. e. g. O00 cm rneans that
the u,its are in thousancls of centimetlgs. T'his can be done in the title. to keep the number of
figures of a minimum.

(e) Headings : all column and row headings should be concise and unambiguous.

(o Doutrle counting : this should be avoicied at all costs, as it can completely inwalidate the
results, e. g. if the table shows total wages as factory x, to bef, 50,OO0 and at factories x and y,
t 120,000, then I 50,000 for x apperas twice in the table.

(e) Tcrtals : these should be shown where appropriate and also arry sub-totals that may be appli-
cable to the calculatiotls.

(h) percentagcs and ratio : these are sometirnes called derived statistics trnd should be shown if
rneaningf'ul, with an indication of how they were calculated'

I5.3 Grouped I'req uency distritlution

This is constructed as fellows :

Step 1: Pick out the highest and lowest figures from the raw data.

Step 2: Determine the range of values. i. g. the difl'erence between the highest and lowest values.

Step 3: Decicle gpon the class intervals, l"here should normally be between 5 and 15 ctasses and,
Wherever possiblc, they should be equal.

Step 4: Take each figure in the raw data and insert a tally (or check) mark against the appropriate
class, e. g.

2 is represenced by II
5 is represenced bY-Itr{I
11 is represencecl by\tl
.t*il I

Step 5: By totalling the tally marks find the class frequencies

Itrxample 4 :

IJsing the data given in lJxarnple 3, a groupecl frequency distribution is constructed cr the universitl
student's heights.

i,501
 ICAI} S'[{TISTICS

Highest value - 77", lowest value - 61", Therefilre, range of value * l -5,,.

T'aking class intervals qs 6o-62 u,63-6s",etc., tht: frequency distribution becomes :

Cla.ss interyal Thlly F-requency

Ileight (incltes) Number o1f students

6A" * 62" I I
63" - 65'i II Z
66"-- 69" IT{i Eil IlI i3
69" - 71" IN I}H TSil TIII 20
\
72" - 74" ITil IT{.I li
75" * 77" ilI J

-lotaI
50

15.4 Class inter-vals and class limits

The fbllowing points should be ca.refully notecl as regards the construction of such a frequency
distribution:

(a) Numtrer of Classes

The number should be relalive ferv so that the infbrmation give is easily graspccl and rctairrecl,
but not so fbw that tire inevitable tross of detail liom grouping becomes too pronouncecl.

(t ) Class interwals (or widths)

T'hese should all be equal r,vhenevcr possible. The excelrtion is generally fbr opening an6
closing classes where there ma"y be, one or two extrernevalucs. Thus, in the above exanrple, if
there was a stttdent of heighl 81" the final class woulcl propably be Zg', to g3,,in grcler to
include him and yet not have one class inlen'al with zero frequncy in between 78" anci g0',.

I
+- 1,502
 J \I]
STATISTICS

{t } ( )pcn cntlctl cl:rss intcrvlrls

'flre olass
intc.als i, the exarrplc above co.rd h*ve been stated as :

Ileight (inchesl

60" * I
(r3" * 2
6(r" - l3
69,'_ 2A
11tl
t! li
75" _ J

50

In this czlse there is no itldication as the size

of thc last crass interv,al. I-Iowever by convention,
it is dcemed to be .{-1.}re sarne size as the class irnmecriately precedi,g
it.

(d) Class Iimits (thcir. nr:rthrmirricat mcaning)

'l he liurits of a class inclicale

vrhatvalues from lhe original data willbe included in
each class,
and therefbre it is irlpoftant tr: clanly
the various w:rys irr which class limits can be stated.

The fbllorving clirss ]imits tbr w.eekly incomes

clo nc;1 all mean the same thing :

1,503
ICAB STA'TIS'[ICS

Stated classes Values included in each class

(i) .L
Iirom O up to but not includingt lO.
0-1 0 i.e.Oroi9.99]
70-20 From t 10 up to but not includingi20.
r. e.:lOtotl9.9q;
20-30 From t2O up to but not including{.30.
i. c. :2() i.o t20.99 ]

(i i) c Irrorn O up to but includingi i O.

10- i. e. O to t9,99+
20- As in (i) above,

(iii) 1- l0 From 50p up to but not includingt l O.50

i. r:. L().50 tc L2O.4g
i.

17-20 Frorn 110 50 up to but rrot inch"rdingr-20.50.

i. ";. l-10.50 fo'"2A.49: .

21-30 Fror:r r20.50 up to but not includingt3e"49.

i. e. t20.50 ttl i30.49 ]

Note that in this case there is a gap bctween:10
and r 1 1, so that any value fulling nearer toi l0
than to : 11 is included in the first carcgoryt 1- I O.

(iv) 0-9 ' Frorn t0.50 up to but not includingt 9.50.

i. e. f.o 50 io i9.49] .

10- 19 From r9.5() up to but not includingrlg.5().

i. to t-.19.49 +
e. t.9.50 .

20-29 From 1.19.50 up to but nct inclurl-ingt29.50

i. c. : l9 50 to t"2g.4g:

The above limits relate to a discreate variatrXe, but the principle applies equally to continuous
variable viz :

0-10 means from 0 up to but not includic,g 1O, i. e

i. e. 0 to 9.999.

1O-2O means from 10 up to but nol inclueiing 20,

i. e. l0 to I9.999.

1,504
r \B STATIS'I]ICS

15.5 Self-zrssessmentquestions

I i-re stl,ted class limits for a grouped frequency distribution of children's heights are

45 inches and under

46-50 inches
51-55 inches
56-65 inches
(
Over 66 inches

(a) A child's height was measured as 50.4 inches. In rvhich of the classes should this
measurement be included ?

(b) What wize of class interval should be used for the class given as 'over 66 inches'.

Solution:

(a) 46-50 inches (true class limits are45.5-50.5 inclfes).

(b) 10 inches, same as the preceding class, which h:rs true class limits
55.5-65.5 inches.

(next
 ICAR
STATIS:TICS

16. DIAGr{,{MMATIC ITEPRESIiN'TATION OF D/ IA

16.1 Introduction
There,are severirl advantages of presentiilg
a mass ofrlata in tabular fornr. The flgures
can easily be
located' compzrrisons between classes can be made
at a gl;rnce, patterns of figrres are highlighted
tabies are easily understoocl by non_statisticians. an<l

{owevel ctrarts, diagrams ancl gra-phs are rlore popular

ways cf riisplaying ciata simply, Such visual
:epresentertion of facts plays an irnportant part
in eveycray lif'c si6ce diagrams can be seen in
rewspapers' advertiselxelus ancl on television
claily. These can be rnisleading a'd give
"\TOng impression
lt is, therefbre. irnportant to aclhere to the same basic principies entirely the
as rvere listed
rnder table construction.

16.2 Cnnstruction of tliagrtrrns and gr:rphs

:) Ali riiagrarns (and graphs) must have zr title

-) -I-he
source of data must be stated.

The urits .,1'rn';asur.r,cnt tha"i have ber'r,rseci

nrust bc gi.;err

The scale must tre stated.

'Ihe axes rnust be clearlv

latlelle<l

,'j.3 Advantages of diagrarns antl gragrhs

1ese principles are fblloweci then:r diagram

will ha_,zc several advantages over a, table
It is easier to picture the mass of figures that the diagrarn
represents.

Rela.tionships between figures are shown more

cleerrrv.

- A quick, lastrng and itccurat(] im.pressron is girren

of the significarrt a,cl peftinent facts

: -1 Types of diagram

:rc &re basicaliy thrcc rnethocls of representing

clata cliagranlrnaticalry

1,500
 .\R STATISTTCS

-: :r.ai-rg:.irns and statistical maps.

'h r Bar ciurrts-simplc, colnponent and multiple.

(c) Pic chrrts.

llach o1'these is consiclere<l in turn r.l,ith exalnplcs to illustrate the method of conslructiorr

16.5 Pictograms zrnd stzrtistical maps

(ir) Pictrlgrarns : Thesc are, as the name irnplics, pictures 1or symbols) which can readily be
associated with the data under consideration. One picture or symbol is used to represent a
unit of,the variable.

E*rrnplc 5:

The lbllowing pictograrn the car slles for l3angladesh li,{a-vi.a.:rd fbr tlie three consecutive years 19-l
to 1 9-3:

C:rr sales l3angladesh \Ia-vland. 19-1 to 19-3

W
ffi.\
: i
W
i 9-1 ft+..#.ii.i.t-*ie@* rnillion
cars

t9-2.
@ W
#ffis*\
ffiW=ffi-

@
Sottrce

19-3
@ Final Accounts
Bangladesh Mayland

(b) St:rtistic:t! Inaps : Ihese are sin"rply rnaps, shaderi or marked in such a way as to show
st:rtistr ca i infor;nation. .

Xixirn'nlrlr: 6 :

'1"!re
fblio',,.'ing rnap represents thc total rarnll;,] I li rr 6..u, Britain during Apr. 1 9-3:

1,601
ICAI} S"f{fIS:I'ICS

Rainfall Great Britain, Apr. 19-3

Source Mctcorological
Office

Key

ffi More than 3 "

m J,'

I 2"7 . r"

tr Less than 1"

5.6 Bar charts

rcn in{'brmation is of a quantitative lbrm, it is ollen represented by a bar charL. Bars o1'equal wirtth,
her vertical or horizontal, are c()ilstructed with their lengths proportionnl to the valuc of the
:iable.

- ramplc 9 :

--cfollowing bar chart represenls the sales of root vegetables (turnips, carrots and parsnips) in
:.ngladesh for the years 19-4 to 79-6:

1,602
I
If,.\B STA'IIST'ICS

Ront vegetables Bzrnglarlesh 19*.1 to 19-5

Sales Kcy
(r(xx))
Turnips

7 5t)

Carrots

ilitr"rlt il.,'s

Sourr:c .

250 Noddy l-uncl

(iazet1e.

0 Ycars

16.7 Ilie ch:rrts

'fhcse are usually drawn rvhen the proportion o1'caclt class to thc rvhole is in-iportant rathcr than the
absolute value oI'each class. A circle is rirawn, and divided ilttro scctors such that thc area ol'each
sector is proportionate to tltc size oi'the ligure' rcpresented.

Examplc 10:

T'hc tbllowing pie ctrart represents the proportion o1'each type of grain produced irr Disney I-and in
the year I9-5 :

Grain ;rroduction Disney I"zrntl, I 9-5

13arley
2],yo
Wheat
tJt?0.' o

Oats Source :

12"/o Disncy L-and

Nriinistry of
lJr-rme Aftairs
I ,603
f

ICAB STATISTICS

(a) Simple bar chart:

'&
Example 7 :

The following bar chart represents thc production of wheat in Bangladesh for the 1-ea--s I
;-
Wheat production Bangladesh, 19-1 to 19-3

Production
m. lbs

500
Source :

Government
250 Statistics

o 19-1 19-2 19-3 Years

(h) Component ber cherrt: A component bar chart ts drawn rvhen each total figure is built up
the
t fiom scvcral conrponent parts.
rch

f,)xample 8:

The fc'rllowing bar chart represents i-he grain prodt",c'.ion (,ye, barley and wheat) in tlre Bangladesh for
Iin theyears i9-l tc l9-3:

Grain production Bangladesh 19-1 to 19-3

I(er
I>roduction
m.lbs
n Rye

ffi Ba-rley

tr Wheat

Source .

Governrnent
Statistics

1,604
/

; {_,-\ rl STATIS:I'ICS

&I*:itii;!e il:er i:hilrt : 'i'iris 1s drawx wticrclwo orrnorcrciated ilcnrs areto be comparscl. Thc
l:;rts arc adjoinrilg and each rcprcserlts rlillbrent itepl
'
:{i.S !}i;r;lrilnrs;nflrl ch:rrtscorn;rar-cd

Pir":l.t-rgriilrts arrd statistreirl ntaps are tedious

t0 drau,ancl lack accuracv, Tley arc attractive to '
the cys but should really only be usetl to convey simple inforrnation.

llar chatts are the easiest type of cliagram to understand antl to tlraw. They are accurate and
luctuill valtrcs can be read off ilre vertical scale.

Pie chafis il.ie rl1ore difficuit to draw then bar chzrrts. They are less accurate and actual vaiues
cet)rlot ttsualll'be read ol-f tlte chart. It is also very dilticult to compare pie charts. especially
il'drllerent sizecl circlcs lrave been clrawn.

t{;.9 Self-:rssessru ent qucs tiorl

i:

\1"' i i it1 typc 01'diagralll or charl rvould be best lbr presentation clf the ltlllorving clata

{;i ) i'r rirnbcr o1-hand lc-roms in Banglarlesh ior six difl'erent years ,7

(.bi l)rtlportir:ns ot Ji{li:rcilt l}'pcs of'goocls erported liom Banglaclesh last mopth 'l

Sotrutiun:

(a) 1)ictoqrirrn rtr bar clrar-1.

(b) llie ci;a11.

I ,605 (ncxt page 1,700)

 iC\.8 5'L,{;'I S"!'r{-r:{

l- ( ;RA P TIICA I, rtII I'II. SIi N'I ATION

E O.[,' DAT,.\
l,-.* Ilistograams

- histogram is a special form cf colllmn or bar cha.r1 1ha1 is riscrl to r-ojlr-esrr1t

dat:r given irr tltc iirrr:: *t
groupecl f'requency distribution. T-he important diff'erence is that tirt:
zirea of eaclr lcett;lr:.r:ic
tc 'lpresents the frecluency of a particular
class interv'el rather than the iieletrt of thc rectangic.

Ivpes of histograrit :
nd
r) Itrqual class intervals

ucs If all the class intervais are of the same size (as in Iixample 1i bclow) then Ih e iccl
itn;il Cs i I t,t"r'q:
ally the same lengtir of base (or width) and the heights u,.i11 be proportional lrl tlre
!i. cqr.i{:rri:id:,;
(just as in a trar chart).
\

irample 11 :

CIas,; intental ii
Closs lintit.s ,trrru!er t;i c'las,t !: i et ti t e,* t:-t.;
t I
1:

"-**-*:
Age (years) Lo t;f pt:rtt:/r i
fr

-----,_--. I
!
t
11*1.5 I0.5-i s.5 5 ij t
$

i6*2A 1 5. s-20.5 _5 11
It
x
I
?_1-25 20.5-25.5 e

.5 22 {
:
25-30 25.5-30.5 -5 i8
I
I
31-3_s 30.5-35 5 .5 10 E

J
i

1,7$A
 STATISTICS
ICAB

The standard width of a class interval is five years'

3tlr:
25:
20.
15.
'lo.
a

o
tr.1 zo.5 25.5 {year s ,

'lhe omission is shown by a-jagged line'

Part ofthe horizontal axis has been omitted, for clarity.

so there are no gaps

Note that the vertical lines are always drawn at the mathematical class limits,
as

in a bar chart.

(b) Llncqual class interwals

the third and fburth

If the clistribution has unequal class intervals, e. g. in Example 12 below,
ad-iust the heights of the
class intervals have twice the range of the others, it is necessary to
length of base onl-r
b.rs to cornpepsate for the fact that the rectangles do not all have the same
by doing this rviil the area of the rectitngle lepresent the frequency.

E,xamplc 1z' :

T,he fcllowing data refers to the weights (iil kgs) of 42 crates of fish landed at chittagong :

1,701
 ICAB SlATISTICS

Class Class Range of Frequency Height of

interval limits class bar

Weight (kgs) No. ofcrates

10=14 9.5-14.5 5 2 2
15-19 14.5-79.5 5 5 5

20-29 79.5-29.5 10 12 12/2:5

30-39 29.5-39.5 10 16 16/2:8
,7
40-44 39.5*44.5 5

The standard width of a class intqrval is 5 kgs. Therefbre, since the third and fourth interwals are twice
as wide, it is necessary to have the frequencies of these two classes to find the actual heights of the
rectangles.

1CI

I
g
s
7 .16
to=7
6
5
lr= Tt2
lt

: 3
e 2
r I

th.5 t9 .5 2]. t 39.5 44 .5 !{e i gtrt (kgs )

Class limits

: nilarly, it a distribution has a class interval that is three times the width of the standard class
:ierval, the frequency olthat class must be divided by three to find the height of the rectangle.

r,702

I
 STATISTICS
ICAB

"1,7.2 Iirequenc--v polygt-ltls

rthe of lrre tt-rps of the recta,gles in the iristogrilm ue-j.ined by straiglrt lines. lhe fig.re
'ridp.i.1s
iskrron'n,asafi.ec|ttertcllpolv-gon.}tisstirndarrlpracticetoloiningpointsateachendofthediagranr
class inten'als' This is because these
to the base iine at the ceiltr(]s of thc ad-joining corresponding
they contain on items'
trvo class intervals have in eflact azera liequency since

Er:rmplc 13:

A ficcluency polygorr is constructed r'rsing the data of Example

11

Cur cff trisng.-

aq,

Additional triangl*

r)

io

0 15,5 20.5 25.5 30. 5 ]3 -578 4a.5

U

Class limits

Arca of :r frequencY PolYgon

polygorr is drawn 1nd some

Comparecl to ttre histograrn, some areas are cut of when the fieqlency
area of the histogram because
extra are cnclosed. 'fhe area of the iieciuency polygon is equzl to the
(shadeil areas) are equal at each stage'
the areas of the cut offlriangle and the adclitional trizrngle

17.3 lirequency cutrres

lines, this is
If a smooth, free hand cun'e is clrawn ratiler than jocing up the rnidpoitrts with straight
known as a fiequency cur\'c ancl i1 is cspecially uselul iftwo or rnore
fiequcncy distributions are to be
compared and contrasted.

1 .703
ICAI] STATTS'TICS

'l-ite arca gla fi-equency curve is the sarne as ttiat. olthe criginal histogram.

77.4 Cumul:rtivefrcrluencycurves
Tlrcse are olten called.ogit,es. The cumulative freclriencies are plotted against lhc upper cl:rss lirlits.

Exirmple 14 :

'fhey
The tollowing is the frecluency <iistribution of the rveights (to the nearest er:tm) of i 00 articles,
harre been grouped into interuals of 10 gratns

Clcrss inten'al Cla.;s limils Frccytencl Ctrnttt lative ./ret1u enc:y

treight (grants) No. arlicle.s

oo- 90 99.5* no< 1

t0- t9 I O9.5- 19.5 2 | +2:73

20- 29 I19.s- 29.s q 3 + 5: 18
30- 39 729.5- 39.5 11 8 -t- li : 19
40- 49 139.5- 49.5 2l 19 + 27 :4t)
50- 59 r49.5- 59.5 2A 40 + 20:60
60* 69 159.5-" 59.5 17 50 + 17 :77
70- 79 169.5- 19.5 t1 77 + 11 :88
rJo* 89 \19.5* 89.5 6 88 *- 6 :94
90- 99 189.s* 99.5 6 94+6:100

'lhe cumrilative liecluencies are plotted against the upper ciass limits because

tartj clc weigl"rs less than 109.5 g

7+2:3 articles weigh less than 119.5 g
I +2+5:8 artic.lcs rveigir less than 129.5 g

1+2+5+11:19 arricles weigh less tliari 139.5 g. etc.

7,704
 ICAB S'TATISTICS

Cuar. f
I00
90
tlo
10

60
50
/r0
l0
20
lo
o
99.5 1r9.1 I r39.: I !'9. 5 lrtrei ght s
to".5 i29.7 149.1 t6g_5 i89.5 (granrs)
Class t iui ts

Note that thc cutnullttive frequency is always plottecl at the uppernathcmutical class limit. is o,ly at
this stage that the cunrulative class iiecluency has been attaineci.

Nole : A cunrulative fiequcncy curv-e has the polnts joineo with one srnooth continuous curve. A
cumuiarive frcquency polygon has the points j oined by a series of staright line.

Sometimes it is nccessary to compare the ogives oftwo diffbrent distributi ons, but, unless the
total fiequencies of tire two distributions are the same, the above methotl does not yield much
useful informatiort For comparisons, it is better to plot cumulative percentage graphs, i. e.
the cumulative fiequencies are expressed as percent'-rges of the total fiequelcies.

Ogives can be used to estirnate the value of any item in the Cistrrbution by identifying the
itern on the vr:flical axis ancl reacling off the value on the horizontal axis.

The rnain u:le, hotvever, "will be met in the next leson rvhen meciians and quartiles are being
calculaled. 'lhe-se are dellncd ancl explairred elsewhere.

17.5 Z charts

A Z- chart consists of three curvcs drau'n on one set of zrxcs. T'he graph extencls over the single year
and irrcorporates :

1,705
 ICAB
SlHTISTICS

(a) Separate rnonthly figures.

(b) Cumulative monthly figules fbr the year.

(c) A moving annual total.

Observations

This curve takes is naule fiorrt its apperance

Aims of a Z-chtrrt

(a) (i) "l'o shorv monthry

sares figures and any seasonal fluctuations.

(ii) To show cumulative monthly figures

ancl indicate any substantial increases and
trends in
';
(iii) To show the totals of figures fbr the preceding ;.,':
l3 nronths and trenrls over the pastr tz
months.

Drawing aZ-chart

'n order to make tlre information clearer a double scalc is often used on the
vertical axis., o. scale is
':sed fbr cluwe (a) and a second scale for curves
(b) .rncl 1c;, since the;;r;;;;-;;r:;;vr sr q vv LrrL)s
r !y('-
- 'r rves are up to I 2 tinres rargcr
trralt thosc used for crruwing qa;

1"7t)6
ICAB STATISTICS

Iixample 15 :

The following table shows the monthly sales (inr 000) of Zlbra Ltd. for t9-4, and, l9-5,
AZ-chart be drawn'ofthis information for I 9-5.

Month Jan. Feb Mar. Apr. May. Jun.

19-4 ?0 20 25 18 t6 25
l9-s 18 21 26 i6 20 26

Month .Tul. Atrg. Sep. Oct. Nov. Dec.

t9-4 18 17 19 18 19 26
r9-5 a/
18 28 32 )J 41

Month Monthly sales Cunulative Nlor.ing

Monthly sales annual totll
19-5 Taka (Lacks) Taka (Lacks) -faka (I-acks)

Jan. 18 18+ 18 239

F'eb. 27 21 + l8: 39 21{',l
Mar. 26 39 + 26: 65 241
Apr. 16 65+16: 81 239
May. 20 81 + 20: 101 243
.[un. 26 101 + 26: 127 244
.Iul. 24 127 + 24: 151 250
Aug. 28 151 + 28: 179 261
Sep. 28 779 + 28: 2O7 270
Oct. 2O7 +32:
a^
)z 239 284
Nov. JJ 239 +33: 272 298
Dec. 41 272'+ 47 : 313 J tJ

Moving annual totals are easy to calculate, being simply the total of 12 month's figures

239 is the total of the 1 2 months from Feb. I 9-4 to Jan. 1 9-5 inclusive.
24o is the total of the 12 months from Mar. 19-4 to Feb. l9-5 inclusive.
241 is the total of the I 2 months from Apr. 1 g-4 to Mar. I 9-5 inclusive.

1,707
ICAB STATISTICS

They are called moving annual totals because you move on a month each time

:i20
(c)
,t80

:'4(J

,'()U

160

l,lo
to. L( 000)
.qo
40 Scr'l a
ao for (a
o
De<. Jair. Peb. tlar. Apr .lr.rl. Arrg,, lieP. oct. Nov. 0er.
I 9-4 r 9-5

-\11 points are plotted at the ord of their time intervales since they are totals rather
than averages.

Curve (a) starts at the Dec. 19-4 figure of 26.

r-urve (b) starts atZero.

-urve (c) starts at24l which is the total of sales up to the end of Dec.lg-4

:rnce the moving annual total is the total of the preceding l2 nronths, sales, the moving
annual total
'r Dec. i 9-5 must be the same as the cumulative monthly total up to Dec. 19-5 and the two curves
i i1l meet at this point.

-ne graph shows that there has been a considerable

increase is sales during the second half of I9-5

1-.6 Lorenz curves

-ile purpose of a Lorenz curve is to show graphically

the extent to which avariable is clistributed
'lughout the population, it gives a picture of the divergence from average. They are used to show
-;h factors as the distribution of wealth, the spread of examination marks, the efficiency of industry

1,708
I(AI} STATISTICS

t-'onstruction

In order to plot a Lorenz curve it is necessary to ctrlculate the cumulative percentages lbr the two
variablcs under consideration. These are then plotted on a graph and the line of equal distribrrtion is
drawn in.

71
I
I
I
lint o( e.qual I
distribtrliorr I
I
I
\,nl \ab\ \
t

Lorenz cufY(:

The line of equal distribution is a line drawn at 4J from the origin whose purposes is to show how
the graph would look if the variable was equally distributed through the Population. There is no
actunl measure of this equality except by noting the point curve which is furthest from the line.

flxample 16:

l'he tbllowing table shows the frequency distribution of wages at Ahmed Manufacturing Co :

Range No. of incomes total incomes

(Taka Per month) Taka (000.s)

Under 2,OOO 588 1,057

2,000 * 4,000 2,414 1,909
4,000 - 6,000 t,7t9 6,O23
6,000 - 10,000 210 1,773
10,000 - 12,oo0 13 143
over 12,000 6 90

4,94s 13,995

t,709
 ICAB
STATISTICS

- Lorenz curve will be <Irawn of this clata.

No. of incomes Total incomes (Taka 000)

588 11.9 11.9 1,o57 7.5 7.5

2,4L4 48.8 60.7 4,909 35.1 42.6
1,719 34.7 95.4 6,O23 43.O 85.6
270 4.2 99.6 1,773 12.7 98.3
IJ 0.3 99.9 143 1.0 99.3
6 0.1 100.0 90 0.7 100 0
4,950

loo
90

80

70
Tr-rt a I
i neome
60
(cum 1;
50

(o u,
JO

2A
_/,,'
,/.t'
IO
,/
lo. 20 30 qo 50 60 70 80 9a loo
l{unrbei of incotu:s (Cunr 'i')17

17.7 Semi-log graphs

These arE used when the rate of change in values is of interest, For Example,
this type of graph is
helpful where there is an expansion of trade generally
and a firm wishes to discover.

7,7tO
 ICAB STATISTICS

Whether they are experiencing the average rate of increase in their sales. They could plot no a ratio
graph the total sales per rnonth for the industry in which they are involved, and their own sales. If the
lines are parallel it means that their rate of progress is equal to the average for the industry. The slope
of such a curve indicates the rate at which the figures are increasing, therefore if the curve is a staight
line the rate of increase is constant. If on the other hand, the absolute increase is constant then the rate
of increase will become slower and the curve less steep.

Example 17:

Logs of Sales (taka 000) of companies

actuaI X and *. : l9-2 to l9-4
Actual sales (taka oO0) sales

1r0@,000 -t lFt--

l$o,oco

t0"{ uJ --?-- ra

l ro00 -- - a--

too. :rrrit

10
19-2 t9-t Le-4

The easiest method of plotting a ratio curv-e is to use semtlog graph paper, This is a special type of
graph paper and since it is extremely unlikely that the student will have any to hand it is necessary ii
consider an alternative method. This is illustrated in the next example.

flxzrmple 18 :

During a five year period 79-2 lo 19-6. the sales of a {irm engineers were as follwos :

l,7lr

\
ICAB
STATISTICS

Sales 4.O()0 | n,oilo 10,000

(Lacs ofTaka)

Aratio curve will be drawn of this data.

l-ogs of sales 3,30i o 3.6027

These are ibund fiom a book of logarithmic

tables
Sales (lacs of 'faka) I_oge of sales

lo, ooo i.a

E,ooo 3.9
6,ooo t.i
t.,
l.0oo l.s
t.t
3.4
2,ooo
,.1
1,7
r9-e l9-1 l9-tr l9-S Yesrs
t9-6

absolute increase fiorn year to year is identical,

i.e. 2,0o0 Lacs. However, the slope of the ratio
'' is bcing lcss steep becauselhe rate orincrease of,sarcs is decreasirg.

1,712
ICAB STATIS'TICS

2,000
Iirom 19-2 to 19-3 the increase is Lacs 2,000 i.e. looyo (
2p00 x 10OoZ )

2,000
F'rom 19-3 to 19-4 the increase is Lacs 2,000 i. e. 50% (
4,000
x 1 000% )

2,000
From 19-'4 to 19-5 the increase is Lacs 2,000 i.e.33.33Yo CO,OOO x 10OZo )

From 19-5 to 19-6 the increase is Lacs 2,000 i.e. 2s% (##x 100% )

17.8 Representation ofdata : conclustions

There are nulnerous ways of presenting statistcal data, ancl the best method to adopt will depend
who is to use the data and for what purpose.

Graphical methods such as histograms and frequency curves will be seen again later in the manua.

17.9 Self-:rsscssmentquestion

A fiequency distribution of a sample of incomes is as follows :

Taka Freequency

40- 80 7
80 - 100 16
100 - 120 28
120 - 130 2t
130 - 140 8
80

In the histogram of this data, the rectdngel for the Tk. 80-100 class has a height of 8 crn. What shoul
be the height of the rectangles tbr the following classes

(a) 1-k. 1O0- 120 ?

(b) Tk. 130- r40 ?

Solution:

(a) 41 crur.
(b) 8 cm.

1,713 (next page 2,000)

 ICAB
LEVEL I
STATISTICS

INTERMEDIATE

cosr ACcouNTING AND srATrsrrcs : voLUME 2- srATlsrrcs

LESSON 2

21. MEASURES OF CENTRAL TENDENCY Page

2.t INTRODIJCTION
21.2 2,100
CHOICE OF AI'ERAGE
2,100

22. ARITHMETIC MEAN

22.1 DEFINTTION
22.2 CALCULATIONFORUNGROUPED DATTA 2.200
22.3 EASATTMATTON OF MEAN FOR GROT'PED DATA 2,2110

22.4 ADVANTAGES AND DTSADVANTAGES OF TT{E MEAN 2.200

22.5 THEARITHMATI{ICMEAN: SUMMARY 2,2{t2

22.6 SELF ASSESSMENT QUESTIONS 2.202

2.202

23. MEADIAN

23.t DEFINATION
)1 ) CALCULATION FOR T.'NGROTJPED DATA 2.300

23.3 ESTIMATION OF MEDIAN FOR GROT'PED 2.300

DATA
23.4 ADVANTAGES AND DISADVANTAGES 2.30t
OF THE MEDIAN
23.5 SELF. ASSESSMENT QUESTION 2.302
2.302

24 MODE

24.1 DEFINITION
21.2 CALCULATION OF MODE FORGROUPED 2.400
DATA
24.3 ESTIMATION OF MODE FOR GROUPED 2,100
DATA
21.4 ADVANTAGES ANDDIS ADVANTAGES 2,40t
OFTFTE MODE
2,t.5 SELF - ASSESSMENT QUESTTON 2"403
2,403

2,000
 LEVEL 1 SIATISTICS

25. GEMOETRIC MEAN

25.1 DEFINITION 2,500

25.2 CALCULATIONFOR.I.'NGROI]PEDDATA 2,500
25.3 ADVANTAGES AND DISADVANTAGESOFTHE
GEOMETRIC MEAN 2,500
25.4 SELF ASSESSMENT QUESTION 2,501

26. ILLUSTRATION AND CONCLUSIONS

26.I ILLUSTRATION 2,600

26.2 MEASURES OF CENTRAL TENDENCY : CONCLUSIONS 2,602

2,001( 2,100)
ICAB STAT{STICS

2I. MEASTIRIIS OI.. C]ENT'IL'I,L 'TIINDEI{CY

21.1 lntroduction

There:rre fbur rneasurcs of central tendency, or average, that can be calculated fbr a scl of d:l1u. 'l'hc-rc
-:irc .

r) 'fhe arithrnetic ms:ui

b) 'fhe nredian

c) '['he rnodc

d) fhe -qeoflretric lnearr :

trach is a dilTerent rnethod of'choosing a singlc llumber to represent the items under consideriltilii

in any given situatic.n tl-re ciri:ice of-rivcrage rn,ill depcud or] thc ilatural ofthc ,lata and ilic purpcr,,: i].:i
x.hich the al'crge is bcing calciutcci.

21.2 Choicc ol' :rverge

ln the sections that ibllorv llie lbur,rieilsurfi arc exiu:rined in detiiil and the calculillions ibr bi:tii
groupcd and uns,roupc-d data arc cxpiriirecl. Siudcnis si:r-ruld bcar in mincl the ibliotvirrg point: .

a) The choice of iivcrge depends on the purpose fbr w'hich the average is rcquirecl

rb) All are correct measures; they are simply difltrent ways of analyzing the same data

ic) Measures {clr groupecl data are always estimates, beL:aLrse of-the iacompleteness of
the clata.

