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Cost Variance (CV)

5 minutes 5 Questions

Cost Variance (CV) is a crucial metric in Earned Value Management (EVM) that quantifies the difference between the budgeted cost of work performed and the actual cost incurred for that work. It is calculated using the formula: CV = Earned Value (EV) minus Actual Cost (AC). CV provides insight into the cost performance of a project by indicating whether the project is under or over budget at a specific point in time. A positive CV means that the project has spent less than what was budgeted for the work completed, indicating cost savings and efficient use of resources. Conversely, a negative CV signifies that the project has spent more than budgeted for the accomplished work, highlighting cost overruns and potential financial issues. Understanding CV is essential for project managers as it enables them to assess the cost efficiency of the project. It answers the question: "How much are we over or under budget for the work performed?" By analyzing CV, managers can identify trends in cost performance, determine the root causes of variances, and take corrective actions to address any deviations from the budget. CV is also instrumental in forecasting future project costs. When combined with other EVM metrics like the Cost Performance Index (CPI), project managers can predict the Estimate at Completion (EAC), providing an insight into the total expected project cost based on current performance trends. Regular monitoring of CV allows for proactive cost management. For instance, if a negative CV is detected early, managers can investigate factors such as inefficiencies, resource allocation issues, or inaccurate cost estimates, and implement strategies to mitigate further cost overruns. In addition, CV plays a role in stakeholder communication. Reporting on cost variances provides transparency and helps stakeholders understand the financial health of the project, facilitating trust and informed decision-making. In summary, Cost Variance is a key indicator of project cost performance, reflecting how well the project is adhering to its budget. By continuously monitoring CV, project managers can manage project finances effectively, ensure efficient resource utilization, and enhance the likelihood of project success within the allocated budget.

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PMI-SP - Earned Value Management (EVM) Example Questions

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Question 1

If a project's Cost Variance (CV) at the 50% completion mark is $0, while Schedule Performance Index (SPI) is 0.8, what does this indicate about the project's performance?

Correct Answer: The project is on budget but behind schedule

The given metrics tell us two key things about the project: 1. Cost Variance (CV) = $0 This means the project is exactly on budget - spending exactly what was planned. 2. Schedule Performance Index (SPI) = 0.8 An SPI less than 1.0 indicates the project is behind schedule. Specifically, SPI of 0.8 means the project is only completing 80% of the planned work. These two metrics together show that while cost performance is precisely as planned (CV = $0), the schedule performance is lagging (SPI < 1). The other options are incorrect because: - Perfect cost control does not mean ahead of schedule - The performance is not optimal in both metrics since SPI shows schedule delays - While schedule recovery might be needed, describing it as 'extensive' overstates the situation when SPI is 0.8

Question 2

When reviewing historical project data, which combination of values indicates the most serious Cost Variance (CV) issue?

Correct Answer: CV = -$50,000 at 25% completion and -$100,000 at 35% completion

The most serious Cost Variance (CV) issue is shown by negative values that are getting worse over time. Analyzing the data: - A worsening cost variance from -$50,000 to -$100,000 represents the most severe situation as it shows: * A significant negative starting point (-$50,000) * Rapid deterioration (-$50,000 additional variance) * Short timeframe (only 10% more completion) This pattern indicates: 1. The project is significantly over budget 2. The cost overrun is accelerating 3. The rate of cost variance decline is concerning The other combinations show either: - Improving trends - Stabilizing variances - Smaller negative values A doubling of negative cost variance in a short completion percentage span represents the most serious cost control issue, requiring urgent corrective action.

Question 3

In a project's earned value analysis, if CV is -$5,000 at Week 12 and -$15,000 at Week 16, what probable scenario explains this pattern?

Correct Answer: Project costs are increasing at a faster rate than planned work completion

The CV (Cost Variance) trend shows a deteriorating pattern from -$5,000 at Week 12 to -$15,000 at Week 16. This indicates that: 1. The negative CV is getting worse over time 2. The project is consistently spending more than planned 3. The rate of overspending is accelerating This pattern clearly indicates that project costs are increasing at a faster rate than planned work completion. A worsening CV trend suggests an ongoing and accelerating cost control issue. Other options are less suitable because: - Enhanced cost control measures would typically lead to CV improvement, not deterioration - Using budget reserves would help stabilize CV, not worsen it - Temporary cost increases due to scope changes would show a more irregular pattern, not a steady decline

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