Cost Variance (CV) Formula: CV PMP Exam Guide
Variance analysis is a helpful tool for analyzing your project’s health, monitoring deviations from your budget or schedule, and identifying corrective actions promptly. Cost variance analysis is specifically intended to help you complete your project within the approved budget. This guide by your experts at Project Management Academy will help you understand how to apply the concept of cost variance (CV) as a potential PMP credential holder and practice what you need to know for the PMP Exam.
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Cost Variance PMP Exam Overview
Cost variance (CV) is a PMP exam concept that measures project progress against the project’s cost baseline. Calculating a CV will help you determine any variance from the project’s monetary budget.
Your project’s budget is the amount of money you have assigned to a project, designated for a specific time period to deliver the project’s goals. Cost variance measures the project cost performance. There are three types of cost variances:
- Point-in-time cost variance: also known as period-by-period cost variance, this type of CV describes the difference between actual cost (AC) and earned value (EV) during a single timeframe without considering previous or future variances.
- Cumulative cost variance: this measurement calculates the difference between the cumulative EV and multiple ACs. Actual cost figures typically come from several consecutive timeframes, as opposed to a point-in-time CV.
- Variance at completion (VAC): this CV specifically looks at the cumulative CV at the end of the project. For VAC, you will need to look at the budget at completion (BAC) and the actual or estimated cost at completion (EAC).
CV PMP Exam Tips
Cost variance is an essential concept for the PMP exam. You should be able to calculate and interpret a CV for a project when provided with data in an exam question. Calculating cost variance is necessary for PMP credential holders on any project, since minimizing costs as much as possible is beneficial for your project team and stakeholders.
Project Cost Management and CV
Clients and project stakeholders are typically cost-conscious since they are putting money into the project to complete it. Deviating from the planned budget could affect the profit they make or the value of the deliverables, which makes CV a vital part of Project Cost Management.
Project Cost Management is a PMP exam knowledge area dealing with estimating, budgeting, and controlling costs throughout a project. The processes of cost estimating, cost budgeting, and cost control are all part of Project Cost Management. Cost variance is a component of cost control.
When dealing with CV, project managers must measure deviations from the cost baseline and determine what kind of corrective action to take. This type of variance analysis requires calculating CV and interpreting it to explain why variances exist and how to fix them.
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Cost Variance Formula PMP
The CV formula is simple, but you need to understand the meaning of some variables. The CV formula and variables to know for the PMP exam are below:
CV = EV – AC
- Earned value (EV) describes the estimated dollar value of any work actually done. In other words: EV = (% of work completed) x (budget).
- Budget at completion (BAC) specifically describes the EV at the end of a project, when you have theoretically used 100% of your budget.
- EV is also sometimes referred to as the budgeted cost of work performed (BCWP).
- Actual cost (AC) describes the dollar amount actually spent to complete the work.
- Actual or estimated cost at completion (EAC) specifically describes the AC at the end of a project. Your EAC might be a known number or an estimate based on what you’ve spent so far.
- AC is also sometimes referred to as the actual cost of work performed (ACWP).
Another helpful concept related to EV is planned value (PV). PV describes the estimated part of the budget allocated to an amount of work planned to be done. You would use PV when your project progress does not correlate precisely to the percent of budget used.
For example, when you start a manufacturing project, you might not need to purchase materials and account for manufacturing costs during the initial planning phase, so your costs are concentrated in the later stages of the project.
Interpretation of cost variance formula for PMP Exam
As a potential PMP credential holder, calculating CV is just the first step. Interpreting your results is the next step and will tell you if you are over, under, or on budget.
- If CV < 0 (negative), you are over budget.
- If CV > 0 (positive), you are under budget.
- If CV = 0, you are on budget. (In the real world, this rarely happens.)
For example, say you have completed 50% of a project with a $5,000 budget in 3 weeks. You have spent $2,750 so far. You decide to use the CV formula to see if you are on budget or determine if any problems need fixing:
- EV = 50% x $5,000 = $2,500
- AC = $2,750
- CV = $2,500 – 2,750 = –$250
Your cumulative cost variance is –$250, so you are currently over budget. But what if you looked at your point-in-time cost variance for each week? Apply the formula to your data from each week:
- Week 1: 10% of work completed, $250 spent
- EV = 10% x $5,000 = $500
- AC = $250
- CV = $500 – 250 = $250
- Week 2: 15% of work completed, $1,000 spent
- EV = 15% x $5,000 = $750
- AC = $1,000
- CV = $750 – 1,000 = –$250
- Week 3: 25% of work completed, $1,250 spent
- EV = 25% x $5,000 = $1,250
- AC = $1,250
- CV = $1,250 –1,250 = $0
This breakdown clarifies something must have happened during Week 2 to cause the negative cumulative CV. Now, you can take a closer look at why this variance happened and how you can fix it.
Potential causes of cost variances
If you discover a budget overrun, it is crucial to identify what may have caused this deviation from your planned costs. Depending on what field your project falls under and what variables are relevant to consider, you may need to examine variances for potential causes such as:
- Cost of labor: your expected and actual labor costs could differ for many reasons, such as underestimating how many hours you would need to complete the project, scheduling conflicts, or a mismatched skill set.
- Cost of materials: material costs include raw materials, supplies, and other items used to create deliverables. A variance between expected and actual costs could be caused by materials getting damaged or costing more than expected.
- Cost of damages: besides materials, other things essential to project work could become unexpectedly damaged as well, such as machines, technology, or even injuries to project team members.
- Overhead costs: these types of costs could involve manufacturing expenses. Examples include rent, taxes, wages, utilities, and more.
Management of these project components will help reduce costs and control potential variance between expected and actual costs. Planning carefully and establishing policies and procedures for management will help in this area.
CV PMP Exam Sample Questions
Ready to apply your CV formula and Project Cost Management knowledge to some sample PMP exam questions? Try the examples below and check your answers at the bottom of the page.
|If your AC = $3,000 and your EV = $3,400, what is the Cost Variance?||($400)||$400||1.13||No variance|
|Your project has a budget of $130,000 and is expected to last ten months, with the work results and budget spread evenly across all months. The project just completed its third month, the work is on schedule, but you have spent $65,000 of the project budget. What is your cost variance?||($26,000)||$39,000||$65,000||$64,999|
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- B. The cost variance formula is: EV – AC. Solved here, it is: $3,400 – $3,000 = $400. This means you have performed work worth $3,400 and only spent $3,000, so you are under budget.
- A. -$26,000 is the variance. This is calculated by subtracting the actual costs of $65,000 from the earned value of $39,000. EV is calculated by taking the 30 percent completion of the project against the BAC. The project is considered to be 30 percent complete.
Cost Variance PMP Exam Summary
Being familiar with the concept of CV is essential to mastering project cost management as a project manager. This PMP exam and project management concept is necessary whether you are controlling costs for a project or preparing for the PMP exam.
Do you have any more questions about cost variance for the PMP exam? The expert instructors at Project Management Academy are here to help. Get in touch with us for more information about anything you need.