STRATEGIC MANAGEMENT ACCOUNTING

PERT Example
PRINTABLE VERSION

Version 16a
© Copyright CPA Australia unless otherwise indicated.
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Strategic Management Accounting

Project evaluation and review technique
Network techniques such as Project evaluation and review technique (PERT) and Critical
path method (CPM) have been developed to enable project managers to describe task
interdependencies and to facilitate planning to compensate for delays. One of the main tools
used in PERT and CPM is the network diagram. This exercise explains the process of creating a
network diagram, calculating the expected times for completion of project activities and how to
identify the ‘critical path’ for a project. There are two common formats used to prepare a network
diagram. The activity-on-arrow (AOA) method shows activities as arrows and events as nodes.
The other is the activity-on-node (AON) method nodes and arrows represent activities and events
are not illustrated. The choice of AOA or AON is a matter of personal choice. For this exercise
we will use AOA.

Construct a network diagram

PERT starts with the transformation of the project plan into a network diagram. The diagram
includes project activities, activity precedence relations (where one activity must be completed
before another can start) and, in some formats, events. Events result from completing one or
more activities. To draw our network diagram using the AOA format we need to transfer the
items from the project activity list below into a diagram.

Activity Preceding Activity

Activity 1 —

Activity 2 1

Activity 3 1

Activity 4 1

Activity 5 2

Activity 6 3

Activity 7 4

Activity 8 5

Activity 9 6

Step 1—Draw Node ‘a’ and then Activity 1

Activity 1 must be completed before Activities 2, 3 and 4 and can begin.

Activity 1
a

Step 2—Draw Node ‘b’

The completion of Activity 1 is represented on the diagram by Node b.

Activity 1
a b
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Step 3—Draw Activities 2, 3 and 4

Activities 2, 3 and 4 can now proceed.

2
i ty
tiv
Ac

Activity 1 Activity 3
a b

Ac
tiv
ity
4

Step 4—Draw Nodes ‘c’, ‘d’ and ‘e’

Nodes c, d and e represent the completion of Activities 2, 3 and 4.

2
iv ity
A ct

Activity 1 Activity 3
a b d

Ac
tiv
ity
4

e
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Step 5—Draw Activity 5 and Node ‘f’

If you look in the project activity list, you will see that Activity 2 precedes Activity 5. That is,
Activity 2, must be completed before Activity 5 begins.

So now we draw Activity 5 and its completion node into the diagram, directly after the
completion (node) of Activity 2.

Activity 5 f
c

2
iv ity
Act

Activity 1 Activity 3
a b d

Ac
tiv
ity
4

Step 6—Draw Activity 6 and Node ‘g’

Activity 3 must be completed before Activity 6 begins, so Activity 6 is added to the diagram
directly after Activity 3.

Activity 5 f
c

2
ty
tivi
Ac

Activity 1 Activity 3 Activity 6

a b d g

Ac
tiv
ity
4

e
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Step 7—Draw Activity 7, 8 and 9

The remaining activities are added to the diagram in the same fashion:
• Activity 7 after Activity 4 is complete;
• Activity 8 after Activity 5 is complete; and
• Activity 9 after Activity 6 is complete.

Activity 5 f
c

Ac
tiv
2

ity
ivity

8
Act

Activity 1 Activity 3 Activity 6 Activity 9

a b d g

Ac
tiv 7
ty
ity tivi
4 Ac

Step 8—Draw Node ‘h’

When all the remaining activities are complete, they meet at the final completion Node h.

Activity 5 f
c
Ac
tiv

2
ity

ivity
8

Act

Activity 1 Activity 3 Activity 6 Activity 9 h

a b d g

Ac
tiv 7
ty
ity tivi
4 Ac

e
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Calculate expected time

Once we have diagrammed all activities and their precedence relationships, we calculate activity
times. Where schedule uncertainty exists, it is suggested that three time estimates are made for
each activity—‘O’ptimistic (shortest), ‘P’essimistic (longest) and most likely (ML). The expected
time (ET) can then be calculated as a weighted average of the three time estimates.

Activity Preceding Activity Optimistic Most Likely Pessimistic ET

Activity 1 20 25 30

Activity 2 1 10 20 30

Activity 3 1 15 20 25

Activity 4 1 6 20 40

Activity 5 2 6 35 70

Activity 6 3 20 28 60

Activity 7 4 8 19 24

Activity 8 5 10 45 50

Activity 9 6 6 9 18

The following formula is used to calculate the overall ‘expected time’ for each activity.

ET = (O + 4ML + P)/6

So for example, for Activity 1 the calculation would be as follows:

ET for Activity 1: (20 + 100 + 30)/6 = 25

or for Activity 6:

ET for Activity 6: (20 + 112 + 60)/6 = 32

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Once the expected times have been calculated for each activity, they should be added to the
network diagram as shown below.

Time estimate in days

Activity Preceding Activity O M P ET

Activity 1 20 25 30 25

Activity 2 1 10 20 30 20

Activity 3 1 15 20 25 20

Activity 4 1 6 20 40 21

Activity 5 2 6 35 70 36

Activity 6 3 20 28 60 32

Activity 7 4 8 19 24 18

Activity 8 5 10 45 50 40

Activity 9 6 6 9 18 10

Activity 5 f
c
36

Ac
tiv
2

ity
ty

40
ivi

8
t
Ac
20

Activity 1 Activity 3 Activity 6 Activity 9 h

a b d g
25 20 32 10

Ac
tiv 7
ity tivity
4 Ac
18
21

e
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Identify the critical path

The next step is to determine how long the overall project will take to complete. As can be
seen from the diagram so far, we have three paths. The longest path, the one that takes the
most time, is called the critical path. This path tells us how long it takes to finish the project.
To determine the critical path, we add together the ETs for the activities on each path through
the network diagram.

Add the ET figures along each path through the diagram:

Path 1: 1-2-5-8 (25 + 20 + 36 + 40 = 121 days)

Path 2: 1-3-6-9 (25 + 20 + 32 + 10 = 87 days)

Path 3: 1-4-7 (25 + 21 + 18 = 64 days)

In this case, the critical path is path 1 (shown using the bold arrows in the diagram below).

Activity 5 f
c
36

Ac
2

tiv
ty

ity
ivi

40
t

8
Ac
20

Activity 1 Activity 3 Activity 6 Activity 9 h

a b d g
25 20 32 10

Ac
tiv 7
ty
ity tivi
4 Ac
18
21

Note: Project ‘slack’ is covered in detail in the study guide.