Study the techniques. then consider carefully the liist section ccmparing the difl'erent filoi{sit
il.veraSc.

li () i,rcxt p cc ),2(;i)
 ICAB
STATISTICS
22.,lIdI'rH,\,,IL,:[.ICM}-AN

-: :j.li i rc{iniririn

rlrr':
'li'iiilr;rr'iiu iilr'rlrir i:, illc best k.trrl, typc of iiver.age.
. .;,,.i l..r i!:; [(.:;:. ;. It is defi,cci AS the total value of the items
(,1 ilertt:,

72.2 {,'alcul:rtion fil_ rrngn;uErecl

datur

;issturting a set of'data consistlj

oi.n itcll x2' " ' x,,' thett the arithmetic
qivcrr try the {brrnrrla 's-xl'
. mean (denoted by x) is

it :', * *, * \.
,'f;*l
*.......... x

lvherc !x (sigma X) denotes the

sum of the inctividual values,

Iixamplc I:
fhe arithrnetic mean of 3, 6,
lA, 14117, i 9 an<J 22 is calculated
as follows :

X::- '
n

where x, - 3, X. = 6, etc.. ancl n

111!0+ 14+t7r- 19 +22

91
7
l3

22,3 Estimatirin uf nrr:rn {i_rr grcupetl data

For a groupcd frecluency
rJistributicrn it i
ulass interval' rhq rnicl-r"aluc- rlecicle' c)n one value that
cii'each best represents eacl
i-.rch class are sprc,tt "r.:::::::t;ir)'t:
e'cnrly abour ,r. ;;J;:'Je,tio,:rlly laken i.e. it is assumed thar
the irenrs in

,1fri\
 ICB
STAT'IS'I'ICS

The fbrrnula is

tl ."1 * t2'2 . t\3 * '''' fn*n

x:
tiol+f;+ +f
11

i. e.
--Itx

rvhcr9xl, x2 ,.... x,, cienote the mi&values of the class intervals

and {, f; q, denote the corresponding
tiequencies and;f is the total frecluency.

l-xam1rlc.2l

he {ollowing table shows the L-rcquency distribution

of (to the nearest gram) r 0o articres
, he arithmetis meiln is calculated
as fcrllows :

Class interval Mid-r,alue (x) Frequency (fl fx

weighl (grants)
No. of articles

100- I 09 I04,5 I I 04.5

ll0-119 114.5 2 229.O
l)o-129 121.5 5 622.5
130- I 39 134 5 ll 1,479.5
14A*149 144.5
2l 3,034 5
150.-159 154.5 20 3,090.0
160*169 164.5 tt 2,796.5
t70-179 174.5 t1 I ,91 9.5
180-189 I 85.5 6 1,1 07.0
190*199 194.5 6 1,t67.O

I00 15,550.0

Ifx
:f
e Xr : 104.5,1 114.5,
\ = 124.5 etc
l', :1, f,:5, Ir:5, ptc. and f-: 10o

) )(\1
 IC;\B STATISTICS

r"}ryI
I fl/r

: i55.-{ grr-lllts

2?":i A{il,:rntitges arul (lisiulvilntilges of thc meitn

Arlvantages l )isliir.'lr ntli::,us

{ri) It is casr, 1.t: l-ilrcie rslitrtci and c2icullte (a) lt ;rrav g,ive unduc r.,'ciglrt 1ri ,-:r
hc inllrrelrcecl li', rjx11'un)r i1;r:]\
(ir) .{i1 tl.re rjal;,i in the distriL-ruiitln i. e. high or low vllucs
is riscrj" anLl ,,;('r it can bc ciclennilrerci
rvittr ;rritirr:rctical l'recision. .- 7,rt:t,?-;: (h) The value of'litc avcraq-e tltay
l-iot corrcspond to a siir ll: itenr
(c') jt {,:ar1 be calci;iatcd rvhen nothing rn thc distriL-iLrtiorr.
l1rorc thirn thc trilai valuc or cluanl.rtv
ol'iterns ancl the n,.rinber oi'iicrrrs
l;rc l<ntrtrlt.

22.5 '!'irg arithmetic mean : Surnm;rrrt.

I-hc lrithrnctic mcan is the trost cornnrorll-v ris(i iiveragc artd is prel'erred in the stucly o1'a great
-i':lf ic1''- of social, t:conofi]ic attd businesli
da1,a. lt is tirc avcrage ol everyday use. It is w,j dejr
;.trldc:t-stood and consttrntly uscd. In everyday iilc we comL- ircr()ss cxprt:ssi\)11s sucir as averag.
i'1",,;tr'. . averirlc pricc- ltvcnlgc inr1r611s. avcrilsc e()t'lsun)l)liorr. cte . ln ull strclr cttscs tltc lr\.crli
!c usL..
i:. Lirc;tritlltnctic tncatt. Tho meart is also rlsed ari an ilid in lurther statistrcal ilnaiysis. It is arithnretr,
irii.rilll. 'i'ltc ineltn is alstl used as an aid in lurlirer strtistictrl analysis. It is used in stnothjng tinte seric.
i;r,'tilc trictltod *.rf'tloving avsragcs. The nrean has extensivc use in the cor-nl:utlli9n of ipde...
;i lt ru btrs,

lll slitlrl. tire arillinrctic tlcltn is thc pref'errecl irvcragc in all circumsia[ces uniess thcre is speci-
rcas()rl ti choosc a:ry olhcr t1,1re of'average.

?2.6 Scll'Asscssmenfqucstion

Calcrriatc thc urilhmctic rlcan fx .r of'rhe icililrvirtrl data :

) io)
ICAB S'I]4TISTIC5

4. L). i ,5. 7. 6. 6. 8. 7. 4. 3

Solution :

\-v 56
- :6
n -l1

22()3 (ttcxL plgc 2.-i(iO)

ICAB STATISTICS

23, MIIDIAN
23.1 Dclinition

The rnedian is the value of the nricldle item in a distributiorl orlce al1 lhe items have besn arraneed in
ordcr of uragniludc

23.2 Calculation lbr ungroupcd dat:r

Once the itcms have been arranged in or:dor starting with erther the l;rrgest or smallesl, then :

(a) ' It'the nurnber of items is od,l, ttre ntcdian is sirrrply the vaiuc ol thc rniddlc .itern

((b) Iiowever, if the nlrmber of iterns is even, the nedian is thc arithnrctic rnean of tlrc two rnldcllo
items.

Ilxam;rle 3 :

The medi:rn of 3, 6, 1 0, 14, 77, 19, and 22 is 14 since this is the arithrnetic mean of tl-re two rn iddle
item.

'l'herelore. mcdian : 14.

Exlmplc 4 :

The median of 3, 6, l(),74,17,19,22 a:nd 25 is found by taking the arithnretic mean o['14 arrd 17.
,;

'I'herefbrc,
l4+17
median:
?

: 15.5

lfithcre are n items in the distribution :

n+7
*-
the median is the value of the th item.
2

23:3 [Estimation of metlian lbr groupecl data

When data has been categorized into classes, eacir containing a range oI'v:rlues, then :

the meclian is the value oi'1he { t}r'itcrrr.

2

2,301)
ICAB
STATISTICS

Tltis uan be lbturcl as foliows

The value of thE micicJle item reacl offthe horizontal axis :

Cum. (.

ll /
t- -
---

Value of vrriablr
where n is the lotar fiequency €f) ancl Ivr is the. mediarr value.

l"xamplc 5:

Lisirrg the sarne data as in Example 2. the median is cstirnaled

fiour the cumulative frequency graph:

tiuar. i.

lilu

s0
70
6')
50
4tt
3r)

20
tu
()
veighr
99 5 109.5 129. 5 149.5i 869,5 i r]9 5 ( grarns )
119.5 l ]9.5
I
a

I
159.s t?9.5 ! t.|, 1 .,
{l l,rlss I irui r:i ,
H

Iie rncdian (M) is 153 5 qrarns.

2,301
 S'I'ATISTICS
iC,\B

23.,1 Atlvantage ilrtl {.lisa(lvirnt2rgcs (}f tlle Iilcdiirrl

Advantages Disirdvantagcs

It ;s sitlple trl urt.lcrstan'l If there a f'ew' iterns. it maY not

be truly relrre's erltirtive.
it is nr.r1. lii-{'ec{cc1 b1' extretne
val riei ,rj'the variablc, It is trnsuituhlc t'or usc itt
Fttrlltcr calculttlitrns
It cen i;e obtaincd evell wllcn
ilrc r uitrc> rrl tltc c\tl'clnc itctlls D:rta has to bc arrangcd itt
arc n()i l<iiown. lr is unal}'ected order ctf size w'hich is a tcdious
b1, urrcclual cl.ass irrtervals cr operation.
open-cncled (.)lasses.

23.5 Scll-assessmcnt(Iucstion

Finii tlte trtccliart o1-the dala ill scction 2?'5'

Solution:

Mu'diul : ('th ltcm

: (when clata ltas buen arratrged in orclcr of size)

;),'302 illc.:at p,il:c ?.. )- '

iCA$ ',l...h'i'-L:i'i !, 'j

21. N,IODE

24.1 l)efinition

Ihe mode is the vuluc that occurs nlost fiequently errlongst ail liic i.terns r;i t-hL iirsili br-ilioli. \i,,i:i::r
Jealing with data groupal ini.o class irttenals ii is risual to ret"er t.o the rrroilr:l c.ir.rss.

\ote that it is not unusual to havc trvo (or rnore) rnodal values cr r:lusscs.

24.2 Czrlcul:rtion Ibr ungroupecl data

The mode ctrn usually be determined by observation and no rc:Li calcui;rtion as such rs ll€ccrssar:r'.

I{owever, it is possible for a distributicln to have rnore ttran one n}cdi: cr. indced. nr r:ri.rdc iil ili I

Exerm;rle 6 :

Considering the data 3, 6, 10, 1 4, 17, 79 and 22 (used in l-rxarr.rpli;s ;.til -tr), cach vaine oc(Lrrs lirc(:
lrnd only once so thcre is a modal value.

lix;rrn;rle 7 :

1.7 bu'ys were asked r,vhal sizcr siroes llte1, rvcrc 1yr,i*tr-1i... iir,; iitll*ro..ing il;:iirrhuti:-;r: y.esLilir-.j. :

5.7; , {1.6, i ,5 . . (-. 5. t,. i- ',r.

i , , 7, arrd j occur rnorc.

.r

i occurs lbrir tirnes and 6 occurs four trrnes.

l-hc modal virlues are therelbre 5 ancl 6.

Exitmlllc 8:

An tntcrvierver called at tetr hirttses and errrlirired to itriw'lllatiy ci;iirlrri', -;:hc-rr:

as ",vr:lrl iri.;.,.:ir flrrirri..
The lirIlow'ing clata resulterl.

(,), ,+, i , 2, 2. O. 1. 2, 3, Z

ancl 4 occur oncc.

S. ? 40()
 ICAB
STATISTICS

0 and I
occur tyrice
2 occurs four times.

The rnodal rralue is thercfore 2

24.3 Estimation of mode lbr grouped tlata

In a grouped frequency distribulion thr-: rroclal class is thc class with the largest {tecluency.

fhe rirode cail be estimatcd frorn a histoErant :

I-lavirlg located tlte moclal class it is necessary .o

clrarv is thc-- clottecl lines shown in the lollowine
diagram. "

IvI: modal value

of the variable

variable

Class inlerval Class limits Frequency (f)

I()il .. j irtj , i.;L;:
-\
li0- i i!] , i::-) r- -. - 9.--
'
1

2
I )/ t:.\i r; ..1, i r1l.5
r

5
ili) - i39 i?9 s - i39.5 11
I40 - 14c.r
tr50- r59
139 5 - 149.5 27
149.5 - 159.5 20
160 - l6t) 159 5 - 169.5 17
170 -- 179 1a-rtl.5 - 179.5 1i
180 - 189
1c)o* i 9r)
171j - 189.5
5 6
i 8e.5 - 199.5 6

2,40I

L
.CAB
STATISTICS

'.
he modal class in 1 3 9. 5 - 1 49. 5

lode :Lm* 'ro ltrn L t)

?lm (1m-1
- ' tn +f )
,.m :139.5
1]i :149.5 - 139.5
: lt)
t- 1 :11
:27
--.- i :20
t0r2 l il) _
cdc : r]v.5 -r -_=----
42-(r1+20)

139.5 + 9.1
148.6 grams

mple 9 :

'ing ttre d,ta irr example 2, tire l,ocle is estimated {ionr a histogr.rn
r reclucnct'
I,'requency

)t

20
l,l
16

r{
1T

t0
I

4
n
I

s
99.5 1CI9 . l?9.5 ll**"si ii:3"$ ie9"5
-1
lJ* ighr tgrael6,
tl l39.: I rr& ": .1a
99.3
i'r ;i',;; lirnirg
, t j .,

2.4V-
 STATISTICS
{CAB

'l he rnoclr r.i-4t l:, i:tr8.i gt'rtttls (;'tllproximatcly)

reall-v liecessall to drarv ti

Jr: ,.rrcii--r 1..., LrriTirrlitic
r;he rni-r1ie graphicall3' (irs ln [-"xaurtr-iii: 9) it is only
e lasses l-llill/evcr' rt is
usuai io drawthe contpl*te hisl'ogranr'
u:",iJii1 cilrss t:lirj. lilc t'!\/(') li'j.t'iinii'lg

alr{1 {1;s}ii(}vnntltg*s *t motle

24"4 Adv;1nr:ii"icii
jil br:'tir hrusincss ancl governillenl'
;hi iltilLii:-i;,i-!'i;.iaiir' nas nlay usi'ls

knor.v the modal siz-e

!,rtrexnrlple,.,t,henplanninganewhousir;gest.atethcarchiteclilc(Jclsl.t)
ril,',1ilr; ic ixclc:r 1rl $1: ahle tr> r-icsigrl suitahle houses'

Diszrdvantzrges
,&clvantages

(a) Tirere ma;'be n'ioclal value or

(a) il is r:li ,\' tlnilcril;.iit,l
nrorc {hart L)ne lnay exist'

(b) l1- r:,: trot affectccl b\'' extremc

(b) Data has to be arranged to
\ i)ril!
asoertain which valtte occl-lrs
most 1.iec1uent1Y and this can bc
ii ciin i;c uillcr-ria.l;d c'"'ctr il ncit
tcdious.
irll the v;rincs irr thc tirslribution
are l'-rlor,vit.
(c) Il is not srlitable for 1-urther
calculirtiolts.
[t catr be tlrs va]ire of an eu1[al
ilq t')r ill l!ia (ii\irlllttli()!l

7.4.5 SeEf-assessmentquestion

Find tire rtlode for the data in section 22"5.

a

Solution

7 (occurs three times)

2.4(i3 (ucxt Page 2,500)

 ICAB STATISTICS

25. GEOMETITIC IVIEAN

e 25.1 Delinition
'Ihis average is used less than the other three.

It is delined :rs the root of the product of the values.

It is usually only oaiculated for a set of ungrouped data and not tbr a frecluency distribution

25.2 Calculzrtion ftrr ungrou;red data

Ila set of data consists of n items, >I xz x: ... x,. tiren the geornetric mean is given by the {brmula .

Geometric lnean :J *, .x x, x x3 ....... X X,,

In ordcr to fincl the ntl-r rlrot o1'this product it rs nccessary to use

loga.rithm tables far thc calculation. or a sophisticated calculator

Ilxamplc 12 :

The geometric mcan of the data 3, 6, 10, 14, 17,19:ind 22 is calculatjon as foilows :

( icurnclrie *",,n :.
',/i7 r, I ro
'?
: 11 (to nearestwhole number), using log tables

25.3 Atlvzrntagcs and tliszrdr.itntages of the geometric meitn

'i'ire georrtetric rnean is Lised rnainl-v whcre changes in the rate of growth are of interest. For this
rcasilit it is oiten used in reiation to index lnrnbcr wherc changes in priccs:,rrc calcullted and
ave raged {lrr B pcrccntage basis of the prcvious y'cirr.

2,500
ICAB STATISTICS

Advantages Disadvantages

(a) A11 the data is used and it can (a) It is diflicult to understand.
be calculated with arithmetic
precision providing all the
cluestions are greater than zero
in value. (b) It is impossible to usc whcn
any item has a zero or negative va.lu
(b) It can be used to indicate a
rate of change.
(c) It can be cluite d-iificult to
(c) Extreme values have less effect calculate.
on it than on the arithmetic
lnean. (d) The average may not correspond
to any actuel value in the distribution

25.4 Self-assessmentquestion

For the data is section 22.5 show how the geonrelric mean would be caiculate d. (.Do not carry out the
calculation.)

Solution:

vt/
I
: 5,717.

2,501 (next page 2,600)

 TCAB
STATISTICS
t.

26. ILLUSTRATIONANDCOI\CL,T]SION
26.1 lllustr:rtion
The tnonthllz salaiies of I00 uren employecl in an oflice have the following distdbution :

\Veekly wage (Taka)

No. ofmen
Exceeding Not exceeding

90 110 18
110 150 42
1s0 190 22
190 230 8
230 270 5
270 31r) -)
3to 390 Z

Yon are recluircd tcl :

(a) I)raw a histograr:t rrf the data.

(b) Calculated 1he rnean, nteclian and modc an,l then choose tile average salary
wtrich would be
most appropriate if you werc acivisirrg :

(i) :\ potentisi crlpkryec.

(ii) fur crnplo.,,cr negotiating r.vith; tracltr union over a \&,agc clainr.
irii) A lraele unio, negotiatione rvith iin enrplrycr over a w*ge claiur

ln each case explain why the particular average is chosen

Sotrution"

'fhc rrtclhorl of"s<-.lvirrg j;c r;,"i1L:cr,i r,r..r li

tllis l-:111b1€r,r) Lt.,!1 l.tr.i.icq of stcps

Stcp I : Delennine the class lilrrits

Step : ' Note thc range of'cach class.
Step 3 : I)etertnine rhe heights for clratu.tng thc histogram.

2,600
ICAB S]AT[ST'ICS'

Step 4: Draw the histogram (for a 'picture' of the distribution).

Step 5: Calculate the mean, rnedian and mode using the formulae.
Step 6: Choose the most appropriate average ac rrdng to each of the following criteria.

(1) A potential employee would want a typicai salary.

(2) An employer would wish to make the average rise as low as possible
(3) A trade union would wish to make the average rise as high as possible.

Weekly salary Il-ange I{eight x f C':rr. l 1k

Taka

90 - 110 20 18 100 18 l8 1,801)

4212:21 42 60 5,460
110 - 150 40 130
150 - 190 40 2212: II 170: a 22 82 3.710
790 - 230 40 4 2la 8 90 1,680

230 * 270 40 5t2 :-:1 251) 5 9-< I ?<(l

)-

270 - 310 40 312 -t- 29iJ .:) 9B 870

)

310- 390 80 !/+

I
3 5r) 2 100 f {)ii
:

Totrls i 0L) 15,500

(a) Histogram

22
?.0

IB
l6
l4
L2

lo
I
6
q
-J

o Ii;laries (f)
so ilc 15CI ;iu .,tu
t /1

2.r01
 ICAB STATISTICS

(b) Calculation of the arithmetic mean :

2. fx
Using1:
tr

15,500
100
Tk. 155.00

Calculation of the mediam :

The mediarn is class is 110-15O

From the cumulative frequency distribution the median is estimated at Tk. 140.50 calculation of the
mode:
\
/ ff,e nrodal class is I l0- l5o
From the histogram thc mode is estimated as Tk. 131. SO

Conclusions:

i) The median is the average that would be chosen by a potential employee because it is the
salary earned by a typical employee. Thus, a new entrant could regard the median salary as his
likely expectation.

ii) The mean would be chosen by management because this has the highest value and hence is a
good basis from which management can negotiate in order to keep the salary increases as
possible.

iii) The mode would be the average used by a trade union because this has the lowest value and
will best serve to illustrate the trade union's case in negotiating the maximum possible rise tbr
their members.

16.2 Measures of central tendcncy : conclusions

:rour measures of central tenclercy have been discussed. As the above example shows, each one has
-;rfirin situations in which it is most relevant, and so a knowledge of each of the fbur is necessary fbr
'
'e studenl.

2,6A2 (next page 3,00O)

ICAB LEVET, I STATISTICS

INTERMEDIATE

COST ACCOUNTING AND STATISTICS: VOLUME 2 - STATISTICS

LESSON 3

31. MEASURf,S OF I}ISPERSION Page

3].I. INTRODUCTION 3.100

31.2 TYPES OF MEASURE OF DISPERSION 3,100

32. RANGE

32.1 DEFIMTION 3,200

32.2 CALCULATION FOR UNGROI]PED DATA 3,200

32.3 ADVANTAGES AND DISADVANTAGES OF TFIE RANGE 3,204

32.+ SELF-ASSESSMENT QUESTIONS 3,20t)

33. SEMI-INTEROUARTILE RANGE

33. I DEFINITION 3,300

33.2 CALCULATION FOR LINGROUPED DATA 3,300

JJ..1 CALCULATION FOR A FREQIIENCY DISTRIBUTION 3,301

33.4 ADVANTAGES AND DISADVANTAGES OF T}IE

SEMI.INTERQUARTILE RANGE 3,303

:i3.5 DECILES AND PERCENTILES 3,303

33.6 SELF-ASSESSMENT QUESTION 3,303

3{. MEAN DEVIATION

34. I DEFINITION 3,400

34.2 C ALCUL.{TION FOR IJNGROUPED DATA 3,40()

34.3 CALCULATION FOR A FREQUENCY DISTRIBUTION 3.401

34.4 SELF-ASSESSMENT QUESTION 3.402

3 Ofi)
 LEVEL 1 SIATISTICS
ICAB

35. STANDARD DEVIATION

3,500
35"I. DEFINITION
3,500
35.2 CALCI,'LATIONFORI.'NGROUPEDDAtrA
3,501
35.3 CALCLTLATION FOR A FREQUENCY DISTRIBUTION
35.4 ADVANTAGES AND DISAVANTAGES OF THE
3,502
STANDARD DEVIATION
3,502
35.5 VARIANCE
3,504
35.6 SUMMARY
3,404
3s.7 SELF-ASSESSMENT QT ESTION

36. SYMMETRY ANII SKEWNESS

3,600
36. I INTRODUCTION
3,600
36.2 TYPES OF DISTRIBt.]'TTON
3,602
36.3 RELATIONSHIPS BETWEEN SKEWNESS AND AVERAGES
3,602
36.4 PEARSOMAN MEASURE OF SKEWNESS
3,602
36.5 SELF-ASSESSMENT QUESTION

3,001 (next Page 3,100)

 ICAI} S'I'ATISlTICS

31. JVIIIASIIITES OF DISPERSION

j1.I Introduction

.\'hen coryrparing sets of data it is useful to have a second figure (apart iiom an average) ihtl
:.present the scatter or spread of the items of a distribution. This figure is knou,-rr as the rrreasure o{'
:ispersion.

itudents should note that within the jargon of statistics, measures of averages dispe::sion and so rtr:.
:re after ref-erred to as the par.tmeters of a clistribution.

11.2 lypes of measure of dispersion

irere are four such rneasures that can be calculatecl fbr a sct data. Tlr.ey are

(a) fhc r'ange commonlv used lilr

(b) The scrni-interquartil e range presentiirg d::.1.a
(c) The ntean deviation (of little practical value to non-stalisticians

(d) The standard deviation

: ach is a different rnethod oI'choosing a single nunrber tcr measure the spreal clf the iterns. Of thern
,1 r is boxed beca"use it is much the rnost irtrpor.tant,

3"1{)il::r:_r;rt .:ltgrj 3 200)

ICAB STATISTICS

32. RANGE

32.1 f)efinition

This is by far the siamplestmeasure of dispersion and isljust the difference between the extreme
values of the distribution,)

32.2 Calculation for ungrouped data

Range : Highest value-Lowest value

Example I:
The range of'values for the 'ollowing data-- 3, 5, 8, 11 and I }-is obviously I 0, since the highest and
lowestvalues are 13 and 3 respectively.

32.3 Advantages and disadvantages of the range

Since this measure yields no information about the dispersion between the highest and lowest values
it is of very little practical use and is rarely calculated for a frequency distribution.

Advantages Disadvantage

(a) It is simple to calculate. (a) It can bevery misleading if the

data contains extreme values.
(b) It is very simple to,understand
(d) Only two values are used from
* (c) It is used as measure of dispersion the distribution.
in cluality control work,

32.4 SeIf assessment question

Calculate the range of the following data :

9, 6, 8, 2, 4, 7, 3.

(Soltrtion : 7.)

3,2OO (next page 3,300)

ICAB STATISTICS

33. SEMI-INTERQUARTILERANGE
33.1 Definition

The medi{divides a distribution into two since it is rhe vatue of the middle irem.
"qru}frut "s
Similarly. th{Ouartiles divide the distribution into four equal part* Once the data has been arranged
in order of magnitude the lower quartile Q, is the value of ttre variable onequarter of the way along
the distribution the middle quartile Q, is the same as the median, being the value two-quarters or
half-way along the distributiort, and the upper quartile Q, is the value three-quarters of the way
along the distribution.

The semi-interquartile range (or quarlile deviation) ls half the difference between the upper and
lower quartiles.

33.2 Calculation for ungroutrrecl data

Q, is the value of the l/4 (n + I )th item

Q., is the value ol Lhe 3/41n + 1)th irem
Semi-interquarti [e range :j].: 3,

Example 2 :

Considering the set of data - 3. 5, 8, 1I and t 3 - the semi-interquartile range is calculated as lollows:

n : 5 .'. Q, is the value of the l/4 6+t 1- I I th item

i. e. taking the arithmetic mean of the 1st and 2nd item

3+5

Also Q. is the value of the 3/4 (5+1; +| th item.

i. e. takingrthe arithmetic mean of the 4th and 5th items.

11+ 13
Q3 :12
2

3,300
 ICAB STATISTrcS

12-4
,'. semi-intcrquarLile rangc : ='
,
33.3 Calculation for a frequency distribution

When <lata has been classifred into intervals, the quartiles are calculated as
following :

Q, is the value of the 1/4nth item

Q. is the value ol'the 3r'4ntl-i itsm
Scmi-interqt,atlilc rllllgc : Q. - Qi

The cluartile values can be estimated fiom a cumulative frequency graph

Q, - vaiue of tirst
quartile
n

Q., - value of third

-tr-:- Jtr
.,t 4
qi,rertile

n
l
1
-2
I
I
n
,i
a

variaL:le

I-Iaving determined values then

Semi-interquartile range : 3l_4,,

1

3,3r) I
ICAI] STATISTICS

Flxarnple 3 :

-fhe lbllowing table shgw.rs the frequency distribution of the w'eights of 80 students.

Weight Frecluency (fl Cu mu I atit, e lfre c1 u e nc y

(stanes)

7.5 - 8.5 4 4

8.5 - 9.5 10 74

9.5- i0.5 l4 28

10.s - 11.5 22 50

I1.5 - i2 5 lo 66

12.5 - 73.5 12 78
13.5 - 14 5 2 80

The quartiles are estimated from a cumulative frequency curve.

Q,: o'os
Q.:12.1 J -1r I L
 ICAB
STATISTICS

12'1- 9 '95
Semi-irrterquartile r:inge:
2

2.t5
2
: 1.O75
: 1.1 stones (to same degree of accuracy,

33.5 Advantages and disadvantages of the semi-interquartire range

Advantages I)isadvantages
(a) It is simple to understand. (a)It dose not take all the values
into account.
(b) It is not affected by extreme
values. (d) Data may have to be arranged
in order of size
(c) lt can be obLained even when
the values of the extreme
items are not known.

33.5 f)ecilcs and pcrcentiles

Just as the cluartiles divide the distribution into fbur equal parts
so rhe deciles divide it into ten equal
parts and the percentiles into a hundred equal part's. rrr"**
are usually estimated frrxn a
frequency graph, ".r*.,rui*"
33.6 Self-zrssessmentquestion
.:z 6= 4 , '2,tl ,7-3
tror the data in 32.4 calculate the semi-interquartile range.

Solution:

Qr: I/4 (7 + 1)th item

:B
Qr: 3/+ (7 + 1)th item
:8
Qt-Q, : -'"./\
1

3.303 (next page 3,400)

 Ir,_'.\B
STATISTICS

-r-1. M}]AItiDE\,TAT'I()N
31.1 Definitinn

iit- tncarl clerriation gires the average (arithmctic

rnean) o1.all tlre deviations o{.the items fronr
r:riltrrletic illean of'*re clistribution, which must first thc
bc calculated. The nrearr clevi'tr.oir is rarelv
-.ilcuiated in practices

-i{.? (--'atculatiorr lor ungroupeil d:rta

.-ssurning a set of data consisting of n iterns

s qiven by the lbrmula 5, 5, x,r . x,, and with mean fthetr the mean deviation
:

\'{ean deviation: (t --x) + (x, _ x) + (a _ *) + ..... +(4, _ x)

n

Meandeviation:Z(x_1) Where x - f is the clifference betr.veen

n each item and the mean, ( x_ f is the rnodu_
)
lus of that difference, i.e. the result is treated
aspositive even difference, i. e if x_E is a
ncgative numbcr.
Example 4 :

To calculate e the mean deviatiorr of 3, 5, g,

11 and it is ftrst necessary to calculatc the mean.

5--
Mezrn x:
;
i+5+tt+11+ll
5

40
-.-:8
5
". x *
f:3-8, _s-U, I t-8, t3*0
: *5, j. 0, r-1. -i-_5.
(x-f1 --5.3.0,j.-5.
I {r-f l:S-if +-0+3+5: j6
.. i\,1ean deviatiou :I(x-.i)
n

Iti
-5

- i.z
3,400
I

ICAB STA'I]ISTICS

34.3 (.hlculation lbr a li"equency distrihuti<ln

For a lictlueney distribrrlion the iorrnula bccolncs :

Mean dcviatiol-. t (x, -x) +1. (x, -x; +.l", (X3 * X)-+ +{,(x,-I.1
-

i.e lv4carr rict,iatiorr =. If.( x * x; Where Xl, X2, *, . r,, denote the mid-values of
:f the classes and t, q, f, f, denote the corespondis
frequencies. Zf is the total frequent

Ilxarnple 5 :

lJsing the sanre data as in fixilmple 3 ttre mean cleviation is calculated as

l4/eights Midtalue Frequency -fx lr -x (xl ) f6-a)

(x) o
7.5 - 8.5 8 4 32 -:i 3 l2
i
E.5 - 9.s 9 10 90 a
2 20
j
I
9.5- 10.5 10 t4 140 _l l 14
10.5* 11 ,5
I 11 22 242 o 0 0
i 11,5 : i2.5 12 76 192 I I I6
72,5 * 13.5 13 12 156 2 2 24
13,5 - 14.s l4 2 28 ) 3 6

I-lsing the lbrmula I1}

": It'
tt80
_\-
80

... x: ll stones

lJsing thc lbnnlrla, rte:ul dcviatiorr

:22
tl( )

3,401
TCAB
s'fAT'ts't'rcs

31.4 Self-assessnrentquestion

Calcul:rtc the rnean deviation of the ltrllorving tlata

3,4, 6.8,9.

[Solution . Mean :6.

lvlean deviation : 3+2+0+2+3

*-l
-:l

ft
W

3,4O2 (next page 3.50O)

 ICAB STATIS'TICS

35. STANDARD DIIVIATION

35.1 Definition

'fhis is the rnost valuable and widely used measure of clispersion. However, it is also the rnost
complex to calculate and the rnost difficult to understand. It is defined as the square root ofthe mean
scluared deviations of the values. llhe actual method of calculation can be summarisecl as a series of
steps.

Step 1: Find the arithmetic mean ( E ) of fhe distribution.

Step 2: Find the deviations of all items from the arithrnetic mean E.

Step 3: Square these deviations.

Step 4: Add the squared deviations.

Step 5: Find the mean of these squared deviations.

Step 6: 'lake the square root of the mean of the squared derdtions.

25.2 Calculation for ungrouped data

,
The Formula for calculating the standard deviation (o) is as follows

o Irx-ii: Where n is thr: nurnbcr of items

Ex:,rrnplc (r :

I-rsing the set of datzr 3, 5, 8, I I and l3 the standard clcviation is calculateci as follows :

Step 1: tr: 8
Step 2: x- f:-5,-3, O, 3, 5
Step 3: (x - I )' : 25, 9, O. 9, 25
Step 4: :( x - x_lz : 25 +" 9+ 0 + 9 + 25 : 68
Step5; Irx*X)r: S:rtn
5-

3,500
 I

ICi\B STATIST'ICS

.'. A= 3.7

35.3 Calculation for a fiequency distritrutinn

lhe forrnula now becomes :

If(x-x)?

\n alternative {brm of this formula is o:

Example 7 :

Using the data of Example 3 the standard deviation will be calculated using the fonnula
:

Zr(x*x),
y+'

Weight Mid-t,alue x (-r * 7) (x - i)' f

(Stones)
J(x - 7)2

7.5 - 9.5 8 -J 9 4* JO
8.5 - 9.5 9 f t+ 10 40
9.5 - 10.5 t (l
-l 1 74 14
i0.5 - 11.5 11 0 0 22 o
1t.5 - 12.5 72 I I 16 16
12.5 * 13.5 t3 2 4 72 48
13.s - 74,s t4 ) 9 2 18

I'otals 80 772

Step 1: ii: li (this was calculated in Example 5)

Step 2: x - f, (see third column)
Step 3: ( x - I )2 (see fourth column)
f (x- X)2 (see sixth column)
Stcp4: If(x-X): :172
Srep5: :f(x-;), _172 =? r(
l' 90,

3,501
 ICAI] STATISTICS

Step 6: : Jt,. :7.47

;. o:1.47stones.
Note on study technique : most students will find it easier to learn the method then to memories
a
formula

35-4 Advantages and disadvantages ofthe standard deviation

Advsntqges Disqch,antages

(a) It is the most commonly used (a) The calculation complex.

Measure of clispersion in
statistical work

(b) The value of every item of data (b) It is diflicult for the layrnan to
is used. rinderstand.

(.s) it can give rnore than a proportionui

lveight to extren e rralues of
because squaring the deviations.

35.5 Variance

The variance is the square of the standard deviation.

Variance : I(x - i )z - for ungrouped data.

n
Variance : If (x - i ), - for frequency clistribution.
zf

Certain problems invoive rrrore than one clistribution As long as the distributions
are inclependent,
the following relationships can be used.

3 5(-)?
 STATIST'ICS
ICAB

The mean of. a sultl : the srim of the nleans

The variance o1 a suln : 1he sum of the variances

Example 8:

has to palis
Ah*rccl tlcl., an engineerin!l tlnn, prt'rciirces iin iletn rvhich, in the course C)I'assetnbly,
rvas kcp1. and the
tlrrough 3 r,vorkshops-A, 13 anrl C, A recorcl of thctinrcs taken in each workshol;
(a11 in hours)'
iollowi,,g stllnllary shols ttre means ancl statrclard dc'viatiorts of tirese ti[rcs

N'[ean ,9qndarcl deviation

Workshop,'\ 3.48 0.25

Workshop B 4.56 0.30
Workshop Ll 1.91 o.2a

ttl
Ass.nting that these limcs are inrlepenclenl, the trican ancl standard deviiltion of the titne takcn
contpletely assen'rble the itenl is ;

N,{ean (,{+B+C) : 3.48+21.56+ 1.9 I

: 9.')5 hours

\,ariarrcc (rvorkslroP A) : (0.25)r :0.0625

\,uriance (rvorksirop 13) =" 1O.3O)': -'0.0900

Variance (wttrkshoP C; - ii).20): : O.f)-X0o

.'. Varia.nce (A+-R1-(l ) ii. 0625+0. 0900 "1-0. 040il

{}.1925

S tairclarcl dcviatirln JTttzs =,o.14 hours

(A+-il+C)

3,5i)3
ICAB STATISl-ICS

11'tlre problern involves adi.ffbtence rather than a surn then

'l-hc nrctur ot-a dilfercrlcc: iilc dift'crcncc of rhc mclrns

'l-lrc varilrnce ol'.r diHL'rc,tce: thc sunr ot'the
vlrfianccs

These relationships become rnclrc importarrt jn laier studies

25.6 Summary

Ot :111 the measures of dispersion that have been calculated the standard deviatiorr is by far the rnost
irnportant. Its main usecl and appiications being in the field of more advanced statistics.

