Detailed Definition
Planning variance is a critical concept in project management and financial analysis, referring to the difference between what was originally forecasted or planned and what was subsequently realized. This variance helps in identifying discrepancies between initial planning assumptions and actual performance, thereby offering insights into the accuracy and effectiveness of the planning process.
Components of Planning Variance:
- Cost Variance: The difference between the planned cost and the actual cost incurred.
- Time Variance: The difference between the planned timeline and the actual time taken.
- Output Variance: The difference between the planned deliverable outputs and the actual outputs achieved.
Examples
- Project Management: A software development project estimated to cost $100,000 and take six months to complete actually costs $120,000 and takes seven months. The cost and time variances are $20,000 and one month, respectively.
- Budgeting: A company’s annual sales were projected to be $1,000,000 but actual sales come in at $900,000. This results in a planning variance of $100,000 in revenue terms.
Frequently Asked Questions
Q: How is planning variance different from budgeting variance?
A: Planning variance typically focuses on the initial project estimates and their realizations, whereas budgeting variance may involve more detailed and periodic comparisons between budgeted and actual figures throughout different points in time.
Q: What causes planning variance?
A: Several factors can contribute to planning variance, including inaccurate initial assumptions, unexpected changes in scope, market conditions, resource availability, and unforeseen risks.
Q: How can planning variance be minimized?
A: Planning variance can be minimized by improving the accuracy of initial estimates, conducting thorough risk assessments, and continuously monitoring project progress to adjust plans as needed.
Revision Variance: This is the variance between revised forecasts and actual outcomes. It is used to measure the effectiveness of revised planning or forecasting methods.
Variance Analysis: A systematic approach to identifying and evaluating the reasons for differences between planned and actual performance.
Cost Variance (CV): A financial metric used in project management that represents the difference between the budgeted cost of work performed (BCWP) and the actual cost of work performed (ACWP).
Online References
- Investopedia on Variance Analysis
- Project Management Institute (PMI)
- Harvard Business Review on Project Management
Suggested Books for Further Studies
-
“Project Management Absolute Beginner’s Guide” by Greg Horine:
This book demystifies the core concepts of project management, including practical examples involving planning and budgeting.
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“Budgeting Basics and Beyond” by Jae K. Shim and Joel G. Siegel:
A comprehensive guide that covers various aspects of budgeting including variance analysis.
-
“Cost Accounting: A Managerial Emphasis” by Charles T. Horngren:
Covers detailed financial and managerial accounting concepts including the evaluation of planning variances.
Accounting Basics: “Planning Variance” Fundamentals Quiz
### What is planning variance?
- [ ] The difference between planned revenue and actual expenses.
- [x] The difference between what was originally forecasted and what was actually achieved.
- [ ] The sum of all project expenses.
- [ ] The difference between the highest and lowest project bids.
> **Explanation:** Planning variance refers to the difference between what was originally forecasted or planned and what was subsequently realized.
### Which type of variance focuses on differences between budgeted and actual figures throughout the project timeline?
- [ ] Planning variance
- [x] Budgeting variance
- [ ] Time variance
- [ ] Output variance
> **Explanation:** Budgeting variance involves more detailed and periodic comparisons between budgeted and actual figures throughout different points in time.
### What is a common cause of planning variance?
- [x] Inaccurate initial assumptions
- [ ] Consistent market conditions
- [ ] Fixed project scope
- [ ] Resource overabundance
> **Explanation:** Inaccurate initial assumptions are a common cause of planning variance, leading to discrepancies between planned and actual outcomes.
### What does cost variance measure?
- [ ] The difference between planned and actual timelines.
- [x] The difference between the budgeted cost of work performed and the actual cost of work performed.
- [ ] The difference between actual revenue and projected outputs.
- [ ] The total variance over a project's lifecycle.
> **Explanation:** Cost variance measures the difference between the budgeted cost of work performed and the actual cost of work performed.
### How can planning variance be minimized?
- [ ] By reducing project scope.
- [ ] By increasing project costs.
- [x] By improving the accuracy of initial estimates and conducting thorough risk assessments.
- [ ] By ignoring market conditions.
> **Explanation:** Planning variance can be minimized by improving the accuracy of initial estimates and conducting thorough risk assessments.
### What is the variance between revised forecasts and actual outcomes called?
- [ ] Cost variance
- [x] Revision variance
- [ ] Time variance
- [ ] Budget variance
> **Explanation:** Revision variance is the variance between revised forecasts and actual outcomes.
### Which organization is a prominent source for project management standards?
- [ ] IRS
- [ ] SEC
- [ ] NASA
- [x] Project Management Institute (PMI)
> **Explanation:** The Project Management Institute (PMI) is a leading source for project management standards.
### Why is planning variance significant for businesses?
- [x] It helps in identifying discrepancies and improving future planning processes.
- [ ] It directly increases revenue.
- [ ] It ensures zero risks.
- [ ] It removes the need for variance analysis.
> **Explanation:** Planning variance is significant because it helps identify discrepancies between initial plans and actual outcomes, improving future planning processes.
### What aspect does output variance measure?
- [ ] The cost difference between planned and actual figures.
- [x] The difference between planned deliverable outputs and actual outputs achieved.
- [ ] The time taken to complete a project.
- [ ] The level of risk involved in a project.
> **Explanation:** Output variance measures the difference between planned deliverable outputs and actual outputs achieved.
### In what context is the term "revision variance" used?
- [x] Measuring the effectiveness of revised planning or forecasting methods.
- [ ] Calculating tax liabilities.
- [ ] Improving human resource management.
- [ ] Reducing operational inefficiencies.
> **Explanation:** Revision variance is used to measure the effectiveness of revised planning or forecasting methods.
Thank you for exploring the intricacies of “Planning Variance” and enhancing your knowledge through our in-depth article and challenging quiz questions!
