Earned Value Management Tutorial Accounting Essay

Earned value direction is a undertaking direction tool used to mensurate the success of a given undertaking at a certain point of clip with the usage of standards such as range, agenda and budget.

It takes a critical expression at factors such as whether the undertaking is in front or behind budget, whether the undertaking is in front or behind agenda or whether the existent work is acquiring done. Founded in the 1960 ‘s, earned value direction has become a criterion for US authorities sections when undertakings are undertaken, with most of them doing it a compulsory tool for mensurating the success and effectivity of a undertaking.In short, “ Earned Value Management ( EVM ) helps undertaking directors to mensurate project public presentation. It is a systematic undertaking direction procedure used to happen discrepancies in undertakings based on the comparing of worked performed and work planned. EVM is used on the cost and agenda control and can be really utile in undertaking prediction. The undertaking baseline is an indispensable constituent of EVM and serves as a mention point for all EVM related activities. EVM provides quantitative informations for undertaking determination devising. “ ( Dwivedi, n.

d. )Footings and constructs used in earned value directionEarned value direction is driven by 3 chief constructs. They are, harmonizing to ( Price, n.d. ) , range ( undertakings ) , agenda ( clip ) and budget ( cost ) . There are three chief prosodies used in earned value direction to find the success of a undertaking. Harmonizing to ( Marshall, 2007 ) , they are,1. Budgeted cost of work performed( BCWP or EV ) = Earned Value2.

Actual cost of work performed( ACWP or AC ) = Actual Cost3. Budgeted cost of work scheduled( BCWS or PV ) = Planned Value ” .Another metric that can be added to the primary prosodies of EVM is Budget at Completion ( BAC ) , which in bend gives out the entire cost of the undertaking. Formulas are available to find the primary informations sets that have been described above.

Planned Value ( PV ) , or the sum of work scheduled to be done as per the initial clip phased baseline can be calculated utilizing the expression of,PV=BAC*Percentage ( % ) of planned workEarned value ( EV ) , or the per centum of the original budget that has been earned because of the work that has been really completed, can be calculated utilizing the expression of,EV=BAC*Percentage ( % ) of existent workActual Cost ( AC ) , which can be calculated one time all the existent costs incurred are summed upUsing the above primary prosodies or informations points, a set of derived prosodies can be calculated.Cost Performance Index ( CPI ) can be defined as the ratio between EV and ACCPI=EV/ACIf CPI value is equal to 1, it indicates that the activity is on budgetIf CPI value is smaller than 1 ( CPI ; lt ; 1 ) , it indicates a cost overproductionIf CPI value is larger than 1 ( CPI ; gt ; 1 ) , it indicates a better than planned cost public presentationScheduled Performance Index ( SPI ) can be defined as the ratio between EV and PVSPI=EV/PVIf SPI is equal to 1, it indicates that the activity is on agendaIf SPI is smaller than 1 ( SPI ; lt ; 1 ) , it indicates a agenda overproductionIf SPI is larger than 1 ( SPI ; gt ; 1 ) , it indicates that the activity is in front of agendaScheduled Variance ( SV ) , indicates the difference between work performed and work scheduledSV = EV-PVCost Variance ( CV ) , indicates the difference between the sum of money that was really spent against the work that was really performedCV = EV-ACEstimate at Completion ( EAC ) , indicates the estimated cost that would be incurred to finish the undertakingEAC = BAC/CPIAdvantages and disadvantagesEarned value direction has become the preferable pick for most US authorities sections and bureaus when it comes to finding the effectivity and success of a given undertaking. However that does non intend it is without it flaws. First we shall analyze some advantages of earned value direction that help it earn such accolade amongst undertaking directors across the US. Harmonizing to ( Clayton, n.d. ) , earned value direction has four principal advantages that set it apart from the remainder of undertaking direction tools.A Single SystemPossibly the biggest benefit to implementing EVM is that it is a individual system that can track the undertaking in footings of work, clip and money ; Project directors do non hold to larn multiple systems.

