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


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

 Planning involves the establishment of goals and the selection of courses

There are basically two levels of planning, short term operational planning and long term strategic planning

Levels of Planning

 (A)   Short Term Planning

This comprises operational and transaction planning.

(1)    Transaction Planning

This is planning for immediate execution. This may include decision 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 months i.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 required and 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. It can either be classified as midterm or long term planning depending on the size and operations of the organization. This will basically answer questions such as, 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 the product to be deleted.

(2)  Strategic Planning

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

It is defined as the formulation, evaluation and selection strategies, methods and techniques for the purpose of preparing a long term plan of action to attain a given objective. This boarders on the type of business to be undertaken, the financing of the business, the pattern of operation of the business and the resources to be allocated to the business.



  1. It facilitates long term policies by minimizing unnecessary concentration on short term factors; hence directing efforts on long term policies.
  2. It assists in simplifying operational planning and budgets; so that actual will be in line with planned budgets.
  3. Planning will enhance a well-developed organizational management information system.   Planning will make   it possible   for management to   make   use   of required information in order to manage well.
  4. Planning makes it possible for better coordination with different sectors of the organization to ensure the achievement of the organizational goals through individual and group efforts.

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

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

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


1.         Strict adherence to planning may become cumbersome, bureaucratic and monotonous.

2.         Unreasonable targets may discourage performance.

3.         Planning may discourage individual initiative. This is because personal initiative may be sacrificed. There is no room for individual effort, rather, collective efforts  towards a particular goal or target supersedes any individual effort.

Stages of Long Term Planning

The  Assessment Stage

This is also known as a 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 and Technological factors affecting the environment:
  2. The organization, i.e. the study of the strength and weaknesses of the organization
  3. The future i.e. uncertain period covered by corporate planning.
  4. The expectations of groups such as shareholders, employees, and general public

(2)The Objectives Stage

This is the principal stage in corporate planning process and seeks 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 to influence the organization.

(5) The Corporate Plan

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

(1)Monitoring and Control

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

 3.3    CONTROL

Control is the process of obtaining conformity to plans through actions and evaluations. Control involves the implementation of plans and the consideration of feedback that may             influence future decisions or activities The role of the Management Accountant in the control process is the identification of controllable costs; that is, those which may be directly regulated at a given level of managerial authority in either the short or the long run. Information on controllable costs, often called feed-back is distributed to the executives responsible for the activities that generate the cost; A system of control indicates all the measures and methods designed to promote efficiency, encourage managerial play and policies and safeguard the organization’s assets.

The control function applies to executives working in non­profit organizations as well as business. A good managerial accounting system submits controllable cost data to the appropriate managers.

Planning &Control Cycle

3.4     Planning, Control and Decision Making

Planning and Control are Inseparable

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

Information Requirements for Planning, Control and Decision Making

  1. Verifiability: The information requirement for planning, control and decision making should be such that it can readily be verified. Such verification can be done by way of references, documents or         schedules.
  2. Objectivity Such information should have elements of objectivity and must be free        from bias it must as far as possible be free from ill-conceived and misconceived ideas and ideals that will affect 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 the right time.
  4. Comparability: The information should be such that it can be compared with other        data or information to prove its authenticity.
  5. Reliability: The information should be capable of being relied upon by the user.
  6. Understandability: The information should be in the form that can readily be understood. There must be no ambiguity in such information.
  7. Relevance: The information should be relevant to the management’s decision at                         hand. Irrelevant information 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 be some criteria to measure the quality of planning and control system. The primary criterion is to check the benefit of such a system whether it encourages managers when working in their own interest to act in harmony with the overall objectives of top management. This interest is termed Goal Congruence since goals and sub-goals are specified to induce (or at least not discourage) decisions that will blend with top management goals. Goal congruence requires motivation,

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

(1)       Direct

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

(2)      Strength

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

Should performance of the managers be judged on the basis of sales, Gross Profit contribution to fixed cost, net income, and return on investment or on some other basis? There are no clear cut answers to these questions. The answers must be framed in terms of the predicted motivational impact alternatives. It may seem strange to view accounting systems in terms of their behavioral aspects. But the task of the accountant is complex and is affected by human aspects. In the design of accounting systems and the selection of accounting techniques an awareness of the importance of goal congruence and the motivational aspect of systems is necessary. When a manager chooses a particular accounting system he is confronted with a decision regarding the cost and value of the information i.e. he must weigh the relative cost 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 any given top management objective is achieved. For example, top management may specify that earnings for the following year should be N50m.They may use the accounting system to communicate and enforce this objective. Near the end of the year if the earning prospects are gloomy (not ripe) top management may exert immense pressure to reach the budgeted target. To reach the earnings objectives (i.e. N50m) subordinates may be inclined to reduce current expenses by postponing outlays or research even though such decisions could cripple future earning power.

