Question

Given the following information for a one-year project, answer the following questions. Remember the following terms; planned value (PV), earned value (EV), actual cost (AC), and budget at completion (BAC).

PV = $44,000

EV = $53,000

AC = $45,000

BAC = $140,000

a). Use the formulas provided in Table 1, to determine the project’s cost variance, schedule variance, cost performance index (CPI), and schedule performance index (SPI) for the project?

Table 1: Earned Value Formulas

Term Formula

Earned value EV = PV to date X% complete

Cost variance CV = EV – AC

Schedule variance SV = EV – PV

Cost performance index CPI = EV / AC

Schedule performance index SPI = EV / PV

Estimate at completion (EAC) EAC = BAC / CPI

Estimated time to complete

Original time estimate / SPI

b). How is the project doing? Is it ahead of schedule or behind schedule? Is it under budget or over budget?

c). Use the CPI to calculate the estimate at completion (EAC) for this project. Is the project performing better or worse than planned?

d). Use the schedule performance index (SPI) to estimate how long it will take to finish this project

Answer 1

Let us first understand the terms given in the question.

Planned Value: This is the first value in EARNED VALUE MANAGEMENT. Planned value is approved value of the work to be completed in given time.

Actual Cost : This is the second value in EARNED VALUE MANAGEMENT. Actual cost is the total cost incurred for actual work completed to date.

Earned Value : This is the third and last value in EARNED VALUE MANAGEMENT. Earned Value is value of work actually completed to date.

Project Cost Variance : This the difference between Budgeted cost & actual cost.

Schedule Variance : It indicates how much ahead or behind schedule the project is.

Cost Performance Index : It is a measure of the financial effectiveness & efficiency of a project. It represents the amount of completed work for every unit of cost spent.

Schedule Performance Index : It is a measure of the conformance of actual progress (earned value) to the planned progress: SPI = EV / PV.

Now answers to the questions are as follows:

a) Project Cost Variance : EV - AC

Here, EV= $ 53,000 & AC = $ 45000

Hence, CV = $ 53,000 - $ 45,000 = $ 8,000

Schedule Variance : EV - PV

Here, EV = $ 53,000 & PV = $ 44,000

Hence, SV = $ 53,000 - $ 44,000 = $ 9,000

Cost Performance Index : EV/AC

Here, EV= $ 53,000 & AC = $ 45000

Hence, CPI = $ 53,000/ $ 45000 = 1.178

Schedule Performance Index : EV/PV

Here, EV = $ 53,000 & PV = $ 44,000

Hence, SPI = $ 53,000/ $ 44000 = 1.20

b) Schedule variance indicates how much ahead or behind schedule the project is. As Earned value is greater than Planned value, the project is ahead of schedule.

Cost Performance Index : It is a measure of the financial effectiveness & efficiency of a project.

If CPI is greater than 1, then project is under budget.

If CPI is 1, the project is on budget.

If CPI is less than 1, the project is over budget.

As the CPI of the project is 1.178, then the project is under budget.

C) Estimate At Completeion = BAC / CPI, It is the estimate of the forcasted cost of the project, as the project progresses.

Here, BAC = $ 1,40,000 & CPI = 1.178

Hence, EAC = 140000/1.178 = $ 1,18,845.50 (Approx)

As EAC $ 1,18,845.50 is less than planned i.e. $ 1,40,000 , the project is performing better than planned.

d) According to the formula of estimating time to complete this project as below:

12 months/ SPI

hence, 12/1.20= 10 months. It will take 10 months to complete the project.

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