Planning is an integral part of all human activities, social,economic, political e.t.c. All activities require planning in order to enhanceperformance. The popular saying, “Whoever fails to plan has planned tofail”, underscores the need for planning.


Planning refers tothe establishment of objectives and the formulation, evaluation and theselection of policies, strategies, tactics and action  n required to achieve these objectives.

 Planning involves the establishmentof goals and the selection of courses

There are basicallytwo levels of planning, short term operational planning and long term strategicplanning

Levels of Planning

 (A)  Short Term Planning

This comprises operational and transaction planning.

(1)    Transaction Planning

This is planning for immediate execution. This may includedecision on what to be performed with the existing facilities, equipment,resources etc. to meet a specified target or goal.

(2)     Operational Planning

This type of planning should last between 1 month to 12 monthsi.e. annually. This is a decision based on the best production plan, marketing,etc of a specified target and the facilities, materials, that will be requiredand the methods required for this operation.

(B)    Long Term Planning

The following will fall under the long term planning;

         (1) Tactical Planning

This is planning that usually falls between 1 year to 5 years. Itcan either be classified as midterm or long term planning depending on the sizeand operations of the organization. This will basically answer questions suchas, the amount of capital to be invested or de-invested, the new facilities,system, and methods to be required, new product line to be included, or theproduct to be deleted.

(2)  Strategic Planning

This will cover a period between one year to ten (10) years ormore depending on the size of the organization. Strategic planning issynonymous with Corporate Planning, and long range planning.

It is defined as the formulation, evaluation and selectionstrategies, methods and techniques for the purpose of preparing a long termplan of action to attain a given objective. This boarders on the type ofbusiness to be undertaken, the financing of the business, the pattern ofoperation of the business and the resources to be allocated to the business.



  1. It facilitates long term policies by minimizing unnecessaryconcentration on short term factors; hence directing efforts on long termpolicies.
  2. It assists in simplifying operational planning and budgets; sothat actual will be in line with planned budgets.
  3. Planning will enhance a well-developed organizational managementinformation system.   Planning willmake   it possible   for management to   make  use   of required information inorder to manage well.
  4. Planning makes it possible for better coordination with differentsectors of the organization to ensure the achievement of the organizationalgoals through individual and group efforts.

Planning will ensure the motivation of staff since each individualwill try to avoid any blame for negative variance. Planning ensures thattargets are set and all efforts will be geared towards that target.

Consequently, individual goals will be sacrificed for the overallgoals of the organization as a whole i.e. planning ensures goal congruence.

Planning will reveal lapses, deficiencies, weakness e.t.c in theorganization which will otherwise not have been possible.


1.         Strict adherence to planning may becomecumbersome, bureaucratic and monotonous.

2.         Unreasonable targets maydiscourage performance.

3.         Planning may discourage individualinitiative. This is because personal initiative may be sacrificed. There is no roomfor individual effort, rather, collective efforts  towards a particular goal or target supersedesany individual effort.

Stages of Long Term Planning

The  Assessment Stage

This is also known asa position audit and seeks to provide detailed answers to question such as:

  1. What is the existing state of the organization    and the environment   in which it operates?
  2. In what environment will the organization operate in the future?There are four aspects of the  Assessment stage:

These are:

  1. The external environment i.e. Economic, Political, Social andTechnological factors affecting the environment:
  2. The organization, i.e. the study of the strength and weaknesses ofthe organization
  3. The future i.e. uncertain period covered by corporate planning.
  4. The expectations of groups such as shareholders, employees, andgeneral public

(2)The Objectives Stage

This is the principal stage in corporate planning process andseeks to answer the Question: “Where does the organization seek to go?

(3)The Appraisal Stage

This is otherwise known as “swot” i.e. strength,weaknesses, opportunities and threats:

(1)Evaluating Alternatives

By this stage, the planning team will be aware o

(a) The scale of strategic tasks ahead.

(b) The major forecast heads and factors, which are expected toinfluence the organization.

(5) The Corporate Plan

By this time, there will be a general agreement on the strategiesfor the organization so that the remaining stages add increasing amount topractical detail. Here the task is to prepare action plans for the variousdepartments and functions of the organization.

(1)Monitoring and Control

This is to see where the activities need to be adjusted to bringthem in line with the original strategies

 3.3    CONTROL

Control is the process of obtaining conformity to plans throughactions and evaluations. Control involves the implementation of plans and theconsideration of feedback that may             influencefuture decisions or activities The role of the Management Accountant in thecontrol process is the identification of controllable costs; that is, those whichmay be directly regulated at a given level of managerial authority in eitherthe short or the long run. Information on controllable costs, often calledfeed-back is distributed to the executives responsible for the activities thatgenerate the cost; A system of control indicates all the measures and methodsdesigned to promote efficiency, encourage managerial play and policies andsafeguard the organization’s assets.

The control functionapplies to executives working in non­profit organizations as well as business.A good managerial accounting system submits controllable cost data to theappropriate managers.

Planning &Control Cycle

3.4     Planning, Control andDecision Making

Planning and Control are Inseparable

Planning cannot be achieved where there is no control; the planmay not succeed. To succeed, the control element should come into play.Management Accounting considers control as a necessary ingredient for the plansto be achieved. Decision making is the final stage in planning and it affordsan opportunity for the decision maker to choose between different alternatives.

InformationRequirements for Planning, Control and Decision Making

  1. Verifiability: The information requirement for planning, control and decisionmaking should be such that it can readily be verified. Such verification can bedone by way of references, documents or         schedules.
  2. Objectivity Such information should have elements of objectivity and must befree        from bias it must as far aspossible be free from ill-conceived and misconceived ideas and ideals that willaffect the objectivity of the information.
  3. Timeliness: The information to be processed and produced for communication to   the  top management must be made in time so that it can be put to use at theright time.
  4. Comparability: The information should be such that it can be compared with other        data or information to prove itsauthenticity.
  5. Reliability: The information should be capable of being relied upon by theuser.
  6. Understandability: The information should be in the form that can readily beunderstood. There must be no ambiguity in such information.
  7. Relevance: The information should be relevant to the management’s decision at                        hand. Irrelevantinformation will be misleading and will affect the decision at stake.

