A For Dummies article whips up some juicy terminology to help project managers with planning their next project. Stick these terms in a formulaic blender and what you’ve got is an earned value management (EVM) smoothie:
The basic premise of earned value management (EVM) is that the value of a piece of work is equal to the amount of funds budgeted to complete it.
EVM is a function of schedule and cost performance, and these are just formalized words for wondering about things like, “How much will this project cost me as it continues?” All the ingredients (variables) that go into EVM’s mathematical blender will settle into three layers of analysis—planned value, earned value, and actual cost.
The “Three Layers” of EVM
Planned value captures the cost of the total approved budget at a project’s completion, the maximum allowable cost for the project. Earned value reflects the approved budget for work that was already done for the project, and actual cost is how much of the budget was spent for the work that was done:
Monitoring your project’s performance involves determining whether you’re on, ahead of, or behind schedule and on, under, or over budget. But just comparing your actual expenditures with your budget can’t tell you whether you’re on, under, or over budget — which is where EVM comes in.
Comparisons and Cost Efficiency
The real value of EVM is in its use of mathematical comparisons. These “secret ingredients” describe things like the difference between actual work expenditures and future planned expenditures (schedule variance) and the difference between the budgeted and actual cost of work (cost variance). The cost performance index (CPI) is used to determine a project’s cost efficiency, meaning the relative value of work compared to how much you paid for it.
Estimated at Completion (EAC)
One important final assessment is the estimate at completion, or EAC. The EAC will tell you what the total cost of the project will be based on current costs, and there are two approaches to calculating it. The first method regards a cost performance that will revert back to the original budget after a task is completed. The second method assumes a cost performance that remains the same after the completion of the task.
Read the original article at: http://www.dummies.com/how-to/content/earned-value-management-terms-and-formulas-for-pro.html