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Cost Variance Analysis

5 minutes 5 Questions

Cost Variance Analysis is a method used by project managers to evaluate the financial performance of a project by comparing its planned costs to its actual costs. This analysis involves calculating cost variances, which represent differences between the budgeted cost (baseline) and actual cost. Cos…

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PMP - Cost Variance Analysis Example Questions

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Question 1

A project manager calculates the cost performance index (CPI) to be 1.25, and the schedule performance index (SPI) to be 1.10. What does this indicate?

Correct Answer: The project is ahead of schedule and under budget

The Cost Performance Index (CPI) is a measure of the financial effectiveness and efficiency of a project. A CPI greater than 1.0 means the project is under budget because the actual cost is less than the planned cost. Therefore the statements describing the project as over budget are incorrect. The Schedule Performance Index (SPI) is a measure of schedule efficiency on a project. An SPI greater than 1.0 indicates ahead of schedule because work is being completed faster than planned. Therefore, the statements that describe the project as behind schedule are incorrect. The only remaining answer, 'The project is ahead of schedule and under budget', is the correct answer because both indices are greater than 1.0.

Question 2

A project manager noticed that the project's cost performance index (CPI) is 0.80, and the actual cost of the project is $150,000. What is the current earned value of the project?

Correct Answer: A. $120,000

The cost performance index (CPI) is a measure used in project management to determine the efficiency of the resources utilized in performing the project. It is calculated as the ratio of the earned value (EV) to the actual cost (AC). In the given problem, we know that CPI = EV / AC. The CPI is given as 0.80 and the actual cost (AC) is given as $150,000. So, we can solve the equation for the earned value (EV) by multiplying both sides by the actual cost. This gives us: EV = CPI * AC, which is EV = 0.8 * 150,000. Solving for EV gives us $120,000, which is answer 'A. $120,000'. The rest of the options do not match this computation and hence are incorrect.

Question 3

A project manager reviewing the cost performance of a project finds the actual cost (AC) to be $160,000, earned value (EV) to be $150,000, and the planned value (PV) at $145,000. Which conclusion can be drawn regarding the cost variance (CV) in this scenario?

Correct Answer: The project is over budget with a CV of -$10,000.

Cost Variance (CV) is calculated as Earned Value (EV) minus Actual Cost (AC). So, in this scenario, CV = $150,000 (EV) - $160,000 (AC) = -$10,000. This negative value indicates that the project is over budget. Therefore, the conclusion is that the project has a Cost Variance of -$10,000 and is over budget. As for the other answers: One is incorrect because it states the project is under budget and gives an incorrect CV value. Another answer incorrectly suggests that the project is performing financially well with a positive CV, and the last answer is incorrect because it suggests that the CV indicates a break-even point, which is not supported by the given figures.

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