|
Material costs can be recorded at various times. Material costs can be recorded as commitments, expenditures, accruals, and applied costs. All provide useful information and are important for control purposes. Because of the choices available for material cost analysis, material cost should be reported separately from the standard labor hour/labor dollar earned value report. For Example cost variances associated with the procurement of material may be determined at the time that the purchase orders are negotiated and placed with the vendors since this information provides the earliest visibility of the potential cost variance problems. Significant variances in the anticipated and actual costs of materials can have a serious effect on the total contract cost and should be reflected promptly in the estimated cost at completion (EAC) and explained in the narrative part of project status report.
Separating labor rom material cost is essential. Consider the following example given below
Example: - You are budgeted to spend $1,000,000 in burdened labor and $600,000 in material. At the end of first month your project the following information is made available to you:
Labor: ACWP = $90,000
BCWP = $100,000
BAC = $ 1,000,000
Material:
ACWP = $450,000
BCWP = $400,000
BAC = $600,000
For Simplicity’s sake let us use the following formula for EAC = (ACWP/ BCWP) * BAC
Therefore EAC (Labor) = $900,000
EAC (Material) = $675,000
If we add both EAC’s the estimated cost at completion will be $1,575,000 which is $25,000 below the planned budget and if the costs are combined before we calculate EAC then
EAC = [($450,000 + $90,000)/$500,000] * ($1,600,000) = $1,728,000 which is $ 128,000 overrun; therefore it is usually best to separate material from labor.
The Author Suresh .V. Menon is a Certified Master Black Belt and has also done 27 Projects in his career spanning 24 years in the IT industry; he can be contacted at sureshmenonr1009@gmail.com for comments and queries.
