Cost Variance (CV) Formula: CV PMP Exam Guide - Project ...

Cost Variance (CV) is a concept found on the PMP Exam that measures how much a project's cost has changed from its original estimates. 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artReadtheArticleReadourBlog▲SkiptocontentHome»Resources»PMPFormulas»CostVariance(CV)Formula:CVPMPExamGuideCostVariance(CV)Formula:CVPMPExamGuideVarianceanalysisisahelpfultoolforanalyzingyourproject’shealth,monitoringdeviationsfromyourbudgetorschedule,andidentifyingcorrectiveactionspromptly.Costvarianceanalysisisspecificallyintendedtohelpyoucompleteyourprojectwithintheapprovedbudget.ThisguidebyyourexpertsatProjectManagementAcademywillhelpyouunderstandhowtoapplytheconceptofcostvariance(CV)asapotentialPMPcredentialholderandpracticewhatyouneedtoknowforthePMPExam.Onthispage:CostVariancePMPExamOverviewCVPMPExamTipsCostVarianceFormulaPMPCVPMPExamSampleQuestionsCostVariancePMPExamOverviewCostvariance(CV)isaPMPexamconceptthatmeasuresprojectprogressagainsttheproject’scostbaseline.CalculatingaCVwillhelpyoudetermineanyvariancefromtheproject’smonetarybudget.Yourproject’sbudgetistheamountofmoneyyouhaveassignedtoaproject,designatedforaspecifictimeperiodtodelivertheproject’sgoals.Costvariancemeasurestheprojectcostperformance.Therearethreetypesofcostvariances:Point-in-timecostvariance:alsoknownasperiod-by-periodcostvariance,thistypeofCVdescribesthedifferencebetweenactualcost(AC)andearnedvalue(EV)duringasingletimeframewithoutconsideringpreviousorfuturevariances.Cumulativecostvariance:thismeasurementcalculatesthedifferencebetweenthecumulativeEVandmultipleACs.Actualcostfigurestypicallycomefromseveralconsecutivetimeframes,asopposedtoapoint-in-timeCV.Varianceatcompletion(VAC):thisCVspecificallylooksatthecumulativeCVattheendoftheproject.ForVAC,youwillneedtolookatthebudgetatcompletion(BAC)andtheactualorestimatedcostatcompletion(EAC).CVPMPExamTipsCostvarianceisanessentialconceptforthePMPexam.YoushouldbeabletocalculateandinterpretaCVforaprojectwhenprovidedwithdatainanexamquestion.CalculatingcostvarianceisnecessaryforPMPcredentialholdersonanyproject,sinceminimizingcostsasmuchaspossibleisbeneficialforyourprojectteamandstakeholders.ProjectCostManagementandCVClientsandprojectstakeholdersaretypicallycost-conscioussincetheyareputtingmoneyintotheprojecttocompleteit.Deviatingfromtheplannedbudgetcouldaffecttheprofittheymakeorthevalueofthedeliverables,whichmakesCVavitalpartofProjectCostManagement.ProjectCostManagementisaPMPexamknowledgeareadealingwithestimating,budgeting,andcontrollingcoststhroughoutaproject.Theprocessesofcostestimating,costbudgeting,andcostcontrolareallpartofProjectCostManagement.Costvarianceisacomponentofcostcontrol.WhendealingwithCV,projectmanagersmustmeasuredeviationsfromthecostbaselineanddeterminewhatkindofcorrectiveactiontotake.ThistypeofvarianceanalysisrequirescalculatingCVandinterpretingittoexplainwhyvariancesexistandhowtofixthem.StudyingforthePMPExam?PracticeQuestionsforPMPFormulasCostVarianceFormulaPMPTheCVformulaissimple,butyouneedtounderstandthemeaningofsomevariables.TheCVformulaandvariablestoknowforthePMPexamarebelow:CV=EV–ACEarnedvalue(EV)describestheestimateddollarvalueofanyworkactuallydone.Inotherwords:EV=(%ofworkcompleted)x(budget).Budgetatcompletion(BAC)specificallydescribestheEVattheendofaproject,whenyouhavetheoreticallyused100%ofyourbudget.EVisalsosometimesreferredtoasthebudgetedcostofworkperformed(BCWP).Actualcost(AC)describesthedollaramountactuallyspenttocompletethework.Actualorestimatedcostatcompletion(EAC)specificallydescribestheACattheendofaproject.YourEACmightbeaknownnumberoranestimatebasedonwhatyou’vespentsofar.ACisalsosometimesreferredtoastheactualcostofworkperformed(ACWP).AnotherhelpfulconceptrelatedtoEVisplannedvalue(PV).PVdescribestheestimatedpartofthebudgetallocatedtoanamountofworkplannedtobedone.YouwouldusePVwhenyourprojectprogressdoesnotcorrelatepreciselytothepercentofbudgetused.Forexample,whenyoustartamanufacturingproject,youmightnotneedtopurchasematerialsandaccountformanufacturingcostsduringtheinitialplanningphase,soyourcostsareconcentratedinthelaterstagesoftheproject.InterpretationofcostvarianceformulaforPMPExamAsapotentialPMPcredentialholder,calculatingCVisjustthefirststep.Interpretingyourresultsisthenextstepandwilltellyouifyouareover,under,oronbudget.IfCV<0(negative),youareoverbudget.IfCV>0(positive),youareunderbudget.IfCV=0,youareonbudget.(Intherealworld,thisrarelyhappens.)Forexample,sayyouhavecompleted50%ofaprojectwitha$5,000budgetin3weeks.Youhavespent$2,750sofar.YoudecidetousetheCVformulatoseeifyouareonbudgetordetermineifanyproblemsneedfixing:EV=50%x$5,000=$2,500AC=$2,750CV=$2,500–2,750=–$250Yourcumulativecostvarianceis–$250,soyouarecurrentlyoverbudget.Butwhatifyoulookedatyourpoint-in-timecostvarianceforeachweek?Applytheformulatoyourdatafromeachweek:Week1:10%ofworkcompleted,$250spentEV=10%x$5,000=$500AC=$250CV=$500–250=$250Week2:15%ofworkcompleted,$1,000spentEV=15%x$5,000=$750AC=$1,000CV=$750–1,000=–$250Week3:25%ofworkcompleted,$1,250spentEV=25%x$5,000=$1,250AC=$1,250CV=$1,250–1,250=$0ThisbreakdownclarifiessomethingmusthavehappenedduringWeek2tocausethenegativecumulativeCV.Now,youcantakeacloserlookatwhythisvariancehappenedandhowyoucanfixit.PotentialcausesofcostvariancesIfyoudiscoverabudgetoverrun,itiscrucialtoidentifywhatmayhavecausedthisdeviationfromyourplannedcosts.Dependingonwhatfieldyourprojectfallsunderandwhatvariablesarerelevanttoconsider,youmayneedtoexaminevariancesforpotentialcausessuchas:Costoflabor:yourexpectedandactuallaborcostscoulddifferformanyreasons,suchasunderestimatinghowmanyhoursyouwouldneedtocompletetheproject,schedulingconflicts,oramismatchedskillset.Costofmaterials:materialcostsincluderawmaterials,supplies,andotheritemsusedtocreatedeliverables.Avariancebetweenexpectedandactualcostscouldbecausedbymaterialsgettingdamagedorcostingmorethanexpected.Costofdamages:besidesmaterials,otherthingsessentialtoprojectworkcouldbecomeunexpectedlydamagedaswell,suchasmachines,technology,oreveninjuriestoprojectteammembers.Overheadcosts:thesetypesofcostscouldinvolvemanufacturingexpenses.Examplesincluderent,taxes,wages,utilities,andmore.Managementoftheseprojectcomponentswillhelpreducecostsandcontrolpotentialvariancebetweenexpectedandactualcosts.Planningcarefullyandestablishingpoliciesandproceduresformanagementwillhelpinthisarea.CVPMPExamSampleQuestionsReadytoapplyyourCVformulaandProjectCostManagementknowledgetosomesamplePMPexamquestions?Trytheexamplesbelowandcheckyouranswersatthebottomofthepage.QuestionABCDIfyourAC=$3,000andyourEV=$3,400,whatistheCostVariance?