Hopefully you’ve been following our series on PMP calculations.
If you have, you’ll know that one of the areas that people often struggle with when studying for the PMP is the calculations involved with the Cost Management knowledge area.
This post is about Cost Variance. Otherwise known as CV.
As the name suggests the CV calculation shows if there are any variations in the costs of the project.
In other words, CV shows if your project is under or over budget.
CV is calculated using this formula:
Cost Variance (CV) = Earned Value – Actual Cost
You can read our earlier blog posts to find out how to calculate Earned Value and Actual Cost.
Tip – Earned Value is also known as Budgeted Cost of Work Performed (BCWP). And Actual Cost is also known as Actual Cost of Work Performed (ACWP).
So you may see the formula written as:
CV = BCWP – AC
CV = BCWP - ACWP
CV = EV – ACWP
So what does the CV that you’ve calculated mean?
A negative number is over budget. And a positive number is under budget.
An important point to remember is that on a perfect project, the CV is 0. This because a CV of 0 is neither over budget or under budget.
Most people understand instinctively why being over budget is bad. But why is being under budget bad?
It could be a sign that the team has missed a required piece of work.
Basically, anytime the CV isn’t 0 – you need to investigate.
Chris is the project manager on a project to build a new photo sharing app for the iPhone and Android smart phones.
The value earned by the project is $2,300,000. The costs incurred by the project are $2,560,000.
What is the CV? And what does it tell us about the project?
Answer The CV is -$260,000. And this tells us that the project is over budget.
How did we calculate this?
Well we know that CV = Earned Value – Actual Cost.
The Earned Value is $2,300,000 (“value earned by the project” is another way of saying Earned Value).
The Actual Costs are $2,560,000 (The project’s costs are “the costs incurred by the project”).
Knowing this we can calculate:
CV = $2,300,000 – $2,560,000 = -$260,000
That wasn’t too hard to calculate, right?
Next in the PMP calculation series is Schedule Variance (SV).
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