In geueral. the rlean and standard deviation are caiculated for a distribution, however the median and
semi-iflterquartile range ate sometimes used. T'hese areithe rnost'common "pairings" of average anci
d ispcrsion.

35.7 Self-assessmentquestion

Calculate the standard deviation for the datairr34.4

(-3)2+(*22+02+22+32
(sorution o

: rtn
:31)

3,504 (next page 3,600)

ICAB STATISTICS

36. SYMMI'TRYANDSKE\ilNESS
36.1 Introduction

If a frequency curve is drawn for a distribution then the position of the peak of the curve is very
rmportant. If the peak is in the centre of the distribution, then it is said to be symmetrical.

rf the peak of the curve lies to one side of the centre, the distribution is said to be skewed.

The further the peak lies from the centre, the greater is the degree of skewness of the distdbution.

36.2 Types of distrihution

(a) A symmetrical distritrution

variable
Mean
Median
Mode

Tlie peak of the frequency curve is in the centre-of the distribution. the curve.on either side of this
being the same shape, i. e. the curve is symmetrical about the dotted line.

1l- 3,600
 ICAI}
STAT'IST
-
(b) A Positrvely skew.ed distribution

I
I
I
I
I
I
I
I
I

N4ode Median Mearr variable

'l'llis occurs vn{retl the

rnaiority of the liequencies are located atthe lowervalues
of thevariable
pca,kofthecurVc1hcrelor1iestclt1rele11oftheCentreofthediStribution

,Ln cxarnple coulcl be s:rlary distribution

within a company.
(c.) z\ negatively shewcd tlistribution

i
I

I
I
-
I
I
I

I
:
I
:

lu{ean L,{eCian tr,fode variatrle

3"601
srt,ltB S'[A['I5:,-ilIi. ]S

t l:: 1he cxact oppositc of'(hl . it ol-.cijts r,trel: 1hr: il-rljcritv c,f ihe ii,c:rluetrrcirr rtrc irto;ricit ti. r.i.re

h i-.ntiln

lN -ranrple rvoriict tre :i.!_:l :ii Jr-:;tii;.

L' ftelationslai;i lr,; t'+*;ee"..r sli,lwt!{j$r, t:liri ;Is'r.:r;] 1:il

In a symmetr-ical distributx.in, the rlrean, meciian and mode rvill all have the same value, and are
!
I located at the same point on the fiequency curve.
I
I in a skewed di stribution, the mean wiil be drawn away from the mode, which is always fkrund at
the peak of the curve. Tle median lies between the mean and the mode.
I
1 Pearsonian measur.e of skervnees
l r"rr"" of skewness of a distribution, can be calculated using pearson's coefficient of skewness.

t,or*.,t, i, '

Skerv: 3 (mean*median)
staildEdGlari6n

ble. lfi
I lrmula gives the clirection oiskerv, (i. e. positivc or negative) as .,vell as tile magprlu6*. 'i.lre
h. rvill ahvays lie betrveen* I sincc ,

+ I indicates rnaxirnutr positivc skc.;r.

0 indicates symn1etry. i. e. no skerv

- 1 indicates maxirmrnt ilcg,itivcr skew

5 ielf-assessment qucstion

l llorl'iirg irave been calculated fur frecluency clistribr,rtir:n

u34
ur 32

d ite Pearson's coefficient of skewness.

\tl -:26
'12
: o.5

3.601 (ncxt page zl,tlr)())

ICAB LEVEL 1 STATISTICS

INTERMEDIATE

COST ACCOUNTINGAND STATISTICS : VOLUMD 2-STATISTICS

LESSON 4

Page
47. INDEXNUMBERS

4I.I INTRODUCTION 4,100

41.2 INDEXNUMBERS AND INFLATION ACCOUNTING 4,100

41.3 TYPES OF INDEXNUMBER 4,100

41.4 SIIVIPLE INDICES 4,101

4I,5 MULTI-ITEMINDICES 4,102

41.6 WEIGHTED AVERAGE OF PRICE RELATIVES 4,103

41.7 SELECTIONWEIG}TTS 4,104

41.8 LASPEYRE AND PAASCHE INDICES 4,106
41.9 COMPARISON OF LASPEYRE AND PAASC}IE INDICES 4,109
,11.10 CHAINBASE INDEXNTIMBERS 1,1 l0
41.1I REVISION OF INDICES 4,lll
41.12 OT}IERPROBLEMS IN CONSTRUCTING INDICES 4,112
41.13 OTHERINDICES 4,112
41.14 SELF-ASSESSMENTQUESTIONS 4,112

41. INDEX NUMBERS AND INFLATION

42.1 MEAST]RING CHANGES IN THE VALUE OF MONEY 4,200

42.2 GENERAL PRICE INDICES IN BANGLADESH 4,2A0

42.3 ADruSTMENTS OF HISTORICAL COST ACCOUNTS 4,20A

4,000 (next page 4,100)

,

;
\
i
 ICAB STATISTICS

4I.I INDI]XNIJMBERS

41.l Introduction

An index number is a techniclue for comparing, over tirre, changes in some property of a group of
items (price, quantity consumed etc.) by expressing the property each year as a Single number, of
index.

Examples o1. ildex nurnbers are fiequently seen in everyday life. The most well known is
probably
the indexof Retail Prices, Whichmeasures changes in theprices of goods and services suppliedto
rctail customers. This inclex is often thought of zrs a 'cost of living' in{ex, Index numlers may alsc-r
measure quantity changes (e. g. volurne of procluction oI'trade) or changes invalues (e.g' retail, sales,
value of exports).

t
Inflation has been a familiar feature of life for several years. It"relates to- evei-incibasinlged-prices
f paid over time for the same commodity. The cause of and the cure for inflation have been much
argued over by economists.

The accounting profession has now, after considerable debate ald several false starts, acknowledged
that the accounts of businesses are distorted when no allowances is made for the eff'ects of inflation.
The use of index lumbers if fundamental to the preparation of inflation-ad.justed accounts.

This is discussed later after consideration of thc various types of index numbem and their calculation.

\ 41.3 Types of index numtrcr'

I
The following types of index number will be considered.

(a) Simples indices

(b) Weighted indices

(c) Laspeyre indices

(d) Paasche indices

I
(e) Chain basc indices.

4,1 00
 IC.{R
STATISTICS

41.1 Simple indices

These are also called percentage relatives
and are based on a single item
Therc arc t\vo types :

(a) Price percentage relatives

(b) Quantitypercentagesrelatives
The formulae for calculating them are :

Simplepriceindex :a x too
Po

Simplc quantity index = 9rtnn

Qo

Wherc P,, is price at time 0

P, is price at time t
Qo is quantity at time O

Q, is quantity at time I

Note:
The concept of time O, time 1 and so on
is simply a scale counting frorn any given point
Thus, for example, if tlie scale started on
I Jan. l98O it would be as follows:
in time.

1 .Ian. 1 -Ian.
1 980 I Jan.
I 981 1982

Ti rne 0 -*l
T.irne 1 j.iurc 2
T-iinc 3
(base year)

4,101
ICAB STATISTICS

The starting-point is an arbitrary choice most convenient for the problem under consideration.

Ilxample I :

If a cornmodity cost Tk. 2.60 in 19-4 and 'l'k. 3.68 in 19-5, then the simple price index fbr 19-5 using
19-4 as base year (i. e. time 0), is .

Pr
Simple price index = rx10U
P6

3.68
=
2.60
-x100
= 141.5

This means that price has increased by 41 . 50% of its base year value, i. e. its 1 9-4 value

Example 2 :

6,500 items were sold in 19-8 compared with 6,000 in l9-7. Thus, the simple quantity inclex for
I 9-8 using I 9-7 as base year is :

Qr
Simple quantity index: -q. x 10O

6,500
: x lOO
b UUU

-
:,0,,

This means tl-rat quantity sold has incrcased by 8.37o of its 19-7 tigure.

41.5 Multi-iternindiccs
tlsuaily ltn inciex number is required to sho'"v the variation in a number of items at once rather thal
just orre as in Examples 1 and 2 above. The l{etail Price Index is such an inclex, and cc.rnsists of a list
';i'about 3 50 items as the price of bread, the cost of the watch repairs, car repairs ancl cinema tickets.

4,102
 ICAB STATISTICS

By using appropriate weights, price relatives can be combined to give a multi-item price index.

41.6 Weighted averages of price relatives

An index number based on price relatives compares the price of each item in one year
with the price of each item in the base year, expressing each as a percentages relati
and then finds the weighted average of the percentage relatives.

Example 3 :

From the following information, construct an index of the weighted average of prices relatives with
19-5 as the base year :

Price (Paisa)
Item
19-5 19-6 Weights
; f,
A 10 20 100
B 25 26 182
r C 35 33 732
,
i
D 72 13 13

427

Solution

Index ofweighted average of price relatives

I II'-P,D x 100 i'''ivJ'J

_s2.783.5
= = 123.6
Uw 42i --

where W : weighl, p, : prices in 19-6, e, : prices in 19-5

4,103
ICAB S'fATIST'ICS

Workings :

Price relative
1 1

p0 i 1)
100
D
Ws(r-x100)
p
p
o '(, p

Ir) 20 200.0 100 20,000.0

25 26 104.0 t82 18,928.0
35 57 94.3 l3z 12,447.6
12 73 108.3 13 l-407.9

427 52,783.5

Irv Ir" ft
p
x i0t)

41.7 Selectingweights
The w'eights applied to price relatives should, in general, reflect the amount spent or total value of
each itern purcirased, rrther then simply the quantities purchased (horvever standardised). The reason
is that this elirninates the effect of a relatively 1o'w-priced itern harring a very high price relative from
only a small price rise.

Examlrlc 4:

'lhe price of sugar and wheat, and the ailrount corrsumed is both years in as lbllows :

item I 9-5 1 9-6 Units consurned

price price (bottr years)
laka llaka
Sugar 2 -) 2
Wheat t5 l(r )
You are required to

(a) consttlrct a price relative index using

(i) quantity lveighls

(ii) value weights

,2^ 4,704
 53.,t ?.',f;Fi',5',{i-}'

I:-rl iii.j .,;lil.i-i-" '*.r:r:iltii.:"j l--1f-iijl.-l j'i;'iiiti!"c is t.llc lrir.'il* i.i:;e lili
-rl.ilii.ii;)';'"';l,!:

!ir. j r,;:.: i:;;

i,l

j '/-i.: 5irnl* i:r-i;slilTi !)i ; o11 1",ahie

t,.,t-5 el
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11' fiiil.i,{iI I i'i ;r L,t l1',. ."Ygi*i1{ \..\,eighI
i',"
ir'-ii!','; ri;il _t,
Wr, i== po x Q,r
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-f
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lilii 3::
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rh' I'h* llri fii31,'.hc l'ali-rc rveightri"i i]l/cr:-rllfr r.) i- .!if uc rc i,-iii1.,i,'r i:; ;

iit* grorc rc:3liitir: cttn br si-rcl^rli b_v- c l : ;,r i ii,;: r; irlj f .il rl i Lrlr il (i i t-r.{-i l. r i r{:

[1.'rn i:-rnl:nditL:r'* I 9*5 i::::.i ;ctr.riiltrt"* I 9'-r'i ?',' il;.irir:i;ri,:

'
t :! tii.l ,l :; l';ir

l-iiiga r :t tt : 1--i :i ( :ti ,,

\.Vlir;lt l. t l lri,:: rti)

'l-ri1.al burigi.;l. /\l .t :ir'1:,.

i:i' i i,,; p;:ii:u .

:i,ilj,ci:rirlr::iii_v" ir-,r tr.r:r.l r( i1'lhiii ilig iyslili:lu,j ;ir:i."i,,:i:r i:it ai.:ii-il

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I i I i,i 1q. ail1

i ;i t:.u,i,;:fl lt i i-,'c i-:ii t; i: itr ti.i:x .;r ; l t i.);l t.-:ai i,i r-r i.i. !
.,\.l r r ,:i;ri i'
ilf il":i:,r; ilri i.: i:ri,,t'ii,;ruI;lr tilII{':i"..!.itiri i-ri' i,:liiti.'i : :f;l i , i r': ,r;
' (.,r! i!iiir'!.. :,r: I ii'; r,r:JiiC ..r j iil;.1 i, :r I : r; :: : ;r ).-i i

irlv i.:;;,iti1r. Tiii: ii:ii!r ti)'i-iri i,r':4i1r)iir-.li1i;;:r: ii:ir; s

i:' i;icl:r::Sr:,.i dil:..i sh i:i i-l i l}i'r i. i i i;t:'- tl.ti s j :.
i-Si !.] (i
r'",':ii i:l;rr ii,.l reiiiiit-):i:.i1i;.-r i.!-r,*:jth;;:i 1ri-:[1{rrri.

.it 1 t :tt:t
 TC-i\B
S'I-{TIS'TIC]S

Given this assumption, a choice Of weights arises betrveen the cluantity purchascd
in the base year
and thc quantity purchased in the current year for which the index is
berng preparecl tsoth choices are
acceptable and both have their respective rnerits and demerits. The
resultant inclices are named after
their'invcntors'.

The Laspeyre index uscs base year quantities and compares the cosl
of'buying base year quarltitics at
current year prices and buying the 52ms quantities at base vear pri ccs.

'i-he paasche index uses cllrrent

year quantities and compares the cost of buying currcnt year
quantities at currcnt year prices with buying then at base year prices.

Formulae

(a)
I(R, xc1,,)xlo0
Laspeyre index:
(P. x c1'1

(using current year cltrantitics as wetglrts)

Z(p,xeu)x1oo
(t.,) Paashes index:
ip x c't,)

using current year quantities as r.vcights)

Emmlrlc 5 :

'l'he l-aspcyre and Paasche indices

will be carculatccr 1.or the lbllow,ing dala, using 19-4 as basc ycar.

19-4 19-5
tenr pricc (p,,; Quantity (q.) nri:il,' , Qtrurttin t<1, r

lk
:1'aka
I
9/pint 50,000 pinrs 16/pint 70,000 pinr
29/tb 3O,o(x) lbs 30/tb 40,000 tbs
42/tb 20,000 tbs 64/th 25,000 lbs
12/ll) 10,000 lbs 20/lb 8,000 lbs
84/lb 0,000 lbs 72/tb 2,500 lbs

4,707
 [[]^{B
STATISTICS

a) Laspeyre index

Item Weight (q) Price (pn) 'PoxQ,, Price (p,) PrxQo

Taka Taka Taka
\Iilk 50,000 I s 4,50,00t) I6 8,00,000
Rice 30.000 I 'tq 8,70,000 30 9,00,000
cil 20.000 I tt 8,40,000 64 12,80,000
Sugar 10,ooo I tz 1,20,o0() 20 2,I6,OOO
Wheat 3,0oo I s+ 2,52,OOO 72 2,l6,OOO

25,32,OO0 33,96,O00

-p, Qo
: vesterday's buying pattem at today's prices

:
-po Qo yesterday's buying pattern at yesterday,s prices

.
..rlex Ip, q^
x lO0
Ipo %

33,96,000
: ,53rryx loo

- 134.I

- he cost of buying 19-4 quantities at 19-5 prices shows

an increase of 34 1o/o over 19-4 costs.

Paasche index

Itern Weight (q,) Price (po) x

P,, Qo Price (p,) PrxQ,
Taka Taka Taka Taka

Mitk 70,000 1 6"30,000 76 11,20,00()

Rice 40,000 29 1,60,000
1 30 12,00.000
oil 25,000 42 11,50"000 64 16,00,000
Sugar 8,000 72 96,000 20 1,60,000
Wheat 2,OOO 84 2,10,000 72 1,80,000

3 1,46,000 42,60,ooo

4,I08
 ii..,.]i
5j'i:.{ i't5l,t{.ts
\-'n ,:
'"1f ii i,ir.l:l-.'r i-nii. ii:i: r,,rili..i.;i i:i t.;S
l. ii:irj ii i rti i )i:i l'.j::.

,' fi .lr)
--_r'i
I '- iO liity'r i-, r.1',i i i rr._,. ii. lle l i li.t i rt r-jii.ytS
!:_i
ll ri {.: d-:S

,-, I .!l
lndfx x _t ri,,
Y-n
.*.t. ,r-f
i! l

42.60,fJ{)i}
_l J .,ifr.i)()ii \ itii)

.- I 3 5.,1

'l'irc I9-5 i,cicx

sir.r.,l iir: lucrea:;e i:f 15.,t,..i:.,,ver b*ylrit j 'i-."1 rri:.:n!itic:r
at I !i-j. n,, it:,,.

11 ":) Crlmtrraris*n *f i,as1rr,.;:.rs: ll$d p;iisschc il:dices

Li a i:ericrd inilatrcn, i,hrrrc is il gclir:ral r'n*idii.c irr l:11;gr; In iriidilir,';:
changcs. ?'i:us. {iir exarlplc. in th{irii i.viri be reiirrivc
ihe I qi;i {),g pi::tr,' bec;:n'irc J'(ir:rlivL:l ,riuc
b ecanle relati rre! y cir
j1.'ilrlcre c*p(liisir.c urrr eic:ctrl* g{,icd:_i
eiiper.

'ihe efl'ccl oi thesc

rciatir,* elianges ivrll [)c li i.irlnl,int: i..i1i.;r) ,.1 ,](:usijn_lirllrr.r_r.
.l',','l tch i ng t ti rc} a ti rrr: l,v I e:s s tr,"ili.i i..()n:iurnuL
*.:<p ens i r,,e !r.,',ds' *' g f;:()'il inr",=e ti:i si]'raii ci.r:i al]a-i
.g{Io:.ls ouvirlg *lriie e_ici-:tric

index is *sscl it r''';ill &ril to tai<c

a-cc'urlt {}i't}e c}ra*glnu patii-:rJr
i.rdex tenirs to-{)1',crs1-ate tlic of il{:r1$r-riiript ifin ;\s a r*srrjr,
real ir,pac' r:J'ir;flui ion c, inili'iiiuars ir i .iispr.!r-.

{}n fire .t}:cr h'nd a P*asche i,,'lex j*r'ol'vcs

recalc,-ri:*i1'lg ii*r* fcr:
rcr ai}
riip|cr}t}ilirrl-r'r,r
Iri--.-c rrunihi.r ilf indiccs i}r.{r*s:aiinp, ,!Ir-,irr,q *i}ch
iii rlai niriirr- tixs is rrr:{ Il;.1t.:t it,.thic.
't'he relil{.jvr: m,*-rir.:; auir ijrrn:r-:rits c,i'irlrl
inijiccri iir* i;u,r.ririi;)risf{r bcii}*'\...

..i i r lal
 lti ii?:l'ts'f F;1'I {. t5

f*cfnljre t r t r: s' iIs a.a^f

'
!-xtp r:: s i w d i r. t: "*

1..;lsile1r-c inii{J:; Jl;:rschr: iitiie>;

\ r,l!-r1gg6;q **€::ir*-*L*s
l.,'irsii.lr to c:,ricr.Iii]tL" rvi:cll: ;t s*;ie s i.',f'--r.t:iirs ilrc L Sjnce crlrr'ofil vr::r;:.weiglrts lrc usr:r_1. jt rc,srilts
i:; t ir; :; cirl.rt,r;: r-i: r.i, siiri: c tr h c: ri r:u iinli r: et(ri- tr-r- iir iirr inder: iteini: hese:ri iln *rr: i:iirrcni 1liti-
r:irirns 1-he r;ii:re ibr;ill ylarS., ,-:. g,.19-7 inelc:x '.1..5i1, il' 1.1r; 15li rttirtitiii
'i il
*: ir .l Hi.radya$tilss
w,qir;ld bc c.riu:uliticd -' it
x ilIt cl
Wlieru: p? : pri**s in 1)-'7 anil f' pricr-s
J . "'VJiero s$rit-rs r:i';r,-cars is ilvtl-icci, lhe i:.i*rii.rrri
I- iru
oJ'c;llcrrl*lii:l is gre:rler ts hr:1.i1 liurn*tmtor enil
r ,-5.
d en o;rii n:i1 ril it r:er"l ciii c i i.l ii {i (li i ca*}r 1."ca r. c. g.;.,
iri 1!- I indt:x rvluid be c*l_rutratcd
- ,liai:ji yoar iti u series qt{'L,lli!-reyrer indi,;us i:-i
d i ri:e;t j v r.: 0n;1 ra.ra b l c r.vil.fi al I tr;r t: r.i o ils
_vcars ..,.r,,2
L t' '1

!rry*dy*elir.gss
;. ail
'- 'rt li
Whr:re p:'= pricr:s in 1'; -7, cF =, quarl-

lil.ics in t9.7 iinri 11,- pr.iccs in I r.-5.

l' iii' cr,J isad"",l u'r I rt gi: oi' ir s i lr,,: i..ls1 r-,rl-c
n; ;t i r

Ilr...,liir.';; is i.lilii tiri {.}ilt. cl Ca{c (;r:llsr.uu*tilri ?-. i:lach Pairsclie indcr in a serics is ttll-v t"iircctl-1,*
i:atlaril ltt:lr,' ht: irei;rg rrsui-i . lri i:rarriicc this r()tnpilrahle rr,iiii ihc irasc yeal (i. c.|9-7
i:i ilt,cr c{}iilc tr_v liririv i.iciiitr::i:,t rr:u,,ist*ri l:i' i-itcln'i t;,car ci.:r;ip;iristri r,,,.iih i !)-5, onl-v vrith
tii* ir;t:;,1: -.rii:;li l{l kCeil i1 rri: !c ila{e " I:lii ii;r> hase sc:rr i9-5) (hui,ser note bek:rv)
rr i,:t kr--s vcf'!J i c-r q.-1,,J1, i] r{)t il
ilil ri si-tr r ;.t i trl ils i i ir', *
pro:rsii::;ii:. ;?- ll'iie nl;rs',:lrt' irr,-ic:,t iiiti-r cr;iv i;e co,lstLuctcei rl
itil i.(! iliiirt iili;:til-.rur.irin ir; irVi,iila!.;lc. iil frac-
liei: " ti:is is vl.'r,v rirc- only (,nu nirli,ilniil stli-
ri..;i : r.:, i lt c .,:,viri;i r,r.Lr \l.i ue I n iJi:x r l i' i 1n ji, t-tlt i!1 {1 1
f
li:,,:-:l,r:-!.r .,r,,:i.r t-ti--riisirr_tl:i.i.-:ij tii; i,iiiisc]_r.t: lliiiu..-.,
a:ril iltis iri ltrl ltrltl.)iir 1-rr,,)iliii.rf.i_i.

+t (} Ch*ia hiisr-: inqlrrx nu

"t{ rm fu cr-s

::'ii'rt.,'. .r. i li i:r" i::il,l;":.

i . ".::rlt6lii: ; 4i

'. :iitr.,i',litte.r;.q,:t r-r:e-ci",'(:r;i il'!c 1(,liu1,'t,lnil ;iiill',luiiii [:lt-ti lire (lj'radios

sait-"

;1.1 I ll
 p.*|tu i
ICAB "1'::qt STATISTICS

19-1 -t'k. 1,000

19-2 1'k. I ,100
l9-3 Tk. 1,210
19-5 Tk. 1,464

Is it correct to say that sales were increasrng ?

Year Sales Chain base index

19-1 Tk. 1,000

1,000
l9-2 Tk. 1,100
1.000x100:11{)
1,210
19-3 Tk. 1.210 x100:110
1,100

i,331
r9-4 Tk. 331 x1O0:110
r,207

1,464
19-5 Tk. 1.464 x 100:110
1,331

Alth<lugh the sales of radios have increase<l each year, the inclex numbers have remainetl
static at I -
'fhcrelbre, in relatit)l to his {igr-rres for the previous year
his sales of radios weae remaining const -
rather then incre:rsing.

'lhe chain base is also a suitable index to

calculate if the weiglrts ascribed to the various items in ,._ ,
index zrre changing rapidly Over a periocl of- years this index would have rnodified
itself to ta. :
account of these changes whereas in ltxed Llase methocl alter a number of years
the whole ind:
would have to be re'ised to allow for the cha.ngcd rveighting.

41.11 Rcvision of indiczrs

ln order to avoid the worse problerns of Laspeyre inclices, it is normal to periodically revise
rL.
comrnodities and weights used as a basis for index calculation. In order to maintain
comparability tL:
new index is "linked" to the olcl series so as to establish one single index series
with periodic revisic
to the weights.

In using any index, consicleration shoulcl Lre giwen to the basis of revision, and
whether the curre:.
weights are appropriate. Thus, fbr example, the LrK cost of living Index (now
the Retail price Inde:;
was not revised liom 191 4 to 1947. 'fowards the cnd of periocl the index
was meaningless, ar:;
indecd this rvas used cleliberately by the IJK Government in the Second Wcrrld War
which tr,.
controlling the price of a fetv conrtnodities in the index was able to hold down the rate
ol.increase c
the itrdex and claim a much lower rate oI'inflation than was actually taking placc.

4,111
ICAB STA'TISTICS

Other problems is constructing indices

- here are other problems besides the selection of items and weights in constrttulii-rn an index

{a) Obtaining prices

rathcr
With many intermediate products used in industry, prices are the results of negotiation
be taken into
than a price list. Even for other products, there is the problem of discounts to
account in establishing prices tbr index calculation'

(b) Technical changes

Over tirne, most products are impfoved, and a direct price cOmparison ignores that
improvement. For example, the 1980 television is a colour set, the 1960 television would
have been black ancl white. 'llhe same problem exists with most products'

There are no simple ans\Mers to these problems what they do mean in totel is that index numbers
if
carefully constructedprovide valuable infornration. They certainly do not, howwer, provide any
absoltrte measure of price changes even in relation to a limited group of commodities.

-11.13 Other indices

Indices designed to compromise between the Paasche and Laspeyre indices have been developed
specifically:

(a) Edgeworth and Morshall's index

(b) Fisher's ideal index

It is not necessary for students to be able to compute these indices.

11.14 Self-Assessment questions

Price ancl quantity data have been collected fbr trvo items :

t3- 4,112
 STATISTTSS.,

.,, I i, .pftCe
., :. :; r'.; i l i rl'ii : qltantit : i:
Taka

Itern A 308
', , t . "r!r', ;li ]
Item lJ 18 13

,-,il::.: i..'rli: 'l r r:,:': -r

C*lEqJ+.!g,t pqrn g yqar 1O, as,bas oiye&rr,,.

(a) l'ricc relative for A

(b) Quantity relative 1br A
(c) I-aspeyre index nurnber
r: : l;{:,1:r i

(d) Paasche index numbcr.

' : i: '. '. i .i
.

; i,,.,,,,, :':riri,''.:i:"-,: .lir:', 'r,:' ,'': :i:i :i'.,r l ,,11i

2(t
(Solution a) "i .i:i'"'i"': j'-r'.',':
=xl00r*123
2J

,, :.t'li::.:i-.ii;lti;,::.'ri1:.:l:;i't:,,,:ii r ' - I,
] r: ' " li
b)
,..-',.t:i,. ,lU
; '{ 100 ..= -l;_
r+t-lt'
.:t ' ,, 'r r:'.1
','"'

, ilq4lt(ryro)
t't1 c) J-'l.i:
(25.r9) . (16110) :< 100 - 116.9 ,':;':i;,a,i tiili{l i
t,
!rr

. i :r:i;: lJii-,if,a;'l
g0r$ :.:::.l;;...,,,
d)
(25x8) + (19.110) x I O0 :116.2

:-, , ''1i,

i cl* l l,'!-.:f :-. e:11'. -li 1'ri:.: { i i-

ilr,r.i,:) li;.r, :,:,i', i

4,1 13 (next p4ge ,{,200)

 rcAhj ": i -' : :ll;: )6
STA'fISTICS

12. INDEX NUMBEITS AND INFLATION ;'{;'ii*; j .;'.:-:r::l1, }, r. i i.l

12.*i!1.';l{le4suiing.chtsng:intheVAIUdOfmOrtcy:,- ..., ii,i I r:::,":,;ri:. ri,.,:r':- .r,,.,i: ,::l

The examination of indices above has concentr:rted on the measurement

of price changes of
qpE;iif,ic gro,.lrp$, qf, gQrErnodities:: :Th'E:rnore' gernerad problen,.*.is
toi irreasurei the,rate,rjti inflation
,ilqelf,lhqchange.in-tthe,yalue,ofinoney:,.: ; ;r :r.irjr.,,:.,..: ,.,,,.,i r:,,ir1:,..,,..,j, i.;::i.,::; ..

,l ;1.,,-,, r' . ii;:.,'....i1' Lr,; ri-; il ,- : ,,. . r ;.i.. -, .;ir t, ".:.,:::i,

The LrK sandilands report. published in197i whicli dealt with thqwqakne$s€s;o-f. histofical cost
accounts in times of inflation, went so 1ar as to cloubt whether strch a measure was meaningtirl,
in
that it is merely an aggregation of iirdividual price changes. This,
howcver, secms a rather
extreme view' Never the less, the measurerxent o1'the general inflation
rate,(#rrdrlreooe the{ds-
cline in the purchasing power of rnoney) croes preseni problems.

ll{i:tt *tqt 9!, r,rsed which ar.e,;pfiicienlly widgly,!4sed,tc' providsra r.:sasontrhle:sarripte of all
goods and servicr
,y-,ir.:; r | , .,.,-,=,9s;,f9,ts.19,nrovide,ag9gd eqti.1n41g:g{thq.rate,ofli.nflation;: ::;!iiiri .i,i,:,
.

42.2 Gencr.al price indices in Banglatlesh

l--; \

in,aapglu4 esh,. :Ilhs. makpfi it difi I quh rto, make g en era I

:,.,. r.j. ,.r j '.'t;.,..t:

I-{owever, the Banglaclesh Bureau of Strtistics does pubrish

t*o .ui"gc,ri." orir-,tjrrrurio, whiuh
will be rrseful in, flor example, ad.iusting accounts lbr the e11-ect to inflation (see belorv) :

'a) Indices of the prices of specific categories of products (e. g. agricultural and industrial priccs
building costs).

ib) consumer price indices for various population groups (e. g. rniddle income
families in Dhaka).
These may also be used to provide an estimate of the rate of
inflation.
(c) Price relatives for selectecl itcms

All of these indices are quite sirnple being L.aspeyre indices with rveights in the
main establisl.rccl
in 1969-70. Nevertheless, they do provide some data.

42.3 Adjustments tn historical cost accounts

Using the appropriate indices acl.justment is made to the historical cost

accounts of the business
in rclation to the fbllor{ng :

'4t260 "' .r... i-'

 IC,TB
STATISTICS
(a) Dcprecintion

The depreciation charge in historical

cost accounts serve only to write
the originar cost of the asset offthe proportion oi
'consumed' in the accounting period.

Iffffiffi:::::.:1j:: ll:.y:*" l, ,:o"i* to give rhe estimated cu*ent cost

of the assers
times nf inftqri^- +r-^ ^ff^-- is
.
;,-_-ffilJ:ilill::::':
that the depreciation charge for
ent cost _;
;"ffi,::i}lj'll:5:ffect
historical cost accounts. the vear is higher than in ::,r

(t)) Cost of sates

The cost of sales figureip the historical

cost accounts is ad.iusted using
the current cost of replacing the goocls index numbers sc -,_- i
sold is matched against the revenue
sold' rather then matching the original from the
cost of the goods sord against -si. :,
the revenrre earnec

(c) Monetaryworkingcapital

The working capital of a business

other than stocks (deart with in (b)
impact of price changes on the total is adjusted to effec: -: ,
amount of working capital trsed
day-to*day operations. by a business :. -

4,201 (next page 5,00O)

ICAB LEVEL 1 STAIISTICS

INTERMEI}IATE

COST ACCOUNTINGANI) STATISTICS : YOLUME 2-SIATISTICS

LESSON 5
Page

51. PROBABILITY

5l.l TTIE MEANING OF PROBABILITY 5,100

51.2 PROPORTIONS 5,101

5 1.3 MEASUREMENT OF PROBABILITY 5,101

51.4 OBJECTIVE AND SUBJECTI\IE PROBABILITIES 5,103

5l.s SELF-AS SES SMENT QIJESTTON 5,104

(t LAWS OFPROBABILITY

52.1 ADDITION LAW 5.200

52.2 MI,ILTIPLICATIONLAW 5,202

52.3 COMPLEMENTARY PROBABILITIES 5,244

52.4 COMBTNATION OF ADDITION AND MI.'I.JTIPLICATION LAWS 5,206

52.s PERMUTATIONS AND COMBINATTONS 5,210

52.6 SELF-ASSESSMENT QUESTION 5,211

53. BAYES THEOREM

53. I INTRODUCTION 5,300

53.2 BAYES TREES 5.300

53.3 BAYES THEOREM 5,301

53.4 SOLUIION OF PROBLEMS 5,301

53.5 USEFI.JLNESS OF BAYES TT{EOREM 5,302

53.6 SELF-AS SES SMENT QUESTION 5,303

54. CONCLUSION AND ILLUSTRATION

54. I CONCLUSIONS 5.400

54.2 ILLUSTRAfiON 5,400

5,000 (next page 5,100)

 I

h
^5\
\-
(h-
al
.h-
VJ' s
t --: tr
o {
: E
h/:
-Jl
s\'
t {.
i
' )'t-'
a
J(
a
ta llc
ICAB STATISTICS
<\

sr. pnoeAs[-rrla

51.1 The meaning of ProhatrilitY

The theory of probability is the basic tool used in statistical inference. A clear understanding of the
theory of probability is essential in developing the methods of statistical inference and decision
theory. The concept of probability originated from the uncertainty of the happening of a
phenomenon. We come across such uncertainty situations in our every day lit'e with comments like
"the chance of rain to<tay is high" or "I am likely to pass the test". These statements appear to be
probability statements, but it is difficult to measure the probability of such a happening in definite
numerical terms, However, the speakers of such statemeots have some idea of the probability in their
minds. One may state the probabilities in numerical terms such as "there is a 40%o chance of rain
tomorrow' or "I have three chances in ten of passing this test'. There is nqnathematical basis for
these statements. Such statements may be termed as subjective or personalistic, interpretions of
the probability- ln this approach, a probability is interpreted as a measure of degree of belief or a
quantitative judgement of a particular individual.