EVM can mensurate the sum of work really completed ; calculate the cost and completion day of the month ; compare the existent public presentation of the undertaking versus the program ; and track the undertaking ‘s budget in existent clip.DiscrepancyDiscrepancy is an scrutiny used in EVM of what caused a difference between the projected baseline and the existent public presentation. This can be measured on three different degrees: estimated to planned, planned to existent and estimated to existent. The procedure for finding discrepancy depends on many factors including the industry, the parametric quantities used and criterions. Always verify the information when analysing discrepancy. It is critical to hold complete, accurate information when executing the computations. The difference discovered in computations can demo you how far off the undertaking is from “ normal. ” It can besides assist track down the root of the job.

Performance IndexsThe agenda public presentation index ( SPI ) and the cost public presentation index ( CPI ) are both advantageous tools in EVM. These prosodies can assist find the current position of the undertaking, be early warning signals if the undertaking goes off path and gauge the entire cost and clip frame. The SPI measures all of the work completed on the undertaking and cipher whether the undertaking will run into, crush or lose its planned finish day of the month. The CPI is considered by most undertaking directors to be the most valuable EVM metric. This measures cost efficiency for the work completed.

Simply put, it can state you if your undertaking is under or over budget at any point during the procedure.FlexibilityWhen the consequences of the prosodies used in EVM show that alterations are needed, the undertaking director can set the work or budget to assist convey the future public presentation of the undertaking back in line with projections. The prosodies can besides nail where any problems are within the undertaking. The undertaking director can so take preventative attempts to cut down the possibility of those problems happening once more. Most significantly, EVM allows for these alterations to be made in a flexible, timely mode at any point during the undertaking ‘s development and execution. ”Given the advantages it is clear why undertaking direction has such a high grade of trust from undertaking directors when mensurating public presentation of a undertaking. However as with most project direction tools it is non without its aggregation of mistakes.

One of its chief disadvantages is that it does non take quality in to consideration. Earned value direction tests whether the undertaking is under budget or if the work is in front of agenda, nevertheless the quality of the work that is being produced goes unbridled. Since quality is an of import facet of the overall merchandise, earned value direction does a lacklustre undertaking of maintaining a check on the overall quality. Harmonizing to ( Price, n.d. ) , quality is non the lone failing of earned value direction.

“ EVA uses the planned agenda and budget along with what has really occurred to develop three values that indicate the comparative wellness of a undertaking. These values are: Planned Value ( PV ) , which is the budgeted cost of undertakings that should be complete ; Earned Value ( EV ) , which is the entire budgeted cost of complete undertakings ; and Actual Cost ( AC ) , which is the entire expenditures to-date.Example: The undertaking budget is $ 100,000. Sixty per centum of the undertakings should be complete, so PV is $ 60.000. Merely 50 per centum of the undertakings are really complete, doing EV $ 50,000. AC is $ 65,000.

EVA DiscrepanciesEVA calculates two discrepancies: cost discrepancy ( CV ) = EV – AC, and agenda discrepancy ( SV ) = EV – PV.Using the values in Section 1, CV is minus $ 15,000. It has cost $ 65,000 to finish $ 50,000 of planned work. SV is minus $ 10,000. The undertaking is behind agenda by $ 10,000 worth of work.

EVA IndexesTwo indexes indicate the public presentation of the undertaking. Cost public presentation index ( CPI ) = EV/AC. Schedule public presentation index ( SPI ) = EV/PV. Using the information in Sections 1 and 2, CPI is 0.

77 and SPI is 0.83.If the indexes are equal to one, the undertaking is on schedule/on budget ; less than one, the undertaking is behind schedule/over budget ; and greater than one, the undertaking is in front of schedule/under budget.CPI IssuesOnce a undertaking is over/under budget, CPI remains basically the same for the balance of the undertaking, unless EV or AC alterations significantly. CPI is dependent on AC for truth.

If AC does non include all appropriate costs and payments, CPI can be undependable.SPI IssuesEVA can non state a critical undertaking from a noncritical undertaking. SPI may be misdirecting when an ahead-of-schedule noncritical undertaking overshadows a behind-schedule critical undertaking.