Goal   Congruence,   Motivation  and   Responsibility Accounting

Goal Congruence

In a given management or cost accounting system, there must besome criteria to measure the quality of planning and control system. Theprimary criterion is to check the benefit of such a system whether itencourages managers when working in their own interest to act in harmony withthe overall objectives of top management. This interest is termed GoalCongruence since goals and sub-goals are specified to induce (or at least notdiscourage) decisions that will blend with top management goals. Goal congruencerequires motivation,

Motivation can be defined as theneed to achieve some selected goals and the resulting drive that influencesaction towards that goal. There are two aspects of motivation;

(1)       Direct

That is top managers want sub-unit managers to aim towards topmanagement goals.

(2)      Strength

That is top managers want sub-unit managers to have strong desireto reach the management goals. Goal congruence is essentially a behavioralproblem. The focus is on a motivational aspect of a particular accountingsystem or method versus another. For example, questions may be asked:

Should performance of the managers be judged on the basis ofsales, Gross Profit contribution to fixed cost, net income, and return oninvestment or on some other basis? There are no clear cut answers to thesequestions. The answers must be framed in terms of the predicted motivationalimpact alternatives. It may seem strange to view accounting systems in terms oftheir behavioral aspects. But the task of the accountant is complex and isaffected by human aspects. In the design of accounting systems and theselection of accounting techniques an awareness of the importance of goalcongruence and the motivational aspect of systems is necessary. When a managerchooses a particular accounting system he is confronted with a decisionregarding the cost and value of the information i.e. he must weigh the relativecost and benefit and that forms the criteria for systems design and appraisal.

Top Management Objectives

The Accounting system should be judged in relation to how well anygiven top management objective is achieved. For example, top management mayspecify that earnings for the following year should be N50m.They may use theaccounting system to communicate and enforce this objective. Near the end ofthe year if the earning prospects are gloomy (not ripe) top management mayexert immense pressure to reach the budgeted target. To reach the earningsobjectives (i.e. N50m) subordinates may be inclined to reduce current expensesby postponing outlays or research even though such decisions could cripplefuture earning power.

We may deplore this decision but our criticisms should be ahead attop management’s choice of objectives rather than at the system. Given theobjective, the accounting system performs well as the help-mate of topmanagement, the accounting system should be judged in the light of theobjectives; whatever they may be.


1.         Use of multiplegoals.

2.         Acceptance ofsystem goals as personal goals,

3.         Design oforganizational structure to pin-point responsibility.

4.         Provision   of timely accurate,   relevant data to guide organization andutilization of resources.

Use of Multiple Goals

Various multiple goals are often specified as a way of givingoperational meaning to the overall management goals. The specification must beconcrete enough so that managers understand what is expected. Organizationalperformance will be measured in the following areas:

1.         Profitability

2.         Productivity

3.         ProductLeadership

4.         ProductDevelopment

5.         Employeesattitudes

6.         Publicresponsibility

7.         Balance betweenshort range and long range goals.

It should be noted that the 1st goal is profitability.This is usually measured in terms of single year results. The thrust of othergoals is to offset the inclination of managers to maximize short run profits tothe detriment of long-run profit. Over stress on any single goal (out of theeight) whether it is short run profit or some other goal usually does notpromote long-run profitability. Instead, coordination of goals is blocked: onegoal may be achieved while others are neglected. For example there are manyquestionable ways to improve short-run performance i.e. by saving outlays(expenditure) on repairs, quality control, advertising, research or training. Amanager may successfully plan productivity for short periods of time. This mayhave some unfavorable long run consequences. Another example is as an executiveof a large size company described the situation; central headquarters of thecompany ordered all plants to reduce their inventories of supplies from a 90day level to a sixty day level. Subsequently, the internal audit staffdiscovered two interesting developments that two of the plant managers achievedthe inventory reduction as follows:

In the first plant the employees threw the factory supplies outthe back door.

In the second plant their conscience hurt, they did not throw thesupplies out; instead, they hid the items throughout the plant,


Another means of achieving goal congruence is to get topmanagement goals accepted as personal goals. It is not enough for the system tospecify sub-goals so that they harmonize with top management goals. In thisway, managers, working in their best self interest as they perceive it, willmake goal congruence decisions. For example, assume that the importance ofconformity to a Budget prediction is accepted by a manager; for this purpose,accounting feedback is regarded as the most important source of informationregarding his own appraisal of self-worth. Then the Budget would be a crucialpart of the control system.

The acting system is only one of the many control systems thatinfluence an individual’s behavior. Society as a whole can be viewed as acontrol system. A person’s performance can be affected by his family, religion,profession, company, department etc. Without massive top management backing,the goals specified by the system (organization or institution) which shouldaim at goal congruence are less likely to gain acceptance as personal goals.Acceptance may be best achieved in some cases as participating processes and inother cases by authoritative processes.

            Design   of Organization   Structure  to   Pin-Point Responsibility

Another principal way of goal congruence is to tailor theaccounting system to the organization in order to strengthen motivation. Thedesign of an organization structure and a control system should beinter-dependent.

Practically, however,the organization’s structure is considered as something given or existing.

The accounting and control systems are constructed and modifiedfrom time to time.  To work optimally,top managers sub-divide activities and stipulate a hierarchy of managers whooversee some predetermined sphere of activities. And who have some latitude tomake decision in that sphere. The sphere of responsibility may be termed as acost centre or if the manager must also make decisions. If the manager isresponsible for production about sales or investment, the responsibility spheremay be in the form of profit centre of investment.

Some type ofresponsibility accounting usually accompanies this delegation of decisionmaking.


