A crucial part of running a business is ensuring a project is done within the projected timeframe. If a company fails to deliver within a specific timeframe, it will cost money and time. This is why variance analysis is done.
Variance analysis is a way to determine the degree to which the figures deviate from the projected figure. A variance will be low if the actual results are closer to the projected potential. The more the exact figure differs from the projected figure, the higher the variance.
Understanding the concept of variance will allow a business to quickly identify if a project will be successful or if it needs to be revised. In other words, it's an excellent way to measure the efficiency of a project. However, not many people realize its importance, so we'll shed light on the matter.
In this article, we'll discuss the basics of variance analysis. Read on below to get started.
Types of Variances
There are two primary types of variance analysis. These are:
Cost Variance
Cost variance measures how much the actual expenditure differs from the budgeted expenditure. You can calculate it as the difference between the actual cost of the project and the budgeted cost.
Think of it in the same way as revenue. Project revenues are the actual revenues you get minus the budgeted revenues. If the actual revenues are higher than the budgeted revenues, there is a positive cost variance. Alternatively, there's a negative cost variance if the actual revenues are lower than the budgeted revenues.
Schedule Variance
Schedule variance measures how much the actual project schedule differs from the project schedule. It measures how much the work is behind schedule, meaning the difference between the exact schedule and the project schedule. You can calculate it as the difference between the actual and budgeted schedules.
Let's say a project has an 8-week schedule. However, the project is behind schedule by three weeks. This project has an adverse schedule variance of 3 weeks. Ultimately, schedule variance is an excellent way to tell whether a project is on track or not.
The Difference between Cost and Schedule Variance
The difference between cost and schedule variance is that the former measures how much the project costs have deviated from the budgeted expenses. At the same time, the latter measures how much the project schedule has shifted from the projected schedule.
They both tell you how much the project is behind schedule, but they offer different insights into how much the project costs. In addition, they can also serve a different purpose in the business.
Calculating Cost Variance
To calculate the cost variance, you need to calculate the actual cost of the project, then subtract the budgeted cost of the project. If the result is positive, the project is within the projected cost. If the result is a negative number, the project is over-budgeted.
Additionally, the higher the result, the worse the variance is. If the result is a large number, it means a significant amount over budgets the project.
Calculating Schedule Variance
Unlike cost variance, schedule variance is a little more complicated to calculate. Ideally, you'll have to figure out the actual schedule of the project then subtract the project schedule. If the result is a positive number, the project is on schedule. If the result is a negative number, the project is behind schedule.
Additionally, the lower the result, the better the variance. If the result is a large number, the project is way behind schedule.
When to Apply Variance Analysis
Variance analysis is critical because it allows you to assess a project's progress quickly. It's imperative to apply variance analysis at the start of a project. This will enable you to evaluate the project's potential and determine if the project is likely to succeed or not.
Variance analysis is also recommended at the end of a project. This way, you'll be able to measure the effectiveness of the project, whether it's successful or not.
Conclusion
Variance analysis is a great way to assess the efficiency of a project. Additionally, it enables you to determine if a project is on track or not. With variance analysis, you can quickly make changes to ensure success.
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