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# TOPIC: QuestionEarned Value vs. Actual Costs

## Earned Value vs. Actual Costs 5 years 4 months ago #2946

 James Pursley Topic Author Offline Fresh Boarder Posts: 3 Thank you received: 0 If earned value (EV) = how much work has been accomplished on the project and Actual Cost (AC) = the true costs incurred, what is the difference between the two terms and how they relate? Your e-mail address will never be displayed on the site. Check this box to be notified of replies to this topic. Note: BBcode and smileys are still usable.

## Earned Value vs. Actual Costs 5 years 4 months ago #2947

 Rachu Offline Junior Boarder Posts: 26 Karma: 1 Thank you received: 2 Hi James, Let me first take an example. Lets say a very small project has total BAC (budget at completion) value of USD1000 and duration estimate of 4 weeks. Following are some numbers after 2nd week of completion in the project, The project is 40% complete. The Actual Cost incurred on the project so far is USD 350. Now according to the duration estimate, the project should be 50% complete (2 weeks in 4 weeks duration), so the PLANNED VALUE is USD 500 (50% of total BAC of USD1000). But the project is only 40% complete so far, so the value we earned in the project, EARNED VALUE is USD400 (40% of the BAC). We also have the ACTUAL COST of USD350. So the EV is the value we earned in the project and AC is the cost to earn that value. If AC is lower than the EV that mean we are under budget (at that point, which is the case in this example). CPI (Cost Performance Index =EV/AC) gives that value. Think about if AC is USD450 in lieu of USD350, the same project becomes over budget. Not sure if my explanation is clear or not, experts please chime in with your valuable comments. Regards, R. Your e-mail address will never be displayed on the site. Check this box to be notified of replies to this topic. Note: BBcode and smileys are still usable.

## Earned Value vs. Actual Costs 5 years 4 months ago #2949

 Khurram Hussain Visitor Rachu’s example is correct. However, allow me to explain the underlying fundamental concept. Projects are carried out to attain different objectives. External projects are usually carried out to earn revenue while internal projects are carried out either to earn revenue or achieve an organization’s objective or goal. Revenue analysis for the projects carried out to earn revenue is easy and you would use measures as NPV, IRR or Rate of Return to analyze these revenues. However, the majority of projects do not contribute directly to earning revenues. For example, setting up a new enterprise resource planning system for an organization doesn’t directly earn revenue of the organization. This is an internal project and the associated benefits are intangible. To analyze cost performance, a project manager needs a system that is impartial of revenue contributions of the project and is rather based on the original budget approved for the project. The Earned Value Management system compares the cost and schedule performance of a project by comparing the current state with the approved cost and schedule baselines. Every project eats its allocated budget to progress. If the project is eating the budget more than the planned rate, it is likely to go over budget. The Actual Cost “AC” is the budget that has been consumed to date. The Planned Value “PV” is the amount of budget that was allocated to be consumed to date. The Earned Value “EV”, is the amount of work the project has completed in reference to the original project budget “BAC”. It would have been better if we could base the EV on the actual revenues generated by the project, however as I have already explained, most of the projects do not have direct revenue contributions. Hence, the EV is a comparison against the approved budget (BAC) instead of the forecasted revenues. To summarize, EV is the sum of the planned budget allocation for the amount of work completed to date. PV is the sum of the planned budget allocation for the amount of work “that should have been” completed to date. The difference of EV and PV will tell you about the schedule variance. If you'll read Rachu's comment now, it should be easier to grab. Please let me know if I have been successful in explaining the core concept? Warm regards, Khurram Hussain, PMP, CSSBB Your e-mail address will never be displayed on the site. Check this box to be notified of replies to this topic. Note: BBcode and smileys are still usable.

## Earned Value vs. Actual Costs 5 years 4 months ago #2950

 James Pursley Topic Author Offline Fresh Boarder Posts: 3 Thank you received: 0 Thank you both for two very well thought out responses! Based on your explanations is still seems like that AC and EV totals will be the same at any point of the effort since even for non-revenue-generating projects you will still have costs. I get the feeling I'm still missing something. If you start back with the definition I used of EV and AC in the starting thread (i.e. EV is equal to the work that has been accomplished on the project; and, AC is equal to the true costs incurred) then maybe my beginning premise is not accurate. Doesn't EV and AC apply to both revenue-generatong AND non-revenue generating projects or is there some exclusion for either scenario that is not needed for one of the two variables? Thank you, Jim Your e-mail address will never be displayed on the site. Check this box to be notified of replies to this topic. Note: BBcode and smileys are still usable.

## Earned Value vs. Actual Costs 5 years 4 months ago #2954

 James Pursley Topic Author Offline Fresh Boarder Posts: 3 Thank you received: 0 Khurram - Thank you once again and especially for such a thorough and thoughtful reply! Your assistance is far from failing me. It is greatly helping me understand a problem area for me and what may as well be a foreign language to me - finances . Your insight is huge help and I greatly appreciate it. I'm scheduled to sit for the exam on December 2 and along with continued review of the knowledge areas and process groups I am spending the last month or so primarily focusing on the finance and formula aspects so I will probably have more questions - fair warning . Thank you, Jim Your e-mail address will never be displayed on the site. Check this box to be notified of replies to this topic. Note: BBcode and smileys are still usable.

## Earned Value vs. Actual Costs 5 years 4 months ago #2955

 Khurram Hussain Visitor Thanks and best of luck for your exam Regards, Khurram Hussain, PMP, CSSBB Your e-mail address will never be displayed on the site. Check this box to be notified of replies to this topic. Note: BBcode and smileys are still usable.

## Earned Value vs. Actual Costs 7 months 1 week ago #11215

 a Visitor This is great explanation. Much better than the textbook. Your e-mail address will never be displayed on the site. Check this box to be notified of replies to this topic. Note: BBcode and smileys are still usable.
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