Cost Variance Calculator

| Added in Business Finance

What is Cost Variance and Why Should You Care?

Ever wondered why some projects go over budget while others manage to stay right on track? That's where cost variance comes into play. Cost variance lets you know if you're spending more or less than you planned for a project.

Why should you care? Because it gives you the power to manage your finances effectively, prevent overruns, and ensure that you're bringing your project in line with your financial goals.

Think of cost variance as your financial radar. If the radar says you're off course, you can make quick adjustments before things get too out of hand.

How to Calculate Cost Variance

Calculating cost variance is easier than you might think. You only need two key pieces of information: the earned value and the actual cost.

[\text{Cost Variance} = \text{Earned Value} - \text{Actual Cost}]

Where:

  • Earned Value (EV) is the monetary value budgeted for work that has been completed
  • Actual Cost (AC) is the actual amount spent on the project

Let's make it even simpler:

  1. Earned Value: This is the amount you expected to spend by a certain point in your project
  2. Actual Cost: This is what you actually ended up spending
  3. Cost Variance: This is the difference between what you planned on spending and what you actually spent

Calculation Example

Alright, let's dive into a quick example to see how this works in real life. Imagine you're managing a small marketing campaign with the following details:

  • Earned Value (EV): $20,000
  • Actual Cost (AC): $18,000

Plug these numbers into our formula:

[\text{Cost Variance} = 20000 - 18000 = 2000]

So, the cost variance for your marketing campaign is $2,000. This means you spent $2,000 less than you had budgeted for.

Let's try another example:

  • Earned Value (EV): $35,000
  • Actual Cost (AC): $40,000

[\text{Cost Variance} = 35000 - 40000 = -5000]

In this case, your cost variance is -$5,000. This means you've overspent by $5,000. Time to reassess and figure out where those extra costs crept in.

By using this formula, you can monitor the financial health of your projects and make informed decisions.

Frequently Asked Questions

A positive cost variance means you are under budget. You have spent less than what was budgeted for the work completed.

A negative cost variance indicates you have overspent. You have spent more than what was budgeted for the work completed.

Cost variance is a key metric in Earned Value Management that helps project managers identify budget overruns early and make adjustments to keep the project financially on track.