Running head: PRINCIPLES OF COST MANAGEMENT 1 Principlesof Cost ManagementNameInstitution
By definition, profit refers to revenue less expenses. To increaseprofit, an entity can decrease expenses, increase revenue or can doboth. Life cycle costing permits an entity to have a big-picture viewof the total costs of a given project throughout its whole lifecycle. This enables an entity to come up with an accurate projectionof the required financial benefits and costs of t project. Tangiblecosts or benefits refers to the costs or benefits which an entity canmeasure easily in terms of dollars. On the other hand, intangiblebenefits or costs are those benefits or costs which an entity cannotmeasure easily in monetary terms. Direct costs refer to the coststhat can be related directly to the process of producing the productsand services from a given project. On the other hand, indirect costsrefer to those costs that are not related directly to the products orservices of a given project, but they are related indirectly to theexecution of the project (Drury, 2013).
Earned Value Management
CV = EV – AC
= $20, 000 – $25, 000
SV = EV – PV
= $20, 000 – $23, 000
= – $3000
Cost performance index (CPI)
CPI = EV ÷ AC
= $20, 000 / $25, 000
Schedule performance Index (SPI)
SPI = EV ÷ PV
= $20, 000 / $23, 000
The project is behind the schedule and is over the budget. It is doing poorly.
Estimate at completion EAC
EAC = AC + (BAC − EV) ⁄ CPI
= $25, 000 + ($120, 000 – $20, 000) / 0.8
= $150, 000
Project is performing poorly than planned
The project will take 12% of the scheduled time to completion.
Drury, C. M.(2013). Managementand cost accounting.Springer.