Project variance analysis Standard costs
Project variance analysis
Standard costs
•
•
•
Absence in the construction industry
o Leads to lack of control
o Leads to inability to increase productivity
Approach
o How construction method should be accomplished
o How much construction method should cost
Advantages
o Allows comparison among alternative methods
o Permits effective analysis of cost data
o Emphasizes budget control
o Promotes cooperation between production and estimating staffs
Types of standard costs
•
Ideal
Represents level of performance achieved under best possible conditions
Maximum possible output at minimum possible cost
Practically unattainable
Normal
o Represents level of performance, in general, over complete business cycle
o Does not take into account economic effects within the cycle
o Deviations may represent economic effects
Expected
o Represents level of performance based upon current economic conditions
o Short-run: revised as necessary
o Deviations may represent inefficient operations
o Attainable
o
o
o
•
•
Material standards
•
Factors
Quantity of material to be used
Price or cost of the material
Determining quantity standards
o Average all past data
o Average best and worst performances
o Develop a range: determine probabilities of reaching various points within
the range and their corresponding risks and benefits
Determining cost standards
o Long-term purchase contracts
o Statistical forecasting
o Average of recent purchases
o
o
•
•
o
o
Median of recent purchases
Other cost estimating
Material variances
•
•
Usage variance results from using more or less materials than was anticipated due
to:
o Variations in material yield
o Variations in job-operation efficiency
o Variations in waste, spoilage, etc.
o Use of substitute materials
Price variance results from paying more or less for materials than was anticipated
due to:
o Unforeseen purchase contracts or terms
o Unforeseen market changes
o Unforeseen changes in delivery costs
o Unforeseen timing of material purchases
Material variance computation
Actual units
x
Actual price
Actual units
x
Standard price
Price variance
(fav, unf)
Standard units
x
Standard price
Usage variance
(fav, unf)
Total variance
(fav, unf)
Material variance example
•
Pouring a concrete slab
o Standard quantity = 190 cy
o Actual quantity = 200 cy
o Standard price = $70
o Actual price = $65
Actual units
x
Actual units
x
Standard units
x
Actual price
Standard price
Standard price
Price variance
Usage variance
Total variance
Labor standards
•
Factors
Quantity of labor to be used
Price or cost of the labor
Determining quantity standards
o Average past performances on similar work
o Make time-and-motion studies of various operations
o Use professional judgment
Determining cost standards
o Union contracts
o Average wage based upon a composite crew
o
o
•
•
Labor variances
•
•
Efficiency variance results from using more or less labor than was anticipated due
to:
o Variations in equipment support
o Variations in material flow
o Variations in working conditions
o Variations in economic climate
Rate variance results from paying more or less for labor than was anticipated due
to:
o Union contract changes
o Composite crew changes
Labor variance computation
Actual hours
x
Actual rate
Actual hours
x
Standard rate
Rate variance
(fav, unf)
Standard hours
x
Standard rate
Efficiency variance
(fav, unf)
Total variance
(fav, unf)
Labor variance example
•
Forming a concrete wall
o Standard efficiency = 0.025 hrs/sf
o Actual quantity = 70 hrs for 3000 sf
o Standard rate = $20/hr
o Actual rate = $21/hr
Actual hours
x
Actual rate
Actual hours
x
Standard hours
x
Standard rate
Standard rate
Rate variance
Efficiency variance
Total variance
Job (variable) OH standards
•
Factors
•
Quantity applied as a function of a base
Rate applied as a function of the same base
Determining standards
o Historical data
o Professional judgment
o
o
Job OH variances
•
•
Efficiency variance results from using more or less labor than was anticipated
Spending variance results from realizing higher or lower variable OH than was
anticipated
Job OH variance computation
Actual units
x
Actual rate
Actual units
x
Standard rate
Spending variance
(fav, unf)
Standard units
x
Standard rate
Efficiency variance
(fav, unf)
Total variance
(fav, unf)
Job OH variance example
•
