Network Analysis

Objectives
After completing this chapter, students will be able to:
1. Understand how to plan, monitor, and control
projects with the use of PERT and CPM.
2. Determine earliest start, earliest finish, latest start,
latest finish, and slack times for each activity, along
with the total project completion time.
3. Reduce total project time at the least total cost by
crashing the network using manual or linear
programming techniques.
4. Understand the important role of software in project
management.

AC 407 Management Accounting &

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 Topic Outline

Introduction
PERT/CPM
PERT/Cost
Project Crashing
Other Topics in Project Management

AC 407 Management Accounting &

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 Introduction

• Managing large-scale, complicated projects effectively is a

difficult problem and the stakes are high.
• The first step in planning and scheduling a project is to
develop the work breakdown structure.
• Time, cost, resource requirements, predecessors, and people
required are identified for each activity.
• A schedule for the project then can be developed.

AC 407 Management Accounting &

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 Introduction

• The program evaluation and review technique (PERT) and

the critical path method (CPM) are two popular
quantitative analysis techniques to help plan, schedule,
monitor, and control projects.
• Originally the approaches differed in how they estimated
activity times.
– PERT used three time estimates to develop a probabilistic estimate
of completion time.
– CPM was a more deterministic technique.
• They have become so similar they are commonly
considered one technique, PERT/CPM.

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 Six Steps of PERT/CPM
1. Define the project and all of its significant activities or tasks.
2. Develop the relationships among the activities and decide
which activities must precede others.
3. Draw the network connecting all of the activities.
4. Assign time and/or cost estimates to each activity.
5. Compute the longest time path through the network; this is
called the critical path.
6. Use the network to help plan, schedule, monitor, and
control the project.
The critical path is important since any delay in
these activities can delay the completion of the
project. AC 407 Management Accounting &
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 PERT/CPM
Given the large number of tasks in a project, it is easy to see
why the following questions are important:
1. When will the entire project be completed?
2. What are the critical activities or tasks in the project, that is, the
ones that will delay the entire project if they are late?
3. Which are the non-critical activities, that is, the ones that can run
late without delaying the entire project’s completion?
4. If there are three time estimates, what is the probability that the
project will be completed by a specific date?

AC 407 Management Accounting &

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 PERT/CPM
5. At any particular date, is the project on schedule, behind
schedule, or ahead of schedule?
6. On any given date, is the money spent equal to, less than, or
greater than the budgeted amount?
7. Are there enough resources available to finish the project on
time?

AC 407 Management Accounting &

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 General Foundry Example of PERT/CPM

• General Foundry, Inc. has long been trying to avoid the

expense of installing air pollution control equipment.
• The local environmental protection group has recently
given the foundry 16 weeks to install a complex air filter
system on its main smokestack.
• General Foundry was warned that it will be forced to close
unless the device is installed in the allotted period.
• They want to make sure that installation of the filtering
system progresses smoothly and on time.

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 General Foundry Example of PERT/CPM

Activities and immediate predecessors for General Foundry

IMMEDIATE
ACTIVITY DESCRIPTION
PREDECESSORS
A Build internal components —
B Modify roof and floor —
C Construct collection stack A
D Pour concrete and install frame B
E Build high-temperature burner C
F Install control system C
G Install air pollution device D, E
H Inspect and test F, G
Table 6.1
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 Drawing the PERT/CPM Network

• There are two common techniques for drawing PERT

networks.
• Activity-on-node (AON) where the nodes represent
activities.
• Activity-on-arc (AOA) where the arcs are used to represent
the activities.
• The AON approach is easier and more commonly found in
software packages.
• One node represents the start of the project, one node for
the end of the project, and nodes for each of the
activities.
• The arcs are used to show the predecessors for each
activity.
AC 407 Management Accounting &
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 General Foundry Example of PERT/CPM

Network for General Foundry

Figure 6.1
AC 407 Management Accounting &
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 Activity Times
• In some situations, activity times are known with certainty.
• The CPM assigns just one time estimate to each activity and
this is used to find the critical path.
• In many projects there is uncertainty about activity times.
• PERT employs a probability distribution based on three time
estimates for each activity, and a weighted average of these
estimates is used for the time estimate and this is used to
determine the critical path.
– PERT often assumes time estimates follow a beta probability
distribution.