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


1.         Use of multiple goals.

2.         Acceptance of system goals as personal goals,

3.         Design of organizational structure to pin-point responsibility.

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

Use of Multiple Goals

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

1.         Profitability

2.         Productivity

3.         Product Leadership

4.         Product Development

5.         Employees attitudes

6.         Public responsibility

7.         Balance between short 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 other goals is to offset the inclination of managers to maximize short run profits to the detriment of long-run profit. Over stress on any single goal (out of the eight) whether it is short run profit or some other goal usually does not promote long-run profitability. Instead, coordination of goals is blocked: one goal may be achieved while others are neglected. For example there are many questionable ways to improve short-run performance i.e. by saving outlays (expenditure) on repairs, quality control, advertising, research or training. A manager may successfully plan productivity for short periods of time. This may have some unfavorable long run consequences. Another example is as an executive of a large size company described the situation; central headquarters of the company ordered all plants to reduce their inventories of supplies from a 90 day level to a sixty day level. Subsequently, the internal audit staff discovered two interesting developments that two of the plant managers achieved the inventory reduction as follows:

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

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


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

The acting system is only one of the many control systems that influence an individual’s behavior. Society as a whole can be viewed as a control 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 should aim at goal congruence are less likely to gain acceptance as personal goals. Acceptance may be best achieved in some cases as participating processes and in other cases by authoritative processes.

            Design   of Organization   Structure   to   Pin-Point Responsibility

Another principal way of goal congruence is to tailor the accounting system to the organization in order to strengthen motivation. The design of an organization structure and a control system should be inter-dependent.

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

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

Some type of responsibility accounting usually accompanies this delegation of decision making.


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

(a ) Accurate Store Keeping

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

For example, the maintenance crew of one Telephone Company regularly performs recurring short term maintenance and repair works of various projects. At other times, the same crew would be concerned with huge construction projects i.e. installing or building plants and equipment, the company insists on weekly report on performance of the regular maintenance work, but have only lose control over the construction projects. An investigation disclosed that the foremen are encouraging the workmen to boost the time on contract projects and to under-state the time on the regular maintenance project. Thus the foreman’s performance on the latter always looks good. The situation is corrected when the emphasis on maintenance and on construction 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 more conscious of the Natural tendencies of individuals to report on their activities so as to minimize their personal bother and maximize their own showing (performance) if the management tries to get detailed reports it is likely to generate monumental contempt for the entire system. The management can induce accurate store keeping if they can persuade subordinates that the documents are important for decision marking.


Responsibility Accounting is defined as a system of accounting that segregates revenue and costs into areas of personal responsibility in order to assess the performance attained by persons to whom authority has been assigned. The impact of responsibility accounting could be described as follows:

The sales department of an organization requests a rush production. The plant scheduler argues that it would disrupt his production and cost 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 a consumer?”Of course the production scheduler does not want to take such a responsibility and he gives up, but not before a heavy exchange of argument and the accumulation of a substantial back log of ill feeling.

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

As a result, the tension created by rush orders disappeared completely and somehow the number of rush orders requested by the sales department is progressively reduced to an insignificant level.

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


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

Another difficulty experienced in the operation of responsibility accounting is that very often the motivational impact boomerangs. Managers become uncooperative and concentrate on their individual works. Family cooperation is replaced by Intra-company Competition. For example, two departments perform successive operations in a line production process making automobile trains. The frames are transferred from the first to the second department via an overhead conveyor system. Because of machine break-down in one department, the manager there requests the department, to slow down production. That one refuses and the frames have to be removed from the conveyor and stacked to await further process. A bitter squabble ensues regarding which department should bear the extra labor cost of staking the frames.