The foundation of rnathematical probability was laid by Pascal and Format in the seventeenth century
in solving the problems connected with games of chance, The famous Swiss mathematician Jacob
Bernoulli (1554-1705) and Frech mathematician P. S. Laplace (1749-1827) developed the theory of
probability using the concept that different outcomes of a game are equally likely. Laplace stated this
principie in his book. "A philosopical Essay on Probabilities as follows : "The theory of chance
consists in reducing allthe events of the same kind to a certain number of cases equally possible, that
is to say r-o such as we may be equally undecided about in regard to their existence, and in
determining the number of cases favourable to the event whose probability is sought. The ratio of
this number to that of all the cases possible is the measure of probability which is thus simply a
fraction whose numerator is the number of favourable cases and whose denominator is the nurnber oll
all the cases possible. "This principle has several characteristics, one of which is that it assumes
symmetry of events" 'lhus u,e have a fair die or a fair coin or a fair deck of cards A seconcl
charasteristic is that it is based on abstract reasoning and does not depend on experience. The
probability computed on the basis of such reasoning is known as a prior probability. For example if
we throw a fair die the probability of getting 2 dots is 1/6 because there are six sides of a die which are
equally likely and only one side has 2 dots.

In general if there are n number of total equally likely and mutually exclusive possible cases and ilr
cases out of thern are farourable to an event, say A, then the probability of Event A is given by the
n1
ratio
n

The theory of probability was originally developed to serve as a model of games of chance. But
gradually it was seen that it could also serve as a model of chances of scientific economic and other
phenomena, Probability is viewed as the uncertainty about outcome of an experiment. real of
conceptual in these fields.

5,1 00
 Wn
./ IeAE.;r i. STATISTICS'

The concept of probability in terms of rrlative frequency was first formulated'oiratpib.r*o

t,y'r.
Bernoulli. I{is theorem goes as fbllows :

,r.i,1i,-,ler.;':i ;:i :.i:i:::.-iii: tr: i i :rj,

"It thc probability of occurace of an event A is P and if n trials are miide indepenclently and
uncler
exactlythe same conditions, then the' probability thrt thc relative lreqrierrcy ol.occura'ce
--'i"
of A difl-ers
frorh'piby an amount, however small, appioacheS zeio: as the numbbrditrrals
r.' r',jr':;" :t..1.-
In: practice wd can repeat an experimeht a rcasonahly large number
ohtirncs. The relptive fiequertcy
;irlue"n4rgximately"qnliloaprio,lprotuuirity*h"r'Lr,ur*g,
.,::.,,- .,: i.:,..r,:j, .; 1..:.:1,:

Thc fimotts Russian Mathematician A N. Kalmogorov in his book "Foundafion of rhe rnec,rlz ot.
ProbrlbiJity"(1933)h4sllate!a5Jlghtlydifl'erentapprpaplrloprobabilitye$,follows:
r ,, ,,:. :.i
:,i,'.iit)i.ti'jt i,.. i -. .: ..:' :1, : ,.), ,..,::: ,.-._,..rrii
: ,, ...ii:.,i
l'W,hgnitlre pf(pE{lment is,rspeatsd,q.large numbor of,tirres,..the relative,frsquenoy
of any:erv6nt would
be practically equal to the probability ofthe event" FGrexarnple illa
coio istossed rl:o.oo tirnes relatiri,b
ml ,,. ,
liequenay:-,with,be,approximately;equal,to: .,.:, , -.:; , rll
n") ,

Thig,approach j-s usqf1,rl, whep w€ canxot calculate a,Ftior probability

f{elative,fiequency:is, rlsua]ly
gblgined from pgqt experiencg. For example, qir: gan say that the probability
that a.partic.ler.,stl6p
wiil'l Q,uscced, is,l75rif wp see,thatiout of a,large,number of shops utder.similar,conditiorrs
in the.past,
750lo shops $ucceeded." : :..
Horryever,''in'this resbn we Bhalt'disctrsithe a'apploachi6no-o*nrre
thepiobauility as the ratio of tire
",;
nriuto-er'of favcrrable cases to thetotaljriuirrtrer orequaltyiitcety
.. ;;1.,,; \1 ::;i
ang
, .:t.r;.l , r '., . ,..,-l .i lnuiyariy "*"i.rilr"
.ri"r.

5r'.2 ' t ffiorticrtis !.: ;

(a
' r.' .'.1.:1. .'r.t :i;:., .:t,r
. r;.jii.,. , i)' ..;, ,:;i..
Probabilities are often regartled as relativc lrequcncies or proport"ions ,.,
i. c. the p.!.o ba.!il!1y th41 : an
evcnt will occur is the proportion ol'tirne thc everlt takes place, or
the proportion of the total number
o.f outcoqte$ thaf ate favourable to the particularevent: :r, . ,.; ,:ir,:. r l r:, , :, , .,, l , :: t 1..,1.,';,,. 11 ',
t

51.3 Measurernentofprobability . i:1i1,;.,

tlpuaP..,tlitv iq,p.e4;u{e4, op,,A,sgulg .fioBr, to 1 rylrere 3 repregents ir;rpossibility,ar"ad l,.repr6sentS

Q
qErr+r4.ty.- .. .,'iii:..rr'r'rr

s,101
 ICAI}J!l:.ii.,r,ic
STATISI'ICS, :i

Absolute certaintly:

: :.::'i:,)
""'''Ttie""" .'l:::r--i:..;a,'. i..: l,l

scale l.r - ',,1 a;, .., l,

of A equal chance ofthe event occurring or not
Probability occurring (50/5O. ehanse),.,:,: -,-.iti,1.,;;1 .1 :1

-!:. i,: '.. I.i..ri - . t,:i

],:: .:,' ,' ,r.:r:;l

Impossibility
1,'..'j;l;:..:r.:i

',Vhen
an il9@4 3ie is throu.n, eac
'sing this infonnation the foilowing will be calculated; the probability that the outcome of a single
:row is :

r) the nurnber 4.
b) an cven number.
c) a number less then 3. ,

e) a 4urubef .lgqs,{han 7.,, , '1..i

-vhen
an unbiased die is thrown, there are six equally likely outcorhes _
l, z, 3, 4, 5, 6.
' or each answer, (a) to (e) above, the nunrber of 'favourable' outcomes rnust
be determinecl and this is
cxpressed as a proportion of the total number of possible outcomes-
. :.,i; , .. :.. r: i I _

.r) P (numhcr 4).

i .,
I
bucarrsc I orrt of'thc six possiblc outcomes is the nurnb er 4.
6
.' I l
., I
(or ) beciruse tlrree out of the six outcomes are even
; "
/.
nurnbers :2,4and6.'t' ":!i:;ilir':'
r
"i :ilii:"1 ;'1 :i;: ': ';r 'l'lr ! ' ;:'

5,1 02
 STATISTICS tc
ICAB

S
(d) p (a number greater than 6)
r
D (> 6):
*0 (or O) because norre of the six o;rtcomes is greaterthan
-6
S
6. 'Ihis is an impossible situation'
g
(e) p (a number less than 7).

p (< 7) : ;6 (or 1) because at the six outcomes are less than 7. It is therefore
o
certain that the result will be a number less than 7'
/' -/-
:" ,/
\ /' {xample 2 :
Y/ An ordinary pack of playing sards consists of 52 cards. If the pack is well shuflled and one card
selected at random, the following probabilities can be caiculated :

(a) the card is the ace ofsPades.

(b) the card is a king.
. (c) the card is a heart.
'
(d) the card is black.

When a card is selected at random, there are fifty two equally likely outcornes.
. i
t, (a) P (ace ofspades)
52
because there is only one ace ofspades in a pack
;
41
:-(or-
(b) P (king)
52 13 )
because there are four kings in a pack.

: i3 (or -)
1
(c) P (heart)
-524 because there are 13 hearts in a pack.

(d) P (black) : 26 -) I
because there are 26 black cards out of the
-(or
52' 2'
total of 52.

51.4 Ohjective andsutrjective protrabilities

Exarnples I ar'rd 2 are examples of ob.iective prob{ll4lg! jince the answers are based on fact anc
experiment. When an unbiased bie is throvm the probability of obtaining a four is 1/6, this does nol
n'ee6ffi6 mean that if a die is thrown 6 times it will come up with just one four, However, if the
experiment is repeated a large number of times (say 60O times) then four should come up
approxirnately one sixth of the tinie in the long run (i' e. 100 times)'

5,103
 ICAIIi :1 '''' -:-.!.'r. i .;
SIh,TISTICS

f l, ; . i t.. ". /'-' .

Similarly fbrthe other numbers- 1, 2,3,5, and 6. Note that obiective probability is the stucly o{.
:clativc proportions ;,.: , ,, ,.

SuUis:s1i\re prrobabilitiest q1]Ig_gt_her-han4.,-gle-bgtt:-q_lg1'14ore_

91- p.e_rqo4a-t^illcigcmcnr aud lteviotrs
ry.Theyitrc'thcrefiore.]essreliahlcantlnccdl.ohjetrcatedwithcatt1itrtt.Abrts[ncssntalr
reckons that the probability that a particular.lotr r.vill bc frnishecl on tirue is 0.8 becausc on past
experietrce gigtrt otrt of ten ofall si.tr.ila,rljobs ivere finish:ecl on dure.'The lJusincssurarr vn,hcj cliit,tscs
tire coursc o1'acticln tlrat offers.him'the bcst chance o['succcss rvil1 not avoid mirking rnii;tlrke s (,1ltss
he is incredibly lucky).

':

12.5 ScIf assessment t;uestiiiii -'"""'""'-- "-' ' ..l

1,()00 raIlle tickets 4.qp..put-in a bo6.anrilhe.winning,tieket-seleeted.atrandom:,If300 rlfthe trckets are

pink, 30o are yellor.v ancl 400'are green, what'is,the probabili:ty
!!4 tn9 ivJn-tigg ligh.rlt fs grccr, /
400
Solution : P (green ticket)
1,000
' r
"1j'i iil i"..
:0.4
.t. : rrrlr.'. 1.1

ii:rr:ii,' 'i

t4- 5,704 (next page 5,200)

 ICAB
ST4TISTICS

s2, I-AWS OF PROBABILITY

,-'6., Arldltlon law

@ent:twoofrnoreeventarPsaidtobemutuallyexclusiveif1heoccurrence
ofany ooe ofthem excludes the occurrence ofall
the others, i. e. only one can happen.

If A and B are two rnutually exclusive events then

the probability that either A or B occurs in a given
experiment is equol to the sum of the separate probabilities
of A and B occurring. i. e.

, 'l o,o o, ul: P (A) + p (B) -l

This law can cover any number of events, long
as as they are mutually exclusive :

1' (A orB orC orD or...) =p (A) +p (B) +p (C) + p

(D) +....

llxamplc 3 I
t,:

i; A bag contains o *&,:i+1Td.1p black balls

:the probability of selecring either a red or a black
{ h*ll whcn one bafl i, iraffiii.rifi ffi
is calculated as fbllows : <-- %

Cle*rly the evEnts are mutually exclusive

since if the ball is red it cannot be black, and vice
versa.
f'Itl

[;
P(red)*4120 P Olack) = t0t20
".
,'. P (red or blaek) P(red)+P(black)
\
4/2O + |O/ZO Y

14/20 (or 0.7)

)
llxamplc 4 :

The probability of drawing an ace

or a king, when one card is drawn from a pack of 52 playing
is calculated as fbllows : r cards

5.2AO
 ICAB
@ oo
STATISTICS

P (ace) :4/52 }(ing:4152

P (ace or king) P'ace) + P (king)
4/s2 + 4/s2
8/52 (or o.15)

,hlNpWents:twoeventsarehotrnutuallyexclusivcittheyCalloccuratthc
same time. This is someirhes regarded
as an overlap situation.

If A and ll are two non-mutually exclusive

events, then the probability that either
experirtent is equal to the sunr of the separate A or R occt*s in a
probauitity minus the probabitity
;"::X that they both

I
The term P (A and B) must be excluded
to avoid double-counting. This is best illustrated
example. by an

Example S:

The probability ofselecting a heart

or a queen, one card is drawn at random
playing card s i s cal cu I at ed as-6i6*-m', *--*..-' --, .when flonr a pack oI,

The probability of selecting a heart

or a queen is orr ovgr-l-4p situation,
as the eueen of Hearts would
be included in both events. It is
ne"Isary to elirninate;i;;*"1ru,;;;;;";ii'n"
vr vrr! vr
LI ou."ns frorn our
calculations

P (h91rt) : 13/52 P (qu-",g3) :.4/sz p (queen of hearts) :

-:E
t/s2
--tt* €
. P (heart or queen) = P (heart) + P (queen) - p (queen of hearts)
: 13/52 + 4/52 - =€==ffi
: *l/52
16/52 (or 0.3 1.1

Exnrnplc 6 : f

Twenty inrlentical dises-are

20 and placed in a large box. one is drawn
^^,u/rto
5ox. 'fh., follorving probabilities will be calculated : that it is
at randorn fiom the

5,201
 -i

,.., -=.-*.

ICAB i .' ,' .. STATISTtrCS:

(a) z\ rrrullrple nf , \.-

)
(b) A rntrltil'rle ol'5 -
,
i
(c) multiple of 2 or 5. i

i
(ir) P (rntrltiple ol'2) |
: P (2 or 4"or o,:.'"'26\'L 1o/2o(or 0.5)
i. e. all even numbcrs

.(,!),,, ,, P(mlltjplg,of 5) : , , : P (5, I0. 15. or 20) 4/20 (or O.Z'y,

:
=
i!. .r.. i:, .,;1r'r:.:;..',', r .:. :-ll
(c) P mrrlliple oy'Z uncl 5) : P (10 or 20) : 2/2O (or 0.1)
L-
I) lntultiple ol'2 or 5 ) -(multiplb-oilZ; +? (mrittiple o1'5| :'ti
'P Ghtrl'tiple of 2:and 5) ' i : ' , '.' ;: -: .' : :',:
: lO/2O + 4/2U2/2O .1.
:12/20: (or 0.6) ,',i
(.,

(a) two or rrnre events are said ro oe independent if the occurrence or

]1d.q:I9S:l:yj"t1:
[]o11:.0(rcu,rrpncc of, one,event,in,no wa5z, ,affects the,oc{}urrence oi non-oeeurrerlce-bFtlrc
,.:.,i.|:
otl-rcrs7 ,

{f A afr B are indcpendent events,,lhen the probability of A and B occurring is thc:1xoduc.

o.f'the separate probabilities.
: ,' '.-:, ij

P(AanclB):P(9.)xP(B)

Er:trn;llc 7 :
. :: i

1'he probability of drawing ar,'; from a pack of cards and throwing a 6 with an unbiasecl dice r.
CalCttlatedaSfOllOws: -i', r' !! 1r,;l'11 I '..;.:'' r:r','rrrrii] ,

I' (acc) :4/57*

P (ace and 6) : P (ace) x P (6)

: 1/13 x I /6 ,-.
: 1 /'18 (or 0.013)
r:'i!,ri;r' '

5 )O)
lCAq ,ii I . i,. S'fAI'ISffFC8

A case contains i2 valves orwnich 4 are dciectivc tnJ trr"'r"ii'irC ;,r;-;ai."i,;; 'ii; ,."i;;;,i;i';a
dr:rwing two non-def-ective valves, the {lrst valve being^ replaced.bel"ore the second one iS:selected;jis
calculated as fbllows :

_ 1'. ;: : - i:':i i,'il, -l - ',ii I'i :.., I

Since 4 arc del'ective then the remaining 8 are non-dcfbctive

;rr; ,,,i,i!', ' , ,: :).:ti',
i|. ',',::,-',1,' .,. ;,.:t,1;',:.; :

So P (defeclle): 4112, P (non-defeciivc)'; f it2

.'. P (r,alve I iron-defective) : 8/12 :213 P (valve 2 non-defective):8/12:2/3

:
Plvalves I and2non-cleJcctivc):l)(valvel)xP(valve2)
-1-4

(b) Pepe-r1]!g fl$l*"]yro or llgre ev.gllrprg said ta bqdgpgr,rdent.l-$941.|.\.enreb.abilit-v, of.the

'.**tr:*,
sCcond ," ciccurring is conditional orr tlrc flrst evcnt havir
evcnt

If A and B q..?r,11n ,"ygntp fpch llar 13 {j p-o+d.i1.ional onAllgn lhqpqobahility sf,Aand B oei;urring is
the product of the probability oIA and the conditional probability of B occurring.

r,ir:,1{iii i. 'l
r.e P (A and R) :1'(A) x P (B/A)
.,Wlirr","
(B/A) -,PloQa!t1f!ty,,o,f .B ooq.uf{i$seiyeq, , . rii:
that A has occurred.
' ::

Examplc 9: / I :,:i, 'i ''

1''il
/
'Iwo cards ,4 Uro*n liom a pack, the fjrst card is not rcplaced bcfbre the sccond ls drur.r,rr. l-1're
probability that they are both aces is calculated as ttrllows:
i-t';'i.i;:.i 1

P (Iirst card) 4/52

=
This is not replaced, therefore 3 a.ces remain, out of 5I carcls
P (sccond card ace, giy"l llr,styaqd is ace) : 3751

.'. l' (both aces) : P (ace) x P (ace, givenfirst one was an ace)
:4/52 x 3-l51
: l/221 (or 0.0045)

,ti:)
 ICAB
,
STATISI'ICS
..:,
i_/
'A bag contains 3 black, 4 red andl3 blue marbles. The probability that if 3 are selected
they will be red, bhe, black in that order is without
L
l .fll*gthen
P (first red): 4129
calculated as follows ,

P (second blue given first read) : 13/19

P (third black, giveh that the first two were

red and blue) :3/18

.'. P (red, blue, black) = 4/20 x l3l19 x 3/lB

,v<y:'o@$' -'t*r,"'
f'
.,,
t,
*-"/' sz.s Complerrrcntilry protrabilitics
Therc art: two situations to be consiclered
:

i
(a) when tr sinq,l-: event has only two possible outcomes
- usualry denotecl as success and
ruiture-iffiJ$Ed q are the probabilities ofsuccess and failure respectively,
rt follows that:
/ ''-
t"g* p)-:
this is becaul l jsince they ,re the only possible
outcomes of the event
.fr-- -'
'fl*1i =L
llxarnple

whgn an unbiasecl die is thrown, q .six is regarded

as success and any other nurnber as failure.
I
"'P-P(success):l/6

andq:p(ftiilure):t- l='
66

fixamplc 12.:

T'he probabirity that a.iob wiil be finished

on time is 0.8 therctbre the probability
. finished on tinre is O.2 because :
that it will be

5,204
 TCAB
STATISTICS

P = P (success) : O.8
q : P (failure) : 1- O.8 :0.2
d) When several events are being considered then the probability that
at least one of them occurs is

P (at least one): I - P (none of them)

This is because either one ofthe events occurs or at least one ofthem
does therefore :

P (none of them ) + P (at least one): 1

//
,/ a"'
Exarplile-lf:
.t .,/
..r'1

-f threE diee are thrown together, then the probability of obtaining at calculated as
:.rllolvs :

I (at least one six) : 1- p (no sixes)

.\ssurning independence then :

? ( no sixcs) : pj;G.'firridi"" ur,d ,ro, six- second clice and not six- th$ gteg
'1'---=.-.= --.___.-:_ _--i
--.- _-_
--,-,, --
J ..!
t/ .t.'.

=516x5i6x5t6V
! -'_-
L
._:-:-=-__:=__.:-j1::: -

126
2t6
1

P (at least one six) : l-125/216 t_.

9t
' 216
r'qi'll

-f 6rcoi"n is tossed five times then the probability of obtaining at least orrc head is
' calculated as
lllows: r r

.\ssuming that the coin is fair [unbiased) then :

thead) : I anct p (tail) :

)
*
I (at least one head) : l-p (no heacls)

5,205
 ICABI - i': STATISTTCS )
'-

11111.
:l_(-x-x-x-y-x
'a^^^^/ \
!LL/.L.
:1 -Tf:z
,,, :-;,;.'.r..:rr .,:'-:,lr ;,'"-..:irr :,.".,;i :., ii r.ii ., ,, -i"jii. r,. ; : : 1... ;1,.i. : t., itt ;t :.
ltt:2, 1Ot,6.Vf1,,
,i : .

,/,/
,il/ 52.4 Comhination of ,rddition trntl multiry[ication,lanry.**,
i i.,.,-'i',,...,,.r'. , .1:i, i
The exanplcs given so far ir this section hav,e.bsen..kept,+;i+nple in order'to.'i{ltrstrate.th6
basic laws.
when it comes t?,$glyrFg !lq,{p,4ifilpult ptd.gg1ppler, p.qgbte[rsrit is, impsrtant.to,work,.out
and wrire
down the outcoules that are favourzrble to a particular situation and then calculate the corresponding
probabil it"ics. :

; i .rjq:rrli..,
without
- .
replacement
----_< .*,-
.11, ;.'..,:i1.::'..,: , I ."' ..,i. rrrli..'i ,;. .,.,t,:, :, 1, l,: -rl.:: :.:. t j:',.1 :l ., 1, , :i .:" ..,.,1,:
'.i
Ilvents A, B, C and D are defined as follows :

r t'(^ ) At least oni*trlte Uaiir ii Oia*", i

'. t',4
tf n:)
I
-.' exactly twb white balls is drawn. t^'-i?

\c '
one ball 9{;g.ach.cotqqr is dr,gw1r.,. ,! .,
I

.:- thc third ball is.white.

,
'(a) Which two events are mutually cxch:sivc Z !
:
iiqr Calculate the probabilities of A. B, C anil D res pectively.
iii i j

(a) B and C zrre mutually exclnsive becarrse the probability of clrawinc exactlv two rvhite:
excludes the possibility of clrawing one oI each colour.
\
A and B rrol ruutually exclusive.
I.:;i: r ,

A anrl C are not mutually exclusive.

..;.i11 :..r, -. :,r,rl:,'-.'- lir
A and D are not mutually exclusive.

B arrd f) are not mutually exclusive.

C and D are not ntutually exclusive.

5,206
I b) (i) P (A): P (at least one white)
STATISTICS

= l* P (no whites)

The bag contains fivewhite and seven not- white balls i. e. the red and blue can be groupecl together
as not-white.

'.'P (A) = I-1112 x 6/U x 5AO

*
.l--
120
' 1,320

I,l l0
1,320

31
: tot 0.84),,
I
(ii) P (B) : P (exactly two white)
Exactly two white can be drawn in any of three possible ways :

Possibility First ball Second ball Third ball

1 White i white Not-White

2 , White Not-White White,
J Not-White lwhite \whire

547t40
, \,.,
-vttr:._
n ll l0 1,320

'574140
P (2) = =
lz" 1T' 10 tJ2o

754140
rPrlr\J., :
ll l0
n
-x 1,320

15- 5,207
 ICAB
STATISTIC$fi

'.' P (exattlytwo white) = p ( I or2or3)

140 140 i40
1,320 1,320 1,320

_ 420
1,320

1
=
U @r o.32)

(iii) P (C) : p (one ball of each

colour)
One of eaclr colour can be dr;*-.,n
1i: ,ri] ,Jne of six possible ways.

Possibility Frist Second Third

ball ball ball
I Red Blue
t dvtrit.
2 Red iwhite Blue
i.
,J
Blue Red ,r-\l_hite
4 Blue iWhite Red
5 {White Red Blue
6
Blue Ited

4?5Ofr
12 lt l0 1,320
P(2) :*x45360
t2 ll l0 1,320
-34560
I'(3)
12 ll 10=-1.320
= -x

p(4) 2W-1*n= 60
12 ll l0 t32a
5J360
12 lt t() 1.320

J<1 -r + (r()
P (6)
12 11 10 1,320

5,209
ICAB
STATISI'ICS

P (one ball ofeach colour): p (l or 2 or 3 or 4 or 5 or 6)

60 60 60 60 60 60
:-
1.302 1,320 1,302 1,320 1,302 1,320
60

3
: (or O.27\
-II
(iv) P 1D;: P (third ball is whire)
There are now four possibilities to consider :

Possibility

1 Not White Not white (r,,;

2 Not White white I
| rynirc
J White Not whire I wr,i,"
4 White wnire | 6r,l,,"

7 (t 5 2lt)
' (1) -
t2 1l l0
-Y- 1,320

754140
'(2) t2 ll^10 1,320

_-
574140
(3) v-
t2 ll l0 1,320

54360
r4)
t2 ll l0 1,320

(third ball is white) : (1 or 2 or 3 or 4)

210 140 t40 60,

*:--:-:=
1,320
+
t.320 1,320 1,320

550

1.3 20

s
; (or O.42)
,/
1/
5,209
 ICAB
STATISTICS

,./ 52.5 . Permutation and comtrinations

t, -^*-*y'
If there are twelve applicants for four different vacancies in
a factory and the recruitment officer,
deciding they are all eclually suitable for each vacancy,
makes the appointments by drawing four
names fiom a hat, how many different allocations
are possible ?

The flrst narne out of the hat can be that of any of the
twelve, as there are
twelve ways of drawing the
first narne' That leaves eleven namas in the,fu41, so there
are eleven ways of drawing the second narne,
and so on.

There are72 x 1l x lOx 9 ways of allocatingthe.jobs,:

ll,gg' in total.
[:'.'ipressed mathematically, this problem involves
finding the numbe r opermtttations oJ size four
r folr il grollp of items size twelve.

1, general, the number of permutations size r from group

a of items size n is
n
p - n(n_l) (n_2) (r..r + 1;
r

It was stated that all the vacancies in the above problem

were different. Two possible allocations are

Vaczrncy 1 23 4 and: Vacancy 123 4

Applicant ABCD DCBA
.lust considering applicant A, B, c ancl D, the
number of ways they can be allocated to the four
vacancies is :

4 /"
P:4x3 x2x7:2 f
4
r/
Yj
;'l

lf the {btrr vacancies were fbr identical

.iobs, the twenty-four arrangements AEtcD, DCBA etc. are
cllbctivels thc same : any distinction between them is
meaningless. The order of drawing the
applicans does not now matter.

l'hc collcctive natDe fbr all permutations which are the same is ,{)onrbination. Taking all
vttca'ncics as indentical, the number of combination t}rc lbur
of four applicants from the group of twclvcs is

5,210
ICAB STATISTICS

t27_
I l,ggo
424
:495
In general,
n (n-l) , . ........ (n-.r+l)
C:
r fr

Where rr : r x (r - 1) x(r - 2) .................... xr

n 11,
Alternativcly, C :
r r, (n-r),

To summarize,if thc -order is important the number of permutations must be calculated, but if the
order is irrelevant then it is the nurnber of combinntions that must be found.

52.6 Sel{'-assessmcntquestions

(a) If three cards are drawn from a pack of fifty-two, without replacement, what is the probability that
at least one is anace?

(b) If three cards are drawn from a pack of fifty-two, what is the probability that exactly two are aces,
if the cards are drawn :

(i) with replaoement ?

(ii) without rcplacement

Solutions :

48 4,7 46
(a) P (on aces) : - 51 50 X
s2
:0.783
P (at least one ace) :O1 - P (no aces)

4448
(b) (i) p (two acesf ,
" ; " 52" i
:0.016
(ii) P (two aces, without replacement):

(
44484483 4483
u"lo's2)*(i*st*50)*( 52 sl
-x-x_ 50
: 0.013

5,211 (next page 5,300)

 ICAB STATIS'TICS

53 BAYES TI.IEOREM

53.t Introductinn

The previous section was concerne<l with calculating the probabilities of events, or combinations
of
events, occurring. This section cottsider how to calculate the probability after the outcome
of a,
event has been observed. The usefulness of this technique will be discussed later.

53.2 Baycs tress

Example 16:
,ilyof thc output of
'
'4/o a factory is produced in workshop A ahd 6oyo in workshop B. t 4 out of every
I
'0oo componcnts from A are defective and 6 out of every 1,o00 components from 'B, are defective.
Afler the outputs from A and B have been throughly mixed a component drawn at random is
fbund to
be defective.

Calculate the probability that it come fiom wokshop B

This problem will be solved using Bayes tree (or probability tree). This is a method
of showing
diagrammatically the various probabilities in a problem.

o. t4 .4x.O74: p (A and D)

.4 x .986: P (A ancl ND)

D .005 .6 x.006: p(B and D)

A - cr.,rnes tiom workshop A
B : cornes from workshop B
D: defective .6x.994:P@ and ND)
ND - not defbctive

The appropriate probabilities have been attached to each 'branch'of

the tree, branches at each stage
corresponding to possible outcomes. The probabilities are conditional probabilities,
depencling o,
all prececling events having occured. For example, the probability on
the topmost branch, 0.o14 is
the probability that a component is defective given that it comes fiom p (D/t,t.
workshop A :

5,3rJo
 ICAB STATISTICS

The probability required is P (BlD). In the section on conditional probability it was established
lhat:

P(BandD):p(D)xp(BD)

,'. 'fhe probability that a defective item comes from B, p @/D), is given by :

P (illD) P(BandD)

The combined probability P (B and D) is obtained by multiplying the probabilities on successive

branches. These combined probabilities are shown at the end of each branch and correspond to both
the events happening.
.6 x.OO6

Total probability of an item being defective.

.6 x .006
P (defective and from A) + P (defective and from B)
.6 x 006
i.4 x. 014) + (.6 x. 006)
0036
(x)r2

)
ZJ

53.3 llaycs of protrlem

The previous example is an illustration of the use of Bayes theorem, which cdn
be stated as a fbrmula
in the fonn.

I?(A,)xP(B/A,)
P (Ar//B)
Z p(Ar)xp(B/{)
53.4 Solution of Problems

Problems may be solved using the formula, but it is generally simpler to use Bayes
a tree as in the
previous example. Using tree, trre technique can be summarised as :

5,30 i
 ICAB SIATISTICS

(i) After constructing the tree, select the terminal branch which corresponds to the occurrenci
of both A and B.

(ii) Divide the probability associated with that branch, found by multiplying the probabilities or-
it together, by the surn of the probabilities of all the terminal branches which are associate:
with event B.

53.5 Usefulness of Bayestheorem

It is difficult at first to appreciate in what practical cit'cumstances Bayes theorem might be applicable
An example will illustrate that there are occasions when this technique is extremely useful.

Exarnple 17:
\. I
A test has been perf,ected to detect a serious illness. The test will detect the illness in 97yo of those
l
affected. Unfortunately, if healthy individuals aretested, yowill be wrongly diagnosed as having
th:
disease. Individuals with milder diseases would be diagnosed as having the serious illness
t in 9o/o : _

cases. The percentages of the three types in the total population are lyo, gSoA respectively.

Calculate the probability that an individual selected at random has the disease if the test indioates
h;
has.

The Bayes tree for this problem is :

P (Have disease and test positive) : .O1x.97

P (Have disease and test negative) : .01x .03

4c

{'y
ri P (F{ealthy and test positive) :.95x.04
IleaL chy

P (Flealthy and test negative) :.96x .96

P (Other disease and test positive) : .O4x .09 P

P (Other disease and test nagative) : .04x .91

5,302 1
TCA.B STATISTICS

B (have disease / test positive) : Prob. on branch where both these occur
Sum of probabilities associated with ir
positive test.

.01x.97
:
1.olx.97p (.9sx.04) + (.04x.09)

0097

.05 l3

- .189

Thus, if a test proves positive, there is only a chance of about 19% that the individual has the clisease.
This result would cast doubt on the effrciency of mass screening for the disease, in view of the large
number of false alarms that would result.

53.6 Self-assessmentquestion

3o/oof the new cars of a particular model are supplied from factory X, the other l07o from factor! \
I O7o of factory X's production has a ma.ior fault, I 2Yo of factory Y's producti on has such a fault.

A purchaser's new car has a major fault what is the probability that it was rt:ill* :r: ilr-'.;r',:'r, 1- '/
(Solution) :

Q"

i4>
\A.o)}l

.12x.7
P (comes from y/has major faulq =
(.12x.7) + (.I0x.3)

: 0.737

16- 5,303 (next page 5,400)

 ICAR
S'TATISTICS

54. CONCLUSIONS AND ILLUSTRATION

54.1 Conclusions:

l he basic laws of probability have been outline with many

detailed examples to show the methods of
calculation.

when solving cornplex problems, it is very important to decide

on the possible outcomes and then
calculate the corresponding probabilities.

Bayes theorem is only used under certain well-defined

circumstances. It is used to calculate,afler the
cvenl'probabilities.

Answers rnay be left in fractional or decimal form, in

the latter case give 2 or 3 decimal places,

54.2 lllustration

A product is manufacturecl in a two-stage process, the stages

being <iesignated A and B. Each process
has two machines, nanred ,{ atrd for process
{ { and B, ancl B, lbr proeess 8,.

Each unit of frnished procluce must pats through either

one of the two machines in process B. (5oo%
go through A, and 509.,6 through ,\ Similarly for
B, ancl B,).

(a) FIow many different ways may a product be manufactured

?

(b) trthe $robabilities of a def'ective from each machine are as fbllows :

2Y" for A, oyo for 4yo for B L, 2yofor 8,.