AC 407 Management Accounting &

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 Activity Times
The time estimates in PERT are:

Optimistic time (a) = time an activity will take if everything

goes as well as possible. There
should be only a small probability
(say, 1/100) of this occurring.
Pessimistic time (b) = time an activity would take assuming
very unfavorable conditions. There
should also be only a small
probability that the activity will really
take this long.
Most likely time (m) = most realistic time estimate to
complete the activity

AC 407 Management Accounting &

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 Activity Times
Beta Probability Distribution with Three Time Estimates

Figure 6.2
AC 407 Management Accounting &
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 Activity Times
To find the expected activity time (t), the beta distribution
weights the estimates as follows:
a  4m  b
t
6

To compute the dispersion or variance of activity

completion time, we use the formula:

ba
2

Variance   
 6 

AC 407 Management Accounting &

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 Activity Times
Time estimates (weeks) for General Foundry

MOST EXPECTED
OPTIMISTIC, PROBABLE, PESSIMISTIC, TIME, VARIANCE,
ACTIVITY a m b t = [(a + 4m + b)/6] [(b – a)/6]2
A 1 2 3 2 4/36
B 2 3 4 3 4/36
C 1 2 3 2 4/36
D 2 4 6 4 16/36
E 1 4 7 4 36/36
F 1 2 9 3 64/36
G 3 4 11 5 64/36
H 1 2 3 2 4/36
25

Table 6.2

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 How to Find the Critical Path
• We accept the expected completion time for each task as the
actual time for now.
• The total of 25 weeks in Table 6.2 does not take into account
the obvious fact that some of the tasks could be taking place
at the same time.
• To find out how long the project will take we perform the
critical path analysis for the network.
• The critical path is the longest path through the network.

AC 407 Management Accounting &

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 How to Find the Critical Path
General Foundry’s Network With Expected Activity Times

Figure 6.3
AC 407 Management Accounting &
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 How to Find the Critical Path
To find the critical path, we need to determine the following
quantities for each activity in the network.
1. Earliest start time (ES): the earliest time an activity can begin
without violation of immediate predecessor requirements.
2. Earliest finish time (EF): the earliest time at which an activity
can end.
3. Latest start time (LS): the latest time an activity can begin
without delaying the entire project.
4. Latest finish time (LF): the latest time an activity can end
without delaying the entire project.

AC 407 Management Accounting &

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 How to Find the Critical Path
In the nodes, the activity time and the early and late start
and finish times are represented in the following manner.

ACTIVITY t
ES EF
LS LF

Earliest times are computed as:

Earliest finish time = Earliest start time
+ Expected activity time
EF = ES + t
Earliest start = Largest of the earliest finish times of
immediate predecessors
ES = Largest EF of immediate predecessors
AC 407 Management Accounting &
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 How to Find the Critical Path
• At the start of the project we set the time to zero.
• Thus ES = 0 for both A and B.