Data must be timely, accurate and relevant to help managers makeoptimal decision about the acquisition and utilization of resources.

(a ) Accurate Store Keeping

Accounting system cannot help managers predict and make decisionsif the store keeping is haphazard. Pressures on one aspect to the neglect ofthe other may spur managers to encourage their subordinates to record timeessentially of thinker with usage report.

For example, the maintenance crew of one Telephone Companyregularly performs recurring short term maintenance and repair works of variousprojects. At other times, the same crew would be concerned with hugeconstruction projects i.e. installing or building plants and equipment, thecompany insists on weekly report on performance of the regular maintenancework, but have only lose control over the construction projects. Aninvestigation disclosed that the foremen are encouraging the workmen to boostthe time on contract projects and to under-state the time on the regularmaintenance project. Thus the foreman’s performance on the latter always looksgood. The situation is corrected when the emphasis on maintenance and onconstruction is balanced so that both are correctly budgeted and controlled.

Accurate record keeping is essentially a problem of motivation;the accountant and manager should be more sensitive to possible error and moreconscious of the Natural tendencies of individuals to report on theiractivities so as to minimize their personal bother and maximize their ownshowing (performance) if the management tries to get detailed reports it islikely to generate monumental contempt for the entire system. The managementcan induce accurate store keeping if they can persuade subordinates that thedocuments are important for decision marking.


Responsibility Accounting is defined as a system of accountingthat segregates revenue and costs into areas of personal responsibility inorder to assess the performance attained by persons to whom authority has beenassigned. The impact of responsibility accounting could be described asfollows:

The sales department of an organization requests a rushproduction. The plant scheduler argues that it would disrupt his production andcost a substantial loss: though the amount of money is not clearly determined. The answer coming from sales is“do you want to take the responsibility of losing the X Company as aconsumer?”Of course the production scheduler does not want to take such aresponsibility and he gives up, but not before a heavy exchange of argument andthe accumulation of a substantial back log of ill feeling.

Analysis of the payroll in the assembling department determiningthe cost involved in getting rush orders eliminate the cause for argument.Henceforth, any rush order is gladly accepted by the product scheduler whomakes sure that the extra cost would be duly recorded and charged to salesdepartment – no questions asked.

As a result, the tension created by rush orders disappearedcompletely and somehow the number of rush orders requested by the salesdepartment is progressively reduced to an insignificant level.

Ideally, particular revenue and costs are recorded and traced to oneindividual in the organization who shoulders primary responsibility for theitem. He is in the best position to evaluate and to influence the situation. Inpractice, the delusion of control throughout the organization complicates thetask of collecting data by responsibility centers. The organization network,the communication patterns and the decision making processes are far toocomplex to yield either pail answers of an ideal management accounting system.


A careful balance must be struck between careful delineation ofresponsibility on the one hand and a too rigid separation of responsibility onthe other hand. Buck-passing is a pervasive tendency that is supposedlyminimized when responsibility is fixed unequivocally. For example, a companyhires university graduates and rotates them among all departments in thecompany during their two year training program. Their salaries are not assignedto the departments and individual managers take little interest in thetrainees. Gradually the company realizes the problem. It now assigns thetrainee to a definite department that fits his primary interest where he isgiven direct responsibility as soon as possible. Both the trainees and managersare now much more satisfied with the new responsibility arrangement.

Another difficulty experienced in the operation of responsibilityaccounting is that very often the motivational impact boomerangs. Managersbecome uncooperative and concentrate on their individual works. Familycooperation is replaced by Intra-company Competition. For example, twodepartments perform successive operations in a line production process makingautomobile trains. The frames are transferred from the first to the seconddepartment via an overhead conveyor system. Because of machine break-down inone department, the manager there requests the department, to slow downproduction. That one refuses and the frames have to be removed from theconveyor and stacked to await further process. A bitter squabble ensues regardingwhich department should bear the extra labor cost of staking the frames.


It is easy to say that the manager’s performance should be judgedon the basis of only those items subject to his control. Bui experience hasshown that it is far from easy to decide whether an item is controllable oruncontrollable. Still accountants must grapple with this problem.

The concept of controllable cost is associated with theimplementation of the decisions. It is a critical underpinning of the ideals ofresponsibility accounting. The basic idea is that only human can influence thelevels of cost incurrence. Controllable costs may be directly regulated at agiven level of management authority. They are those that are directly influencedby the manager within a given time span.

The above definitions have two ingredients; one, we cannotdistinguish controllable from uncontrollable costs without specifying a leveland scope of management authority. For example, insurance cost on machinery maynot be controllable by the manager of a producing department. However, suchcosts may indeed be controllable by the manager of the insurance department.Secondly, the time period may not be long enough. Eventually all costs would becontrollable by somebody in the organization. As the time product shortens veryfew costs may be controllable.

The main issue for the designer of the responsibility accountingsystem is that controllability is a matter of degree.

  • There are usually few costs that are clearly the responsibility ofone person.
  • The time period is always impossible to solve for many cost(items) although controllability may often be difficult to pin-point;responsibility accounting nevertheless clings toa tough minded approach. Youask “who is the one person in the organization with the most decisionmaking power over the item in question?” This is usually the executive whoclosely supervises the day-to-day activities that influence that cost (item).He has the authority to accept or reject the material or service in question.Therefore he must bear the responsibility. If the manager is responsible forboth the acquisition and the use of the service, that costs should be deemed ascontrollable by him. However, the diffusion of control throughout theorganization complicates the tax of collection of data by responsibilitycenters. For example, raw material price may be most affected by the decisionsof the purchasing officer whereas raw materials usage may be influenced by theproduction supervisor.

The management accountant approaches this problem by charging theproduct department for raw materials at pre-determined unit prices rather thanactual unit prices. In this way, month to month price fluctuation does notaffect the performance of the production supervisor. Pre-determined prices(budgeted or standard prices) are frequently utilized so that performancemeasures may exceed the possible misleading effect of change in prices.

