Cost Variance :

Cost Variance is a simple concept and can be used to avoid cost overruns while managing a project. In this article, I will explain what is cost variance in project management and why cost variance is useful.

What is cost variance?

Cost variance is the difference between the Budgeted Cost of Work Performed  (BCWP) and the Actual Cost of Work Performed (ACWP).   

Let’s say your car has broken down and you had to take it to a mechanic. After the initial inspection of the car, the mechanic gives you a repair cost of $1000. And he asks you to come back later in the day to pick up the car.

After a nice afternoon, you go down to a mechanic and ask him about the car. The mechanic tells you that he had to replace the battery, instead of charging it. Due to some issues with the battery. And hands over a bill of $1200. The extra $200, in this case, is cost variance.

Cost variance = $1000 – $1200 = -$200

Sometimes cost variance can be expressed in terms of percentage.

Cost variance (%) = ( Budgeted cost – Actual cost  ) / Budgeted cost 

In our example, it will be  (1000 – 1200) / 1000 = -20%

So the actual cost exceeds the budgeted cost by 20%. 

  • If the project is over budget then the cost variance is negative.
  • If the project is under budget then the cost variance is positive.

Variance Cost
                                                              Graphical illustration of cost variance

 

Why is cost variance useful?

Calculating cost variance can be useful in two cases. One at the end of the project where it is used for reporting to finally understand how much you budgeted vs how much you actually spent. The other is while the project is still in progress. In the second case, it is used for cost projections.

Projection of final cost using cost variance:

Suppose you want to paint your house and you decide to hire 2 people to do the job with 20$ as their daily pay. To complete the work it takes 4 days and 2 barrel (200$ each) of paint.

After the end of the 3rd day you notice that only half of the work is done. So in order to complete the project an extra day has to be given. Also, a 25% increase in labour cost is seen.

 

Conclusion:

Cost variance is used to determine project health and helps you in avoiding cost overruns when you have multiple large scale projects to manage.

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