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

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

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

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

  • There are usually few costs that are clearly the responsibility of one 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. You ask “who is the one person in the organization with the most decision making power over the item in question?” This is usually the executive who closely 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 for both the acquisition and the use of the service, that costs should be deemed as controllable by him. However, the diffusion of control throughout the organization complicates the tax of collection of data by responsibility centers. For example, raw material price may be most affected by the decisions of the purchasing officer whereas raw materials usage may be influenced by the production supervisor.

The management accountant approaches this problem by charging the product department for raw materials at pre-determined unit prices rather than actual unit prices. In this way, month to month price fluctuation does not affect the performance of the production supervisor. Pre-determined prices (budgeted or standard prices) are frequently utilized so that performance measures may exceed the possible misleading effect of change in prices.

In a given situation some costs may be regarded as controllable with various degrees of influence and others as uncontrollable. Most advocates of responsibility accounting favor exchanging the uncontrollable items from the performance report. For example, the report from a shop foreman’s department will contain only his controllable costs. Such items as property taxes and rents would not appear on his report. From this stand point, these are uncontrollable costs.

The controllable view is that uncontrollable items that are indirectly caused by the existence of the foreman’s department like factory foreman should be included in his report. In this way managers become aware of the whole organization and its cost. The behavioral implication of this idea is that some managers in the organization influence almost every cost by also assigning that cost to some other executives in the organization. These executives would be more inclined to influence the manager who has primary control over the costs.

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


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

A plan cannot exist on us o\\n. unless there is a need for decision, that is commitment of resources, direct or reputation. Within the context 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 to make day-to-day or routine decision as well as strategic decisions or non-routine ones. Effective manager must be well equipped with the various and techniques of decision-makingthis chapter will discuss extensive!) the major techniques that are adopted by the management accountant in reaching final decision bearing in mind the need for adequate coordination and balanced sense of organizing in every management step.

Some of the tools used by management accountants in analyzing alternatives and reaching decisions are-

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


QUESTION(1) Management accounting is an instrument of management control”. “Management Accounting is nothing but a decision-making tool”. Reconcile these two statements by giving 3 examples to illustrate the truth of each.

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

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


Briefly but concisely discuss the role of the Management Accountant in the management process. Pay particular attention to the Managerial function of planning, control, organizing, communicating, and motivation.                                                                                                                      



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

Examples of management accounting as a management control too include,

Preparation of Budgets and Long Term Plans.

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

Investing and Financing Decisions.

Management accounting as a decision making tool involves choosing between alternatives. This is management control function of management accounting. 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 motivation in respect of management accounting reports include:

  1. Accurate   and   timely   Information:

Management accounting reports should be prepared with as much accuracy as possible.   However, it may be necessary to balance the desire for accuracy with the need for timely information.

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

Reports prepared on a regular, routine basis should facilitate management by exception. They should not overburden managers with a volume of irrelevant data.

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

The reasons for which the report is needed. The ability and skill of the recipient. The report should use charts, graphs and statistics or narratives depending   on  his personal preference.


The Role of the Management Accountant in:


In planning, the Management Accountant helps to formulae plans by providing vital information to aid in such decisions as the products to sell, in what market, at what prices etc. He also evaluates, capital expenditure proposals. In budgeting, he provides important cost data. He also establishes budget procedures, time table and coordinates and harmonizes the various departmental inputs to the budget and presents same for top management approval.        


The Management Accountant aids control through providing performance reports which compare actual performance with planned performance for various responsibility centers. He provides prompt measurements of action and identifies problem areas for correction.


Management accounting, through responsibility accounting, represents the design and implementation of the accounting system for better definition and consolidation of these relations.


Management accounting aids organizational communication. For instance, the budget communicates plans to those managers responsible for carrying them out. This helps them to be aware of expectations from them, the requirements and constraints, and inter-relationships between the various sub-units. Also, the performance report produced by the management accountant communicates information to a manager about how well he is managing his activities, as well as directs a search light on areas needing detailed investigation and, possibly, corrective action.


When budgets are produced and adopted, they motivate managers towards achieving set targets. He also motivates personal by helping identify potential problem areas and areas needing detailed investigation, thus he provides a supportive system to enable managers control their activities more effectively.


Decision rules are models which will assist the decision maker in choosing the most appropriate alternative(s) according to a pre­determined criteria. By this the decision maker is presented with ranking of the alternatives according to that criterion. This makes it easier for the decision maker, since the final selection will only be a matter of routine as long as the decision maker believes in the particular rule being applied.