A t=2
ES = 0 EF = 0 + 2 = 2

Start

B t=3
ES = 0 EF = 0 + 3 = 3

AC 407 Management Accounting &

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 How to Find the Critical Path
General Foundry’s Earliest Start (ES) and Earliest Finish (EF)
times

Figure 6.4

AC 407 Management Accounting &

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 How to Find the Critical Path
Latest times are computed as
Latest start time = Latest finish time
– Expected activity time
LS = LF – t

Latest finish time = Smallest of latest start times

for following activities
LF = Smallest LS of following activities
For activity H:
LS = LF – t = 15 – 2 = 13 weeks

AC 407 Management Accounting &

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 How to Find the Critical Path
General Foundry’s Latest Start (LS) and Latest Finish (LF) times

Figure 6.5

AC 407 Management Accounting &

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 How to Find the Critical Path
• Once ES, LS, EF, and LF have been determined, it is a
simple matter to find the amount of slack time that each
activity has:
Slack = LS – ES, or Slack = LF – EF
• From Table 6.3 we see activities A, C, E, G, and H have no
slack time.
• These are called critical activities and they are said to be
on the critical path.
• The total project completion time is 15 weeks.
• Industrial managers call this a boundary timetable.

AC 407 Management Accounting &

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 How to Find the Critical Path
General Foundry’s Schedule and Slack Times

EARLIEST EARLIEST LATEST LATEST ON

START, FINISH, START, FINISH, SLACK, CRITICAL
ACTIVITY ES EF LS LF LS – ES PATH?
A 0 2 0 2 0 Yes
B 0 3 1 4 1 No
C 2 4 2 4 0 Yes
D 3 7 4 8 1 No
E 4 8 4 8 0 Yes
F 4 7 10 13 6 No
G 8 13 8 13 0 Yes
H 13 15 13 15 0 Yes

Table 6.3
AC 407 Management Accounting &
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 How to Find the Critical Path
General Foundry’s Critical Path

Figure 6.6
AC 407 Management Accounting &
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 Probability of Project Completion

• The critical path analysis helped determine the expected

project completion time of 15 weeks.
• But variation in activities on the critical path can affect
overall project completion, and this is a major concern.
• If the project is not complete in 16 weeks, the foundry will
have to close.
• PERT uses the variance of critical path activities to help
determine the variance of the overall project.

Project variance = ∑ variances of activities

on the critical path
AC 407 Management Accounting &
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 Probability of Project Completion
• From Table 6.2 we know that
ACTIVITY VARIANCE
A 4/36
C 4/36
E 36/36
G 64/36
H 4/36

 Hence, the project variance is

Project variance = 4/36 + 4/36 + 36/36 + 64/36 + 4/36 = 112/36 = 3.111

AC 407 Management Accounting &
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 Probability of Project Completion

• We know the standard deviation is just the square root of

the variance, so:

Project standard deviation   T  Project variance

 3.11  1.76 weeks

 We assume activity times are independent and

that total project completion time is normally
distributed.

AC 407 Management Accounting &

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Probability Distribution for Project Completion
Times

Figure 6.7

AC 407 Management Accounting &

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 Probability of Project Completion
The standard normal equation can be applied as follows:

Due date  Expected date of completion

Z
T
16 weeks  15 weeks
  0.57
1.76 weeks
 From Appendix A we find the probability of
0.71566 associated with this Z value.
 That means the probability this project can be
completed in 16 weeks or less is 0.716.

AC 407 Management Accounting &

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Probability of General Foundry Meeting the 16-
week Deadline

Figure 6.8

AC 407 Management Accounting &

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 What PERT Was Able to Provide
• PERT has been able to provide the project manager with
several valuable pieces of information.
• The project’s expected completion date is 15 weeks.
• There is a 71.6% chance that the equipment will be in
place within the 16-week deadline.
• Five activities (A, C, E, G, H) are on the critical path.
• Three activities (B, D, F) are not critical but have some
slack time built in.
• A detailed schedule of activity starting and ending dates
has been made available.

