Managerial Accounting comprises the process of identifying, measuring, analyzing, and interpreting information to help managers make decisions with respect to the organizations goals. Earned Value Management (EVM) is a process that allows engineers to have visibility into technical, cost, and schedule performance on projects. The performance metrics for EVM focus on observables for early warning and trending of project performance.
Earned Value (EV) is the value of work performed expressed in terms of the budget assigned to a work breakdown structure (WBS) component. The WBS is a decomposition of the statement of work (SOW) into smaller units and provides the basis for planning, budgeting, scheduling, cost accumulation, reporting (internal and external), and data aggregation on the project. An example WBS is shown below.
The ultimate objective of the WBS is to identify manageable units of product-oriented work that can be measured against technical, schedule, and cost performance within the constraints of the project. For each WBS package, there is an associated unique identifier which provides traceability between the cost system and the scheduled work packages.
The schedule identifies all work and shows the sequence and interrelationships of discrete tasks required to build a product while providing a way to measure program progress. The key observables taken from the work break down structure to schedule relationship are budgeted cost of the work performed (BCWP), actual cost of work performed (ACWP), and budgeted cost of the work scheduled (BCWS).
The budgeted cost of the work performed is the planned cost for a defined WBS element scope of work or portion that has actually been finished through a given time period. Just as in managerial accounting it is a measurement of the work completed. The budgeted cost work scheduled is the planned cost for a defined scope of work that is scheduled to be accomplished through a given time period. The actual cost of work performed is the costs incurred and recorded in accomplishing the work performed within a given time period. From these three observables which are derived from the WBS, Schedule and financial accounting system both variances and efficiency metrics can be calculated for management planning purposes.
The first variance and one that is often most associated with managerial accounting is the Cost variance. The Cost variance metric measure the cost performance on a project. It is the difference between budgeted cost work performed value (BCWP) and actual cost (ACWP).
Cost Variance CV = BCWP – ACWP
In other terms the Cost Variance = Earned Value – Actual Cost. A positive value indicates an underrun and a negative value indicates an overrun. A metric for schedule Variance can be expressed as the difference between earned value (BCWP) and budget (BCWS).
Schedule Variance SV = BCWP – BCWS
Schedule Variance = Earned Value – Budget. Again a positive value indicates a project is ahead of schedule while a negative value indicates a project is behind schedule. The two variances can be seen on the timeline below as the WBS elements are projected across the project schedule.
Variance data should originate at the lowest WBS level; however, analysis should be performed at the level that will provide the most meaningful information to management. The analysis of the cost and schedule variances to determine the cause, possible impacts, and any corrective action required to meet the project objectives as planned are rolled into an analysis report which documents the cause, impact and corrective action for cost and schedule when established thresholds are exceeded. When dealing with multiple project of different size it is often the case that thresholds for cumulative variances will not be standardized across projects.
In order to correctly focus management decisions Earned Value converts the cost and schedule variances into percentages.
SV % = (SV / BCWS) *100 and CV % = (CV / BCWP) *100
These percentage metrics define the relative variances to their base assumptions. These key measures of the earned value management technique shows the progress made on an individual task based upon the pre-established schedule and cost. At any point, the total authorized budget (BAC) for accomplishing a defined statement of work can be compared to the cumulative budget for cost/schedule as well as the cumulative actual costs of work performed to indicate SOW variances.
Earned Value has two additional metrics which measure a projects efficiency as it relates to cost and schedule.
Cost Efficiency CPI = BCWP / ACWP Favorable is > 1.0, Unfavorable is < 1.0
Schedule Efficiency SPI = BCWP / BCWS Favorable is > 1.0, Unfavorable is < 1.0
The Cost Performance Index (CPI) is an indicator of the cost efficiency at which work has been performed to date. The index is determined by dividing the numerical value for earned value (BCWP) by the numerical value for actuals (ACWP) for a given time period. When the index has a value greater than 1.0 it indicates the work accomplished has cost less than expected or vice versa. The schedule performance index is an indicator of the schedule efficiency at which work has been performed to date. The value is determined by dividing earned value (BCWP) by the value for budget (BCWS) for a given time period. A value greater than 1.0 indicates the project is ahead of schedule while a value of less than 1.0 indicates a project in behind schedule.
In closing Earned Value Management is an managerial accounting technique which measure cost, schedule, and budget; then makes a corresponding detailed valuation of the performance of project. As the project progresses at predetermined reporting periods the metrics are reviewed to determine (1) how much value should have been achieved according to the plan, (2) how much value has been produced and (3) how much money has been spent. These three assessments form the basis for all earned value analysis techniques. These measures not only provide insight into project performance, but also provide the necessary data points to estimate probable completion costs (EAC).