In a given situation some costs may be regarded as controllable withvarious degrees of influence and others as uncontrollable. Most advocates ofresponsibility accounting favor exchanging the uncontrollable items from theperformance report. For example, the report from a shop foreman’s departmentwill contain only his controllable costs. Such items as property taxes andrents would not appear on his report. From this stand point, these areuncontrollable costs.

The controllable view is that uncontrollable items that areindirectly caused by the existence of the foreman’s department like factoryforeman should be included in his report. In this way managers become aware ofthe whole organization and its cost. The behavioral implication of this idea isthat some managers in the organization influence almost every cost by alsoassigning that cost to some other executives in the organization. Theseexecutives would be more inclined to influence the manager who has primarycontrol over the costs.

But there is also a pitfall here; there can be over dependence onan accounting system as being the prime means of motivation and the final wordon the appraisal of performance. Although the accounting system may plays anecessary role in coordination and motivation, its many limitations deservecommon complain of managers often marked by tones of decisions to make.


Decision-making is the process of selecting among alternativecourse of action. It is the last stage of planning process.

A plan cannot exist on us o\\n. unless there is a need fordecision, that is commitment of resources, direct or reputation. Within thecontext of planning, strategies, policies, goals and objectives are essential features. Decision making also evolve in all stages.

Process of Making Decision,

The major stages involve in decision making are:

  1. Identifying the goal as the main premise.
  2. Identifying the alternative means of achieving the stated goal.
  3. Evaluation of the alternative means of achieving the stated goal.
  4. Choosing of an alternative that will give the best result.

Decision making as a Routine- and Non-routine Management function

Management is made tomake day-to-day or routine decision as well as strategic decisions ornon-routine ones. Effective manager must be well equipped with the various andtechniques of decision-makingthis chapter will discuss extensive!) the majortechniques that are adopted by the management accountant in reaching finaldecision bearing in mind theneed for adequate coordination and balanced sense of organizing in everymanagement step.

Some of the toolsused by management accountants in analyzing alternatives and reaching decisionsare-

  1. Marginal costing technique
  2. Absorption costing technique
  3. Investment Appraisal Technique


QUESTION(1) Managementaccounting is an instrument of management control”. “ManagementAccounting is nothing but a decision-making tool”. Reconcile these twostatements by giving 3 examples to illustrate the truth of each.

You have been asked to review your company’s management accountingreports. What steps

QUESTION(2 )What steps would you take to ensure effective communication and maximummotivation of the recipients of the reports?(ICAN)


Briefly but conciselydiscuss the role of the Management Accountant in the management process. Payparticular attention to the Managerial function of planning, control,organizing, communicating, and motivation.                                                                                                                      



Management accounting is primarily concerned with the provision ofinformation towards planning, decision making and in controlling operations. Itis therefore internal management information system.

Examples of management accounting as a management control tooinclude,

Preparation of Budgets and Long TermPlans.

Computations of variances, highlighting those variances which seemto merit further investigation with a view to taking suitable control action.

Investingand Financing Decisions.

Management accounting as a decision making tool involves choosingbetween alternatives. This is management control function of managementaccounting. These include:

– Whether or not to shut down a department.

–Whether to make or buy a product or components

–Whether or not to accept a special order.

– Whether or not to introduce a multi-shift system.

 – In the final analysis,the aim is to run a business as efficiently and effectively as possible.


Steps to be taken to ensure effective communication and maximum motivationin respect of management accounting reports include:

  1. Accurate   and  timely   Information:

Management accounting reports should be prepared with as muchaccuracy as possible.   However, it maybe necessary to balance the desire for accuracy with the need for timelyinformation.

  • Types of Information – Basically, twotypes of management accounting reports, exist i.e. those provided on a regularbasis and those provided on a one-off basis.

Reports prepared on a regular, routine basis should facilitatemanagement by exception. They should not overburden managers with a volume ofirrelevant data.

Specific reports drawn on a one-off basis should have regard to:

The reasons for which the report is needed. The ability and skillof the recipient. The report should use charts, graphs and statistics ornarratives depending   on  his personal preference.


The Role of theManagement Accountant in:


In planning, theManagement Accountant helps to formulae plans by providing vital information toaid in such decisions as the products to sell, in what market, at what pricesetc. He also evaluates, capital expenditure proposals. In budgeting, heprovides important cost data. He also establishes budget procedures, time tableand coordinates and harmonizes the various departmental inputs to the budgetand presents same for top management approval.        


The ManagementAccountant aids control through providing performance reports which compareactual performance with planned performance for various responsibility centers.He provides prompt measurements of action and identifies problem areas forcorrection.


Managementaccounting, through responsibility accounting, represents the design and implementationof the accounting system for better definition and consolidation of theserelations.


Management accountingaids organizational communication. For instance, the budget communicates plansto those managers responsible for carrying them out. This helps them to beaware of expectations from them, the requirements and constraints, andinter-relationships between the various sub-units. Also, the performance reportproduced by the management accountant communicates information to a managerabout how well he is managing his activities, as well as directs a search lighton areas needing detailed investigation and, possibly, corrective action.


When budgets areproduced and adopted, they motivate managers towards achieving set targets. Healso motivates personal by helping identify potential problem areas and areasneeding detailed investigation, thus he provides a supportive system to enablemanagers control their activities more effectively.


Decision rules aremodels which will assist the decision maker in choosing the most appropriatealternative(s) according to a pre­determined criteria. By this the decisionmaker is presented with ranking of the alternatives according to thatcriterion. This makes it easier for the decision maker, since the finalselection will only be a matter of routine as long as the decision makerbelieves in the particular rule being applied.

The decision rules to be considered in this text will include theexpected value, the maximin rule, the maxi-max and the minim ax regretcriterion.

  1. The Expected Value    

This is one associated mainly with risk. The alternative decisionsbeing considered have two or more outcomes where, objectively or subjectively,a probability can be assigned to each outcome.

