Cost Variance Explained - Celoxis

Cost variance is the difference between the Budgeted Cost of Work Performed (BCWP) and the Actual Cost of Work Performed (ACWP). Budgeted cost ... ☰ Features Pricing Compare LiquidPlanner Mavenlink Monday.com MSProject Wrike ZohoProjects More Product Integrations Deployment Security Customers Showcase CaseStudies Reviews Services Support Training RemoteServices More Affiliates Resellers Blog TryFree Demo Login CostVarianceisasimpleconceptandcanbeusedtoavoidcostoverrunswhilemanagingaproject.Inthisarticle,Iwillexplainwhatcostvarianceisandwhyitcanbeuseful. Whatiscostvariance? CostvarianceisthedifferencebetweentheBudgetedCostofWorkPerformed(BCWP)andtheActualCostofWorkPerformed(ACWP). Budgetedcostofworkperformedisalsoreferredtoasearnedvalue.  Costvariance=Earnedvalue-ActualCost. Tokeepitsimpleandshort,Iwillcallbudgetedcostofworkperformed(BCWP)asEarnedValueandActualcostofWorkPerformed(ACWP)asActualCost.  Example: Let’ssay,youroldcarhasafewproblemsandyouwanttorepairit.Youtakethecartoamechanicandaftertheinitialinspection,hegivesanestimatedrepaircostof$5000. Afterafewdays,youvisitthemechanicandthemechanictellsyouhehadtoreplacethebatteryinsteadofchargingit. Asperyourcalculation,youfoundoutthatinsteadof$1000forbatteryrepairsyougotcharged$1200.Thisisanincreaseof$200comparedtoyouroriginalestimate. Here,$1000istheearnedvalueand$1200istheActual cost.   Costvariance=$1000–$1200=-$200 Youcanexpresscostvarianceintermsofpercentage, Costvariance(%)=(Earnedvalue–Actualcost)/EarnedValue %Costvarianceinourexamplewouldbe, CostVariance(%)=($1000-$1200)/$1000 Costvariance(%)=-20% So,theactualcostincreasesby20%. Iftheprojectisoverbudgetthenthecostvarianceisnegative. Iftheprojectisunderbudgetthenthecostvarianceispositive. Whenyoulookatthegraphbelow,youcanvisualizecostvariance.   Whyiscostvarianceuseful? Costvariancecanbeusedinmultipleways,fromreportingtocostprojections,itdependsontheuser.Let’slookatsomeofthewaysinwhichcostvariancecanbeuseful. 1.Comparison:- Afteryouarecompletedwiththeproject,comparingthebudgetwiththeactualscanbeofhugeimportance. Iftheactualcostishigherthanthebudgetedcostbyalargemargin.Youhaveaproblemwiththebudgetingsystemandneedtorectifyit. 2.Projectionoffinalcost:-  Fortheprojectionoffinalvarianceincost,youcanusehistoricaldata. Historicaldatacanbedatafromasimilarprojectortheprojectyouarecurrentlyworkingon. IfyouhaveBudgetedcostorEarnedvaluealongwiththeactualcost,youcanprojectthecostoftheprojectafteritscompletion. Let’strytounderstandthisbyusingtheabovegraph, Wehavetoconsiderthegraphwithlinearnaturetobetterunderstandthescenario.Iftheactualcostgoesonincreasingatthesamerate,itwillcrossthebudgetedcost. Conclusion: Costvarianceisusedtodetermineprojecthealthandhelpsyouinavoidingcostoverrunswhenyouhavemultiplelargescaleprojectstomanage. 11BestMonday.comAlternatives Kanban Submityourcomment Wewillnotpublishyouremailaddressnoruseittocontactyouaboutourproducts. × StartaFreeTrial Your30-daytrialcomeswithsampledataforaquickevaluation Pleaseenteryourbusinessemail.Topreventabuse,wedonotallowfreeemailproviderslikeGmail,Hotmail,etc. Iagreetothetermsofuse Getstarted Thiswebsiteusescookiestoimproveyourexperience.IfyouclickOKorcontinuetousethiswebsite,wewillconsiderthatyouacceptourcookiepolicy. OK