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

  1. The Expected Value    

This is one associated mainly with risk. The alternative decisions being 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 (like those verifiable by repeated toss of coin) is not practicable; but rather the probability in business is that which is subjective. Thus, the Expected Value of an event is the total of the probability of each possible outcome multiplied by 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 to the 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 x N11,500) +

(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   +   N 6,900        =  N14,100

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

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


The following data is given:

Very Good Weather    Fair weather      Good Weather          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 should plant 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 N3 5,000.

Advantages of the Expected Value

(a)       It is simple to understand and calculate.

(b)       It represents whole distribution by a single figure.

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

Disadvantages of the Expected Value

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

(b)     Makes the assumption that the decision maker is 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” best of the worst” situation.

3.         The Maxi-Max

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

4.         The Mini Max-Regret

This type of decision seeks to minimize the “maximum  regret” that there would be for not choosing a particular strategy. The regret is the opportunity loss from taking one decision given that a certain contingency occurs; as in good weather, fairly good weather and bad weather; or boom steady and recession or any other contingencies.

Illustration 3

The table below shows potential profits and losses expected to arise 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 probabilities are, boom 0.6, steady 0.3 and recession O.I.


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

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

(c) Select the most suitable 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 x 160) +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 as follows;

This is constructed by setting the best positions under any state to zero. The procedure is to take the highest from each state i.e. Booms, steady ,Recession  etc and subtract that value from all the alternatives or products .Arrange the 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

Maximum regrets

A = 380

B = 320

C = 160


 C,  160, B 320 and   A380

DECISION; Select product C because  it minimizes  the maximum regrets:


A food processor which grows its own crops knows the probabilities of the occurrences of states of nature.   Based on the company’s past experience with planting maize, millet and yam in Zaria, the following pay off matrix has resulted over the past years for the three states of nature:

– Good weather

– Variable weather

– Draught (bad weather)

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


To solve this, we find 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 the highest 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. in descending order

Yam, Maize and Millet

Select Yam with the highest value of N44,000

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

Note: According to the proponent of this criterion, each of the state of nature should have equal chance of occurring. Since the options are 3; each will have 1/3 chance of occurrence 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 the highest value N36,666


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

– The expansion of the economy

– Stable economy and

-Contraction (recession) of the economy.

“new” with a negligible increase in price. The three possible 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 off in terms of yearly net profits before income tax to be as follows:

States of nature;

                                                           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   N300,000        N250,000            0

Add new and negligible increase in price         N100,000        N100,000        100,000


You are required to use 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 table below shows potential profits and losses which are expected to arise 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 probabilities are boob: boom 0.6, steady state 0.3 and recession 0.1.


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

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

(a)       Expected Value

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

 Product “B” = (0.6 x 200) + (0.3 x 160) + (0.1 x – 120) = N156

 Product “C” = (0.6 x 160) + (0.3 x 0) + (0.1 x 60)    =N102

 Ranking ABC: select A with the highest expected 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 an information which supplies an answer to an action. In business organizations, such information is usually generated internally, subsequent to a given situation as part of control mechanism.

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


(1)       Opened Loop Control System

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

(2)        Closed Loop Control System

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

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

(3)        Single Loop Feedback

This represents the feedback which is based on part of a performance of a process in the basic system model.

(4)        Double Loop Feedback

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

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

(5)       Negative Feedback

This is feedback which indicates an unfavorable deviation from planned or prescribed course of action.

(6)       Positive Feedback

This is a control action, which enables actual results to be maintained. That is. actual to be equal to standards or planned actions.


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

The underline logic behind this theory is premised on the fact mat human 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 Popular notion being held in various quarters that labor cost is /variable cost and that labor cost per unit is constant.

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

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

If, for example, that first unit of output requires 2500 hrs and a 70% 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    Total Hrs                 Time per batch                  Incremental per unit

Time per Hr                 i.e. BXC                                                           Per unit

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 learning effect can also be depicted on a graph   either for unit/ times (graph “A”) or for cumulative total time 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 here becomes horizontal once a sufficient number of units have been produce i.e the learning effect is lost and production would become a constant standard to which a standard efficiency rate may be applied. However, in graph “B” there is an initial rise in cumulative total costs, this reaches a peak as production continues, the cumulative total cost will begin to fall.