It should be noted that in business, objective probability (likethose verifiable by repeated toss of coin) is not practicable; but rather theprobability in business is that which is subjective. Thus, the Expected Valueof an event is the total of the probability of each possible outcome multipliedby the value of each possible outcome.

Illustration I

               Alternative A                 ALTERNATIVE B                        ALTERNATIVE C

                         Outcome                                Outcome                                           Outcome

Probability       Contribution                    Probability      Contribution Probability       Contribution

0.3                       N16,000                  0.1                   N12,500          0.4               N18,00

0.4                       15,000                     0.2                   15,000             0.6               11,500

0.3                       12,500                     0.3                   19,000             –                      –

–                                   –                       0.3                   11,500             –                       –

–                                   –                       0.1                   16,000             –                       –          


Calculate the expected value and rank the projects according tothe decision rule criteria



A = (0.3x N16,000) +(0.4 x N 15,000) + (0.3 x N 12,500)

N4,800  + 6,000  +          N 3,750      =   N14,550

B = (0.1 x N12,500) + (0.2x N15,000) + (0.3 x N19,000) + (0.3 xN11,500) +

(0.1x 16,000)

N1250 +     N 3000 +               N5,700+    N3450 + N1600 = N 15,000

C = (0.4 x N18,000) + (0.6 x N 11,500) =

N7,200   +   N6,900        =  N14,100

Ranking = BAC: Select B with highest expected value of N15,000

Note: Each probability total = 1. This indicates that all outcomeshave been included. The number of outcomes can vary. But the expected number ofoutcomes are usually three: depicted by optimistic, most likely andpessimistic.


The following data is given:

Very Good Weather    Fair weather      GoodWeather          Bad Weather

Probability                    0.25                            0.50                             0.25

Rice                            N20,000                      N30,000                      N5,000

Yam                              N50,000                     N40,000                      N 10,000

Millet                           N30,000                      N20,000                      N12,000

You are required to calculate the crop which the farmer shouldplant using the Expected Value criterion.  


Rice=(N20,000 x 0.25) + (N30,OOQ x 0.5) + (N5,000 x 0.25) =

N5,000   +N15,000 +       N1250         –   N21,250

Yam – (N50,000 x 0.25) + (N40.000 x 0.5) + (N10,000 x 0.25)

N12.500   +N20,000   +N2500  = N35,000

Millet – (N30,000 x 0.25) + (N20,000 x 0.5) + (N12,000 x 0.25)

N7500  ,N 10,000   +N3,000  – N20,500


Projects with the highest expected value should be preferred.Therefore the ranking is yam, rice and millet in that order,.


Yam is therefore preferred with the highest expected value of N35,000.

Advantages ofthe Expected Value

(a)       It is simple tounderstand and calculate.

(b)       It representswhole distribution by a single figure.

(c)       Arithmetically, ittakes account of the expected variability of all outcomes.

Disadvantagesof theExpected Value

(a)   By representing whole distribution by asingle figure, it ignores the other characteristics of the distribution e.g. skewness,,range, etc.

(b)     Makes the assumption that the decision makeris risk neutral.

(c)     It is prone to errors from calculations.

2.         The  Maximum – Rule      

This is also known as maximizing the minimum i.e. The” bestof the worst” situation.

3.         TheMaxi-Max

This is maximizing the maximum situation i.e. The “best ofthe best” situation.

4.         TheMini Max-Regret

This type of decision seeks to minimize the “maximum  regret” that there would be for notchoosing a particular strategy.The regret is the opportunity loss from taking onedecision given that a certain contingency occurs; as in good weather, fairlygood weather and bad weather; or boom steady and recession or any othercontingencies.

Illustration 3

The table below shows potential profits and losses expected toarise from launching varying products in 3 market conditions.

Boom                           Steady                                     Recession

Product A                       280                              100                              -100

Product B                        200                              160                              -120

Product C                        160                              0                                      60

The probabilitiesare, boom 0.6, steady 0.3 and recession O.I.


(a) Calculate theexpected values of each of the 3 products and state which to be selected.

(b) Select the mostsuitable alternative by the use of maxi-max criterion

(c) Select the mostsuitable alternative by the use of the mini-max criterion

(d)  Mini max regret


(a)       Expected Value

Product “A”= (0.6 x 280) + (0.3 x 100) + O.I ( – 100) =N188

 Product “B” – (0.6 x 200) + (0.3 x160) +O.I ( – 120) =N156

Product “C” – (0.6 x 160) + (0.3 x 0) + (O.I x 60) =N102

 Ranking ABC

DECISION : select A with the highest expected value of N188.00.

(b)Maxi-Max i.e. “Best of the best” Condition


A =280


C = 160     


DECISION :select  project“A” with the best of the best of N280.

(c)                      MAXIMIN


 A= -100   B=-120  C=0

RANKING= (descending order)

    C=0       A =-100         B= -120

DECISION; Select PRODUCT C=With the best of the worst situation.


 A REGRET MATRIX is thus constructed asfollows;

This is constructedby setting the best positions under any state to zero. The procedure is to takethe highest from each state i.e. Booms, steady ,Recession  etc and subtract that value from all thealternatives or products .Arrangethe maximum regrets, and rank in an ascending order, i.e. lowest to the highest and select the lowest.

Boom               Steady          Recession

Product A        0                      180                  380

Product B         0                        40                  320

Product C        0                      160                  100


Boom                           Steady                          Recession

A=280-280=0              280-100=180               280- – 100=380

B=200-200=0              200-160=40                 200– 120 =320

C=160-160=0              160-0    =160               160-60      =100


A = 380

B = 320

C = 160


 C,  160,B 320 and   A380

DECISION; Selectproduct C because  it minimizes  the maximum regrets:


A food processorwhich grows its own crops knows the probabilities of the occurrences of statesof nature.   Based on the company’s past experiencewith planting maize, millet and yam in Zaria, the following pay off matrix hasresulted over the past years for the three states of nature:

– Good weather

– Variable weather

– Draught (badweather)

States of nature

Good weather             Variable weather                    Bad weather

Probabilities                 0.25                             0.50                                         0.25

Maize                           N40, 000                     N60, 000                                     10,000

Millet                           N50.000                      N40, 000                                      15,000

Yam                             N60.000                      N20, 000                                     12000


compute the mostprofitable crop the company should grow by the use  of (a) The expected Value (b) Coefficient ofoptimism with 2/3 as the given coefficient (c) Rationality criteria.