($400)$4001.13NovarianceYourprojecthasabudgetof$130,000andisexpectedtolasttenmonths,withtheworkresultsandbudgetspreadevenlyacrossallmonths.Theprojectjustcompleteditsthirdmonth,theworkisonschedule,butyouhavespent$65,000oftheprojectbudget.Whatisyourcostvariance?($26,000)$39,000$65,000$64,999UpcomingPMPCertificationTraining–Live&OnlineClassesNameDatePlacePMPCertificationTrainingJan31,Feb1,2,38:30am-6:00pmBirmingham,ALViewDetailsPMPCertificationTrainingApr18,19,20,218:30am-6:00pmBirmingham,ALViewDetailsPMPCertificationTrainingJan3-6&10-136:00pm-10:30pmOnline-UK/Ireland(GMT)ViewDetailsAnswersB.Thecostvarianceformulais:EV–AC.Solvedhere,itis:$3,400–$3,000=$400.Thismeansyouhaveperformedworkworth$3,400andonlyspent$3,000,soyouareunderbudget.A.-$26,000isthevariance.Thisiscalculatedbysubtractingtheactualcostsof$65,000fromtheearnedvalueof$39,000.EViscalculatedbytakingthe30percentcompletionoftheprojectagainsttheBAC.Theprojectisconsideredtobe30percentcomplete.CostVariancePMPExamSummaryBeingfamiliarwiththeconceptofCVisessentialtomasteringprojectcostmanagementasaprojectmanager.ThisPMPexamandprojectmanagementconceptisnecessarywhetheryouarecontrollingcostsforaprojectorpreparingforthePMPexam.DoyouhaveanymorequestionsaboutcostvarianceforthePMPexam?TheexpertinstructorsatProjectManagementAcademyareheretohelp.Getintouchwithusformoreinformationaboutanythingyouneed.AbouttheauthorRelatedpostsErinAldridgeContentManageratProjectManagementAcademyErinAldridge#molongui-disabled-linkPMP®CertificationRenewal:YourComprehensiveGuideErinAldridge#molongui-disabled-linkPMPExamTechnique:MakeorBuyAnalysisErinAldridge#molongui-disabled-linkTheBasicsofPaybackPeriodsinProjectManagementErinAldridge#molongui-disabled-linkSchedulingYourPMP®ExamErinAldridgePostnavigationEMVPMP®:YourGuidetoExpectedMonetaryValueAnalysisFreeFloatvsTotalFloatReceiveournewslettertostayontopofthelatestpostsSearchfor:CategoriesAgileContinuingEducationCorporateTrainingDisciplinedAgileLeanSixSigmaPMBOKGuidePMI-ACPPMI-SPPMPCertificationPMPExamPrepPMPFormulasPMPQualityProfessionalDevelopmentProjectManagementRiskManagementScaledAgileFrameworkTrainingandDevelopment©2008-2021ProjectManagementAcademy®.Allrightsreserved.TermsofUsePoliciesPrivacyStatementContactUsPMI,PMBOK,PMP,CAPM,PMI-ACP,PMI-RMP,PMI-SP,PMI-PBA,ThePMITALENTTRIANGLEandthePMITalentTrianglelogo,andthePMIRegisteredEducationProviderlogoareregisteredmarksoftheProjectManagementInstitute,Inc.|PMIATPProviderID#3348ThePMIATPsealisaregisteredmarkoftheProjectManagementInstitute,Inc.IIBA®,BABOK®GuideandBusinessAnalysisBodyofKnowledge®areregisteredtrademarksownedbyInternationalInstituteofBusinessAnalysis.CBAP®andCCBA®areregisteredcertificationmarksownedbyInternationalInstituteofBusinessAnalysis.ThesetrademarksareusedwiththeexpresspermissionofInternationalInstituteofBusinessAnalysis.ITIL®isaRegisteredTrademarkofAXELOSLimited.TheSwirllogo™isatrademarkofAXELOSLimited.ProjectManagementAcademy®,PMA®,themosttrustednameinprojectmanagementtraining®,andSeniorCertifiedProjectManager®areregisteredmarksofEducate360,LLC.