Cost Variance Analysis in Project Management
You are managing a project that is 15% over budget at the midpoint. The earned value (EV) is $100,000, actual cost (AC) is $115,000, and planned value (PV) is $110,000. What is the most likely reason for the cost variance?
Quick Answer
The answer is that costs are higher than planned for the work performed. This is the most likely reason because cost variance analysis in project management compares earned value (EV) to actual cost (AC), and here AC of $115,000 exceeds EV of $100,000, producing a negative cost variance of -$15,000. Since the project is 15% over budget at the midpoint, the actual expenditures have outpaced the value of work completed, confirming a cost overrun rather than a schedule or scope issue. On the PMP exam, this scenario tests your ability to interpret EVM metrics and distinguish between cost variance (CV = EV - AC) and schedule variance (SV = EV - PV); a common trap is confusing a negative CV with being behind schedule, but here the schedule is also behind since EV is less than PV. A useful memory tip is to remember that cost variance is about the budget spent versus work done, so if AC is greater than EV, you are spending more for less—think “AC > EV = cost overdrive.”
Answer choices
Why each option matters
Answer the question above first, then reveal the full breakdown to understand why each option is right or wrong.
Correct answer & explanation
✓
Costs are higher than planned for the work performed
The cost variance (CV = EV - AC) is -$15,000, indicating a cost overrun. This means the actual cost to complete the work performed ($115,000) exceeded the earned value ($100,000), so costs are higher than planned for the work performed. Option B is incorrect because SV = EV - PV = -$10,000, meaning the project is behind schedule, not ahead. Option C is incorrect because AC > EV and AC > PV, so the project is over budget. Option D is less likely because a scope increase would typically increase EV if the additional scope is being performed, and the budget might be adjusted accordingly; the given data does not support scope increase as the primary cause.
Answer analysis
Option-by-option breakdown
For each option: why learners choose it and why it is or isn't the right answer here.
- ✓
Costs are higher than planned for the work performed
Why this is correct
AC > EV shows cost overrun.
- ✗
The project is ahead of schedule
Why it's wrong here
PV > EV indicates behind schedule.
- ✗
The project is under budget
Why it's wrong here
AC > EV shows over budget.
- ✗
The scope was increased without adjusting the budget
Why it's wrong here
Scope increase would likely increase EV proportionally.
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Same concept, more angles
2 more ways this is tested on PMP
These questions test the same concept from different angles. Work through them to make sure you can recognise it however the exam phrases it.
Variation 1. Your project is running 15% over budget at the midpoint. The cost variance is due to higher-than-expected material costs. What is the BEST action?
medium- A.Reduce the quality of deliverables to cut costs
- ✓ B.Analyze the variance and implement corrective actions such as reducing scope or using cheaper materials
- C.Request additional budget from the sponsor
- D.Inform the sponsor of the overrun and wait for instructions
Why B: The PM should analyze the variance, determine root cause, and develop corrective actions, then communicate to stakeholders.
Variation 2. You are managing a project that is running 15% over budget at the midpoint. The variance is due to higher-than-expected material costs. The sponsor is concerned about cost overruns. What should you do FIRST?
medium- A.Ask the team to find cheaper alternatives for materials immediately
- B.Reduce the project scope to bring costs back in line with the budget
- ✓ C.Analyze the cost variance to determine the root cause and update the EAC
- D.Request additional budget from the sponsor to cover the overrun
Why C: The PM should first analyze the root cause of the cost variance and determine if the trend is likely to continue. Based on this analysis, the PM can develop a revised estimate at completion (EAC) and communicate it to the sponsor. Simply asking for more budget or reducing scope without analysis is premature.
JA
Written by Johnson Ajibi, MSc IT Security
Senior Network & Security Engineer · founder of Courseiva
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