To solve this, wefind the expected values, i.e:

Maize: N40,000 (0.25)+ 60,000(0.5) + 10,000 (0.25) = N42,500

Millet:N50,000(0.25)+40,000(0.5)+15,000(0.25) = N36,250

Yam: N60,000 (0.25) +20,000 (0.5) + 12,000 (0.25) = N28,000

Ranking: Maize,Millet and Yam. Select maize because it has thehighest expected value

(b.)  Calculate the co-efficient of optimism,assuming the co-efficient is given as 2/3.

Note: Multiply thehighest value under each option by the 2/3 and the lowest figure by 1/3 i.e 1-2/3= 1/3


Maize = 2/3x 60,000 +l/3xl0,000 = N43,333

Yam -2/3×60,000+l/3xl2,000 = N44,000

Ranking, i.e. indescending order

Yam, Maize and Millet

Select Yam with thehighest value of N44,000

(c). State the cropthe company should grow by the use of the Rationality criterion.

Note: According tothe proponent of this criterion, each of the state of nature should have equalchance of occurring. Since the options are 3; each will have 1/3 chance ofoccurrence i.e.

Maize =l/3xN40,000 +1/3×60,000 + l/3x l0,000=N36,666

Millet = l/3xN50,000+ 1/3×40,000+ l/3 x 15,000 = N34,999

Yam =1/3xN60,000+1/3×20,000+l/3xl2,000=N30,667

Ranking: i.e.descending order

Maize = N36,666

Millet = N34,999

Yam  =N30,667

Select maize with thehighest value N36,666


BALKISU Company iscontemplating an introduction of a revolutionary new product with new packagingto replace an existing product at a much higher price or a moderate change inthe ingredients of the existing product with new packaging at a small increasein price or a small change in the ingredients of the existing products and theonly change in packaging is to include the word “new” with a negligibleincrease in price. The three possible states of nature are:

– Theexpansion of the economy

– Stable economy and

-Contraction(recession) of the economy.

“new” witha negligible increase in price. The three possible states of nature are:

-The expansion of theeconomy

– Stable economy and

-Contraction(recession) of the economy.

The market researchdepartment has calculated the expected pay off in terms of yearly net profitsbefore income tax to be as follows:

States of nature;

                                                           Contraction        Expansion    Stable

Probability                                                                0.3                        0.4                    0.3   

Revolutionary andmuch higher price                N500,000      N100,000        (N50,000)

Moderate change andsmall increase in price   N300,000        N250,000            0

Add new andnegligible increase in price         N100,000        N100,000        100,000


You are required touse the criteria below to select the best option for the company:

(a.)       Maxi-max       (b) Maximin         (c)   Minimax Regret (d)       Expected Value.

Illustration  6

The pay off tablebelow shows potential profits and losses which are expected to arise fromlaunching varying  products in 3 marketconditions.

                                                                                                                                                Boom                    steady                        recession  

Product“A”                  280                        100                              – 100

Product“B”                  200                         160                               – 120

Product“C”                  160                            -0                                   60

The probabilities areboob: boom 0.6, steady state 0.3 and recession 0.1.


(a)       Calculate theexpected values of each of the 3 products and state which to be selected.

(b)        Select the mostsuitable alternative by the use of the maxi-max criterion.

(a)       ExpectedValue

  Product “A” = (0.6 x 280) + (0.3 x100) + (0.1 x – 100) = N188

 Product “B” = (0.6 x 200) + (0.3 x160) + (0.1 x – 120) = N156

 Product “C” = (0.6 x 160) + (0.3 x0) + (0.1 x 60)    =N102

 Ranking ABC: select A with the highestexpected value of N188.00.

(b)    Maxi-Max i.e.“Best of the best”

Best Conditions

 A = 280

B = 200


RANKING= A, , B,  and C


select project“A” with .the best of the best of N280.00

2.10     FEED BACK

Feedback is aninformation which supplies an answer to an action. In business organizations,such information is usually generated internally, subsequent to a givensituation as part of control mechanism.

Chartered Instituteof Management Accountants (C.I.M.A) Terminology defines feedback as a componentof a control system, which measures the difference between planned and actualresults and modifies subsequent actions to achieve the required results.


(1)       Opened Loop Control System

This isa system which allows control to be influenced by external intervention.Control is not exercised internally because information generated internally isnot used for control purposes.

(2)        Closed Loop Control System

C.I.M.A. defines aclosed loop control as a control system which includes the provision forcorrective actions taken on either a feed forward or a back basis.

A feed forwardcontrol will forecast the differences between planned and actual results beforethe event to avoid or minimize unfavorable differences. While a feedback systemor feedback loop system carries output back to be compared with inputs.Business organizations often use feedback for the control purposes and are saidto have a closed loop control system. In spite of the closed loop controlsystem, external factors that may result in differences are usually taken intoconsideration.

(3)        Single Loop Feedback

This represents thefeedback which is based on part of a performance of a process in the basicsystem model.

(4)        Double Loop Feedback

This isalso known as higher level feedback, which is a control system transmitted tohigher level in the system. That is usually to the top or senior management.

This isdistinguishable from the single loop feedback in the sense that a single levelfeedback is concerned with “task control” whereas higher levelfeedback has to do with multiple or overall task control.

(5)       Negative Feedback

This is feedbackwhich indicates an unfavorable deviation from planned or prescribed course ofaction.