!, B

ancl the defectives are thrown out as they occur, what is the probability of a perfect
produced'/
it, bcir,

(c) lhe total production is 10.0o0 items per annum, the loss on each
defective itern is Tk. 1 0 and
the profit on each perfect item is Tk. 80. Calculate the expected
B
net profit.

Solution

(a) A product can be manufactured in four ways : ,{ then Br Ar then

Br, { then B,, A, then B,.

(b) A perfect itern can be produced in any ofthe four ways given.

5,400
 ICAB

SlATTST'ICS
.Since, 5O%o ofthe products go
through .{ and 5o%
go through A^
_50
l'(At): ,50
o'5 and P (4):
6-:
iil:o,
Similarly for B,
and B,

*50
I'(Rr) : : 0.5 and p :
,r; 1Br;
50
Too
: 0.-5

P (Defbctivc{;: a:
' 100 o,r
.'. P (Perfbct/Ar)
= 1_ 0.02 :0.98

P(Defective/\=a:ooo

.'. P (Perfect/\): t_
0.06 :0.94

P (Defecrive,G,) : : o.oo
fr
.'. P @erfective/B,):
l_ 0.04:0.96
P@efective/8,):3:oor
- 'l()0

.'. P (Perfect/B,): l-=

O.02 :0.98

--, I3,
The probabilj
p (Br) .{ and is perrect, is
"" ,"/,,'1'l:';Hj:T X.."*n
The probability
of a perfect lruru
item hrlavlng gone
throush -$ and B,
B, is O.49xO.48: O.2352.
,
The probability
that an itern goes
P (Ar) x P t.
@/A,) : 0.5 x 0.98 : o.o[|outn '$ and is perfecr, is
PtA,.rxp(p/Ar
):o.49
P(8,) x P (p/8,):
O.5 x 0.98 :0.49
... rhe probabili
B, is c.4e - o.oJ':"j.1ffi"" item having sone rhrough.gand

5,401
 ICAB
STATISTICS

A, B,
P (Ar) x P (P/,\) : 0.5 x O.94 * O.47
P (Br) x I, (?,{8,): O.48

.'. the probability of a perfect item havi,g gone through .{, and B,
is O.47 x O.48 : 0.2256.

A, B,

P(A2)xP(P/An):O.47
P (82) x P @/Br): 0.48

the probability of a perfect item having gone through

". O.47 x O.49
is
{and B,
= O.23O3.

.'. P (Perfect itern) : p (Ar B, or A, B, or A, B, or A,

B,
: P (Ar Br) + P (Ar B,) + p (A, Br) + I, (A, B,)
=, i).2:152 + O.2401 + O.)256+ 0.2303
.'t)ll

(cj ii'iiti:';11-:i: ;'iiii,i ;.':iriliiiictiorl is I o,0{)0 iterns per annurn,

the expectecl number of perfect items
;, l.r 93 I > x l(),tl(to : 9,312

'fhe profit on each of these is

Tk. 80, therefore the expected profit on the perfect items is
9,312 x Tk. 80 = 7,44,96O

P (perfect item; : O.93t2

.'" P (Defective item): 1-O.9312 - O.06g8

.'. expected number of def'ects is 0.O6gg x 10.00O: 6gg. The loss on each ofthese
Tk.
therefore the expected loss on the ciefective items is 6gg :
x Tk. 1O Tk. 6,880

the expected net profit : 7,44,96O-Tk. 5,gg0

: Tk. 7,38, 080

This is the average protit that the company might expect

to make per annum. of first reading.
this question may have sounded like a Bayes theorem problem. However,
the requirec
probability is that a perfect item will be produced, a 'before'
rather after the event probabilitl.

5,402 (next page 6,000)

ICAB
LE\/EI- STATIS'TICS

INTIIRMEDIATE
COST ACCOUNTING AND STAT]STICS
: VOLUNIn 2 * S.TAT.IST.ICS

LESSON 6

Fage
61. NO RI\{AL D ISTRIB UTION

1
61. INTRODUCTION
61.2 FEAILIRES OI] THE NORMAL CTJRVI] 6,i 00
61.3 MAIHEMATICALFOR\4I]]-A 6,i01
61.4 APPLiC-{TIONS OF THE NORMAL
DISTzuBUTION
6,101
61.5 EXPECTED FREQIjENCTES 6,102
61.6 StsLF_ASSESSMENT Q{lESTroNS 6,107
6,1 09

CONCLUSIONS AND ILf,USTRATION

52.1 CONCLUSIONS
62.2 ILLUSTRAIION 6"200
6,200

U,OOO 1.r"r., pnge 6,10O)

 ,.l

,
d
*

i
ICAB STATISTICS

61. NORMAL DISTRIBUTION

6l.l Introduction

The normal distribution is used to answer questions such as :

Calculate the probability that a metal bar is bEtween 2.63 and 2.74 cm long.

Note that the data involved is continuous, not discrete (i. e. data which ean take any value and does
not 'jump' fiom one possible value to the next). Binomial and Poisson distributions (outside the
syllabus) handle discrete data. When continuous data has been collected and a frequency distribution
formed, it is often shown diagrammatically in a histogram. The advantage ofthis particular {iagram
is thatthe total frequency of the distribution is represonted by the total area of the bars. When
comparing histograms based on different sample sizes it is necessary to make the total area of each
diagram the same or else comparison is impossible. The is quite simply achieved by letting the area
of each rectangle be equal totherelativeJrequency ratherthen theaDsolutefiecluency ofthe class.

t'
If I : frequency of the first class tlren the relative frequency for thdrst class is -li .,
Ir n

Where n = Xf is the total frequency, for the second class the relative frequency is f, / n etc.

A particular type of histogram, that keeps arising in statistics is the bell shaped diagram, i. e. the
highest column is the centre of the histogram with decreasing columns spread symmetrically on
either side of this peak. If the class intervals arevery small, l}le histogram (Figure 1) becomes a
frequency curve @igure 2).
Figure 1
Figure 2

lla

lt is mathematically neat to fix the total area under a histogram as one unit of area.

6,100
 ICAB
SX{TTSTIES

Since the area of the original histogram

was one, the area undet the curve
and it is this symmetricar curve will also be equal to unity,
that known as thvtormar cristribution ctrye.
61.2 Features of the normal curye

(a) It is symmetrical and bell.shaped.

(b) Both tails of the clistribution approach,

but never meet, the x axis.
(c) The mean' median and mode lie
together on the axis of symmetry
of the curve.
(d) 'fhe area under
the curve is one ancl, by symmetry,
the area to the 1ef1 of the
area to the right of the mean equals mean equars the
0.5.
6I.3 IVlathematicalformulir

since the total area ,nder the curve

is one, the probabirity that
certain rimits wilr be the corresponcring a va.lue of the variabre ries
proportion of the totar area. between

/.
fi
l:|
I
i

i I
t',., I
l. I
Ir I
T

I
I
I
I
,
!

Mean
Median
Mode
613 Mathematicalformula

Since the total area uncler the

curve is one, the probability
ceftain lirnits will be the corresponcri'g that the a,alue .f the variable lies betx,ee
promotio, of the total area. -

6.t01
 ICAB
STATISTTCS

{ 1,1

w
*
I m*rrn *2

So P (x lies between15 and

or \) is A
p(xr<x<x,):{

This area can be found by using

the normal distribution tables givbn
in the manual.
In order to use these tables it is necessary
to know the mearr @ andthe standard
distribution being studied, Knowing, ) deviation (Q) of the
these, the values (r5 urro xr)
ized' i' e' the can be expressed in of the variable can be standard_
""; J;;;rffi;ilit:f
terms of the mean
the distribution
the standardised variables (usuauv
;ll?ffi[Hff||]ii|i* given the letter z to distinsuish
rhem

- x-lt
L
--
o
61.4 t Applications ofthe normal
distritrution
This distribution iras many applications
in life; e. g. height, weight, interigence
other related rnatters lrave this ofthe populatiorr and
type of distribution. Flowever, /!r'
theory which will be stuilied in .,u'
one of
or its
lrs maln
main uses is in sampling
later lessons.

advisabre to draw a sketch of the distribution

:H:I';:J,:":::ilJ,::;X" to ensure that the

Examprlc I :

A normal distribution has a mea'

of 68 ancl a stanclard deviation
of 3. The area under the
between the mean and74 is cu^,.e
calculated as fbllows :

6,102
 ICAB STATISTICS

First the curve is drawn and the required area shaded.

In order to find the area between ri : 68 and x, : 74 il is necessary to standardise the values of the
variable using the formula.

For x, : 68 and with P : 68 and cr: 3

t 68*68
'r Zr= - O
.' -., -a-
for x, :74 and wilh ll : 68 and o: 3.

74*68
zz -
,L-

ii;
z, and z" simply measure the number of standard deviations between each value of the vart-
able*68 and 14 - andthemean, so 68 is zero standard deviations fromthemean, since itisthe
m€an, and74 is two standard deviations above the mean. (i. e.2 x3:6 and 68 + 6:74)

Standardizing is a logical process that enables the normal distribution tables to be used. These
tables give area under the curve between the mean (z : O) and value calculated usittg the formula

Zr: O gives an area of 0, and

Zr: 2 gives in area O,4772. (note that the total area to the right to the mean is only O.5OO)

.'. the probability that x lies between 68 and 74 is O.4772 since that proportion of the area 1>

enclosed between these limits.

.'. P (68< x < 74) : O.4772.

6,t03
ICAB STATISTICS

It is not usual to standardize the mean as it will always result in a zero value and this is understood in
the working.

Example 2 :

A norrnal distribution has a mean of 12,and standard deviation of 3. The probability that a ranclomly
chosen value of x lies between the values of 6 and 15 is calculated as fbllows :

Again the curve is drawn and the appropriate area shaded.

tln

6 t25
*r It *7

Since the area lies on both sides of the mean it is calculated in two steps :

(a) The area from 6 to the mean of 12 will be found, and

(b) the area from the mean of 12 to i 5 will be found.

6-12 The minus sign merely indicates that 6 is 2 standard

(a) Z.:
l-
=-6=-2
., deviations below ttre mean. It can be ignored for the
purpose of tlre calculation, since thc distribution is
t5 _12 3 symmetrical.
(b)
"3J =:=i

F-rom tables : zr: I gives an area of 0.3413

zr: 2 gives an area of O.4772
.'. total area

1'l' 6,104
 ICAB
STATISIICS
I

"' Probi'rbility that a randomly chosen value of x lies between the values of 6 and 15 is o.g1g5 r
P(6<x<15):0.818S.
Example 3 :

'Tatnis packed in tins clf nominal u'eight 1 kg. The actual

weight or jam delivered to a tin by the fiiir:
rtlachine is normally distributed rbout tlie set'"veight
a sutndard deviation of l2 s

1l thc sc1., or.rverag,e, Iilling ofiarn is 1 kg, calculate the proportion of tins containing
:

(a) Less than 985 g.

(b) More than 1,030 g

(c) Iletw,een 9859. and L. O30g.

(d) Less than 9859. : i. c. p ( < 958)

f/n

(/n

In ordcr to caloulatc thc: proportion oI'tins containig lcss than 9g5g it is necessary
to lind the arl-
bctween 985 and i,0O0 (shacied
) and subtract this fiom the area under half the cun .
r. c. u.5.
W

6,1 05
ICAR STATISTICS

xr 98_( - 1.000
= = -1.25 (again the minus sign can be ignored)
--_--
t2
rom tahles z. :1.25 gives an area of O.3944.
. Area I of pa.t of diagram : O.5- 0.3944

So P (x < 985) :0 I 056

, Proportion o1'tins is 0.1t-)56 (or 10.56-Yo).

b) Morcthan 1,0309:r. e. P (x> 1,030)

f his is cal cul ated in a similar way to part (a), i. e., area under half the curve less area
F*t" fA
shaded
YZfr
a
1010-1000
12

From tablps zr- 2.5 gives an area of 0.4938.

Area of part of diagram:0.5* 0.4938
ffi so P (x >1, 030) : 0.0062

Proportion of tins is 0.0O62 (or 0. 62"/0).

c) Betrryeen 9B5g and 1,030g : i. e. P (985 < x< 1,03O)

6,TO6

)
 ;{',tr} STATISTICS I

The area will again be calculaled in lwct slL'pri.

(i) the area between the mean ai-id 985

(ii) the area bctween the mean and 1 {)3{)

tfri
T hese areas have already been calculatecl in (a) and (b)

Area 1 is 0.3944
t\rea 2 is 0.4938

\ So P (985 < x < 1,030) : O.S'88Z

.'. Proportion of tins is 0.8882 (or 88.89/o) \

61":! Exl.lecterl fi'rqrxt'nt:ies

'f
ires'; ?rrr, i:rllvc'i ir: c:"li:cil-v the same
way as fl*r the other two distributions. The probabilities must
be calcul;rted llrst and then the corresponding fiequencies can be found.

Ilxam;rle 4 :

Considering the data Erample i 2, if 50,00O tins a week pass through th'e filling machine the number
of tins expected to contain :

(a) Less than 9859.

6,107
TCAB STATISTICS

(b) More than 1,30g.

(c) Between 9859 and 1,O3Og.

is calculated as fbllows :

(a) P (x > 985) :0,1056

.'. expected number of tins:50,000x O.1055

:5.?t!
(b) P (x > 1,030) : O.0O62
.'. expected number oftins : 50,O00x O.0062
: 31!

(c) P (985 <x< 1,O3O:0.8882

.'. expected number of tins : 50,OO0x 0.8882

:44.41O

(Check - 5,280 + 31O + 44,410 : 50,000)

61. Self-assessment question

I

Using the data in example 1 1, calculate the probability that 4 randomly chosen value lies betwe en 4.5
and 9.

Solution :

P(4.5<x<12) : Probability corresponding to z:- 25

:0.4938
P(9<x<12) : Probability corresponding to z :- 1

: O.414
P(4.5<x<9) : 0.4938-0.3413
:i.1:?:)

6,108 (next page 5,200)

 ICAB ST'ATIS'TICS

62. CONCI-USIONANDILLT}STTLATION

62.1 Conclusions

lt very important to realise that the binomial and Poisson distributions apply to discrete data whereas
is
the normal clistribution is used for continuous data.

Further applications of this last distribution will be met in the conring lessons.

62.2 Illustration

The average annual earning of a group of 10,000 unskilled building rvorkers ernployed by frrms in
'laka 2008.
Bangladesh in 19-4 was Taka 2,OOO with a standard deviation of
Assriiuing that the earnings were norrnally distributed about the average value, estirnate now many
workers earned :

(a) I.ess thall Taka 2,OO0.

!
(b) More than Taka 1,600 but less than Taka I,80()0-
F

(c) More than Taka 2,000 but less than'faka- 2,2OO

(d) Above Taka2,2OO*

!: Solution
\
(In each part the probability must be calculated before the expected frecluency)

(a) P (x < 2,000)

f/n
tlo

2,OOO

Since the mean of the distribution is Taka 2,OOO it follows that half the values will be below it (and
half above).

6,200

h
\
 1

1i:

ICAI}
STATISI'ICS

P (x < 2,OtlO; - 9.5

Number of works : I C),000 : s.000

:3
(b) P(1,600<x<1,80O)

It is necessary to calculate the area between Taka

1,600 ancl raka 2,000 and the area between
1,8000 and Taka 2,000 and subtract to find Taka
the shaded area.

./ l.(r00 - 2,000 _400

-i -' = -:ll: -2 t\rca: 0.4772
200 7oo

(a) 1,800<x<2,000)

1,800 _ 2,000 _2OO

200 rr;.": _t Area : 0i1_1:

(b) =

p(1,6O0<x< 1,800) : q_Li:.2

Number of workers : 0. I 3 59x 10,000 : t 1:2

(c) P(2,000<x<2,2OO)

0 ?,200
 IC.{B SIHIISTICS

To calculate this area :

2,200 -2,0a0 200 I

-
L^- ---- Area:0.341:i
200 200
-l

.'. P(2,000( x (2,2OO)=0.3413

.'. Nunrber ol'workers : 0.3413x 10,000:1,18

(d) P(x>2,2OO)

,I
I
t
II

In order to find this area it is necessary to substract the answer to (c) frorn 0.5
i.e. P ( x> 2,2OO): O.5 - 0.3414

: 0.1 597

\ Number of workers - O.l487 x I0,000 : I,5g?

6,202 (next page 7,000)

ICAB LEVEL 1 STATISTICS

INIERMEDIAIE

COST ACCOI.]NTING AND STATISTICS: VOLUME 2- STATISTICS

LESSON 7

Page
71. THEORY OF SAMPLING: POINT ESTIMATES

7I,1. INTRODUCTION 7,100

7T,2 LINBIASEDESTIMATES 7,100
77.3 DISTRTBUTION OF SAMPLE MEANS 7,102
71.4 CONFIDENCEINTERVALS 7,104
7I.5 SAMPLE STZE FOR A GIVEN ERROR 7,107
71.6 SELF-ASSESSMENT QLIESTIONS 7,108

1' THEORY OF SAMPLING: ESTIMAIION Of,' PROPORTIONS

'7,2AO
72.I ESTIM.{TION OF LINKNOWN PROPORTION
72.2 SAMPLING DISTRIBUTION PROPORTIONS 7,202
72,3 CONFIDENCE INTERVALS 7,202
72.4 SAMPLE SIZE FOR GIVEN ERROR 7,203
72.s SELF-ASSESSMENTQUESTIONS 7,504

73. CONCLUSIONS AND ILLUSTRATION

73.1 CONCLUSIONS 73AO

73.2 ILLUSTRATION 7,300

14. QUALTTYCONTROL
,74.1 TNTRODUCTION 7,400
74.2 QUALITY CONTROL CHARTS 7,40O
74.3 CONTROL LIMITS 7,4A1
74.4 CONTROL CHARTS IN PRACTICE 7,4O1
74.5 SELF-ASSESSMENT QUESTIONS 7,4O4

7,OOA (next page 7,lOO\

f,

'tr

N
 ICAB STATISTICS

71. TIIEORY OF SAMPLING: pOrNT ESTTMATES

71.1 Introduction

It is often necessary to draw conclusions about a whole popLation by examining only a small sample
taken from that population. In order to be able to do this successfully it is very important that
the
sample is truly representative ofthe population. Therefore, the items chosen of form the sample must
be selected at random from the population. only then can bias be avoided.

The sample data of the mean, meclian, standard deviation etc. are known astatistics : tbe
corresponding population values are colledp arameters.

71.2 Unbiasedcstimates

Any sample statistic can be used to estimate the corresponding population parameter and this is
then
known as a point estimate of the parameters.

The most commonly used statistics are the mean and standard deviation.

Therefbre' if one sample is randomly selected from a given population its mean
fi) will give
the best unbidsed estimate of the population mean (-l )

_T
r=-=ltst(lt)
n

However, the sample variance (S) will not give the best estimate of the population
variance(oz) . It
has been found that a sample variance tends to underestimate the population
variance, i. e. it is a
biased estimate. A better estimate is obtained by using a divisor of (n{) instead
of n when
calculating the sample variance.

:1:
,' ='f;=,i' = Est(o2)

This modified version of the formula is only used when estimates of population parameters
are
required and the calculations are based on Sample data.

Example I:
A random sample of 15 metal bars is taken from a day's production. The weighty
of bars in kg are:

7,loo
 ICAB ST!lTISTICS

IC
1,2O5, 7,2O5, 1,208, 1,275, 1,260, 1,2iO,7,271,1,212,1,293, 1,296, l,2gg, l,2gO, l,2gl, 1,292.
1..293.
7
Using this data" the hest possiblc point estimates oFthe ltlean and standard deviation of the weights of
o// such bars are calculated as follows :
If
th
ra. -- v
_Lr
t,
If
1,205 + 1,205 + e
q
18.e30 .
= --:;_.#9, W
tf
ir
:1,262kg.
F
.' x : 1,262 kg. can be used as an estinrate ol'the population mean.
m
i.e.[ :1,262 kg. : est (p )

(x* x ) -li:S-.r, *s4, -41, -2,+g; +g; +10, +21 , +24,+27,+zB,+29, +30, +31.

f (x- x ), -3, 249, 3,249, 2,9 I 6, 21209 ; ti, 64, g 1, 1 o0, 441, 57 6, i 29 ; 7s+, e+r, eoo, 96i.

2
.-,.'
t(N-,\)4
c
--
r1* I

+j
9,249 + 3,249+.... ....+901
s 1A
la

1 7.1 04
: lro
,*'t,'
l4

: .,,[lzz rc, .-\

;o
: 34.96 kg.
v
_ 3s ks.
lh
s : 35 kg can be used as an estimate of the populatibn standard diviations.
d
:.11-8.*'=! Est (o)
So
When is n large, the estimate obtained by usirrg thc clivisor (n-1) will tiifl'er very little fioin that o
obtalned using the divisora. It is odly with small sanlples (of the orcler 5,10 or 15 items) that the f
difl-erence is important. tn

7,701
 ICAB
STATISTICS

71,3 Distritrutionol'sampteme:lns

If two samples of 1he sanlg sizp Efe drawn liorn givn

a pop,lation. they will not be icle*tical,
though each has been raltdorlly selOcted. So cvcn
lf the rnean of cach sarnple is calculated, trvo
values will resrtlt' cach of which could difltrcnt
bo usccl to cstinrate the population paranreter.

If tr large numher of satnples ofthe same

size (rr) are clrawn from a give' pop.r,tion and tire me.n of
easlr calculated' a distribution ofvalrtes
will he obtaincd. This is knorvn as thsarttpring cri.rtribtrtiort
e/'lke ftteqn or the rli.ttribrttion of'santple mecrn.t.

when large sanlples are taken (i'e n > 3o) 1[15

clistribution is found to be n.rmir.lly distrib,tcd
irrospective of 1h'^ fbrm of the clistribution
or the p,rent population.

Furtllermc're' the tnean o1-all the sanrple

means is thc population ll]carl. So the distri
mears will be of the type bution gf sanrplc

'\ny nortnal distribution is completely de{'ined by its mean

the standard deviation of this
and standard cleviation. To zrv<licl
'"ltut:o? sampling distribution is calred thstancr)rcr errutr.ar,rr,
its
t alue is6 (i e' the population standarcl deviation
divided by the square root of the serrnple size).

lhe larger thq sample size (n) the smaller

will be ttrg value ol.the standard and the less
'lispersed will be tlie sample means about the pop,ration mean. "rro$
'ln
So tlre distribution of sample means is normal
with meaq/l and standard deviation or standard
j error
: and therclbre the standardised
',n variable becornes

7,102
ICAB STATISTICS

i-p
;G
The following point should be noted :

(a) The population from which the samples are drawn need not itself i.e. normally distributed. It
is the sample rneans that are normally distributed about the population mean.

(b) The standard error, , of the mean is not the sarnple standard deviation not the population
f
standard deviation; it is an entirely separate value that measures the spread (or dispersion) of
the sampling distribution. It happens to depend ono and n which is not surprising, though it
cannot be proved at this level.

(c) n is the size of each sample and not the number of samples that are taken. In general, only one
' samplp is available and all conclusions are based on the one set of data.

(d) The main reason fbr taking samples is so that inferences can be made about the population
under consideration. It is therefore, very likely thare will not be known ands m,st be used as
an estimate ofQ

(e) It is assumed that the population is very large, so that any sample forms only a very srnall
proportion of that population (less then 5Zo).

(f) A further necessary assumption is that the sample size is greater then 30.

The procedures to be used when (e) and (f) arc not satisfied will be discussed later.

Example 2 :

The length of a component is specified as 2ocm with a standard deviation of 0.45cm. The probability
that a sample of 100 rods will have mean less than 1o.85 cm is calculated as follows :

7,103
 STATISTICS
ICAB

lt -2O, o: 0.45, n: 10O, x: 19'85

I s.u.,ouro "rro,
o g = o.o45cm
"'l n Jtoo

P (x < 19.85) Standardising : z = q#

*0.15
=#
0.045

: -3.33 Area O'4995

population mean of 2o}
i.e.,19.g5 is 3.33 standard errors (standard deviations) below t}re
{

.'. P (x < 19'85) :P (z<- 3'33): o'5 - 0'4995

5
:0.005 or (*;*)
5 in
to have a mean less then 19'85 crl on only
Therefbte a sample of 100 rods woulcl be expected 1 sample in 2'o0o
way of expressing this is to say that only
10,o0o (or 1 ilr 2,OOO) occasions. Another
cm'
would yield a mean length of less than 19'85

11, 4 Confitlcnce intcrvals

of the population mean' It is possible
to give a probable range
Instead of giving just a point estimate
lie withi, this
lies and the probability that it does in fact
of values in which the popuration mean
aconfidence inten'al'
range. This range of values is known vs

7,1o4
 ICAB
STATISTICS

ttrp limits aI^ a ponfidence intervat the fbflowing qrirical values

lXa"J*::::.caloulare must first be

, lij
,/:a.

I . ,..
l-,

/,; i
95Y" of thp area under any normal curve
is cpntained within I g6 sta,dard deviations
This can be checkecl fiom nornral curve tables. of the mean.
.

1.96 standard deviations corresponcrs

47.5'% of the area: twice this (remembering to o.475 or
that the tables are onesided) gives 95yo.

Str fbr a sampling disrribution the range fronr

/-r
_ t.96+ (1) 1s ,, + I 96+
.,ln .,1,

(b) contains 95Ya of all the sample rneans.

Therefore, the probability that a sample
this range is o'95 (95/l oo) pnd the probapility rne&n lies within
that a sarppre mean lies outside rhis
1OO). So 95 samples out of every range is 0.o5 (5r
100 would yield a mean value in this
range and only five sarpples in
evgry I OO would yield a value ortsicle this range.
Also

,,; J ' '('" ./:\

?, \}.
,;. I

99%a of the area uncler any norrnal curve is corrtainecl

within 2.5g standard deviations ofthe
mean. So
lbr a sampling <listriburion rhe range fronr
t/ - 2.58+ (c) ro p +2.58] (d) \e/ conrain
tn - -" vv'rr( s 99o/oot.all the
J;
sample mean' There{bre, the probability
that a sample rnean lies within this range
and the probabilitv that it fars ourside the iq 0.99 (99llQ0)
range rs , o t ( r / l oo) il;;; ;r", , on sarnpres 99
would yield a value within the range and only
ene woulcl give a valuq outside.
7,105
ICAB STATISTICS

It tlrerefore fbllows that there is a95o/o probability that the population mean lies within I .96 standard

errors ol-a sample mean. i e. itt the rungcl - 1.96+ to v - 1.96+

,l n ,1,,
There ls a9996 probability that the population mean lies within 2.58 standard errors of a samplc

nrean, i. e. inthe ran$e f * 2.588 .o ; + 2.58]F

Tlrese ranges of values are known as the 95"/" tnd 99Yo confidence intervals fbr the population mean.
Any size of qonfidence idterval can be set up, by using the ap1)ropriate number of standard errors, but
these are two very commotrly used values.
o
95%o confidence interval : f -1 .rUG to t +1 .gUG
o o
.'.P(x *r.96f,; < P < 7 rl.e6 J,, ) = 0.95

o o
99oh confidence intcrval : t - 2.58-Ttt to t + 2.58 Jn
',1

o
.'. P ( ;-2.s8G ., l, < r+ 2 s8f,;)- O.ee

Example 3;

The mean and standard deviation ofthe height of a random sarrlple of 10O studerlts is 168.75 and 7.5
crrr, r()spectively. "the 95Yo 'an<l 99"/o confidence intervals for the mean height o{'all students are
calculated as follows :

252,conntf criccjl!t::]rd
600
"
.1- 1,96-r ro 7 + L96j (also wrilten as x- + 1.96-r )
\l n ln '(l n

t : 168.75,o unknown .'. s is used as an estimate, i.e.s - 7.5 : Est (o)

7.5
Confidence interval : 168.75 + 1.96Iffi

: 168.75 + 1.47

:16i.28<F <T7A.22

7,106
ICAB STATISTICS

i. e.

So there is a probability of 0.95 thatp lies within this range. It is not certain thatTtl lies between
167.28 and 77O.22 cm because the sample mean cr,,rld be one of the five in every hundred that r,
mcrre that 1.96 standard errors from trt

99 "/o C onfrdence intenral

o
Confidence interval - t+ 2.58 x
J"
o
168.75 t 2.58 x-r
!rl
168.75+ 1.94
166.81 < p <170.69

So there is a probability of O,99 tlrat trt lies between 166.81 and 170.69 cm. Again it is not certain
because the sample rnean could be the one in every hundred that is more than 2.58 standard errors
fiom p.

Also the result of increasing the degree of confidence (from 957, to 997) is that the precision of the
estimate is reduced i. e., a wider interval) is calculated forp .

71.5 Sample sizc fbr a given error

oo
1.96,'tf and 2.58-F are known as theerrons' in the estimates of p .It is possible to reduce the
n tl n

size of this error by increasing the value of n- the sample size.

Example 4 :

In measuring the reaction time of individuals, a psychologist estimates that the standard deviation of
all such tirne is O.O5 secs. Calculate the smallest sarnple size necessary in order to be (a) 957o and (b)
99o/o conftd.:nt that the error in the estimate will not exceed O.Ol secs.

(a) 95Yo confidence lirnits are I t 1.96f,;

0.05
: 1.96$ :
error in estimate 1.96 x
G
and this must be less than or equal to 0.O1 secs

7,1o7
ICAB Sli{I'IS1'TCS

0.05
.'. l96x r < 0.01
4n
1.96 x 0.05 <.1,
0.01

9.80 <,1-,i

96.04 < n (squaring both sides to removs scpiare root)

The sample size should OrZ since n must be grextcr tharr rrr equal ttt 96r.()4

o
(t,) 99olo confidence limits arcJ t 2.58 f
{lt
o 0.05
.'. error in estinratc:2.58 -T
1Jtt
:2.58 x
.J tt

and this rnust he at most ().01 sccs.

2.58x0.05 < 0.01

lnr
2.58x0.05
0.01
=Ji
tz.so <.li
166.41 < n (scluaring both sides)
The saurple size should b" )jJ
71.6 Sclf-assessmentquestion

A sample ofI OO items from a production line has a mcan length o{'8.4snr rvith shndard dcviat.ion
0.5cm. What is the 95Yo contidence interval Lbr the nrcan length of all itcrns fiorn that prodr-retiiin
line'7

o
9 5Yo confidence interval :x+ 1.96
,ln
using s to estimate o,
9 5 o/o confi dence interval :8.4+ l.e6x A.5cm
ffi-
8.4 t l.96xO.OScm.
8.3O2<p<8.498cm

19- 7,108 (next page 7,2OO)

 I(]AB SIhTIS.TTC,S

72. TH*]OTTV Or SAMPLING: ITSTIM,{I'ION Or PTTOPOI{I]TONS

72.1 llstimationol'unknown;rrolxrrtion

Jn the salne \.\ay that tire mean and staudaril devi;rthtr o.f a samfrle are
:ln uilbilscd estirnates of thc
llilpi-rlarion parilricters. str ,-he proportroll Df an atuibute in a sample rvill give an ullbiased estimate r.rf
th r,: Sropu iatiu n propot'tiolr.

'litirs it'itr a .s:rnrplc trl'sizd n. x, itcttrs posscris a pirnicrr!ar irl.tributc, thc: i;1aii11111c,
.f thc p(ri..,ulflti()' t
prllltrrti<tn { pi }i(r)!sc:Jsur.c. 1!rirl llrr.ihurc is ilir.,crr itr. :

Furtherrnofe tlrc distribulion ol-suniple prripcrrtions about thc pojrulatitllis

irrdportion is rrornral r.vith
il rilciln p (sec abovc) adcl a Strntlard beviatior: (i.c. strnd:rrd etror) giwcrr
bv :

Standarcl utr"t
#

hijll(:e tltc standafd varirblc. z. hcc(rrtc:i

p1*p
'/_
=
Jptt"

lixactly the satne prirrciplos oI'standarising and using ilormal cut'vd tables
appl1,

i.xnmplc 5:

trast experie,ce Witlr .n cx,rninaliorl irl I dW has shown that tlre only 5tt7" crf the stud€rrts pass. 'llte [-h
lrrr.rbahility that 5 39/" t>r rrlore of a groulr ol'2rti) srudents pass is calc[latetl
as tbllorvs.

t': ().5 '.' q-O.s antl n :2Ot).

7,201)
 ILhB S'IATISTICS

Sl:ut..lrriil r.icvr;il ir,, =- lE

-,/ li

i itYcti pt't;irirrt11111 ir - i) 5-i

I'r oportion pr
p=().5

l' (p' > 0.15) Stolldarciising,, =,

g'li*

= I ,4 I L\rea =- (, .42(t7

.'. I'' (pt> 0.55): p( z> I 4l ): o.S--o..4po?

_ i).f}71)3
=-:-.
f lrcr $hirnccs o1- 557o, (cr more) passing a19 0,()793 (rr appfiixil:r:rtet_v tt i4 i Oo

7,2o1

l-
 t(-_.\lt STATISTICS

1?""2 Sirnrpling distribution oflrroportions

ll.. rrrrrrrhur.{'strur;rlcs. crc}r gt 15c sapre size (n). are drawn fittnr a population and the proportion of I

\ilr:i;Lrs.{u\. Qri i, dctcrrlilcil ii-rr cach sitrnplc, th(: salnpiing distribttticln of these
proportions will again
lrs;r n.}rrriul disti-lbrrtion rvitir tncitti i), thctrue pftlportion 0f successes, and standard error.

r-"'
i ltti
t,,-..-
1l
I rl

Proportion pr

a.'
F
I
i2"3 (bnlitlenccintervitls
'l'he 9-{,1i, and "i5,}'o e-oni i(lencc intenrals lirr thg- tnie proportion of successes (p) are of the same from
: .rs lltrrse ;.tlre;.td1 sLatcd li'r tltc Il)ulill
i'
t
q 95?1, sonfidencc inlen'al :f - I 96!..:
t; to, p' + 1'96
pq
t'l

i. c p'-t
f*
l.e6!-

I t)u I Ptt
t-
997o confidence interval : t' - 2 851f -:- to
Iil
p1 + 2.58
V,,

i. e. p' + 2.5t1

sirrcc p is thc r.,cry thrng that is bcing cstirnated,the standard error *urbe calculate<l with the
ff
sunrplc virtrtcs trfpr and i-pr in place of p and q

1)())

l,\-
ICAB STATISTICS

Example 6:

In a random sample of 100 voters 55%o of them favoured canclidate A. The 95Yo and99o% confidencc
tntervals for the proportion of all voters in favour of A are calculated as follows :

p' : 0.55 = Est (p)

l-P':0.45:Est(q)
pq
957o confrdence intenal : p'+ L96
n

:0.55 + msro/s
+ 1.96 1Il_
Y 100
: 0.55 + o.o975

0.4525<p<0.6475 i. e. 95oh confident that between 45Yo and

650/o will vote for A.

pq
99o/o confidence interval : d + 2.58
n

6.sr',L+s
:0.55 + 2.58 .J-
li too
: 0.55 + 0.7248

0.4216<p<0.6748 i. e. 99Yo confident that between 42%o and 6goA

will vote for A.