AC 407 Management Accounting &

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 Sensitivity Analysis and
Project Management
• The time required to complete an activity can vary from
the projected or expected time.
• If the activity is on the critical path, the completion time
of the project will change.
• This will also have an impact on ES, EF, LS, and LF times for
other activities.
• The exact impact depends on the relationship between
the various activities.
• A predecessor activity is one that must be accomplished
before the given activity can be started.
• A successor activity is one that can be started only after
the given activity is finished.
AC 407 Management Accounting &
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 Sensitivity Analysis and
Project Management
Impact of an Increase (Decrease) in an Activity Time for a
Critical Path Activity
SUCCESSOR PARALLEL PREDECESSOR
ACTIVITY TIME ACTIVITY ACTIVITY ACTIVITY
Earliest start Increase (decrease) No change No change

Earliest finish Increase (decrease) No change No change

Latest start Increase (decrease) Increase (decrease) No change

Latest finish Increase (decrease) Increase (decrease) No change

Slack No change Increase (decrease) No change

Table 6.4

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 PERT/COST
• Although PERT is an excellent method of monitoring and
controlling project length, it does not consider the very
important factor of project cost.
• PERT/Cost is a modification of PERT that allows a manager to
plan, schedule, monitor, and control cost as well as time.
• Using PERT/Cost to plan, schedule, monitor, and control
project cost helps accomplish the sixth and final step of PERT.

AC 407 Management Accounting &

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 Planning and Scheduling Project Costs: Budgeting
Process

• The overall approach in the budgeting process of a

project is to determine how much is to be spent
every week or month.
• This can be accomplished in four basic budgeting
steps:

AC 407 Management Accounting &

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 Four Steps of the Budgeting Process

1. Identify all costs associated with each of the activities

then add these costs together to get one estimated cost
or budget for each activity.
2. In large projects, activities can be combined into larger
work packages. A work package is simply a logical
collection of activities.
3. Convert the budgeted cost per activity into a cost per
time period by assuming that the cost of completing any
activity is spent at a uniform rate over time.
4. Using the ES and LS times, find out how much money
should be spent during each week or month to finish the
project by the date desired.
AC 407 Management Accounting &
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 Budgeting for General Foundry

• The Gantt chart in Figure 6.9 illustrates this process.

• The horizontal bars shown when each activity will be
performed based on its ES-EF times.
• We determine how much will be spent on each activity during
each week and fill these amounts into a chart in place of the
bars.
• The following two tables show the activity costs and budgeted
cost for the General Foundry project.

AC 407 Management Accounting &

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 Budgeting for General Foundry
Gantt chart General Foundry project

Figure 6.9
AC 407 Management Accounting &
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 Budgeting for General Foundry
Activity costs for General Foundry, Inc.
EARLIEST LATEST TOTAL BUDGETED
START, START, EXPECTED BUDGETED COST PER
ACTIVITY ES LS TIME, t COST ($) WEEK ($)
A 0 0 2 22,000 11,000
B 0 1 3 30,000 10,000
C 2 2 2 26,000 13,000
D 3 4 4 48,000 12,000
E 4 4 4 56,000 14,000
F 4 10 3 30,000 10,000
G 8 8 5 80,000 16,000
H 13 13 2 16,000 8,000
Total 308,000

Table 6.5

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 Budgeted Cost (Thousands of Dollars) for General
Foundry, Inc., Using Earliest Start Times

WEEK
ACTIVITY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 TOTAL
A 11 11 22

B 10 10 10 30

C 13 13 26

D 12 12 12 12 48

E 14 14 14 14 56

F 10 10 10 30

G 16 16 16 16 16 80

H 8 8 16

308

Total per week 21 21 23 25 36 36 36 14 16 16 16 16 16 8 8

Total to date 21 42 65 90 126 162 198 212 228 244 260 276 292 300 308

Table 6.6

AC 407 Management Accounting &

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 Budgeting for General Foundry

• It is also possible to prepare a budget based on the latest

starting time.
• This budget will delay the expenditure of funds until the last
possible moment.
• The following table shows the latest start budget for the
General Foundry project.
• The two tables form a budget range.
• Any budget can be chosen between these two values
depending on when the company wants to actually spend the
money.
• The budget ranges are plotted in Figure 6.10
AC 407 Management Accounting &
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 Budgeted Cost (Thousands of Dollars) for General
Foundry, Inc., Using Latest Start Times

