A difference between the budgeted and incurred cost is variance.
The variance analysis is a tool that helps in evaluating the performance of any organization by means of difference between the budgeted cost and actual cost.
The variance analysis comprises of the following steps
– The difference between the budgeted and the incurred cost is calculated
– The reasons for the difference is investigated
– The investigation report is forwarded to the management for their information and necessary action
– The necessary action is taken to bring the incurred cost in closer alignment with the budgeted cost.
When should be the analysis conducted:
– The analysis should be conducted when the company incurs extraordinarily high costs
– The analysis can also be conducted in areas where costs are of a long term nature and might not be expected to change much
Ex: A project should be completed in 9 months and the estimated cost of the project is $900,000. After a month 10% of work is completed at an expense of $100,000. The planned completion should have been 15%.
Find the project’s cost variance and Schedule variance budget
Planned Value = Planned Completion is 15% = 15%of$900,000 = $135000
Earned Value = Actual Completion is 10% = 10% of $900,000 = $90000
Cost Variance = Earned Value- Actual Cost
Scheduled Variance = Earned Value-Planed Value
Since the project cost variance is negative, this means the project is over budgeted. Since the Scheduled variance is negative, the project is behind schedule. Based on this calculation it is advised to take a corrective action.