As before, a wider interval results from the greater degree oI'confidence.

72.4 Sam;rlc size lbr a given error

The standard error and hence the error in the estimate can be reducd by increasing sample size rr.

.\t the 95Yo level, the error in the estimate is 1.96 -

G and at tl-te 99%o level 2.5gx pq
./; n

7,203
 ICAII STArISTICS

Exirmple 7:
An advertisipg lirrrr clainrs (hat its recqnt promotipn reashccl 30glo of the l.amilies Iiving in the gir1,.
T'hcy company wllo hired thg tirm doulrls this assgrtion and rvishgs to LrkE u sarnplr- sul\,cy rrf ils orvrr
Calgulate thg sample riiz$ rtrlccsriary to he a1 lgasl 95{% corrfidpnt that the gstinratp lvill be rvithin -1,%
of thc truc valuc.

p' 0.30 Ilst (p)

l-p' o.70 llst (q)

[:]rror of estinrate - l96x tr;

0.O3
1;
.'. 0.03
k;.r';
le6x!*;

'jn !2Li9.j,T7
0.03

)
1.96'x0.3r0.7
(squaring bpth sidcs)
0.3

n 896.4

A sarnple size of [9? shoulct be taken,

72.5 Sclf-assessmqrtquestion

In p rpndopt sample of I 44 pqoplp 637i, prefgrrpd thB flavour of 4 new brapcl of ilstiqrr
cotl.eg to ttrat
of the othFr braqds testpd. what is the 99Yo r:onfirlensg interval fpr the proporrion ot'tlre torrrl
population preferring the ngw brand.

(Ettlution 99?i, confidenpe Pq

intervat - p, f 2.Sg
tl

0.03r0 37
=+ t).63 * 2.53
= O.53;f 0,1
: o.s3 < fr < t).7

7,?O4 (next pSgc 7,3(X))

 ICAb S:TATTSTICS

73. COrr-(ILUS!()NSANDILLIiSTRATION
73.1 Conclusions

z\s can he scctl. tltc normal disribution hus many application. lt cun ba based as an approximation to
tlte binorrtial prrrbubility distribution under ceftain given conditions; It is also tirnAurn.ntoi ,., *u.,i
of the work on sanrpling.

So far' two santpling ciistriburions haVe becn coveredfbr the m€iln and tbt proportions, Whilst samplc
statistics can bc used to give point estilnates df thc cot'respondilrg!, par:rmetcrs, it is more t'erilistic to
give a ltnge of vtllues wittrin which the ;iarameter grobably lies. This is knopl ds it
confidense
i0terval ahd the dcgrec of cortfidence is the probability that the range coltains the population
I]iirilrilclc[.

73.2 lllustr:ttiein

A manulacturc of alectric light bulbs tleods to estimate lhe ev€roge 'burning lilb' ofl the hulbs he
makes. A randorn sample of l Oo trttlbs was fourld to havo a nreilfl life of 34o horirs with
a standhrd
cleviation of 39 hortrs, caldulatrn :

(it I 'l'ltc standarr.l errerr of ttrc nlcarr.

(h) -l-he
9592; and 99')/o ctlrrfidence i,ten.'ls {or the population ill.,an.

(c) 'l'ho sahrplc sizc necessary to proviclc

il dcgfec of accuracy rvithirr 3 hours at thc 95,% level.

tiotutitrn

*} 340 s:30=ljst (r) n:100

(t)

o
( il) Stirndard crrof =-7tt
"l

30
- Jtoo

= 3 hours

1,3oo
 ICAB STATISTICS

(b) 95o/o confidence interval forlt

o
1.96x lnr
"+
:34O + 1.96x3
:34O + 5.88
:334.12 - 345.88 hours

99Y" confrdence interyal for 1l

o
v+ 258x'rtln
34O + 2.58x3
34O+ 7.74
332.26 - 347.74 hours

(c) The error in the estimate: 3

o
.'. 1.96!nr -3
F 30
,,1.e6*G :3
1.96 x 30
3 -'ln
t
re.6 : Jn
& 384.16 : n

it is necessary to use a sarnple of at least 385

7,301 (nex page'7,4OO)

ICAI] ST1{I'IS'IICS

74. QUALI'I'YClON'r'Ror,
i4.l Introductiein

Statistical quaiity control is a1echniqr.re t.iri,l1 ejnlllrtys statisticai rnelitc,ls al ilrt aid to c0r:irollin!; ritc
quality of a mamtfictured itent.

It is necesslry becalse slight clrrality flucllal,iorrs \'vi1l 'iccllr duti t''l'

(a) Ilandom ell'ects such as tcnlpcrature c1i:rnges, machitle spcecl changcs, riligltl t()o tllovenlellt
c{c'
ancl/or.

(b) permanent alterations in the setting of a machitre such as rnigh'i oscur if a part becomes damaged
or rnovcs ottt olPlacc.

It is irnportalt to determine whether or not these quality fluctuations are .significant and this thcn
is

the aint of statistical quality ctlntrol.

74.2 QuaIitY control charts

Successive samples are taken liom a production line at regular irllt:rr/als througirout the r'vorking
clay.
be
The sarnplc results are then plotted on a chart so that an overall piclure of'wha1 is happerring carr
tbrlrcd. It cal thc6 be segn'at a glance' if thc rcsult arc tending to Inove in a particular elirection'

The res,.rlt that- is usually citlculated for each samplc is the tnean ( -1 lr anci tilc control chart will har"c
tlre lerllowinll altpearanct; :

I 23 4 Sarnple number
The process mean will already bv known.
20- 7,401)
 ICAI}
S'E}TTIS'I I

74,3 Control lirnits

uOntrol limits ilrc set;rt a given nurnbcr ol'stanrlarcl srrors
lrorn the mean-rhe usual procecltrrc ..
grt thc inrti:r c<-:nti'ol iitilits (or w'arnirg lrmitst 1.95 standarcl
errors liorn the mean anci the
c,ilt-i:t:i lilrlits 1also caiicci itcliotl lirnits) 3 st-aniiarrl errors
fiorn the riean. Tliese ;_Lre inlbct the -
i;r:r.i 998'1,i, c,cilfirierrcc linrits. T'ire cirerrt no:,v liirs
the Ibllorving apperance.

actiorr limir

u,arning lin

x
Process me;-r

xxxx1.96 warning linr

x

action litnit

Sarrylc t
n ri rr rL:cr

i-he probability ttral a sritnplc lncilrl trirlls

oursiclc the warniils linrils is 59zo .r I in 2O SO il.a .'r, ,.1
a lies c'rtitsiclc this range it is cil.irer t'rric oithe 5olo r:r
tire process has chirngccl.

Thc pr<lbabilitlz that a saitrtr;ie nri.:ln flilis i:rirrsir.lc

thc actio* lirrrils i:-r (1.22 or 2 it i.{}0(i (i. r:. j i,
So a valrre OJ'' ? rying oLrtsidc 1i'icli: jinriis r.i,i1r
lirrnost certairry lave r',;sulted liolti i_i L
change in ths rltralitv of-11rc procluct bcllig pritrJuced. !a(_.t.ii-i

74.4 (lontrol chitr{s in pr..rr{ir:l:

I1'the llrcails o1'sttcccssivu- satlrplcs iic

bctwccn thc iililcr coiltrol l.,nits thcil [hc;-rrcilrrcrr
reqttrclcd as i:cing uncic:r cc;ttl.rol. IIttr,
'cvel. il'a sarnple rrean lics oul-sir-ir: thc:;c cririrr"ol lirriils ihc: I
1;<tssible tilal tht:re lra.s becn a Ilcl:i.rli:lrrctri chl,ruge iit
-l'hcrclorc, the pri)ccss lcaclirrrl lo a riiralilv cii.
lirc 1:rrJccss rnusl. br: sl.o;tpeci arrd thc cause ot.the ,
cliatige icrcalcci.

i "tl,J I
 il* s';A i'rs:E'c{i5

r rrl jj'th* sainple irleitll-{ stal-';ilhin tl.ie irlncr q:rr.lrL-:l lisrirs. ii drail in;r
",i;n i ;,ut d int' \r,.arrailt i itthcr j:
.[ l-,,esti;1,;; i i on.

;,, ;,,

Process mean

S:rmplc nurnber

.-irnple 8

-'lllean r.r,eight of ir iargc lir;rl-l:r'oduced at a bakerV wars lbru.rcl to be 3tj Cunces w-ith a standard
llion ol'I c'runce.

fnle batches of 4 loaves wers taken at two hourly interv-als ftom the even and the following
are
of the last six consecutive sample batches.
ft.r
[. ,, o. 30,2, 30.3. 3o. r .

I
I Darw a conrrol charl.

what proportion of loaves of would be expecteci to 1u_11 belor.r,2g ounccs ?

rurion :

l
.,- control iitnits '3O+ l96x /7
v+
:30 + 0.98
1 Ani
ICAI} S'IXI]ISTICS

29.02 * 3C.98
tI
oulcr control lirnil,s 3O+3x-r;
:1t-l r I5
= ZN"S * :t S

;(

ir:rl6f
tl
lnner

P roces$ rtean
7ri inner
0uL€1-
},.

Saorpie nur'Yli{:i-

Although the samples are small, since they contain only tbur iterns, the thcclry of thc nitrmal
distribution applies because thc populirtion standard deviation is giveri al<i so it is nirl ncccssary to
usc u sanlplc valuc,

(b)

28*30
P (r < 28) Stanclardisirrg '. z: .
I

: -2. Area: 0.4772

P(x<28):P (z'--Z) :0.5- 0.4772
:0.0228
The required proportion is 2.289'o

7,4i.1,a
ICAR S'IA'I-IS'fICS

:J.5 ScIf*assessmentqucstion

,t: 1hc situttiot-t despribe,.l in q:xample 8. a {urher batch of loaves has a mean rryeight of 3 1 .2 ounccs.
\Viut action, if rury. sirould he taken '/

Soltrtiotr : 'l'l-ris vltlrtc iics outsiclc the inncr control limits : thc production process shoulql be checkerJ
icrr a possihrle iirr-rlt carrsing. to iargc loavcs to be produced.

7,1O4 (naxt pagq 8,0O0)

I

I
!
ICAB LE\/EL 1 STAI-ISTICS

INTERMEDIATE

COST ACCOUNTING AND STATISTICS : VOLUME:- STATISTICS

LESSON 8

Page.

81. SCATTERDIAGRAMS

81.1 INTRODUCTION 8,100

81.2 CORREI-ATION 8,101
81.3 TYPE,S OF CORRELATION 8,101

a2- REGRESSION

82.I LINEARCORRELAIION 8,200

82-2 LINE OF BEST FIT 8,200
82.3 EQUATTON OF A STRATGHT LrNE, 8,200
82.4 }IIGH.LOW METHOD -8,201
82.5 LEAST SQUARES REGRESSION 8,203
82.6 REGRESSION LINE 8,204
82.7 NOTES ON T}iIE CALCULAIION 8,207
82,8 REGRESSION AND EXTRAPOLATION 8,207
82.9 INTERPOT,AIIONANDEXTRAPOLAIION 8,207
82.10 SEr,F-ASSESSMENT QITESTION 8,209

83. CORREI-AI]ION

83.1 INTRODUCTION 8,300

83.2 P'RODUCT MOMENT CORRELAIION COEFFICIENT 8,300
83.3 INTERPRETATION OF COEFFICIENT OF CORRELAIION 8,301
83,4 COEFFICIENT OF DETERMINAIION 8,302
83.5 SPURIOUS CORRELATION 8,303
83.6 SELF-ASSESSMENT QUESTTON 8,303

84. CONT'IDENCE INTERVALS AND PREDICTION INTER\/AL S

84.1 UNCERTAINTYINPREDICTIONS 8,400

84.2 AVERAGE VAI-UES AND INDIVIDUALS 8,400
84.3 ILLUSTRAIION 8,401
84.4 SELF-ASSESSMENTQUESTTON 8,402

8,000
 dCAB S1}ITIS'IICS

TTTVIE SIIRIIIS

85.1 INTRODIJCTION 8,500

85.2 VARIAIIONS IN OBSERVAI'IONS 8,501
85.3 A TIME, S]]RIES C}RAPH 8,502
85.4 ANAIi.SIS OIT A TIIvIE SERTE,S 8,505
85.5 MO\TNG AVER,.\GES 8,505

86. FORECAST'ING TEC}INIQIJIIS

85.1 INTRODT]C'I'ION 8,600

86.2 PROJF,CTION 8,600
86.3 PREDICTION 8,601
86"4 FORECASTING 8,602
86.5 DESIGNING A SYSTI]M 8,602
86.6 IV{ODELS 8,602
85.7 ANALYSIS OF TIME SERTES 8,603
86.8 T-IMITAIIONS OF REGRESSION ANALYSIS.FOR FORECASTING 8,6C7

n 86.9 E,XPONENTIAI- SN,IOOTFIINGS 8,607

85.10 FORECASTING : CONCLUSIONS 8,609

s
l
H
\

8,001 (next page 8,100)

I
I(]AB S:I'ATTSTICS

81. SC-.aTl'ftltt DL\GI{AMS

81 .1 Introduction
Infonlalion about trvo variablcs that are sonsidered to be rclated in sorne way can be plotted on a
scattcr diagranr, one axis reprcsenting each variable. For eranrple, thc amount of rainiall ancl tlre crop
yield per acre can bc pittttcd against each other, or the Ievel o['aclvertising expencliture and s11es
rcvcnue.

It is itnirorlant, howeveL to decide which variable can be userl tr: preclictthc olhe-r i. e., r,vhich is the
irtclapertclenl and which the de7.tendent vctrio ltIe.

In many cases it is cluitc clcar, c-. c , the aniolrnt of rainlall obviousll, oauscs a parlicular crop yielcl ancl
11t)1 trice -t'ersa FIerc rainiu ll is tl'rc iriclelte ndent variable and crop yielcl tlre depenclctrt variable, (i.
e.,
yicld dclrends tttt llic art'.-,irnt r,f llilrhii). Sornc relationships havc ciassic "chicken and cgg"
characteristics. lbr crailrpic. ttih'ertising ancl sales reverlue. Whether a giveu level oi adver-tising
causes a llarlicular lcr"'c1 tr1'salcs or rvhetltcr a parti cttlar levcl of ssles provokcs a certail level 6{'
:idver-tising is rtot cluite so clcar. [n lirct. aclr,'crtising tends tolbectl.y aflect salcs levels rvhercas salcs
clnly have air inctirect inl'lttcttce oil dccisions ahoui aclvenising expenditure ancl theretbre sales ti.:rrds
1o be regardcd as thc depcndctrt vitriable and advcrtrsin.q expencliturc tire inclcpcnclelt variable.

.l'he
ilrilepctldcnt vitrilblc is usu:rlly makecl alon,s thc irorizctirtal (x) axis ancl the clepentlelt variablc
along the vertical (y) axis.

Sludenls are advisccj ttr think in tcrns oitl.rLixaxis being ttre cimsc encl the'v'axrs the elI'ect.

'l-he viiires.rl'thc trl.r.r variablcs aro plittlcd togclircr -so tlrat thc <liagrarn consists of a number oi-
poitrts. '['hc: t';itr.; in u,hich thcse lrc:seattcrcii or dispcr,.iiicl inclicates if 1ny link is likely to cxist
be tr.veen thc variahlcs.

v)
dependeril
variable

(x)
iuCependcnt" rrariilirle
8,1()0
 ICAI} STAI'ISTICS

8I.2 C'orrelation

L)ne advanlage of a scatter diagrarn is that

it is possibl,i to see cluite easily if the points indicatc rhat *
rclationship exists between thc variables, i. e. to see;'i'any correlation exists betweerr thern.

It is not possible to rneasure the degree of correlation from a scatter cliagrarn. I{owever as will be seen
Iater there are methods of calculating a mrmorical value of this.

81.3 'fypes of correlation

(a) (b)

Perlecl positive Pcrl'ect negative

(d)

I-ligh positive I-orv negative

***+ r
No correlation

8,1 01

L.
ICAB S'IHTISTIC]S

These five scatter cliagrams illustrate some of the diftbrent types of correlatiotl

if the points lie exactly on a straight line, then the correlation is said to be perfect. In practice this
rarely occures and it is nrore usual for the points to be scattered in a band, the narrower the band the
higher the degree of correlation.

positive correlation exists where the values of the variables increase together. Negative correlati-on
exits where one variable increases as the other decreases in value.

'Ihus, considering the diagrams :

Ar"'{i''o-
(a) This is an example of perfect riffifive correlational since the points lie exactly on a straight line
and as 'x' increases'y' incteases.

(b) This is an example of perfect negative correlation since the points again lie on a straight line, but
as the xvalues increase so the yvalues decreases.

(c) In this diagram, the points lie in a narrow band rather then on a straight line, but x and y still tend
to increase together, therefore a high degree ofpositive correlation is evident.

(d) This tirye the points lie in a much wider bancl and as x increases, y tends to decrease, so this is an
example of low negative correlation.

(e) When the point are scattered all over the diagram, as in this case, then no correlation exists
between the two variables.

2l- 8,102 (next page 8,200)

 ICAI}
STATISTICS

Tt2. IIEGRI]SSTON

tjz.l [.inurr.comel:rtion

When the points on a sciltter diagrarn

tend to 1ic in a narrow band, there is a
between the variables. l-his band may strong correlatt,--:
be curve or straight. For example :

*
lP
??/
,r'x-rx H.a /
/xir X
?X,
/X
/x -.r' --
/ X/x x/,
^ "/ /,- )1,
aa
x /it )< /
{ r'l..rx
-/xat
)i/
x I

WJrcn thc bancl is straiglrt the correlation

is linear antl the relationship between the
cxpressed in terms of the equation variables can be
ll of a straiglrt linc. It is this type ofcorrelation
th roughoul this lesson. that will be studieq
I

82.2 I-ine of trest fit

ro obtain a measure of relationship in

tire form of an equation in orcler to forecast
necessary to fit a straight li^e, among values it is
the points on the scatter diagram, that
l:r plotted points. There are several best represents all of the
ways of accomplishing this.

one method is simply to fit a line

"by eye" which appears to best suit au the points
plotted. This ha:
that no two peoples lines will coincide
and it is therefore nor mathematica[y ac-
:Trff,|*'"tage

82.3 Equation of a straight line

'Ihe equation for

any straight line is of the fonn

Y:a+bx

8,200
 ICrtIl
STATISTICS

where x and y are the variables and a and

b are constants for the particula.r rjne
the intercept on the y axis and measures in question a is callecl
the point at which the li'e will cut
the y axis.
b is called the gradient of the line
and measure its cregree of srope.

a and b can take any varue including zero

a,d may be positive or negative.

* locate any particular line, it is therefore

necessary to deterrnine the values
,';:tn* of zrnd b fbr that

82.4 l{igh-tow merhorl

The high-low rnethod of fitting a straight line

to the points on a scattor ctria.granr is
rrocedure as it uses only the highest a relatively cru<le
ancl lowest values in a set ol'clata
iinci flts a line between these
:oints, by determining the varues of a and
b, as ciefined in the prc'ious scc.ior.

Example:

'he following table shows the amount of fertiliser

appirecl to identical fi..l,ls and their
;clds: resulting

Fe rti I i s e r (kg.,h e cta re) Yi e I d {to nnes4te c ta rr: )

x ,v,

100
40
200 .15
300
50
400
65
50c /tl
600
70
700
80

8,201
ICAI] STKTISTI

v
80

I
?0 I
I
I
I

I
I

I
v
I h
I
Qi) l

X- xr
".Id
nl -

ii)

l()

o ioo zoo 3oo 400 500 600 700

The slope of the line, b, is given by

Inc'rease in y values between highest and lowest points

b*
Yr. - Yt
X,, - xt

80-40
'floo."1otr

- 0.O67 (to 3 dec. pl)

a is found by substituting known values is in the equation y : a -f bx.

e.g. using values at highest point.

8O:a+O.067x7O0
T
: v+ 46.9
a:33.1

8,202
ICAB STAIISTICS

So equation of line of best fit is

y: 33.1 + O.067x.

82.5 ,Least
squares regression

The method of least squares regression is the most mathematically acceptable method of fitting a line
to a set of data. It is possible to calculated two different regression lines for a set of data. This is
because the horizontal deviations and the vertical deviations of the points from the line are consid-
ered separately. It is the sum of the squares of these deviations that is minimised; this overcomes
problems that might aries because some deviations would be positive and some negative depending
on whether the point was above or below the line. It is not necessary to go into the theory of this
method any more deeply at this level.

huri:errLatr
devi^at ion

line of trest fit

The two regression lines that result from applying this method are :

(a) The regression line of on x- this must be used when an estimate of y is required for a given value
ofx.

This line minimises the sum of the square of vertical distances of the points from the line.

(b) The regression line of x on y- this must be used when an estimate of x is required fbr a knov,rn
value of y.

This line minimises the sum of the square ofthe horizontal distances of the points from ttre line.

The scatter diagram has the following appearance when the regression lines are graphed :

8,203
 ICit.B S'IKT'ISTICS

t12.6 The regression linc

This is alternatively known as the line of bcst fit or the least square line. I'he regrcssion line is the
best linear relationship that can be established fiom the available data of y in relation to x.

It is in fact the line which minirnises the square o1'the vertical deviation (hence least square line) .

n
t*;
gresslon I ine
F,

t l obserrred
! dev lat lon value
a +

LI

u\;

It is important to appreciate that the normal regression line is designed to estimate y: hence tl-.
vertical deviation only are considered. This is relerred to as the regression of y on x.

There is always an alternative regression line x on y, which n-rinimises the horizontal deviation. T1-" ,

is of little practical significance.

8,204
ICAB STATIST'ICS

Calculation

Assumrng tirat the equation of the regression line of y on x is :-

y:a+bx For the regression line x on y x: o +py

the equation is

It is necessary to calculate the values of a and b so that equation can be completely determined

The follorving forrnula are usecl .

n: xy-:x:y
b: p: nlxy-5xIY
n;x2 * (ix). nly'-(zy),

t1/ hsv
ix fJ:y

Itrxzun;rlc 2 :

using the data in exarnple 1, the regression line of y on x is for.rnd as follows

x x" xy

100 4i: 10,000 4,000

200 45 40,000 9,000
3 L)0 50 90,000 15,000
400 65 160,O00 26,OOO
500 70 250,O00 35,000
600 70 360,000 42,00O
700 ttt) 490,O00 56,O00

Ix:2.800 ty:42O 1x2 : 1,4O0,000 Ixy : 187,000

8,205
 ICAB STKTISTICS

(Zx;2 :2,80d
b:78,40,000
nlxy-ZxZy
) ..- .,
nZx--(Lx)-
Replacing with the above values gives :

7x1.87,000-2,800x420
h:
x I4,00,000 - 78,40,000

I3,09,000 - I 1,76,000
98,00,000 * 78,40,000

1,33,000
:-
19,60,000
-
r{1 b: O.0679 (rounding to 3 significant figures)
!
Zy bIx
t
n n
t

420 2.800
t 0.0679
I 7 " 7
ri
v :6O-O0679x400
: 6O 27.15
-
:32.84

.'. a: 32.8 (rounding to 3 significant figures)

.'. the regression line {br y on x is :

y : 32.4 x 0.0679 x

This line would be used to estimate the yield corresponding to a given amount of fertilizer.

Using the regression line and replacing x with 250 :

y:32.8+0.069x23O
:32.A + 16.975
:49.775

5O (rounding to rvhole nurnbers line with original data)

8"246
ICAB STATIS'TICS

82.7 Notes on th€ calculation

a) A scatter diagram is always a useful aid in answering question on correlation and regreession.
;ven if it is not specifically requested, a sketch diagram can be included as part of a solution.

b) The calculation can be reduced to a series of steps :

Step I : Thbulate the data as shown paragraph (b)

Step 2: CalculateIx, Xy Xxy,Ix2 land lyz if recluirecl) and [x)2 (and (Iy)2 if required).

Step 3: Substitute in the formula in order to find and b (and x and 3 if necessary). These
formula do not have to be mernorised, but practice is essential.

Step 4: Substitute constants in the regression equation.

t2.S Regression and comelation

The angle between the two regression lines y on x and x on y decreases as the correlation between the
variables increases.

ln the case of perfect correlation the angle between the lines is zero, i.e. the two lines coincide and
become one.

.\t the other extremc, the angle between the lines becomcs 9O'when there is no correlalion between
rhe Variables, in this case one line is one of the x axis and the other parallel to the y axis'

S2.9 Interpolationandcxtrapolation

is has been shown, regression lines can be used to calculate intermediate values of the variables. This
rs known asinterpolation and it is one of the rnain uses of regression lines.

It is also possible to extend regression line beyond the range ofvalues used in their calculation' It 1S
now possible to calculate values of the variables that are oulside the limits of original data, this is
known'as e.r t ra Po I a I i on.

)2 8,207
 ICY\B
STATISl'ICS

e.g

I
I

t
I

I'r'";il'il ext:-irpola'rirttr ts f itat i1 assurrrcs tliat lhs linear relationship

already calculatecl is
I ! ' , r,t'i,' ri1 tt1il\l 'r1{}! bC Si,r.

' ,: , ::::;'li1i:rt- iirt ri ct"r--.i-: .,'i 6'lr1 exatn+ri c, i.t is qui et possible that if the amount of l.ertiliser
r"\:.il;i jll'li:}ir!1' ('j1iir'ri'-1e lircl givel riurgcthere rloulrl comc a point wherc it
'l '".] had ar1 adverse eflection t6e
5,ielcl. ]ie xri:ii iuiglir: aclrr;lilyr bc rjal:raged by t<_ro rnuch fbrtiliser.

-i
iri: -.csuit:iiii r.liili:r:lrr; c*rilij be this liorr-r .

.z f- extended regression lirre

I

l t
I , \ *
I _,t- true gr;rph
I
i
I \
I

.{

t,(-- knovn \l
ren&,e I

I i I ,50C
100 i00
'i-iltrul"rc 1'hu vield liom using 1,5o0 kg/hcctare of lertiliser
as cstirnated {iorn the regrcssion [ir:.
tuity ttc vcry diiltrerii liiir.tr llilii ;rurrrrrll1,21i-11 is-,cd in practice.

(ieltcrij.lly s1:caking, extrapolitti{)Tr []lirsr" irc trc:ricil

r,r,,ith i:lutiiin silcc orrisir.i,; lhc l:angc o{-kn<tr,
values odler lilclors rltly iri{luence thc situation ani-l ihe iincurrelationsirip tlil.y,}()1.
stiil hllcl truc

rJ,2i)ft
I{-AB
STATIS'I'ICS

il.lO Self-assessmentquestion

: Ix: 56O,ly - 85. lx, - 62,5OA,Xxy: 74,200 and n -12, fin<l the regression
line of y on x

-iolution : Equation of line is y: a + bx

L-
nlxy-IxIv
nfx2-fI*),

_%
12x14.200 560 x 85
12x62,50A - 560x560

: O.281

IY - blx
0.=-
nil
85 O28l x 560
11 t2

:- 6.03

Regression-line is y:* 6 03 + O 2g1l

8,209 (next pagc 8,300)

 ICAB STATISTICS

33. CORRIII.ATION

83.1 Introduction

'fhrough regression analysis it is possible to dcrive a lincar rclitlictnship bctwccn trvo variablcs attd
lrencc cstimate unknorvn valucs, l.Iolvevcr, this does not nrclsure tbe degtve ofcon'elalion bctrveclr
the variables, i.e. how strong thc connection is hctrveen 1hc lrvo variable.

83.2 .Product mom-cnt correlatigS:o:[,:tqlt

:

This is calculated using the following formula :

flZxy - IxI"r,
: l:
-(zx)2\nZy2 *(Lg2t
I

'Ihis does not have to be memorised, but practice is nee ded at applying it to data and lntcrpreting tbt
result.

qi Example 3 :

Using the data of Example I calculate the product moment correlation coefftcient,

The summations have already been rnade it example 2 and will be used here :

!x: 2,80O \y:42O lxy: 1,87,OO0 !12 : l4,OO,0O0 f,y2 :26,550

$ (Ix)2 : 78,40,o0o CIY)z : 1,76,400

\,1

nLx! -LxZ.y
tlsing r:
-(I,)2ln2y2 -(Zgzl

and substituting

7x1,87,000-2,800x420
'- x 14,00,000- 78,40,000[7 x 26,550- 1,76,400]
^lll

13,09,000 - 11,76,000

Jts,oo.ooo x 9,450

8,300
ICAB STATIS'TICS

133.000
-,ff
14,00 x 97.2

..' r = 0.91

Note :

Since the numbers axe large. l9,6O,OO0 and 9,350 have been seu?re-rooted and then rnultiplied. T'he
samp answer would have been obtained if they had been multiplied and square root taken of the
product.

83.3 Interpretation of coefficient of correlation

Having calculated the value of r, it is necessary to interpret this result. Does r : O.98 mean that there
is high correlation. Low correlation or no correlation?

rvaries between+ I and-l where :

r: + I means perfect positive correlation

r: O means no correlation

r: - I means perfect negative correlation

So in this case the value of 0.98 indicates a high degree of positive correlation between the variables.

In general, the closer that r is to + I (or - 1 ) the higher the degree of correlation. This will usually be
conflrmed by the scatter diagram where the points will lie in a narrow band for such values.

Example 4:

The product moment correlation coefficient will be calculated for the following data :

x:25463
y:17 21 19 15 l8

8,301
 ICAI] s'!].\T'i sT'rr_'s

)
v x' v" xy

) 17 4 289 34
5 27 Z5 441 105
4 19 16 361 76
6 15 JO 225 90
J 18 o 324 51

'lotals 20 90 90 I,640 3s9

fotals
squared (400) (8.1 00)

rI x -y _ZxZy
tlstnc: i r 1 .
t/t nZ r" -(I r)' llrZ r' - (Z.y)/ J

and substituting

i 5x359 - 20x90
' ",/Jsxso-4ool[5xr,6ao-8.roo]
1,795 - 1,800

Jso^too

-5
^l'lo.l
1
r: - 0.07

Clearty very little correlation exists between these variables.

tt3.4 Coefficient of determination

'fhe coefficient of cletermination is the square of the coclficient of correlation,

and so is clenoted by
r2. 'I-he advantage of knowing the coetlicient of cletennination is that it is a measure of how rnuch ol.
thevariation in the dependentvariable is'explaineci' by thevariation of the inclepeldentvariable. 'Ihe
varialion not a.ccounted lbr by variatiorts in the indepenclent variable will be duc to ralclom fl.ctua-
tions or to other specific factors which have not been identifiecl in consiclering the two-v.riable
problem.

In the example on f-ertiliser and yield r had a value ol 9.98 and

9,302
 ICAI}
S1}ITISTICS

Thus, variation In the amount of fertiliser applied

accounts for 960/o of the vnriation in the yield
obtained.

83.5 S;ruriouscorreltrtion

students should be ar'vare o{'thc big danger involvcci

in correlation a'alysis. ,I-rvo variables when
compared may show a high clegrce of'corrclation
but they n'ray stiil have no direct c.nncction.
correlaticrn is termerl spurious' or nonsense correlation such
ancr unress two variable can reasonably
beasstttncd to have some direct conncction the correlation
coellicient found will be meaningless
however higli it mety be.

The followin-q are examples of'r'ariables belween

rvhich tirere is high but spurio,s correlati.n

(a) Salaries of school teachers consumptlorr olalcolio[.

(b) Nurnber <;f television receiving lir;c'ces .,cl the number

of adrnissions to firental hospitals.

Such examplcs clearly have no directca,.r'al relationship.

Irowe.veq there may be so,re ,ther vari-
able which is a causal lactor colnlnolt to both
of the original variables. For example, the general
in living standarcls anrl real incomes is responsible rise
l'or both tlie irrcrcase in teachers, salaries
consurnption of alcohol, *nd

83.6 Scll'-trssessmentquestion

If t : o'42' how much of the variation in tilc clepenclent

variabre is explained b, the variation of the
rndependcnt variublc'l

I Solutio,s : I1'r: o 42, then 12 : 0 1764. So abour 176o|of

the variation is explained by variations
in the independent variable..l

1i.303 (next page 8,400)

IChB STATIS'TICS

54. CONTTDENCEINTERVALSANDPREDICTIONINTEI{VALS

84.1 UncertaintY in Predictions

used for pre'
As previous sections have shown, once a regression line has been calculated it c4n be
value of y for
diction ofvalues. The regression line will provide a 'point estimate' of for example, the
a given x where x and y are related by y = a l- bx'

lirre is only an
However, this prediction is subject to uncertainly, since the calculated regression
relevant to estab-
estimate of the true regression line, based on a sample of data. It is therefore often
lish a confidence interval for a prediction that has been made.

Ifaregressionlirreoftheformy=a+bxhasbeenfound,theobservedvalueofyislikelytodiffer
population of
fiom the value predicted from the equation : the observed value of y is only one fiom
possible y values. The standard devialion, o of the population cannot be found exactly, but
s, an

estimate of o, can be cound from.

Where $ is ttre estimated value of Y

otrtained ftorn the regression line.