(6)       Positive Feedback

This is a controlaction, which enables actual results to be maintained. That is. actual to beequal to standards or planned actions.


INTRODUCTIONTheLCT postulates that whenever a repetitive task is being performed the averagetime spent in producing a unit falls by a specific percentage whenever theactivity level is doubled. If the average time falls to 40% then learningphenomenal of 60% is present within the labor force, but if the average timefalls to 20% them the effect of the learning will be 80%.

The underline logic behind this theory is premised on the fact mathuman being unlike machine acquires a lot of skills, experience, exposure,specialization and dexterity for performing repetitive assignment.

The theory of learning curve therefore disagrees with the Popularnotion being held in various quarters that labor cost is /variable cost andthat labor cost per unit is constant.

CIMA official terminologystates that the learning curve is “the mathematical expressions of thephenomenon that when complex and labor intensive procedures are repeated, unitlabor times tend to decrease at a constant rate. The learning curve models mathematicallyresults in unit production time being reduced.

Learning curve is therefore a term used when the time taken byskilled labor elements reduces. It is almost relevant to new products and theprocess involves skilled repetitive labor operations.

If, for example, that first unit of output requires 2500 hrs and a70% learning curve applies, the times for production would be as follows:

A                     B                      C         D                           E                  F

No of units  Cumulative       Cumm.    TOTAL(BXC)  Time per  Incremental time

Units                time              Batch                                 batch                                    

1                      1                  2,500         2,500             2,500               2,500

1                      2                 1,750          3,500             1,000               1,000

2                      4                1,225           4,900             1,400               700

4                      8                  858            6,864             1,964               491

8                      16                601            9,616             2,752               344


(C)                                (D)                              (E)                              (F)

Cumulative Average    TotalHrs                 Time per batch                  Incremental perunit

Time per Hr                 i.e.BXC                                                           Perunit

70% x 2500=1750       1×2500=2500              2500                            –

70% x 1750= 1225      2×1750=3500              3500-2500=1000         1000/1=1000

NOTE    also that the learningeffect can also be depicted on a graph  either for unit/ times (graph “A”) or for cumulative totaltime or costs (Graph “B”)

Graph (A).

graph of learning effect for unit/ times

graph of learning effect for cumulative total time or costs

In Graph B

The curve herebecomes horizontal once a sufficient number of units have been produce i.e thelearning effect is lost and production would become a constant standard towhich a standard efficiency rate may beapplied. However, in graph “B” there is an initial rise in cumulativetotal costs, this reaches a peak as production continues, the cumulative totalcost will begin to fall.

Learning Curve may berepresented mathematically as follows:

Y – axb

Where y = thecumulative average Direct Time per unit.

a = theaverage labour time per unit for the 1st batch.

x = thecumulative no. of batches produced

b = theindex of learning


(i) Output is being doubled each time.

(ii)The cumulativeaverage time or hour reduces.

(iii)The incremental time per unit however reduces at a muchfaster rate than the average time per unit.


General motors’ has designed a new brand of BMW car for which thecost and sales price for the first motor to be produced has been estimated asfollows:


Materials                                                         40,000                                                      

Labor (8000Hrs xN4/hr)                             32,000       

Overhead(120% of labor cost)                       38,400                 

          Profit mark up                                                  132,480

The company plans to sell all the cars at full cost plus 20%. An80% learning curve is expected to apply to the production work. Only onecustomer has expressed his willingness to buy the new brand of the BMW. But hethinks he should not pay the same price for the cars he intends to buy.

You are required with various computations to provide theseanswers;

(a) If he paid N132,480.00 for the first car, what price would hehave to pay later for a second                                  car    (b)What will bethe quoted price if the customer ordered two at the same time?  (c)  If the customer buys two cars now at one pricewhat will be the price per unit for a 3rd and 4th car, if he ordered them bothlater on ?



A                     B                     C                D               E                                F                                                      

No of units    cum units  Cumm.Time    TOTAL    Time per batch    Inceremental time/ unit

                                              @70%      BXC                                               E/A

1                       1                     8,000              8,000            8,000                      8,000

1                       2                    6,400                12,800         4,800                       4,800

2                       4                  5,120                20,480          7680                        3840                                                 

4                       8                    4,096               32,768           12,288                        3072

(a)        Separateprice for a 2nd car

– Materials                                                   N40,000

– Labour (4,800 xN4)                                 N19,200

-Overhead at 120% of labour                        23,040

  TOTAL COST                                            82,240

 Profitsmark up (20%)                                 16,448                            

 SELLING PRICE                                        N98,688

(b)     Single Price for the 1st Two Cars

Material cost for twocars

(40,000 x 2)                                                    80,000

labour (12,800 xN4)                                       51,200

O/H (120% of laborcost of 51,200)                  61,440

Total  cost of  2 cars                                     192,640

Profit  (20% of 192,640)                               38,528

Selling price of thetwo cars =                           N231,168                  

                          PRICE PER CAR-      =      231,168/ 2

                                                                       =   N 115,584 each

(c)   A price for the 3rd and 4th cars


For two cars (400x 2)                                         80,000

Labor 7,680 X N4                                              30,720

OVER HEAD 12% of  labor cost                      36,864

 Total Cost                                                   N147,584

PROFIT (20%  147,584)                               29,517

TOTAL SellingPRICE                               177,100.8

 PRICE per car-                        =   177,101.8/2 =   N88,550.4   each


Experience Curve is a term usually applied to managerial andtechnological learning effects within an organization. It expresses the viewthat cost savings are achieved over time due to technological andorganizational changes not just learning by skilled laborers.

Relevance of Learning Curve  

(1)       To calculate themarginal (Incremental) cost of making extra units of a product.

(2)       To quote sellingprice of a product.

(3)       To preparerealistic production budgets and none efficient production schedules.

(4)       To prepare arealistic standard costs for cost control purposes.

(5)       To establish arealistic and workable incentive scheme for workers.

Limitation of Learning Curve

(1)       The learning curvephenomenon is not always present.