WEEK
ACTIVITY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 TOTAL
A 11 11 22

B 10 10 10 30

C 13 13 26

D 12 12 12 12 48

E 14 14 14 14 56

F 10 10 10 30

G 16 16 16 16 16 80

H 8 8 16

308

Total per week 11 21 23 23 26 26 26 26 16 16 26 26 26 8 8

Total to date 11 32 55 78 104 130 156 182 198 214 240 266 292 300 308

Table 6.7

AC 407 Management Accounting &

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 Budget Ranges for General Foundry

Figure 6.10

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 Monitoring and Controlling Project Costs

• Costs are monitored and controlled to ensure the project is

progressing on schedule and that cost overruns are kept to a
minimum.
• The status of the entire project should be checked
periodically.
• The following table shows the state of the project in the sixth
week.
• It can be used the answer questions about the schedule and
costs so far.

AC 407 Management Accounting &

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 Monitoring and Controlling Budgeted Cost

VALUE OF
TOTAL WORK ACTIVITY
BUDGETED PERCENT OF COMPLETED ACTUAL DIFFERENCE
ACTIVITY COST ($) COMPLETION ($) COST ($) ($)
A 22,000 100 22,000 20,000 –2,000
B 30,000 100 30,000 36,000 6,000
C 26,000 100 26,000 26,000 0
D 48,000 10 4,800 6,000 1,200
E 56,000 20 11,200 20,000 8,800
F 30,000 20 6,000 4,000 –2,000
G 80,000 0 0 0 0
H 16,000 0 0 0 0
Total 100,000 112,000 12,000

Table 6.8 Overrun

AC 407 Management Accounting &
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 Monitoring and Controlling Project Costs

The value of work completed, or the cost to date for any

activity, can be computed as follows:
Value of work (Percentage of work complete)
=
completed x (Total activity budget)

The activity difference is also of interest:

Activity difference = Actual cost
– Value of work completed

A negative activity difference is a cost underrun and

a positive activity difference is a cost overrun.
AC 407 Management Accounting &
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 Project Crashing
• Projects will sometimes have deadlines that are
impossible to meet using normal procedures.
• By using exceptional methods it may be possible to
finish the project in less time than normally required
at a greater cost.
• Reducing a project’s completion time is called
crashing.

AC 407 Management Accounting &

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 Project Crashing
• Crashing a project starts with using the normal time to create
the critical path.
• The normal cost is the cost for completing the activity using
normal procedures.
• If the project will not meet the required deadline,
extraordinary measures must be taken.
– The crash time is the shortest possible activity time and will require
additional resources.
– The crash cost is the price of completing the activity in the earlier-
than-normal time.

AC 407 Management Accounting &

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 Four Steps to Project Crashing
1. Find the normal critical path and identify the
critical activities.
2. Compute the crash cost per week (or other time
period) for all activities in the network using the
formula:

Crash cost – Normal cost

Crash cost/Time period =
Normal time – Crash time

AC 407 Management Accounting &

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 Four Steps to Project Crashing
3. Select the activity on the critical path with the
smallest crash cost per week and crash this
activity to the maximum extent possible or to
the point at which your desired deadline has
been reached.
4. Check to be sure that the critical path you were
crashing is still critical. If the critical path is still
the longest path through the network, return to
step 3. If not, find the new critical path and
return to step 2.
AC 407 Management Accounting &
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 General Foundry
• Suppose that General Foundry has been given 14 weeks
instead of 16 weeks to install the new equipment.
• The critical path for the project is 15 weeks.
• What options does the firm have?
– The normal and crash times and costs are shown in Table 12.9.
– Crash costs are assumed to be linear and Figure 12.11 shows the
crash cost for activity B.
• Crashing activities B and A will shorten the completion
time to 14 but it creates a second critical path.
• Any further crashing must be done to both critical paths.

