Strategic Management Accounting · Module 4: Project management
Four Forecasts, One Project
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Chapters
- 0:00Question
- 0:32Breakdown
- 1:26Rule
In short
Earned value management forecasts a project's final cost from its performance to date. When cost efficiency is expected to continue, estimate at completion = budget at completion ÷ CPI, where CPI = earned value ÷ actual cost. With a $1,200,000 budget, $480,000 earned and $540,000 spent, the estimate is $1,350,000.
- CPI = EV ÷ AC; SPI = EV ÷ PV.
- Efficiency continues: EAC = BAC ÷ CPI.
- One-off overrun: EAC = AC + (BAC − EV).
Transcript
0:00Question
Four forecasts for one project. Only one matches the assumption in the question. Lilly Pilly Health is fitting out a clinic on a budget of $1.2 million. So far it has done $480,000 of work, and spent $540,000 doing it. And the cost efficiency so far is expected to continue. What's the estimate at completion? Pick one.
0:32Breakdown
Earned value asks one thing first: how much work did each dollar buy? $480,000 of work for $540,000 spent. That's a cost index of about 0.89. If that efficiency continues, the whole budget stretches by the same ratio. $1.2 million, times 540 over 480: $1.35 million. A adds the gap between spending and the plan. That mixes cost with schedule. Cross out A. B divides by the schedule index, not the cost index. Cross out B. C finishes the rest on budget, as if the overrun stops today. Cross out C. D, $1.35 million.
1:26Rule
Read the assumption first. Efficiency continues? Divide by CPI. A one-off overrun? Actual cost, plus the budget for the work left. Want more traps like this? Follow for the next one.
Try a question on this lesson
From the EstatePass Strategic Management Accounting bank. Answer it, then read the explanation.
Lilly Pilly Health Ltd is fitting out a clinic with a budget at completion of $1,200,000. At the review date, planned value is $500,000, earned value is $480,000 and actual cost is $540,000. The project manager expects the cost efficiency achieved to date to continue for all remaining work. What is the estimate at completion?
Sources
- PMI, Practice Standard for Earned Value Management
- CPA question bank: cpa-sma-0411
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