The SPI may bespeak a healthier undertaking than existent world.Why Not EVA?Undertaking directors give many grounds for non utilizing EVA, including disbursal to implement, requires EVA package, involves many others in many sections, divulges more information than desired and it is excessively complex.If the undertaking range, agenda or budget is unclear, its ends and results are obscure, the Work Breakdown Structure ( WBS ) is uncomplete, the AC aggregation system does non describe costs seasonably, direction exerts undue influence or distraction, or the clip to decently setup informations is non available, EVA may be a waste of clip.

”Earned value direction and its relevancy to project directionSince its origin earned value direction has had a specific involvement in the ability to pull off a undertaking efficaciously and expeditiously and to do maximal usage of the resources available to the undertaking director. By taking in to account cost/budget, agenda and range, it allows undertaking directors to do sound determinations when all affairs have been considered.It besides allows flexibleness to the direction to do extremist new determinations in instance some adverse and unexpected alterations occur to the range or any other of import metric. However the most of import facet of earned value direction can be considered as its ability to let direction to ever mensurate the success and effectivity of a undertaking at a given point of clip, therefore leting direction to do any alterations if any are required to airt the undertaking along the intended way, which is besides the position echoed by ( Kerby ; A ; Counts, n.d. ) .

EVM is a tool that integrates the cost, agenda and proficient demands of a undertaking. It requires subject in all facets of the undertaking ; it requires that the organisation executing the undertakings to be after the work and so to work to that program. Obviously, some jobs will happen that could non be predicted and hence will non be a portion of the initial program ; nevertheless, good planning does let a director to better extenuate those issues and concerns that are known.The usage of EVM besides helps the ndertaking director in finding the current undertaking position by replying inquiries such as: Are we on agenda? Are we on cost? Do the costs reflect the true achievements? What are our discrepancies? An added advantage of EVM is the designation of tendencies that helps a director better predict where the undertaking or a peculiar component is headed and a better method to set up a realistic Estimate At Completion ( EAC ) for the undertaking. In kernel, EVM gives forces more dependable information to do better direction determinations ”A non-profit organisation has commissioned Invictus Technologies to construct the organisation a web site in order to transport their message across to a wider audience. After dialogues, the organisation has agreed to a budget of $ 100,000 to finish the undertaking.

Invictus Technologies has agreed to manus over the merchandise to the non-profit organisation in 10 hebdomads. They have besides decided to follow Earn Value Management as its preferable undertaking direction tool to guarantee the undertaking is completed within the designated clip and within the pre-agreed to budget.The chief factors Invictus Technologies should see when earned value direction selected as the preferable undertaking direction tool are Scope, Schedule and Budget.

The three chief prosodies of earned value direction are Actual Cost, Earned Value and Planned Value.Calculations are listed below. The expression that will be used are, PV=BAC*Percentage ( % ) of planned work, EV=BAC*Percentage ( % ) of existent work.PV = BAC*Percentage ( % ) of planned workPV = $ 100,000*60 %PV = $ 60,000EV = BAC*Percentage ( % ) of existent workEV = $ 100,000*70 %EV = $ 70,000Scheduled Variance indicates the difference between work performed and work scheduled.SV = EV – PVSV = $ 70,000 – $ 60,000SV = $ 10,000Undertaking is in front by $ 10,000 ( 1 hebdomad ) .Cost Variance indicates the difference between the sum of money that was really spent against the work that was really performed.CV = EV – ActiniumCV = $ 70,000 – $ 75,000CV = – $ 5,000Undertaking has a Cost Overrun of $ 5,000.SPI = EV/PVSPI = $ 70,000/ $ 60,000SPI = +1.16Activity is in front of agenda.CPI = EV/ACCPI = $ 70,000/ $ 75,000CPI = 0.93Undertaking has a cost overproduction.Cost Estimate at CompletionEAC = BAC/CPIEAC = $ 100,000/0.93EAC = 107,526.88Cost Discrepancy at CompletionVAC = BAC – EACVAC = $ 100,000 – $ 107,526VAC = $ 7,526ETC = Original Estimated Duration/SPIETC = 10 Weeks/1.16ETC = 8.62 WeeksThe Undertaking will hold a cost overproduction of $ 7526 but will be completed 1.4 hebdomads in front of agenda.


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