54.2 Average values and individual valucs

value
care mtrst be taken to distinguish betrveen the confidence interval fbr the expected or {rverage
value. The latter
of y obtaile6 from the regressing line, and the range of the values for an individual
y
,urrg. of values is called a prediction interval not a confidence interval'

the 95Vo confidence interval {br the expected value of y is

t1
-o (r -x)
_+_____:1__
vt t.O25xsx
n Z(*
i,where.
-A)z

x: value of x for which Y is Predicted

value of y predicted by regression line

n')
I0 -y)-
"-,
t. o25: appropriate t-distribution factor, rvith n-2 degrees of fieedom
dfroi"" of n is large, then the nonnal distribution is used).

8,400
 ICAB stHfrs'[rc]s

The 9So,to prediction interual for an indiruidual y value is wider than ths confidcric:c' ;nil:r':*.1 ,fcr liie:
averagc y value. -l-lrc 95ozir prcdiction interval is :

f t,.02sxSx

The formula is very similar to the preceding one, but has an extra ftictor of one under the square rclot
sign.

E4.3 lllustration

Using the data of Example 1, calculate the 957ir confidence interval fur the average crop yield u,herr
55O kglhectare of t-ertiiizer is applied.

x v 9 (y1y)' (x*x)2
"'ioo
50 39.59 0.1 68 90,000 x=400
200 45 46.38 1.904 40,000
300 50 53.t7 10.049 10,000
400 65 59.96 25.402 0
500 70 66.75 10.563 10,o00
600 70 78.54 12.532 40,OOO
700 80 80.33 o.l09 90,ooc)
6O.7n 2,Sgg0o

Note : The values of y are calculated by substituting values of x into the regression line found in
ExamPle 2,? = 32.8 + 0.0679x.
e.g. x:1O0, y:32.9, +(0.0679x l0O)
36.50
when *o :550, f :32.S + (0.O679X 550)
, : 7O.l4S

95or'o confidence interval for average value of y is :

70.745 + t. 025 x
,0- fi2 t (ro - r)2
;.rG-fl2

:7O.145 * 2.571 x

- 7A.145 t 2.571 x 3.485 x 0.4725

:7O.145 + 4.233

/.i- 8,401
 ICAB
STATISTICS

Note : t.025 for (7-2) de$ee of freedom=

2.571

84.4 Self-assessmentquestion

the previous example, what is the erYoprediction

:;'#jil;fin interval for an indiVidual y varue

I Solution :

957o prediction interval is :

70,1451r,O25xsx

: 70.145 aZ.S7t x 3.485 x 1*r+(sso*4oo)2

7 290,000

I * 70.145 + 2, ,7 x 3.485
il x 1.1060

9.Lt I

s*

8,402 (next page g,SOO.1

 ICAB
STATISTIC'S

85. TIME SII.RIES

85.1 Introduction

-{ time series is the name given to e sQt of observations taken

at equal intervals of timp, e.g. daily,
rveekly, rnonthly, 9tc, The obs9rvations can be plotted
against tirxe to give an overall picture of what
ts happenirlS.The
ftorizantal axls is always the time qxis.

Examples of time series are total annrtal exports, rnonthly

unemployment figures, daily average tem-
-oeratures, gtc.

Examplc 5 :

rhe following data relates to the production (in tonnes) of

flogels by the n6rth west Engineering co.
f hgse arg thp quarterly totals taken over four years
from 192 to l9_5.

lst Qtr. Znd Qtr. 3rd Qtr. 4th Qrr.

te*2 9l 90 94 93
I e-3 98 99 97 95
t9-4 t07 t02 l06 110
I 9-s 123 131 128 130

will now be graphed so that an overall picture can be gained of what is

This time serips
'he company's production happening to
figures,

8,500
1CIAI} STATISTICS

Production
(tonnes)

It0

100

34lx31I?1tl
<r,-..rg-a - ,<,. jlr-t) -----t(-tl { ----l(- t9-5--4
Years

The graph shows clearly how the production of flogels has increased over the four year time period
Ihis is particulallV true during the last year considered.

115.2 Vrrriation in otrscrvations

A timc series is influEnsed by a number of factors, the most important of these being :

(a) Long-term trends

This is the way in which the graph of a time series appears to be going over a long interual of time
'fhe riser fhll is due to actors which only change slowly, e.g.

(i) increa.se or decrease in Population

(ii) technological improvements

(liit !,ompetition liont abroad.

8,501
IChB STATISTICS

(b) Cyclical variations

This is the wave-like appcarance of a time series graph when taken oven number of -vears. Gencrally,
it is due to the influence of boorns and slrrmps in industry. The distance in time frorn one peak to the
next may be imyttring, btrt usually it is approxirnately 5 to 7 years.

(c) Scasonal variation

This is a rcgularize and fall over specified intervals of time. The interval of time can be any length
hours, days, rveeks, etc, and the variatiotrs are of a cyclical type with a I'hirly detlnite period, e.g.

(i) rises in the nurnber of goods sold betbre Christrnas and at sale times

(ii) rises in thc dcmand lbr gas and electricity at certain times during the dery

(iii) rises in the number of customers using a restaurant at lunqh-time and dinnertime.

-l-hesc are rcfbrred to under the general heading of

'seasonal'variations irs a comlrlon exarnple
is the steady rise arrd fall of, for example, sales over the fbur seasons of thc year.

Flo'rvever, as can be secn frrrm the cxatnples. the term is also used to cover regular variations
over other short periods ol time.

(d) Residual variation

'lhis covers variirtion wlrich camlot be ascribed to (a), (b) or (c) above.
an1' other
This is taken as happening entirely aI randorn due to unpredictable causcs, q.g.

(i) strikes
(ii) hres
(iii) sudden changes in taxes or levies.

Not all tirne series will contain all four elements. For example, not all sales figures show
seasonal variations.

\5.3 A timc scries graph

Thegraphincxamplel covcredthctlturierlyprodl*ilr-)11 ril iii)gcl:io""critlortrycartirneperiocl

ti,502
 ICAB SfHTISTICS

'lhe long'terrn trend (a) nnd seasonal (quarterly) r,ariation () were obvious
1tom the graph. Howevel,
in order to be able to observe any cyclical vzriation it is usually necessary to huve data covering a
tnuch w-ider time-span say 1G-I 5 years minimunt.

Thp follorving graph shows the production (in tonnes) of rvidgets fbr each cluarter of the l g years
frorn 19-l 19-18.

." 11.1
. .t'::
.

l'r..
ll
''.I,'-. I
, :.1..:'.
I :','i I
*-.-,-t.**
+- :-*y'--\r F
-i

i r.,
I --
- i.
.r:.i
i

,..
..
I
. . :..
-'
!'
:
t,"

!--.-i.-i-
ffi,,' I
I

- t.. -,3 :
- I-_- .. -:::I::.;: ,"1; l
-t*-
I
_ t-
: .{;,'i
ffi
fi

n
u -.--l f,\.f' ":
f -.r -- .,
*t '-,
mi
l'l li,.r,
_*_t'-l
,.t{;
. :":_1 : j
. I
J.
I

:::.!-: i._
-;1.- . ..
3*# 3_ l"L:]
-,1 i ,,1
I

-. -_- :-.-.1A
. _._-_ /4 - ..:..-*-J 't
.,I
i '-* --'

}J:,i:
I

.'! .'
jj .-
I
!
'li'r
---i-. -

I i
i I
I i. :i 'til, I
li
'..:' t,i, T---.-1 -tI
-'.-i-*-''i
i-.1_;_ i -l .. r.: r
.'-:
-- .,.t ,' -E J -._ -.1
l-fi.1',. -.
_t-. i
...-
..,A-$, -.. .1 .+-lr
_r . - ---3 ----.- ---?..
. t'. -.- .,[i ...t . ..t - I
I

., .L.T.
ri,l.-,] I

..'
- .'.$-- ----1
:7:N'' J---.-...: :1 'I
--A {6--,p ' - '''-.a
--1 .-. - r - ..- I "_i
: .r:t: .l- *-- --- -:
{
'-";.1 *-.-.-.t,.-
-
'
. ,.a,:

il
r
i: . ,l.fi.l
.4- --.*l
.*.f'! l-"-
- --.1-
':--1I i .j:{
---l- i
i: *1-.':.:-.1 r- '--t '-T') --
"
rII - r ..1
-::-l-:r ,..
'l
'
rl:1. -;1: - - *f'l -{-':J-;-
-r-:-i=- *" --"r-,!-...1 :l
f I=
t-El. r;l- f
l:: :.::j_*.-i:- - * I i-.-:-i *.
i*--r--^l
r

-*-t
--l
l"
1-. --'
:, il;, l:
t" -..
:=i:11 - r "-- -l- -'
__l :-. _ -__ -.:::i;;-:* *.r :- ;-i .
*i--i.- --r --3
---:i
J ;a '' :;..1i'
r.i-* { r-.*{
i1
l

-- ,t I - I
---+* 4-
;::.1
l
_ ---- ! -,-_- - _ -r I ---:J.l-..i.
lr
I -"t t-- I _

13.t rrl r9.0 r34 1$6 t.\.fi r3-? 198 19t 19.10 l9-:1 'lB-1? tg-l*t :9-',i4 10"11 r+'16 rs-tr rs-tl Year

'fhis time it is possible to detect :

(a) The long-term trend-upr,vards in this case.

8,503
 ICAB
S'I'ATISTICS

'ol
cyclical variations-the waverike appearance ofthe graph
shows that the cycle ofproduction
spans 6 years, i. e. tlie clistance in tirne tretween
successive peaks (and successive thought) is
6 years.

The ftrllorving graph is a simplified version of

the sarne data, showing rnore clearly where
peaks (and troughts) of procluction osctrr. the

5 tsi'a ,i ar s
stancg
be fwcen
rlrs
i

a
t I
{

t
I

' g ycarr ,\ Di.9t ence

6-yr.., b c tHCah
t rou6hs

r)-l l:i-? tg.r] r9-.? r:!-5 tt-6 rt-l 1s.B lg.g 1t-15 r9.ft 1r-t7 lr-t0 f €ars

;) seasonal variatiorr'-since these are quarterly production

figures this is sometime called quar-
terly variation' These are the smalisteps * -r*
They occur becatrse some parts of the y"n. ;;;;;; are evident on the first graph.
depend very much on the type of indu.iry
,r. busier than others and the actual pzrttern will
the building irrorr=t.y tends 1c, rr* ,ru.r. during
tlre wintcr r*onths because ofthe weather. ".g.
whe."a* ur, .rrgi"r""ri,g compa ny maybe quietest
duritg thc summer months due to holidays.

8,504
 ICAB STATISTICS

(d) Residual variation- this is always very difficult to detect until the time series has been anall.se;
in dctail.

85.4 Analysis of time series

It is essential to be table tcl discntangle thesevarious influences and tneasure each one separateh. lm
main reasons firr analysing ir time series in this way are :

(a) l'o be able to predict future values of the variable.

(b) To attempt to control luture events,

85.5 Moving avcrage

The moving averages are a means of smoothing cut the irrigularities in a graph so that trends ron
move obvious. fhe sirnplest way to cxplain the rnethod is by means of an example.

Iixamplc 6:
b\

fhe following are the sales figures fbr Rloggs llrothers Engineering l-td. fbr the fourteen year fr,-rm
i9*l 1o 19*14.

Year Sales ( Tk. ooo)

I9*1 49t
**
19-2 5t9
I 9-3 4(o7
19-4 452
I 9*5 607
I 9-6 681
19-7 764
1 9-8 696
I 9-9 751
l9- 10 802
19-n 974
19-12 1,026
19- 13 903
t9*74 998

I-Jsing the method of moving averages the general trend of sales will be established

8,505

L
IC){.8 STATISTICS

. rrstit is advisable to dr:rw agraph ofthe time series so that an over-all Picture can be gained and the
-r'clical movements seen.

5 ytars 5 year-s Distance

between peaks.
I

I
:l
I

I
I
I
I
I

Distance
between
yetts.
troughts.
'
I:Ii- l(r-? lr)-3 ! ?-,3 I 3.! i'J-B |}.$ r$.9 )t-rt ,g-,r' r3.tr ,'r't4 ' Ycer5

order to calculate the trend figures it is necessary to establish the span of the cycle. From the graph
' ;an easily be seen that the distance in time between successive peaks (and successive trought) is 5
:ars : therefore a 5 point moving average must be calculated.

-- table of the following form is now drawn up :

8,506
 ICAI}
STATISTICS

Sales 5 yearly 5 yearly

Year ({ 000) rhoving total moving average

l9-1 497
19-2 519
I 9-3 4o7 2,476 495
19-4 452 2,666 533
1 9*s 607 2rgIl 582
t 9-6 681 3,20o 640
l9-7 764 3,499 700
19-8 696 3,694 739
1 9-9 715 3,983 797
19-10 803 4,24s 849
19* 11 970 4,4s2 890
l9*12 1,026 4,699 940
19-73 903
)9-1 4 9e8

Notes on the ealeulatiOn :

(a) nalne implies, the five yearly thoving total rs the

sum of successive groups of 5 years,
l;.tj'"
:. c, 491 + Slg + 4O7 + 452 + 6O7 :2,476
5 tg + 4o7 + 452 + 607 + 682: 2,,666
I
I

802 + 907 -t- t,oz6 +9031+ g98 : 4,699

(b) 'rhese riroving tolals
i. c. Ie simpry divided by 5 to give the moving averages
2,476 : 5 :.495
2,666+-5-533
I
l
I
I
4,699+ 5:940 :

(c) Averages are always plotteci

in the midrtel of the time period , i.e, 49s is the average of the figures
tbr 1 9- I r9'2' I 9-3, 19-4'
and s-s anJ so it is plotted at the end of 1 9-3, this being the mid-point
' r
the time interval fi-om the encl of 19-1 of
t;the end of 1g-5, Sirnilarly, 533 is plotted atthe enci of 1g-4
1

I
I

and 940 is plotted at the end of lg_72.

8,507
ICAB STATISTICS

A secorrd eraph is nowclrar,vn showing the original figu;es again and thc lliend figures i. e. tire flve
yearly nroving averages.

i,)v,
.-:

x Original datir
l-rerrd figures

191 t92 t93 194 l9,E 19-9 te 12 le.-r3 le-1.1 Years

8..5t1$ 1nc\t pr.-rc I r'rrir)

I
 ICAB STXTISTICs

86. FOITIDCASTING TECHNIQUES

86.1 Introduction

Forecasting is basic to any decision about the future. Forecasting is therefore one of the
important roles perfbrmed by thc financial manager. This section indicates how the techniques
ing to regression analysis and tirne series can be utilised in forecasting.

Forecasting does not remove risk and future uncertainties but assists planning. A company rvc
prefer to eliminate uncertainties entirely, but where this is not possible forecasting can reduce
risks involved.

The required accuracy of forecasts varies from situation to situation, but usually depends on the
scale involved and the cost to the company of inaccurate tbrecasts.

Generally the shorter the time scale involved the more accurate the forecast must be srnce ther;
less time for corrective action.

The forecaster is therefore looking for a model which will not be thrown out by the introduction c.
Y single unusual item of data, but on the otherhand if data suddenly changes because ofnew trends
model must be suf.ficiently adaptable to r"eact. The model must therefore combine both stability
I

flexibility.

Management may use varying methods of anticipating future results, projection, prediction r:
forecasting.

a6.2 Projection

Proiection is merely the extension of historic data into the future. Various technique can :tr

applied-such as regression analysis or experimental smoothing on the one hand, or putting a ru-:'
across a graph on the other.

8,600
ICAB STATISTICS

Sales

Time <- Past Present I"uture -)

Pro-iection by ruler

The student should note that such a method is very cause-this rulepro-jection mayvery from that
illustrated on the graph. Other techniques are considered later.

Pro-jections may give a gcod estimate of future results where a very stable situation is being
considered. or where the situation is not affected by outside factors. They do not however anticipate
changes in market conditions.

86.3 Prediction

Where outside factors :rre known tc i.nfluence the situ:Ltion in question, modeLs can be built to take
tlrese external factors into account. This is known aqtrediclior".

l'he differeircc betrveen pro.jection and prediction can bcs,t be illustrated by e.n examplc.

Erurmple 7 :

Forthe past 3 months the net inflow of funds into building society has been maintained at a static
level of Tk. 30.000 per month. The pro-jection for the next month's not inflow would be Tk. 30.000
based on past p"'tforrrrarr"e. How.ever if minimum lending rate had .just increased by 1o% then since
the building societies are show to adiust their interest rates accordingly people transfer their funds to
investments now olI'ering higher interest rates. The prediction next month's net inflor.v would be iess
than Tk. 30,000 say Tk. 25,OOO.

8,601

-/
ICAI} STATIST'ICS

86.4 I.orcc:tsting
Forecasting is rnore sophisticated than prediction. As rve1l:rs considering known cffects of clianges
in othcr situations ttre fbrecaster brings his.judgemcnt to bear on the situation. To consider cxarnple
1 abcve, thc I'orecaster may know that the governlnerlt wishes to push interest rates even higher, antl
he would fbrecast gloomicr results, a net inllow ott11. Tk. 20,000.

86.5 l)esigning zr System

To decicle upon its long term policy and plirn, a cornpany wili need to fbrecast results, such as sales
A system ollorecasting wiil be designed, havrng regard to thc fbllow,ing iterns.

(i) I):rta : .\n;r lorccast rvril take intc considcnrtion resulls rvhich have been obtained in the past.
No sitr-riition rs statr<; and tlie nrosi up to cleta rcsuits are the rnost relevant to the fbrecastins
inoclcl.

(iD Ntodels : must try to rnake a model rvhich will fit the situation under review.
'1-hc fbrecaster

Fie rviil need to plot graphs of past results to look for patterns, trends, seasonal fluctuations
and other cycles which mighl appear from past results, which must be reflected in the model

(iii) Srnoothing : As indicated above the most reccnl data is tlrr: most rclevant, and the systcrx
rnust have some way of-inclucling ilrc nerv datir. Florvever the rnodel must be stable, and not
react too violcntly to hiccups in the data. l-his is know,n us srnoothing, and techniclues used
include exponcntiai smoothing and rnovilrg averages.

(iv) trlorcczrsting : The pro.jections of-uoclel nrustllic:r i-rc i;12;1li-131sd in the light of :rny outside
llctors or changed conditions.

(v) Iirrors : Any forecasl is besl a close irpproxirnnlion of an actual restrll, and the forecaster will
wzrrlt 1cl make allowances lirr errors. Statistical theory cun be applied to ibr casting errors, b-v
assurning that errors canre Iiorn a normal distrihutiorr rvith a lnean of zero. This enables the
firrecirster to calculatc the tolerances on the lbrecast

86.6 lvlodels

N{odels are bascd on pasl rcsults rvhich can lrc spiit into 3 elernents : a trend, seasonal fluctuations
and residual I'lnctuations. lvlodels can be additive (i. e. I'rend -F seasonal fluctuation + residual
I'luclnalion) or multiplicative (i. e. 'frend x seasonul fluctuation x residual fluctuation). The follorv-
ing cliirgrarns illustrate thc trn'o types of'nroclcls, rrnd are based on the level ofsales over a period ol
tirric.

R 6r)?
 ICAB STATIS'T'ICS

In the additive model sales : trend r- seasonal variation + residual fluctuation.

In the multtplicative modei sales : trend x seasonal variation x residual fluctuation

86.7 Analysis o1'a time series

A tin-Le series is nuurerical infbrmation about a particular sub-ject presented in

historical fbnn.

Monthly sales figures for a shop, quarterly output of coal and annual trade figures are all examples of
time series. Most businesstnen and econornists have to make predictions. Various statistical
techniques for analysirtg time series have been developed so that the influences that have determined
a series can be identified and forecasts of future events can be toned down or augrnented according to
the various influences present at that time.

Most time series comprise for distinct elements :

(i) Trend : long-term direction in which the clara is moving over time.

(ii) Cyclical fluctuations : cornplex lactors cause of cillations about the general trencl on :r
long-term scale, for example 5,7,9 or l1 years.

(iii) Seasonal variations : Many industries have regular upturns and downtnrns clepencling on tlre
time of year.

(iv) Randorn fluctuations : As the rame irnplies, long-term trend is interrupterl from time to time
by unexpected nnd unpredictnble occurrences.

'Ihe statisticians task is io isolatc these influences so that a reasonable precliction car)
be rnade of
future events. 'lhis iesson ;r siders only three of the four elements; tren<l, seasonal variation ancl
random fluctualions. StudcnLs should a.ppreciate tliat not all tirne series contain ali {blrr elements,
e. 9., not all trades are seasclnal.

The approach it to :

(a) identi$z that trend (i. e. regression line)

(b) calculate seasonal variations from the trend

(c) a" r'age seasonal variations

(d) apply them to ttre future.

8.603

)
ICAR STATISTICS

Exurmplc 8 :

.iones I-td. Manul:rctures a variety of electronic cor ronents. The products raprdly become obsolete
and .[ones lollorvs the policy of redesigning or abarr.ioning each type of instrurnent after zr lil'e of four
ycars, in order tcl iivoid uneconornic levels ol output. One product, the Song, is under revier'v at tite
prcsent tirnc. The research and development department has produce<l a new design (Mark z) at a
ccrstol-T'k. 67"OOO. Sellingpricewouldbeset atTk.60perunit; itisestimatedthatvariable costswill
bc Tk. 25 per unit and that fixed costs of the firm would be reduced by Tk. 55,000 per annurn if the
product were tc be abandoned.

Sales of the previous rnodels :rll of which have been sold at Tk. 60 per unit have been as fbllows in
recent years.

Mark W Mark X Mark Y

Year Units Year Units Year Units

I9-5 900 l 9-9 1,2000 19- 13 1,3 00

79-6 2,100 19- 10 2,000 79-74 2,300
79-7 2,800 19-11 3,400 19- l5 3,600
19-8 2,700 19-12 2,20C 19-76 2,500 (est.)

A trend line fitted to the sales data, using linear regression analysis, has been estirnated as lbllows :

Sales volume in year n: 1564 + 98 ( n- 19 - 4)

Ignore the time value of money

You are requirecl to predict the sales for years I+17 to 79-20 fbr mark Z, and the maximum value at
which introduction of the new rncrldel w<lrild just be pref'erable to abandonment.

8,604
 ICAB Ltr\'trL ST.{TISTICS

t<
a.l
i
t.)
co
\f= 'u
oi
(.)
N
>' I I I I

a.)
O
o
Lr t. : ca
i
I
lFr o\ C
rn
\o \o
\n tar c.) =l'

orl

tr
o fi
t-r q q
I
f. a N
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)
l-
C.l cc
&.
rr) ;rt .d
:f'
cn
+
if, {'
l I I I I

\o
{n\19-:".rc.91:..
vlOCt-.-l---^\Cl\D.o
si-rr\tlrrr"Sl.i,
ltlt
o
!r ;)"
z
* - :,1

F 2
tA N3N$tNcrc9$:f,C)
.f,mrrrX
\O$\l
trcioril:::lNnX
,rrrrEl+l
IIIl']

1l

ql?co'\o$Noco\orf,No
.t$viV+
9p\^\n'r)r,vl
I! ,o" \ co" q <)"
1 c{ 11 R ." *1. r:
-HFdNNNc'INNc.IOI

-U
:\-cc-NC\f,Nmci\oa
alalN*Ncr}N#Ncr.lN

tt
r,n \O t-. CC 3\ ,O q O] ra -J irl $
liP Irlil-.-
rrttt-
oo'o\o,o i I | | | i I

,n >D
2,i-
8,605
 ICAI}
STATISl'ICS

Predicted sales :

Dill-erence

19*77 2,83 8 - 44.8 - 1,271 1,567

19* 18 2,936 0.9 +26 2,962
l9-19 3,O34 46.O + 1,396 4,430
l9-20 3,132 - 2.6 81 3,O51

The final column i, the above taburation gives the forecast

sales for each erf'the years I917 to
19-20 inclusive.

Maximum outlay which wourd Justify

introduction of the ncw motrel

Total Net
Unit Contribution Irixed contribution
Year salcs @ Tk. per unit cost

19-17 1,567 s4,845 55,O00 (1 ss)

19- l8 2,962 1,o3,670 55,000 49,670
19-t9 4,430 1,55,050 55,o00 1,00,0:5o
19-2o 3,051 7,06,785 ss,000 51,79.5

2,OO,350

T'he ntaximum oullay which

would -lust favour the i,troduction of the new moder is T k. 2,oo.3 5o at
the beginning of 19-17.

8,606
 ICAB
STATISTICS

86.8 Limitatinns of regression analysis for forecasting

(a) "lc'cotrnting c'ont'entiorts-in so far as the datil used is based on accounting data, this
bc distorted by the apptication of specific accounting may
conventions. c. g. mzrtching, prudence.
(b) In'flation-historic costs and revenues will be expressed
in money terms. They must bc co,
r"erted fo current costs to detennine
the trend line, then future inflation rates incorp.ratcd
the forecast. i,

(c) stabilily o1f rclationship-the linear relationship between x

ancl y may change over time.

(d) Type oJ'rclationship-the relationship is

assumed to be linear.

(e) Multi-colinearitv-the problem of identi$zing the

effects of a number of di{ferent variables.
(f) Auto correlation-where costs are influenced
by cost in the previous periocl (e. g. it may
easier to increase rather than reduce costs as be
activity leavels vary).
86.9 Exponentialsmoothing

A method which overcomes the shortcomings of moving

averages is exponential smoothing. Like
moving averages, this is an adaptive forecasting method.

The method is :

New forecast : old forecast plus a proportion

of the forecasting errors.
either Ncw fbrecast : old forecast pruscx, (latest observation--old
forecast)
or New forecast : o( (Latest observation) + (
1- oc ) (o*r fbrecast)
It can be seen from the simple formula that oirly
the most recent data in needed since only
previotts fbrecast and the valtre the
ofcr (the smoothing constant) are required,
together with the latest
observation' as it becomes available, to update
the {brecast. A lowvalue for the sraoothin.g
Si1! * : o' f is equivalent to a 1g period constants,
moving aver.rge whilst a higher one, sa]a, : 0.5,
1o only 3 periods' r'Ience, for time
is eq,ivarent
series which change only slightly, a small
;te whereas' if a more sensitive method is'needed, value odi is appropri-
then larger"""", *;;;,iore suitatte.
-xpone,tia.l smoothing is a shortened form for exponentiany
weighted moving average which
'rdicates that various weights are given to different
observations. As can be seen in equation (2)
'bove' the latest observatio, has a weight ofix and the weights
of the other observations decrease by
- iactor of ( 1* cr ) at they become older. clearly, the
olderthe observations the less weight attached,
-quations' (I ) and (2) are a convenient and simple from of a weighted
average of all previous
"servations viz :

8,607
 ST}\1'ISTICS
ICAI]

Whcrc t[e subscript refers ttl the number o1' pe liods sitrce tlic prcse llt '

I:o is the fbrccast m:rde now

D, is the observationlperiocls age (i. e. Q is the latest obsen'alion)
a, is the weiglrt fcr an observationiperiods old'

Exnnrltle 9

Civen an olcl lbrecast of 117 (i c l]

:127), compare the ell-ect of using dit}-ercnt v;rlues of the
smc-rothing constant ibr the following data'

133, 1l 8, 150, 132, 157,732.130, i39,770,132

Sohrtion

'['hc forccast ol'tile lirst pcriotl's dcmand is 127 itturned out to be 13 3. Flence , fbr x: 0. 1 , the forecus
of the secot:d is giver-r by ccluarion (1.;

lig:frr+3(D,-F,)
ts<t:127 + 0.1 (133_127):127.6
'l-he fbrccast fclr the third clernand is

127,6 + 0.1 (118-127.6): 126.6

A work table for x : o. 1 can be set up as fbllows

llrror o- (Error)
(D-F,)

TJJ t27 a
() 0.6 127.6
118 127.6 -9.6 -o.96 126.6
150 t26.6 23.4 2.34 128.9
732 t28.9 3.1 o.31 729.2
157 r29.2 27.8 2.8 132.O

t lz 132 0 0 732
130 132 -2.O - o.2 131.8
739 131.8 7.2 o.72 t32.5
770 732.5 J./ 37.5 736.3

t32 136.3 *4.6 - 0.4 13 5.9

8,60[t
IC-AB S'I]{TISTICS

'I'he student should set up such a table for hirnscll'using z:0.5.

tt6.1() lir;rccasting: conclusions

IjorecastitLq lccluriqucs- it for the analysis of data. The

ma,v be argued, lag behincl, the techniques
problcm is that therc can be no completely reliable a1:proach tcl fbrecasting. 'Itie objective, horvever,
must be to cnsure that :

(a) all rclcvant data is obtained

(b) that data is correctiy analysed and interpreted

This section has served as an inlroduction to the statistical tcchniques which can held.

8,609 (next pagc, 9,000)

ICAB I-EVEL 1 STATISTICS

INTERMEDIATE

COST ACCOUNTING AND STATISTICS : VOLUME 2_STATISTICS

LESSON 9

Page

91. DECISIONANALYSIS-SINGLEDECISIONS

91.1 INTRODUCTION 9,100

91,2 THE DAY_OFF MAIRTX 9,l ol
9I.3 DECISION-MAKINGCzuTERIA 9,102
91.4 MAXTMIN RULE 9,103
91.5 MINIMAX REGRET RIJLE, 9,103
91.6 E)GE.CTED VALIIES 9,144
91.7 APPLICABILITY OF E)GECTED VALIIES 9,106
91.8 SELF-ASSESSMENT QUESTTONS 9,106

92. DECISIONANALYSIS-MULTIPLEDECISIONS

92.I DECISION TREES 9,200

92.2 DECISION TRESS-A COMPREHENSIVE EXAMPLE 9,207
92.3 SENSITIVITYANALYSIS 9,210
92,4 PROBLEM EXAMPLES 9,2L3
92.5 CONCLUSIONS 9,2t3
e2.6 SELF-ASSESSMENT Qt ESTTONS 9,214

9,000 (next page 9,10O)

i

{
t
 ICAI}
S-TATISTICS

9!. DECISIONA]YALYSIS-SIIYGLEDECISIONS

91.1 fntrotluction
Most decisions rvhich acompany's rnanager,ent has
to rnake can be described aylecisi,ns marJe
ttnder uncertatnfi' The essential f'eaturcs of rnaking
a clecision uncler uncertain conditions are
:

(a) 'rhe decision maker

is {aced with a choice between several alter,ative
courses of action.

(b) Each c.rtrse 01' actitl' may havc.se'er.l possible

outcomes, dependent on a number of
ttncertai'factors, i e' even when a decision has bebn
rnacle the outcome is no means certain.

(c) wlricir choicc ol matle rvill depcnd upon the criteria

used by the decision-maker i, j,clginq
between the outcotncs of the possible seurses of action.
1
I
'l-he structurc of ancl sta.ges in-
a decisi.rl ma),be represented by a diagram
:

DIAGRA]\4 OF A DI]CISION

Recognize neecl for

n clecision

Itecognise alternative
courses ofaction

E VAL {.TAIE,.U-II]I{N A1'I \rE S

Decide which alternative

to adopt

9,t00
IC-AB STATISTICS

The lesson is concerned with teclrniques available 1'or evaluating anrl d;cicling which decrsrorl
alternative to adopt.
v
f'hese techniques rnay be ciassil-ted as follows

Single decisions Multiple rlecisions

;- }?ay-of} matrix Decision trees /--

- rnaxirnum rule cxpectcd ,a I ucs.)',

- rnirrinrax regrct rule - scnsitivity :rrralysis
- expected

91.2 The pay-off mzrtrix

The pay-off matrix is a tabular iayoul specifying the result of each combinationQf action atid
outcome. .,,
-/
Ilxample 1:

A company has three ncw prodtrcts A, RI} and C of which it can introduce only one. 'I he level of
clcnrirnd lor edch corlrse of'action ruight tre low, medium or high, Ifthe cornpatry dccides to introduce
procluct A, the net incorle that rvoulcl result from ttre levels of cletnand possible are estimated at Tk.
20, Tk. 4O anci Tk. 50 respcctivel),, sirnilarly. if prorlrrct B is chosen, nct incoilre is estimated at'Ik.
80, Tk. 70 ancl Tki.!? and for product c,'lk. 10'I'k. 1o0 ancl Tk. 40, respectivcly.

Construct a pay offmatrix, to present this information concisely.

Outconte Decision (action to introduce)

(tlemand)
A B C
lh.ka Ttrka Taka

lfiw 80 1C)

Meditrm '40 70 100

Iligh 50 (10) 40

9,101
ICAI] s1-{I'rE'I'r{ls

Palt-c,ff r-natrir. shorving net income (taka; resuiting from the introducticn olilrodrit':,s r, l1 :ri:ri i
demand is lolv, medium or high.

Note:

A realistrc assumption miglrt be that the cornpany is obliged to meet u,hatever level of dernand arises
(for f-ear of incurring customer badtuill, and thus fewer sales of its other products).

This wouid-justi$z the fall in net income at higher levels o1'demancl in the case trf prodrrct. 13 in
particular, where it appears that there are considerable diseconomie s of sale.

91.3 I)ecision-makingcriteria

In Exarnple I above it is b;- rneans clear rvhich clecision is goi,lig to produce the rnost sitlislactftr]'
result, sincc cach procluct gives the most clesirable outcome at\ne ls,cl of dcmand.

ihrec tecirniciues u'i1i be consrdered fbr chocrsrns betu.'een -\, B and C inthis situatirrii

(a) rnaximurn rule

(b) Minimax regret rule

(c) maximization of expectcd values

91 .1 Nlatximum rule

Select the alternalive which nr:rxinrizes the mininiutn piry-off achievabic. .

Note that this pcssimrstic upprr-raclt secks to acirieve the i:cst results if the worst happens

llxample 2 :

Apply tbe ntottrrturr ruie trt lixample I to select a coures of aclion

t6- 9,1o2

-/
 ICAB
STATISTICS

Action
Demand .*'r'
;-
rt
A B C .i i,..'.
thka t*" Taka

Low 2At ---" 8{)*." ro{

Medium 40 7Q 100
High 5CI (1.0) 40

Mininrum pay--oif 20t, (l 0) 10

Thus' introducing product A will ensure the maximurn payoffis

each case.
the worst results were to happc, in ;

91.s l(ilUgx &grc!,rute

Sclect the alternative which ininimizes the loss through

not selecting another alterlative.

