Cost Variance Reporting
Cost variance reporting is the calculation and reporting of costs that are different than what was expected by the budget or standard.
When to Use Cost Variance Reporting
Most businesses provide a monthly cost report for each department that will include variances from the OpPlan. Some companies also provide a monthly cost report for projects that show the variances from the project budget baseline.
Monthly cost reports are generated by finance that indicate how much money was spent in a department or on a project. The report will typically show how much was spent in the preceding month and how much has been spent since the beginning of the year or project. These reports will often include a planned or standard amount that the actual costs can be compared to. When these are compared, the difference is the cost variance.
- The standard for a department cost report is normally the OpPlan, although occasionally the standard will be the previous year’s costs.
- The standard for projects is the project budget baseline.
- Variances are reported in two ways: 1) the current period (month) variance which is the variance that occurred in that month, and 2) the cumulative variance which is the variance that has occurred since the fiscal year or project start.
- The current period variance is helpful to understand current issues and problems. However, it is very susceptible to timing issues since if a cost occurs the day before or the day after the period in which it was scheduled, it will show as a current period variance.
- The cumulative variance will help to identify trends because it minimizes the effects of timing issues. However it is not good for identifying recent problems because the long term effects will outweigh the near term effects.
- There are always minor variances. Variance reporting starts when the variance exceeds thresholds that are usually set at either an absolute value or a percentage of the costs.
- When a variance occurs, there are three potential causes. The actual cause could be a combination of these.
- Timing – the variance occurred because a cost happened in a different month than expected. This variance will disappear over time.
- The amount of work – this variance occurs because the assumed activity that was in the plan was in error. The actual activity that is needed is higher or lower and therefore an overrun or underrun will occur.
- The cost of the resource – this variance occurs when the cost of the resource is different than the assumed cost in the plan. For instance you planned to have your most senior person do the work, and instead you used a summer intern. This could create an overrun or underrun.
- Beware, sometimes the potential causes will cancel each other out in a given period. This is OK for that period, but if one of the causes was timing, it will eventually be reconciled and then the other variances will be evident.
Hints and Tips
- Most variances are a combination of effects so check each potential type of variance.
- A variance is not necessarily bad; it just means that it is different than planned. Analyse and understand the variance to determine its impact.
- Beware of underruns, they are sometimes due to optimistic “underwork” and that activity will need to be re-accomplished at some later time – potentially causing an overrun.
- Don’t get too deep or too shallow in your variance reporting. Report what happened at a level that is appropriate for whoever reads the variance reports.
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