(2)       It assumes stableconditions at work.

(3)       It also assumes acertain degree of motivation amongst employees.

(4)       Breaks down affectproduction of an item.

(5)       It might be difficult to obtain enoughaccurate data to decide what the learning curve percentage is

 (6)  Learning Curve experience will ceaseeventually once the job is repeated often and often

(7)       Productivetechnique might change.


  1. You have been asked about the application of  learning curve   as management accounting technique.

Required to

a.         Explain thelearning curve theory

b.        Illustrate thelearning curve

c.          Indicate the areas where the learning curvemay assist in management accounting.’

d.         State the factors that must prevail ifthe learning curve phenomenon is to be applicable to a particular organization.

e.         Illustrate the use of learning curvestheory for calculating the expected average unit cost of making:

i.          4 machines

ii.         8 machines

Using the data given below:

Direct labor need to make the first machine -1,000 hours

learning curve                             80%

Direct labor cost                         N3 per hour

Direct material                            N1,800 per machine

Fixed cost for eithersize order   N8,000

f.          Calculate the total incremental hoursof production a third of 6 machines after the first and second order of 8machines.

g.         Calculatethe total incremental hour of producing a second order   of 4 machines after the first order ofMachines.


BALKISU   Company   is  contemplating   an   introduction   of a revolutionary newproduct with new packaging to replace an existing product at a much higherprice or a moderate change in the ingredients of the existing product with newpackaging at a small increase in price or a small change in the ingredients ofthe existing products and the only change in packaging is to include the word“new” with a negligible increase in price. The three possible statesof nature are:

– The expansion of the economy

– Stable economy and

-Contraction (recession) of the economy.

“new” with a negligible increase in price. The threepossible states of nature are:

-The expansion of the economy

– Stable economy and

-Contraction (recession) of the economy.

The market research department has calculated the expected pay offin terms of yearly net profits before income tax to be as follows: States ofnature

Contraction                            Expansion       Stable

Probability                                                    0.3                                 0.4                   0.3

Revolutionary and much higher price           N500,000                                   N100,000        (N50,000)

Moderate change and small increase in price  N400,000                                 N350,000         0

Add new and negligible increase in price        N200,000                                 (N600,000)        100,000


You are required to use the criteria below to select the bestoption for the company:

(a)       MAXIMAX-      (b)      MAXIMIN         (c) MINIMAXREGRETS     (d)   EXPECTED VALUE


REGINA Company Ltd has been making annual purchase of 80,000 waterpumps from water Engineering Nigeria Ltd. The price has increased each yearreaching a level of N136 per unit last year. Because purchase has increasedsignificantly, the Company’s Management has asked that an estimate of the costbe made to manufacture the pumps in its own facilities. The Company has noexperience with product requiring assembly. The Engineering; manufacturing andaccounting departments have prepared a report for management which include theestimate shown below for an assembly run of 10,000 units. Additional productionemployees would be hired to manufacture the assembly. However, no additionalequipment, space or supervision would be needed.

The report stated that total costs for 10,000 units would be N1,940,000or N191.40 per units.

The current purchase price is N136 per unit, so the reportrecommended the continued purchase of the product.

Component (outside purchase)                                                                        240,000

Assembly labor (i)                                                                   600,000          

Fact overhead (ii)                                                                     900,000

General and Administrative overhead (iii)                                           174,000

(i) Assembly labor consist of hourly production workers

– Fixed factory O/His 5% of direct labor.

– Variable fact O/His 100% of direct labor,

– GeneralAdministrative O/H 10% of total cost of materials;

Assembly labor and factory O/H.

(ii) Factory overheard applies to products and a direct labor costbasis.

Variable overhead cost varies closely with direct labor cost.

Fixed factory overhead is 50% of direct labor

Variable factory overhead is 100% of direct labor (Iii) Generaland administration overhead is applied at 10% of total cost of materials (Components)assemblylabor and factor overhead.

You arerequired:

  • Assuming 80% Learning Curve what will be the cumulative labor costfor producing the 80,000 units during the first year?
  • Compute the total incremental cost for each pump producedwith    the 80% learning curve   if 80,000 pumps are eventually produced.
  • Should the company buy or make the pump?


Pay-less Limited experiences difficulty in its budgeting processbecause it finds it necessary to quantify the learning effects as new productsare introduced.

An order for 30 units of new products has been received byPay-less Limited. So far, 14 have been completed, the first unit requires 40direct labor hours and a total of 240 direct labor hours has been recorded forthe 14 units. The production manager expects an 80% learning effect for thistype of work.

The company uses standard absorption costing. The costsattributable to the centre in which the unit is manufactured is as follows;


Direct material                                                             3,000 per unit

Direct labor                                                                   6.00 per unit

Variable overhead                                                       0.5per direct labor hour

Fixed overhead 6,000 per four week operating period

Thereare ten direct employees working a five day week, eight hours per day. Personaland other down time allowances account for 25% of the total available timecost.


ANAS Nig Co Ltdfinds it necessary to quantify the learning effects of a new toothpaste productcalled CLEAN PASTE newly introduced into the market.

The first unitrequires 800 direct labour and the cost per unit attributes to the centre inwhich the unit is manufactured is as follows:

Direct materials                        3,000

Direct  labour                           800hrs @ N500

Variable overhead0.5 of direct labour hour fixed factory overhead = 5,000 for the first unit

Note: Assuming alearning effect of 80% is prevalent and mark up of 50% on total cost; you arerequired to determine;

  1. Thetotal direct labour hours required for 1st unit
  2. Thetotal production cost of the 1st unit
  3. Theselling price of the 1st unit
  4. Thecost price of 8 units produced together
  5. Theselling price of the 4th units produced together
  6. Theselling price of 4th units produced together
  7. Thetotal cost of 4 unit produced separately
  8. Theselling price of each unit produced in (f) as above
  9. Thecost of each unit produced in (g) above

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