If the company in Examplc I had chosen to introduce product

A and subsequently demand 6ad been
high' the company woultl have felt no regret (i. it
e. was the best <lecision possible for that particular
outconle.

I-Iowever' if the outcome has been medium clemancl

and the cornpany had chosen to introduce
product A' the net income would have bcen
Tk. 40 whereas ii'product c had been chosen net income
wcruld lrave been Tk' 100. Thus, the company
havost the opportrttity to make an extra Tk. 6o net
income and this can be termed the extenl
0fits rcgret (or opportunity cost).

Examplc tl:
using the data of example 1 , apply the minirnax regret
rule to cleciclc the best course of action for the
company.

From the original pay-oft-table, it is now necessary

to prepare a new table showing the opportunity
cost or extent of regret for each choice and
each outcome. This is preparecl as fbllows.

setp l: select the rnaximum pay-ofFfor ea.ch outconlc

(e. g. fbr rneclium dcmancl maxim.rn pay-off
is taka IO0 on thc introduction of product
C).

9,103
 ICAB STATISTICS

Setp : Sui't-*-. J:-1. :t-.t-. :: .:e risf eCitr,.g 1.-r11 5 ruul_(-mes r lirrrtt 1he maxlmunt pay-offin that rorv
thr-rs - r. ,:1 .:-=: :-tgures -rI'regret as tbllo*s .

Decision (nction to introduce)

Outcome
r dernand)

A B C
Taka Taka Taka

Low 60 0 ^/o
Medium 60
)o o
FIigh 0 60 10

Maximum regret 60 60 70

Hence, if it desired to minimize

the maximlrm amount of regret either product A or product B
should
be introduced, both giving a maximum to taka 60 regret...

Note :

rhe choice between A and 13 posc's another probleu . shoulrl the product be chosen
which then
minimixes the second highest (c. g product B taka 30 as opposed to product
A, stilr taka 6o) or
shouicl the underlying figures be examined to see that product A procluces
positive net income every
time whereas prclduct B coultl resrtlt in a ioss 'l rhe answer of course, depends
on what furt6er
criteria are adopted.

91.6 Expected valucs

rhe fundamental weakness of both the maximin anil maxirnax regret rules is
that they take no ac-
:ount of the relative likelihood of each of the possible outcomes occurring.

:or instance, in example I if there was a 98o% chance that demand would be
medium and only a2yo
:hance of it being low or high there would be a very strong terrptation
to choosc product c (p;rrolT
.aka I O0 w-hen outcome is medium demand).

n order to have arational basis for decision making it is therefbre necessary to have some
estimate
rf the probabilitres of the various outcomes and then to use thern
in the decision criterion. Thus, the
rird possible crrterion isthemaximiscttions of expectetl value.

f
9,104
7
I{'i\It STATISTICS

Tlre expectqd value of a particular action is defined aghe sum of the r,alues of the possible otttconte,
ear:h nrultiplied by their respecLive probabi.lities.

I:.r:rmltle "l :

i,Ising the data of example 1, apply the criterion ofrnaximisation of expecfed value to decide the best
coulsc of aclion lor the company. assuming the tbllowing probabilities {

P (Low demand) : O.1

P (Medium demand) : O.6
P (Hieh demand) : O.3
t,0

'i'hc cxpecte<.l value of thc decision to introduct A is given by the following summation :

0.1 x20 +0.6x40 + 0 3 x 50: Tk 41

I
ii. c", on )Aoto of all occasions dcmand will be lorvand net incorne Tk.20, on 60"/o of all occasions
ricrntnd lviltr be mediurn and net incomc Tk. 40 and on 3Ool" of all occasions dernand will bc high and
net incollc 'fk. 50. Thus, on average, net itcome u,ill be the weighted averagc of all three net in-
conles, rveighted by their respective probabilities').

'i he exi:cctcrl vaiue ot all 1he products rnay calculated by a table :

Table of expected values

!
Product
()utct-.ntc i''robability
(dcrttanr-'1,i ol- outcorne
A B C

Income Income Income Incorne Incorne lncorne

x X X
Probability Probability Probability
'Iaka Taka Taka Taka Taka Taka

[-rrrv 0..1 20 2 80 8 10 I
A-
N'Icdiurr-t 0.6 40 24 70 +Z 100 60
IIigh 0.3 50 15 (1 0) (3) 40 12

l-tttal 1.0 41- 47 73

'l.irris.
ii'the criterion is to maxirnise the expected rralue, it means that the product with the highest
cx]lecteri Yalue bc choscn, jl1 this casc product C.

9.1 05
 IC)TB
STATIS'IICS

.91.7 \1 I i;,- I i:i:., ,: r\J)cctcrl r-alucs

'l-irc et - - --- -: -'riiltc is onlyvalid rvhere the decision being macle js either

(a) , - :ri-c.,rcci regular11,,- over a lterir d oltime ; or

(ir,)
'lc'isi(i11, but r'vhcre its size is lairly small ic rciation to ihe lotal assels of the Ilrnr
' * - ': '''ilc ol nlany, in terrns o1'the sunrs of money involvecl. thrt Iace thc flr*r o'c. il ncrlod

{n olhei '-'-'rcls. lltelav'olJ averoge' will apply in thc long run, but cle3rly
the resul1 of anr- sine.1e
actiot't it'iirst. bv dellnition, be orre of the specified outcorncs. rhus,
r.virile the expccted value of
!ntrodi:crng product Cl is'Iaka 73, each aclu:rl outcome will result in either
Tk. l0-fk. 100 or lk. 4t)
ne1 tncoirre, and it is only i1'a rvhole scri cs of product introcluctiolr
were involve4 thalt1ater.aga
over [t periocl of tirne rvould approach Tk. 73, so long as the expectccl
value crilcrious was appliecl
+ consistently 1o all the decjsiols.

rherefbre, ii is quitc ircceptabie to adrrpt the cxpectecl va.r*e as the decision-ntaking

criterion lbr the
sompanv in erarnple .1. so long as it has ser.eral other products and the
salnc sofi oI'markctinc deci-
sion arises flrirll, rc-qularlv.

I'o illustratc thc distinction being macle, consiclcr a 1]lan insurinq

his housc against firc clarnage 1br a
vear. SLrppit-sc lhc hoLrsc is rvorl.h-i'aka 10,0()0 arrcl Lhc probabrlitl,
oI-thc h()usc being burnl dorvn is
o'()001 (tire txrly olher outcotlrc lrcing that 1he lrousc is not burnt
clou,n with a probabilitl.r.li'0.9999).
Tlte tlitn rvotiirl bc r-ltrite prePared to pa)', say taka 3 0o pa 1<l insyrc
iris 1or-rse eve. tlrro.glit thc
crpcctedvaluc('orcxpectedcosti',thiscirse)isonlyi)00Ix'thka lo,0o0+o.9999xo:T.k ()o.
l
[']rc nlan callllot :rlforcl to pily l.k' i 0,00o oul rriorc tiian
once in his lif'etirne and therelorc c,,nol
'illbrd lo plo.v' the ove rage.r by using expeoted value as his clecisicln criterion (ifso he wo'lcl rolirse
tc:
rray a l-,rclriutn grcater tlian l'k l.oo). IIorvcvcr, 1o tire
insurunce cL)rnpary, Tk. I o^ooo is not tr largc
sLllll' lrli)st of- their transactions bcing 1br sinrilar or greater
arnounts ancl thereforc expected
i'otllcl be approprittte as a decision r':riterion for thenr. In {acl, the 'a1rre
expected value ot'tire jnsurance
J.rrnpalt).'s dicision to insLrre lire house at T.l< 3 00 pa is
.

0.0()ol x ( --'fk 9.997)+ 0.9999x.i.k .J

or * Tk. O.9c)97 + 1'k. 2.9997 :"t-k. -)

:.td:rny l-lositive expccteci t'aiue rvoulcl. in theory, harrc

mncle it worth their while to .insure
)1.8 Sell'-asscssmentquestion
-tlle
tilrce possible outcomes ol-a clecision arc prollts of rk. I o, T-k. 50
and 1'k. 80 with probabililies
,3. 0 i and O.4 respectivcly, whiit is thc expected
prolil ?
: rlulicrn ;I:xpectecl proiit:0.3x T.k. l0+0.3 x.fk. 50+0 4x.l.k go :
fs.:g)
9,1 06 inext page 9,200)
IC]AB STAI'IST'ICS

92. DECISION ANALYSIS _VIULTIPLT' DECISIONS

92.7 Decision trecs

So lar only singic dccisiort has hacl to bc nradc. I.lorvever, lnany manageriat problems colsist
ol'a
rttther Iong, clrawn-ottt strtlcture invoivittg a wlrole sequence o1'actions lncJ outcornes. Where
a num-
ber oI'decisions have to be rnade sequcntially the complexity o{'thc clecision-tnaking process in-
cre.tscs considerably. ily ttsing r/ecrsion tree,\. however, highly complex problems can be hroken
c10wtr into a serics o1'simpler oncs while provicling, at thc same tinte, opportrrntty lbr the clecision-
tnakcr to obtain specialist itdvice in rcl:rlion to each stirge o1'his prgblern.

A decision trce is a wiry of applying the expected value criterion to situations where a number if
decision are made sequentially.

It is stl called because the decision alternatives are represented al'sranches in a tree diagram.
1

Example 5:

A retailer must decide whether to sell a product loose or packaged. In either case, the product
ntay scl l, or not sell.

Represent this in a tree diagram. S{3\\

Pot&rg.u
i+
S(r\l

I Decision point

Q outcome point

t"o,
.)',5

9,200
 ICAB STATISTICS

Note that there are four possible outcomes, B, C, D and E.

It is possible to evaluate the outcomes in terms of expected values.

Example 6:
In Example 5, the profitability of selling package<i products in Taka 10, loose products Taka 15. Tt€
loosethrougtr not setiln[G rat<a sln either case. The probability of the procluct being sold is 0.7 for
packaged prod.ucts, 0.5 for loor" p.o=.l*rit..
.-

You are required to evaluate the expectcd values of each decision alternative.

A - o.5x]'k 1 s -Tk. i. s
5
g.-o
5o11

Tk. 5.O-
i
\,,
Loo$s
Abr
se11
:0.5 x Tk.(5) {
R = Tk.(2.5)

C:0.7 xTk.1O:1k.7,o
p--9
-Sull

Tk. 5.5 - i'

-# D :0.3 x Tk.(5; :1'P. l.s) I

Therefore, the decision to sell a packagecl procluct has the higher expected
value

92.2 Decision trees-a comprehensive example

The last problenr could have been solve<i without a tree dia-eram, but the
technique cotnes into its
own in a more L,.lrlplex situation, as illustrated by the next exarnple.

9,207

I
-a
ICAB STATISTICS

llxzrrnple 7 :

fhe mana.ger of a newly ibmed pecialist rnachinery rr rlufircturing subsicliary iras to decide w,irellter
to builcl a small plant or a iarge plirnt for rnanutitcturi : a nclv tr'licce o1'rnaeirinerv rvith an cxpecteii
market lilt of ten years.

One ot-mai'or lactors influcncing his decision is ttre size oI'the rnarket tiral thc colnpany can obtain {bl
its product.

Demand uray be high dr:ring thc l-rrst two years, brLt if initial users are unhappv with t]te product,
ilemand rnay then Iall to a low level for the remaining cight years. lf users are hi4tpy then den aud will
be miritrtained at its high level, Convc:rsel),. cautiorr by prospective buyers lnaJ- lnean only a letrv lc'rrci
of demand lbr the first two years, br.rt again, depending orr horv satisfled these fbw buyers :rrc, demaud
nrqz {fueq either remain low or rise to :r hig}r level.

Il'thL- company initially builds a largc plant it must live r'vith rt ['or 1he rvhole ten years, regarcl lcss of
the rnarket demand. If it builds a small plant, it also has the option allcr xrvo years of expanding the
plant but this erpansion would cost more overall, r,vhen taken with the initial cost of building srnall,
thcn starting by building a large piant.

Various lticces of inl'ormation havc been collected, or estimatcd by the marketing manager, the pro-
duction firarlager and the linance departrnent.

(i) Nlarketing informzrtion

fhe probabilities of the four possible outcornes have becn assessecl as follows

/o
Stat high, continue higlt 60
Staft high, subsecluently low l()
Start low, continue 1ow 25
Start low. subsecluently high 5
1 00.

(ii) Annual income estimate

(a) A iarge plant with high rnarket demand n'ould yield Taka In per a1lnum, for each ol'ten years

(b) z\ Iarge plant witir lorv ma.rket dcrnuncl would ;zicld orriy l aka 0. 1 m per annum because of
l.ligtr tixed costs ancl inclhciencics.

(c) A srnall plant tvith lorv clernand tlrroughout tlie ten r,-ears pcriod woulcl yield Taka 0.41n per
itllnLtlal.

q )o)
ICAI} S'f1{I'ISTICS

(d) -r', .:: ,-- ,' ' '15:rL i'.;r aitinrll-t

lirr
:::c -1. - :;-i ,:Cr ,.,r'r J rantillucJ
:ar nlanuiictlrrers

(e) :-:r.i r,,ere e\panded after two ).ears and demand *,lls hrgir rn the last
'--r--
-. -:--,
--.: rc l laka 0.7ur per annum; i. e., being iess efficient than cne that rvas
_ ',
!--_ -;

ll._

(f) 1i r:; sir-irli plant \\,ere expanded after t\l'o years but dernand w:rs lov,, fbr the eight vcars
.- .-t - I
t,!1i u then 1r n,ould yield Taka 0.5m.

(iii) Cirpitnl costs

(a) Initial cost of building a large plant Taka 3m

(b) Initial cost of building a small plant 'laka 1.3m
(c) Additional cost of expanding small plant Taka 2.3rn

Using expected vzrlue :rs the decision criterion. advise the rnanager on what choice of plant to makc.

Ignore the tirne vaiue of money and taxalion.

'I'hc first stage in solving a problern of this lrature, rvhich imrclves more ttren one decision being
urade over a period o1'time, is to construct a decision trec to demonstrate the structure of the deci-
sions rvhicir have to he macie.

't1 c) ,0l

I
 ICAB
S'I]AT'ISTICS

t
Pay-off
'I'k. rn
i

+ /.O
ri l a.lJ L0r,
- o.2
I

I H ICH
LOU
D + 5,2

- z.o
i

I
IIIGH
r30
^!
'f tt
I

f: X PrL\D
s :"f\ l. t
t.? ,
NO \
XPANS iON HICH
ri I Cll H . 1.6
i

I
I . 2.8
I

ICH
I
H
K + l.o
I

L -.2. l

I
IiXPfu\S IOi H + 1.5
I
I
N + 2.'
I ,
a

,
irr',t iwc ytr:rrs 2( Renrai nr nt e ight ycars )

Diagram I
Ir,lotcs :

(i) r Decision points

(ii )
o Outcome points
bach path represents a <liff-erent series c)f events ancl outcornes
. for exatrpic pzLth AG repre
scrts an initial decisio, to build a small plant, demand for the first
two years.

9,204
 ICAB
STATISTICS

turns - ,:rupon a filrther clecision rstakcn 1o expancl ihe plan1.

bpt gntbrtrrnulelr..
dcrrr.: _ _ _ :- ., sirrs ftrlls to a low level

is tak- '' " -:' cost will be Taka l '3m If clemancl in the flrst rwo
)/ears is high net iilcorne rviil bc
Tak;' I *-: annuil1 ancl a seconcl decision altcr trvo years
is reciuirccl. Iiit is decidecl to expancl
the n - - -: e ost of raka 2'2nr will be incurred, tinally, demand in
rhc last ciglt years coulcl be high
or lc
" "i rs lorv thcn the nct annual incomc floor these last eight years will be only -faka 0.05rn
Thu' -- ..rtal, trrc,e1 rcsult of this series of'events wiil be :

Path Build srnali 2 yr demand Fligh Expansion 8 yr delnancl lorv Outcome

AG^ -1.3 2 x O.45
-:.- 8x005 : _2.2

, 11-thc sarne done 1'or each path the results

oblainccl ilre as shorvn on the cliagra, .bovc. .l-he studcnt
I should work the calculations lbr hirnsel{.

Each ol tire tw'elve pc'rssible tnonetary outcornes

iras :L ccrlain cliance of occ,rring,
u'irich decisions are tnacle' iLnd sitle e expected valuc depending ol)
is the critcrion to be usecl in rnaking
the expecleJ the clccisioii
trt'hll11Ll1ll3 tltc largc plart rr.rst
'rtlrtc he cor,parecr rvith the expectcd value
the snla11 plaIlt' i * hlclle'cr orb,irdi,g
-:rr cr the hrglrer.'a1lre bcing chosen). fhis is done by a process
roll-back rr liie h is crpl.rrnc.i bc1,..i.,. k,own as

f-lir: varirtus probabilities ntusr. be calculatetl

Froru thc irrlbrrnalion about probabililies

s1\,1-n in tltc- (luestiolt ir is ltct-ssiblc to nurkc
tior:s rvirich rvill prove trsefitl ccrlain decluc_

tJsing tlre acldition rulc that I, (A+B) : p(A) + pgl) rvhere A anci B arc
rnritualiy exclusive rt can bc
seen thal :

P (start high and continue high)

o6
P (start high and cclntinue lorv)
0.1
SLr D
I (star1hieh)
o.7
P r.ljrafi lor.v ancl continue lorv)
o25
i) (st-art lorv ancl continuc high) 0.05
scp / start 1()w)
0.3
I.O
The rule-s ,--ri ctrildtrronal probabilitv can
then be aoplied P (A/ts): Pr.A+13)
I',(B)

9.205

A
 CAB STATISTICS

fherclbre :

0.6 0.6 6
(Contimiing high/starled high)
C.6 + 0.1 0.1 1

01 0.1 1

(eontinu ing low/starled high I

0.6 + 0.1 0.1 l

0.25 0.25 5
(Continuing low/started higlt)
0.25+0.05 030 6

0.05 0 05
1
(Continui ng hi gh/started hi,gh)
0.25 + 0.05 0.30 5

fhe prob:rbilities are now included in the dicision tree (diagram 2) and the pay-offs are rolled back
riong thc anns to czrlculate the expected walues.

The following steps are tal<en.

Step 1: Calcuizrte the expected value at point A (diagram 2) i. c. lhc expccicd valuc givcn lhat lt !lrgc
firctory was built and demand fbr the first two yetrrs rvirs high.

Expcclccl vuluc at ,\ : tl'"1 O1* t]-" 'O'2\ = 5'97

77
Step 2: Calctilate similarly the expected value at point B, r,vhere a large factory was built and demand
for the first two Years was low.

15 *08
Expecte<t valuc At B : ( - x 52)+(- x -C2) ='

Step 3: .Work back- a further stcp, calculating the expccted value at C, v,4rere a large tactcry has been
burlt, hut resulting demand is not yeL knorvn.

Stcp 4: Sirnilarly, calculatc the expected v:rltres as points D. I1 lr. and G (the student should do these
r:alcgialions lbr hirnself) Pc;int 2 iind 3 arc decision pcints, aild by the cxpected value crite-
rion tl"rc action thal will be t:rken will be tl-)at with the greatest expected valuc. Thus, al 2 the
clercision t0 expand rvill be taken (cxpectecl value of 2.26 compared fo 7.77) and at 3 1he
clecision not to expand u,culd be taken (expected vallte at2.5 comparecl to- 1.43).

Step 5. thcn work back one turthcr step to point FL

Ilxpccted value at 1I : (0.7 x 2.261+ (0.3 x 2.51:2.i''
Slcp 6: 'lhe llrst clecir;ion point tras norv bcen reached. fhe criterion of t:iking the path ",vith the
irighest expected value is applicd.

9,206

t.--
ICAB S'IA-TIS'[ICS

Conclusri.: --
Students ::r --:- '.-,: aCait tlkL-It irl-titr- iii:-,::tg .tI ea-.:h il,r\\-s. t c.
discouni::: ^r ;'i cil-l prlblems [9 ip.;1l1ir1rpetc 1l.ri:, bl elile,-i1atir1,,
the net p:e s ; 1.. ..d\ and using erpected net present values. The approach
,.c
the decisr :- rdentical.

Dizrgranr 3

*5.97 I
HTCH (677) r, .u

f{ LcH (r/7) -(,r. 2

LOU
(0. I

* I q4
I
LOU
.l)l HILH ( l/6) .\,?

BUILD BI
LOU (5/6) -2.C

.l.q( HICH (6/7) +J.0

2 .26
. J .26

'*o LOrr (l/7) -2.7

I Ll\'-l
I 3U I Li) HICH
I 5rt\ t- L (0. 7 + I .7?
HrcH (6/ /) * 1.6

I
+2.l3
keo,
I

t
LOtr (t/7) +2. B

i HlcH ( U6) r.r !

i- i)1;
- I .+l
i {o 3 )

,$D LOU (1/6)

I
Llt
uo
I
i1r.. l 5
HIC[{ (1.6)
I

I LO! (\16) t) ]
a

I i-l ..7t'at'> Remaining I ycars---,

t) )t)7

A
ICAB STATISTICS

Note:
Since in the case of building big initially there is no second dccision poinl, the expectecl value at
point C could have been fbund using tire original probabilitics.

I{igh, hi.qh (0.6) +7.4

High, lorv (0.1) -0.2

Diagram 3
(0.0s) +5.2

-2.O L

Expcctedvaiue at C: .6x7.O + I x eO.2) +.05 x 5.2 + 75 x (-2 0) :3.c)4 as bclore.

I'herc is, however, no short ci,rt fbr firrding thc expected value of builcling srnail initiallv (point II)

92.3 Sensitivitynntrlysis
it is possible tcl assess ltow sensitive a decision is to changes in tirc various probzrbilities that ltave
been ttsed. If probabilities have been cstimatecl they nray not be entirel."- accrlrale and it is intltortant
to check what tirc dccision would havc been il-the probabilities irad becn diilbrcnt. If only a \/ery-
slight cht.rnge in 1.1-rc probability orre ol'thc outcorrles causcs a clifi-crent clecision tcr be nraclc thc
situalion is very scnsitive. I{owcveq then rvhere it rccluires a vr:ry large change in probability to aller
the dccision ntadc, 1lien the dccision-malcer carr lcct tar uiore ccnJ'ident that he has rnadc thc correct
clroice.

Exnmyrlc 8:
Using the data of example 7 , the rnanager has doubts as to probability foreczrsts and on closcr ques-
tioning of the marketing director he ascertains that :

(i) I1'demand in the llrst two years is low there is verylittle chalge at all of the pro<luct catching
on. lfirus, a more accllrate probability of high demand- in last eiglrt years given that 1ow de-
mand in first two yelrrs. is zero.

(i i) If demand is high in first two years there is almost as much chance of customers, disliking as
liking the product. He therefbre estimates the following probabilities.

9,208
ICATS
STATISTICS

P (FIigh Iast eight r.elrs llrst nvtt vears htgh :--t

P (l,on last e rgirt \'€iirS r, first twLr years hieh:-

3

l
You arc rc(luircd to :

(1 ) State what the managcr's decision r.vill be if these new probabilitics

are uscrl
(2) Discuss whether the origin,r decision is sensitive.
'1'he optimal decision is ascertained uncler thesc conditions by the means just
explainecl.

' 3.9i
IGTi
H
Lol.t (l/7)
+
(0.7) - o.z
2.14
LOI.J
{o.l) HI.GH (O)
.
-) 5.2
EUILD
gIG LOH (l)
2.o

. HrcH (4/7)
o,77 a 3.O

+ 2.IL exP LOU (l/i)

2.?
}IiCH
(0.7)
BUILD . HlcH r4/7)/
NO 2.11 1,6
SI'1ALL 2,?.9 F-\ PAI{ S ION
LOt' (]/71
I
LOU

(0. 3) HIGH (O)

-2.3 r ?.9
+ 2.7 tlcPA.t,D
LOi.J ( t )
- 2.t

+ 2,7 Hl6H (0) r.5

HO "
EXPANs J ON

LOU (I) , 2,?

g 209
 .}li
ii.,.Itl--.*-Lr
I lr 1
IL-AI] ST?\TISTICS

(i) ftrc nranager's clcciston should nowto be build small and notto expand even if initial de-
matrd is high sincc thc cxpected value of expansion is l- Taka A.77m whereas expected valge
of lot expanding is + -faka 2 I 1.

(ii) Thc orieinal decision is at least a little sensitirre to a change in the various probabilities. By
varying each probability in turn and continuing to vcry it until the decision alters, tltdegrce
of sensitit,i/-v cttn be ascertained {br each unknown cutcofitc.

(it is as r.vell to check the extrentes of probability 21 first to ascertain uuhether a decision is at all
sensitive

92.4 Prohlemcx:rmplcs:

Ex:rmple 9 :
I

It is 3I Dec. year 5 Marketers Ltd are considering whether to contimre to distribute their products
through wholcsalers or to creatc their o.rvn sales lbrce
'fhe marketing m:rnager estirnates that tirere is a TOoA chance of sales being taka lm in ycar 6 bu1 a
2O<'/oclrunceofsaiesbeingonlytakaS0o,000and al0oZchanceofsalesreachingtakal.2rninyear
7, tbe probabilities arc r:xpected to chance to 80o/" , IOoA and 107o respe cti.;ely.

The cash profits (in faka 0Os) arising atthe end of the yearfrom differentlevels of sales underthe
alternative distrib'.rtion methods are forecast as follows :

Sales Taka 0.8m Sales Taka 1m Sales Taka l.2m

Year 6 7 6 7 6 7
Through wholcsalers 6o 70 c)( ) 100 720 140
Own sales lbrcc 30 40 t.20 740 180 200

Reccruitt-nent cost and capital expenditure to sc1 up lr snlcs lbrce wouici cost the company Taka
50,O0O at ilte beginning of yeiLr 6 or Taka 55,000 at the bcginning of year 7 if the decision rvere
dclayed.

fhe con-rpany's cost of c:rpital is 15%, pa; the prcsent value of Taka I at l5o/o one year is 0.87, in
trvo yezrrs is 0.76.

You are rcrluircd trr:

(a) deflne the alternative strategies available to nlarkctcrs Ltd :

9,2tO
 -]

IC-'AI] S'I',\ !'!S'l'I{ lS

i.bt prescnt un cr':"1it itj.rll i.rI'the -liia1 I L- -

,i
.i

(c) bileli-r -rIDLilC:il .i-r.iItv i]]ti -'ii.rl 1 :,i!1,r1 \ It,rt rcilc!tc.i irl illc c\ iliiiitiirrii

Solution :

(ul ,,Utefnaii..-e i,';.1:. .: -, \

{i) L r', jlI-L rii l.' rise rvht,lesalcr s lirr trvt'r yL:ilrs.
iriI ! :J.Li. .1 \.rlcs tbrce imrnediatelv.
riii r
-.i:.i i'. lri,lcsalers in year 6 ancl llrc- *rcal.e :r sales lorec

(b) j t,t I t i, t i t,,tt,,l' o I t r' ttta t tte.s

) e(11'.\' Cosh proJits p t t) !) nb i: I i I,t, Iixpe c I it tl D!.scoto'tt Jlret't:n.|.

'!ttko
Ysltte ,fac{or \:{t{il€
000 thkq 0{}0 ihi)15% 'lttka a{t{}

(i) (Using wholesnlers fcr two years)

5tj a2 t!
g0 01 ril
120 0i 1.1

10 B7 0.87

la i
iiC ,r)
1 l,] {) \l

l*(l l.i,l

01 101 4.76 71
153
{ii} {Jr*atixng sales immedintely

]C 02 l
t:c 07 o
t_,
.l
+
1S0 01 in

01 I ii8 087
"l
-
1
"l\-'
r-!
cl 4
1'j0 03 112
:00 01 ?tt
0I _L.Lo- 0.76 1 ,rr 1

I{equircnrent/ciipit;il (50) 1.Oir {5,J)

i41
r(l ().}!l

a
r

l(1,\lt STATISTICS

{;ii} {..r'rr.'lrfirr:X s:llcs fclrce

!
ris sLrafcl:-v (i)
aftcr I year'

76 '\)}l
-T! c
t'\
;: s .r trlrtcg""' ( i i ) I i)3
- (
,]

ii rr:i:rU i tnr c:riii ciip iia I (5s) 0.87 ("18) 3 g

1:l tt
eY, .
't I t!
*r aI
d
(.'or;iliii:.t Li:c .\i:,ili- \'tli:if 5 iis iimc o Sll
/ t-r, ti
Ii i:,. i:u,iru;*,1,.'..l Ll1;tl .Jlniiirgv (i) is optimirl
IG {
1t.) i i ) ! !t;.i i !' i fi I t'. !i. tt)r'.s
f; 3
il
i,, '1,11i1;rr1p'.!1ttt:.rinl.aining c[istritrttlirrrt tlircrrillr u.holesirlr:rs shot^,'s thc ]righest Lrrcscr.]l/
liir:i:i'rrlr.titti*ttlc11ccts1w()yi:irrsLrlilv:rnilitr.vorrlclscefilrcilsorlablct()ilssutnc
r':ii:i,-'..,
tlrlri 1i;i,' ircr:r,:lits lr["c:rr:ir.lilrg, a sirles liircr: r,.,,r.ruiil appl-1.I'cr long,r:r perioil.
!
'L t(:.ii',)ir ti'tt rrlt:s {irt-r;c lvrlrttrl r':sull irt :i strlrslarrl.i:rl drop it: nei re\/cise ti.rc llrr:rc al
lilq:: il't.,'i.rri r!ltiiciFtilc.rl 1cr.,'el. Ilrr,: clerncn.i ol'risk invrtLved ntil\'witrrarit lirither invcslt-
f i!1ir');l

ii 11,": ,;,ti,.'s i:; cstahlisheil, it lvi l1 bc riilllcult irnri crrstlv 1o l'clrclnle i{'sales rlccisiitu irr
i1r .'':i:.-rii ilt:tl llrc r.,olr:ntc of brrsjncr,:; r.liri not rcat:h crpeclltll\;n\.

t'. t;trrlr,i. .r', ;

.,1, l-,,',1i1:jtl .. ; '::':..ii:ijii-:iilLillLiliittti!Il(:wl);r:i!1;61:rttrjli;t:,:lirt:lii.lr (;irricdorrlllrciirrtilutr-i.'itti.i:s1r

--t ilittii,'-,i
'r,i 'ti'',".: : l;lli;il ttititl..rt iittll .tlsl ittt,.r i:t'i;trrir.:t'ilr lts:iur.:i;rtcd r,,'i{lt thc ittirt'rrtfiiciuti: rri t.it(:
l',i i',, 'r-r;

i tr :i : .. j'j : i li !1 : ::::ri i',i l.,i; I *,.i1{.r{i tc!llcrilivtl:1,.

'i'lti :t,i:' 'r'r;!iii,.,:r-i !t) llllij tl:C eliltcctccl rrillriL: ri1'IlriS itri.r jeCt.

1'r1i:i:;1 l'r i ; i 1I 5''.

!1.211
 ICAB
STHTISTICS

Iaka (.5,0O0)

Irarluic

10(%

Failure I'l

'a|t/
lre hing J /t) tJI {O/ 1)
l- Taka 60.000 -F40,00{) +2_5,000
C i) B

..-.r. .ire 11o decision points in tliis free.

iiic -< Dlr-ciibie outconrcs .,\, lf , Cl. If anri ir

L)ri tcLintc Prohal;ilit1, ol' f'resent vatrui; oi I-lxpected value

point ach il":r'crtrcit t clrstl Jl()w
llhk:r 00(l faka 00t)

tl -i /S\ (r.50)
il ()irO7:0{i7 ()\t
{1 2s)
it 15 \ i) .l i ().7:: .: i5;7-{ 35
-q.5o
i.: :{ () i) -< r) 7 == 11 ]g-,.a
{.) -+--{
i5 ,+.25
().1 < ().() r {).7 = (}.IXy
!
Nil l.i iil
i .:rpct-ii-.ri ite1. it-c:jcnt vi:luc 6. -\

'-)f.5 { :t,61';orni,r6

i'ltis scr:ii"; i llli:. inlrr--'dt:cecl sc\irrlrl n.rlcs that give guidancc i1) decision-nrarkirre. ,,\ clcci..,iort nilc Iir:rt
Iiii<cs:icr:.rrrr:1 i;l-if ic rclal.iv{l likciihoocl of the vilri(lus
cxl!$(:!ci'l r':lluu:; givc lhe trcst deoision rule of'thc lnctiiocls
r,utcrtrnc,s .,i:rir".i.;;;,:r; is prc{trahlc, hcrrcc:
cliscr.rssccl.

() ?11
t,9-

ICAB S"TAI'IS'TICJS

92.6 Self'-assessmcntquestion

ln Iixanlplr.: 1{i, cirlcululc lirr; expci:lerl r.,;ilu{j of i}rc ;:rl.-:-i*c1 ii tire ltrobabtlitics clnlrr;r-:trcl rvith tire
larrncir r{icr i.urthrr Ce:r,*inpmrnl art: .

\,'cry' sr: ccess{u ! ri.i5

Sirccessiir i (i4
I )i :;;rlrP'' i : t i I Ir-t: i) 45

(A and B imatrtered : expected valus (3.2s)

C 0.15 r 0.9 x A.7 x 33 '\.,I
_" -1 I

I) 0.4 x 0.!i x 0.7 x 15 : 17t

ll 0.45 x 0.9 x 0.7 x Nill r\1ri

Li.xpecl cii \.,i1 ; ir L: 3.8,i) a

,::._.._;: I
h

tl.-2 l,j icrril *i'rri::lrrli,,

*9dL
r

\ ICAB LibrarY
lllllllllllllltl
7942

p"oQ \ ?,'
\f
F'i .-uruHffiI*i'il

k;*"d