How to Find and Calculate Cost Variance
Understand how to calculate cost variance for clear insights into your project's financial health and budget.
Cost variance is a fundamental metric in financial management, particularly within project contexts. It provides a straightforward evaluation of a project’s financial performance by comparing the budgeted cost of work completed against the actual amount spent for that same work. This comparison helps in understanding whether a project is progressing within its allocated financial limits. By regularly calculating cost variance, project stakeholders can track financial health, ensuring spending aligns with initial plans.
Essential Data for Calculation
To determine cost variance, two primary pieces of financial information are required: Earned Value (EV) and Actual Cost (AC). These metrics are necessary to assess a project’s financial standing. Accurately deriving them is foundational for a precise cost variance analysis.
Earned Value (EV) represents the budgeted cost of the work performed to date. It is the monetary value of work completed, measured against the project’s approved budget, not just the amount spent. For instance, if a project has a total budget of $10,000 and 60% of the work has been completed, the Earned Value would be $6,000. This provides an objective measure of physical progress in financial terms. EV is often referred to as the Budgeted Cost of Work Performed (BCWP).
Actual Cost (AC) signifies the total expenses incurred for the work performed up to a specific reporting period. This includes all expenditures, such as labor, materials, equipment, and associated overhead costs. Unlike Earned Value, Actual Cost is a direct measure of what has been spent, without considering the value of the work achieved. Financial records, invoices, payroll data, and expense reports serve as primary sources for tracking these expenditures.
Performing the Calculation
Once Earned Value (EV) and Actual Cost (AC) figures are established, calculating cost variance is a direct process. The formula for cost variance (CV) is: CV = Earned Value (EV) – Actual Cost (AC). This quantifies the difference between the value of work completed and the actual money spent.
For example, if a project’s Earned Value is $15,000, and the Actual Cost incurred is $12,000, the calculation is $15,000 – $12,000, yielding a cost variance of $3,000. Alternatively, if the Earned Value is $10,000 and the Actual Cost is $11,000, the calculation results in a cost variance of -$1,000.
It provides a numerical snapshot of financial performance. The result then leads to an interpretation of the project’s cost efficiency.
Understanding the Results
The numerical outcome of the cost variance calculation provides immediate insight into a project’s financial status. There are three possible results, each carrying a distinct meaning regarding the project’s budget performance. Interpreting these results is essential for effective oversight.
A positive cost variance indicates that the project is currently under budget for the work performed. This means the Earned Value, or the value of the work accomplished, is greater than the Actual Cost incurred to achieve it. A positive result suggests that resources are being utilized efficiently, and the project is spending less than planned for the progress made.
Conversely, a negative cost variance signals that the project is over budget for the work completed. In this scenario, the Actual Cost exceeds the Earned Value, meaning more money has been spent than the value of the work achieved. A negative outcome points to potential cost overruns or inefficiencies in spending.
When the cost variance is zero, it signifies that the project is exactly on budget for the work performed. This outcome means the Earned Value perfectly matches the Actual Cost, indicating that spending is precisely in line with the planned budget for the progress made.