Cost Variance (CV)

5 minutes 5 Questions

Cost variance is a measure of cost performance on a project. It is the algebraic difference between earned value (EV) and actual cost (AC). CV = EV - AC. It helps determine if the project is under budget (CV > 0) or over budget (CV < 0). Maintaining a positive cost variance throughout the project suggests that the project is efficiently using its resources.

Guide on Cost Variance (CV) in Earned Value Management under CAPM

What is Cost Variance (CV)?
Cost Variance (CV) is a concept under Earned Value Management (EVM). It is used to measure the cost performance of a project by comparing the actual cost against the earned value (work performed).

Why is Cost Variance (CV) Important?
CV is important because it gives a clear view of how much more or less the costs are compared to the original plan. A positive CV indicates that the project is under budget, while a negative CV indicates that the project is over budget. This allows project managers to make necessary adjustments for maintaining the budget.

How Does Cost Variance Work?
CV is calculated using the formula: CV = EV - AC where EV is Earned Value and AC is Actual Cost. This gives a numerical value, the interpretation of which can provide project performance insights.

Exam Tips: Answering Questions on Cost Variance (CV)
1. Understand the CV concept thoroughly, especially the meaning of positive and negative CV.
2. Be familiar with the CV formula and be able to use it to calculate CV when given EV and AC.
3. Get used to interpreting CV in context. It's not just about computing a number but about understanding what that number signifies in the grand scheme of the project.
4. In case studies, draw upon your understanding of CV to make informed recommendations or predictions about the project’s cost performance.

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Question 1

In a manufacturing project, the actual cost is $25,000 while the earned value is $30,000. The project is in the middle phase and the project director is concerned about being over or under the budget. What is the cost variance?

$25000 $5000 -$5000 -$25000

Correct Answer: $5000

Cost variance (CV) in project management is calculated using the formula CV = Earned Value (EV) - Actual Cost (AC). In this scenario, the earned value is $30,000 and the actual cost is $25,000. The CV = $30000 - $25000, so the cost variance is $5000. This is a positive value which indicates that the project is under budget. The answer '-$5000' is incorrect because a negative cost variance would indicate that the project is over budget, which is not the case based on the numbers given. The answers '$25000' and '-$25000' are not correct because they do not result from the correct calculation of earned value - actual cost.

Question 2

In the middle of a project, the actual cost is $40,000 but the earned value is $50,000. The project manager wants to know if they are over or under budget. What is the cost variance?

$10,000 $-10,000 $30,000 $90,000

Correct Answer: $10,000

Cost Variance is calculated by subtracting the Actual Cost from the Earned Value. In this case, from the question, the Actual Cost is $40,000 and the Earned Value is $50,000. Therefore, subtracting $40,000 from $50,000 gives a positive $10,000 which indicates a favorable variance - the costs are under budget. The answer $-10,000 is incorrect because it suggests a negative variance, which would not be the case. The answer $90,000 and $30,000 are incorrect because they do not follow the method of subtracting the Actual Cost from the Earned Value.

Question 3

The planned value of a project is $60,000 and actual cost is $70,000, but the earned value is $50,000. What is the cost variance of this project?

$10,000 No variance $20,000 $-20,000

Correct Answer: $-20,000

The cost variance (CV) of a project is calculated as the Earned Value (EV) minus the Actual Cost (AC). From the question details we have EV = $50,000 and AC = $70,000. So, the CV is $50,000 minus $70,000 which equals $-20,000. This means that the project is over budget (negative variance). The other answers are incorrect. An answer of '$10,000' would suggest that the project is under budget (positive variance), which is not true based on the CP value. The answer of '$20,000' suggests a bigger positive variance, which is also incorrect. And 'No variance' would mean that the EV and AC are same, which is not the case here.

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