AC 407 Management Accounting &

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 General Foundry
Normal and Crash Data for General Foundry, Inc.
TIME (WEEKS) COST ($) CRASH
COST PER CRITICAL
ACTIVITY NORMAL CRASH NORMAL CRASH WEEK ($) PATH?
A 2 1 22,000 23,000 1,000 Yes
B 3 1 30,000 34,000 2,000 No
C 2 1 26,000 27,000 1,000 Yes
D 4 3 48,000 49,000 1,000 No
E 4 2 56,000 58,000 1,000 Yes
F 3 2 30,000 30,500 500 No
G 5 2 80,000 86,000 2,000 Yes
H 2 1 16,000 19,000 3,000 Yes

Table 6.9

AC 407 Management Accounting &

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 General Foundry
Crash and Normal Times and Costs for Activity B

Figure 6.11

AC 407 Management Accounting &

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 Project Crashing with
Linear Programming
• Linear programming is another approach to finding
the best project crashing schedule.
• The data needed are derived from the normal and
crash data for General Foundry and the project
network with activity times.

AC 407 Management Accounting &

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 Project Crashing with
Linear Programming
General Foundry’s Network With Activity Times

Figure 6.12

AC 407 Management Accounting &

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 Project Crashing with
Linear Programming
The decision variables for the problem are:
XA = EF for activity A
XB = EF for activity B
XC = EF for activity C
XD = EF for activity D
XE = EF for activity E
XF = EF for activity F
XG = EF for activity G
XH = EF for activity H
Xstart = start time for project (usually 0)
Xfinish = earliest finish time for the project
AC 407 Management Accounting &
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 Project Crashing with
Linear Programming
• Additional decision variables for the problem are:
Y = the number of weeks that each activity is
crashed.
YA = the number of weeks activity A is crashed
and so forth up to YH.

 The objective function is

Minimize crash cost = 1,000YA + 2,000YB + 1,000YC

+ 1,000YD + 1,000YE + 500YF
+ 2,000YG + 3,000YH

AC 407 Management Accounting &

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 Project Crashing with
Linear Programming
• Crash time constraints  This completion
ensure activities are not constraint specifies
crashed more than is that the last event
allowed. must take place before
the project deadline:
YA ≤ 1
YB ≤ 2 Xfinish ≤ 12
YC ≤ 1
YD ≤ 1  This constraint
indicates the project is
YE ≤ 2 finished when activity
YF ≤ 1 H is finished:
YG ≤ 3
YH ≤ 1 Xfinish ≥ XH
AC 407 Management Accounting &
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 Project Crashing with
Linear Programming
Constraints describing the network have the form:
EF time ≥ EF time for predecessor + Activity time
EF ≥ EFpredecessor + (t – Y), or
X ≥ Xpredecessor + (t – Y)
For activity A, XA ≥ Xstart + (2 – YA) or XA – Xstart + YA ≥ 2
For activity B, XB ≥ Xstart + (3 – YB) or XB – Xstart + YB ≥ 3
For activity C, XC ≥ XA + (2 – YC) or XC – XA + YC ≥ 2
For activity D, XD ≥ XB + (4 – YD) or XD – XB + YD ≥ 4
For activity E, XE ≥ XC + (4 – YE) or XE – XC + YE ≥ 4
For activity F, XF ≥ XC + (3 – YF) or XF – XC + YF ≥ 3
For activity G, XG ≥ XD + (5 – YG) or XG – XD + YG ≥ 5
For activity G, XG ≥ XE + (5 – YG) or XG – XE + YG ≥ 5
For activity H, XH ≥ XF + (2 – YH) or XH – XF + YH ≥ 2
For activity H, XH ≥ XG + (2 – YH) or XH – XG + YH ≥ 2
AC 407 Management Accounting &
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 THE END

AC 407 Management Accounting &

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