STRATEGIC MANAGEMENT ACCOUNTING

PERT Exercise
PRINTABLE VERSION

Version 16a
© Copyright CPA Australia unless otherwise indicated.
 PERT EXERCISE PRINTABLE VERSION | 1

Activity on arrow diagram exercise

A manufacturing company wants to acquire an industrial furnace. The furnace is to be used
for firing clay products. A furnace may cost several million dollars depending on its size
and capabilities and may be over 100 metres long and have more than 40 000 components.
Effective project management is essential.

A company buying a furnace will often request several tenders. If a customised design is
required, this means there is considerable preparation and effort. Once a tender is awarded,
the key phases to be completed by the successful bidder are design, purchasing, shipping,
installation, commissioning and customer training.

Furnace project information

The table below is a project activity list for a furnace project. The main activities ‘a–h’ are listed,
along with their preceding activities and completion scenarios (optimistic, most likely and
pessimistic).

Project activity list

Preceding
Activity activity Time in weeks

Optimistic Most likely Pessimistic

(O) (ML) (P)

A Tender preparation — 7 8 15

B Customer tender review and acceptance A 1 2 2.7

C Furnace design B 7.5 10.8 15

D Purchasing B 16 20 30

E Receive/ship goods to site C, D 6.7 7 13

(including clearing customs)

F Installation E 4 5.8 9

G Commissioning F 3 4 5

H Customer training F 2 3 3.7

➤➤Tasks
1. Calculate the expected time for each activity (rounded to the nearest whole number).
ET = (O + 4ML + P)/6
2. Using the project activity list provided, draw a network diagram for the project.
3. Determine the critical path for the project.
2 | STRATEGIC MANAGEMENT ACCOUNTING

Solution
Calculation of expected time (ET)
Preceding
Activity activity Time in weeks

Optimistic Most likely Pessimistic

(O) (ML) (P) ET*

A Tender preparation — 7 8 15 9

B Customer tender review A 1 2 2.7 2

and acceptance

C Furnace design B 7.5 10.8 15 11

D Purchasing B 16 20 30 21

E Receive/ship goods to site C, D 6.7 7 13 8

(including clearing customs)

F Installation E 4 5.8 9 6

G Commissioning F 3 4 5 4

H Customer training F 2 3 3.7 3

* ET= (O + 4ML + P)/6. For example, activity A’s ET = (7 + 4 × 8 + 15)/6 = 54/6 = 9

Network diagram
There are two common formats used to prepare network diagrams: activity-on-arrow (AOA) and
activity-on-node (AON). For this exercise we will use the AOA format as used in the study guide.

To construct the network diagram, all activities with no preceding activities begin at the project
start node, and other activities follow as specified in the ‘preceding activity’ column. The only
exception to this rule occurs when two activities have the same start and end nodes. In this case a
dummy activity must be used. Dummies are used twice in the network diagram below. Dummies
are needed because:
1. Activities C and D both follow Activity B and precede Activity E (C and D have the same start
and end nodes).
2. Activities G and H both follow Activity F and end at the project end node (i.e. G and H have
the same start and end nodes).

Note that the nodes (circles) in the diagram have been numbered. Numbering of nodes is
conventional, but not necessary. Nodes simply show the start and end points of activities.

C 4 G 8
(11) (4)
A B D E F
1 2 3 5 6 7
(9) (2) (21) (8) (6)
H
9
(3)
 PERT EXERCISE PRINTABLE VERSION | 3

Critical path (CP)

The CP is the longest path through a diagram. It identifies the expected time to complete
the project. The CP is indicated by the bold arrows in the diagram above. Expected times
for activities are shown in brackets. Following along the critical path (A > B > D > E > F > G)
the estimated times add up to 50 weeks. This means that the expected time for project
completion is 50 weeks.

Opportunities for shortening the project duration must focus on critical path activities.