Learning Curve may be represented mathematically as follows:

Y – axb

Where y = the cumulative average Direct Time per unit.

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

x = the cumulative no. of batches produced

b = the index of learning


(i) Output is being doubled each time.

(ii)The cumulative average time or hour reduces.

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


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


Materials                                                          40,000                                                      

Labor (8000Hrs x N4/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%. An 80% learning curve is expected to apply to the production work. Only one customer has expressed his willingness to buy the new brand of the BMW. But he thinks he should not pay the same price for the cars he intends to buy.

You are required with various computations to provide these answers;

(a) If he paid N132,480.00 for the first car, what price would he have to pay later for a second                                  car    (b)What will be the quoted price if the customer ordered two at the same time?  (c)  If the customer buys two cars now at one price what will be the price per unit for a 3rd and 4th car, if he ordered them both later 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)        Separate price for a 2nd car

– Materials                                                   N40,000

– Labour (4,800 x N4)                                 N 19,200

-Overhead at 120% of labour                        23,040

  TOTAL COST                                            82,240

 Profits mark up (20%)                                  16,448                            

 SELLING PRICE                                        N98,688

(b)     Single Price for the 1st Two Cars

Material cost for two cars

(40,000 x 2)                                                    80,000

labour (12,800 xN4)                                       51,200

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

Total  cost of   2 cars                                      192,640

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

Selling price of the two 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 Selling PRICE                                177,100.8

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

  2.12     EXPERIENCE CURVE   

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

Relevance of Learning Curve  

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

(2)       To quote selling price of a product.

(3)       To prepare realistic production budgets and none efficient production schedules.

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

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

Limitation of Learning Curve

(1)       The learning curve phenomenon is not always present.

(2)       It assumes stable conditions at work.

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

(4)       Breaks down affect production of an item.

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

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

(7)       Productive technique might change.


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

Required to

a.         Explain the learning curve theory

b.        Illustrate the learning curve

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

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

e.         Illustrate the use of learning curves theory 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 either size order   N8,000

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

g.         Calculate the total incremental hour of producing a second order   of 4 machines after the first order of Machines.


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

– The expansion of the economy

– Stable economy and

-Contraction (recession) of the economy.

“new” with a negligible increase in price. The three possible 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 off in terms of yearly net profits before income tax to be as follows: States of nature

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 best option for the company:

(a)       MAXIMAX-      (b)       MAXIMIN         (c) MINIMAX REGRETS     (d)   EXPECTED VALUE


REGINA Company Ltd has been making annual purchase of 80,000 water pumps from water Engineering Nigeria Ltd. The price has increased each year reaching a level of N136 per unit last year. Because purchase has increased significantly, the Company’s Management has asked that an estimate of the cost be made to manufacture the pumps in its own facilities. The Company has no experience with product requiring assembly. The Engineering; manufacturing and accounting departments have prepared a report for management which include the estimate shown below for an assembly run of 10,000 units. Additional production employees would be hired to manufacture the assembly. However, no additional equipment, space or supervision would be needed.

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

The current purchase price is N136 per unit, so the report recommended 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/H is 5% of direct labor.

– Variable fact O/H is 100% of direct labor,

– General Administrative O/H 10% of total cost of materials;

Assembly labor and factory O/H.

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

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) General and administration overhead is applied at 10% of total cost of materials (Components)assembly labor and factor overhead.

You are required:

  • Assuming 80% Learning Curve what will be the cumulative labor cost for producing the 80,000 units during the first year?
  • Compute the total incremental cost for each pump produced with    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 process because it finds it necessary to quantify the learning effects as new products are introduced.

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

The company uses standard absorption costing. The costs attributable 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                                                       0.5 per direct labor hour

Fixed overhead 6,000 per four week operating period

There are ten direct employees working a five day week, eight hours per day. Personal and other down time allowances account for 25% of the total available time cost.


ANAS Nig Co Ltd finds it necessary to quantify the learning effects of a new toothpaste product called CLEAN PASTE newly introduced into the market.

The first unit requires 800 direct labour and the cost per unit attributes to the centre in which the unit is manufactured is as follows:

Direct materials                        3,000

Direct  labour                           800 hrs @ N500

Variable overhead 0.5 of direct labour hour fixed factory overhead = 5,000 for the first unit

Note: Assuming a learning effect of 80% is prevalent and mark up of 50% on total cost; you are required to determine;

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