Variance analysis is a crucial tool in cost estimation and control, helping project managers identify deviations from the planned budget and performance. It allows them to understand the reasons behind these deviations and take corrective action to optimize resource allocation and achieve project goals.
This article explores various variance analyses, explaining their significance in cost management.
Cost Variance Analysis
Cost variance measures the difference between the Budgeted Cost of Work Performed (BCWP) and the Actual Cost of Work Performed (ACWP).
Formula: Cost Variance (CV) = BCWP - ACWP
Percentage Over/Under Analysis:
This analysis provides a percentage representation of the cost variance relative to the BCWP, highlighting the severity of the deviation.
Formula: % Over/Under = 100 x (ACWP - BCWP) / BCWP
Unit Variance Analysis
This analysis focuses on individual cost components and their respective variances. It helps pinpoint specific areas requiring attention for cost control. Key aspects include:
1. Labor Rate Variance:
2. Labor Hours/Units of Work Accomplished Variance:
3. Material Rate Variance:
4. Material Usage Variance:
Schedule/Performance Analysis
Schedule/Performance variance measures the difference between the Budgeted Cost of Work Scheduled (BCWS) and the BCWP.
Formula: Schedule/Performance Variance (SV) = BCWP - BCWS
Conclusion:
Variance analysis is essential for effective cost management and project control. By identifying and analyzing cost deviations, project managers can proactively address challenges, optimize resource allocation, and ensure project completion within budget and schedule. Regularly reviewing and evaluating variances helps improve decision-making, leading to successful project outcomes.
Instructions: Choose the best answer for each question.
1. Which of the following is NOT a component of Cost Variance Analysis?
a) Budgeted Cost of Work Performed (BCWP) b) Actual Cost of Work Performed (ACWP) c) Budgeted Cost of Work Scheduled (BCWS) d) Cost Variance (CV)
c) Budgeted Cost of Work Scheduled (BCWS)
2. A positive Cost Variance (CV) indicates that the project is:
a) Over budget b) Under budget c) On budget d) Behind schedule
b) Under budget
3. What does the formula "% Over/Under = 100 x (ACWP - BCWP) / BCWP" calculate?
a) Schedule/Performance Variance b) Percentage deviation from the budgeted cost c) Labor Rate Variance d) Material Usage Variance
b) Percentage deviation from the budgeted cost
4. Which variance analysis focuses on the difference between actual labor hours worked and budgeted labor hours?
a) Labor Rate Variance b) Labor Hours/Units of Work Accomplished Variance c) Material Rate Variance d) Material Usage Variance
b) Labor Hours/Units of Work Accomplished Variance
5. A negative Schedule/Performance Variance (SV) indicates that the project is:
a) Ahead of schedule b) Behind schedule c) Over budget d) Under budget
b) Behind schedule
Scenario: You are managing a project with a budgeted cost of $100,000. The project is currently 50% complete. The BCWP is $45,000 and the ACWP is $50,000.
Task:
1. **Cost Variance (CV):** CV = BCWP - ACWP CV = $45,000 - $50,000 **CV = -$5,000** 2. **Percentage Over/Under:** % Over/Under = 100 x (ACWP - BCWP) / BCWP % Over/Under = 100 x ($50,000 - $45,000) / $45,000 **% Over/Under = 11.11%** 3. **Interpretation:** * **Negative CV:** The project is over budget by $5,000. * **11.11% over budget:** The project is currently 11.11% over the planned budget. This analysis indicates that the project is currently exceeding its budget. Project managers should investigate the reasons behind this variance and take corrective action to control costs and bring the project back on track.