Base is project labor hours
o Standard quantity = 1950 hrs
o Actual quantity = 2000 hrs
o Standard rate = $4/hr
o Actual OH = $8200
Actual units
x
Actual rate
Actual units
x
Standard units
x
Standard rate
Standard rate
Spending variance
Efficiency variance
Total variance
General (fixed) OH standards
•
Factors
•
Quantity applied as a function of a base
Rate applied as a function of the same base
Determining standards
o Historical data
o Professional judgment
o
o
General OH variances
•
•
Volume variance results from supporting more or less field labor than was
anticipated
Budget variance results from realizing higher or lower fixed OH than was
anticipated
General OH variance computation
Actual units
x
Actual rate
Standard units
x
Standard rate
Actual units
x
Standard rate
Budget variance
(fav, unf)
Volume variance
(fav, unf)
Total variance
(fav, unf)
General OH variance example
•
Base is monthly labor hours
o Standard quantity = 10,000 hrs
o Actual quantity = 12,000 hrs
o Standard OH = $50,000
o Actual OH = $62,000
Actual units
x
Standard units
x
Actual rate
Standard rate
Budget variance
Actual units
x
Standard rate
Volume variance
Total variance
Standard costs
•
•
•
Absence in the construction industry
o Leads to lack of control
o Leads to inability to increase productivity
Approach
o How construction method should be accomplished
o How much construction method should cost
Advantages
o Allows comparison among alternative methods
o Permits effective analysis of cost data
o Emphasizes budget control
o Promotes cooperation between production and estimating staffs
Types of standard costs
•
Ideal
Represents level of performance achieved under best possible conditions
Maximum possible output at minimum possible cost
Practically unattainable
Normal
o Represents level of performance, in general, over complete business cycle
o Does not take into account economic effects within the cycle
o Deviations may represent economic effects
Expected
o Represents level of performance based upon current economic conditions
o Short-run: revised as necessary
o Deviations may represent inefficient operations
o Attainable
o
o
o
•
•
Material standards
•
Factors
Quantity of material to be used
Price or cost of the material
Determining quantity standards
o Average all past data
o Average best and worst performances
o Develop a range: determine probabilities of reaching various points within
the range and their corresponding risks and benefits
Determining cost standards
o Long-term purchase contracts
o Statistical forecasting
o Average of recent purchases
o
o
•
•
o
o
Median of recent purchases
Other cost estimating
Material variances
•
•
Usage variance results from using more or less materials than was anticipated due
to:
o Variations in material yield
o Variations in job-operation efficiency
o Variations in waste, spoilage, etc.
o Use of substitute materials
Price variance results from paying more or less for materials than was anticipated
due to:
o Unforeseen purchase contracts or terms
o Unforeseen market changes
o Unforeseen changes in delivery costs
o Unforeseen timing of material purchases
Material variance computation
Actual units
x
Actual price
Actual units
x
Standard price
Price variance
(fav, unf)
Standard units
x
Standard price
Usage variance
(fav, unf)
Total variance
(fav, unf)
Material variance example
•
Pouring a concrete slab
o Standard quantity = 190 cy
o Actual quantity = 200 cy
o Standard price = $70
o Actual price = $65
Actual units
x
Actual units
x
Standard units
x
Actual price
Standard price
Standard price
Price variance
Usage variance
Total variance
Labor standards
•
Factors
Quantity of labor to be used
Price or cost of the labor
Determining quantity standards
o Average past performances on similar work
o Make time-and-motion studies of various operations
o Use professional judgment
Determining cost standards
o Union contracts
o Average wage based upon a composite crew
o
o
•
•
Labor variances
•
•
Efficiency variance results from using more or less labor than was anticipated due
to:
o Variations in equipment support
o Variations in material flow
o Variations in working conditions
o Variations in economic climate
Rate variance results from paying more or less for labor than was anticipated due
to:
o Union contract changes
o Composite crew changes
Labor variance computation
Actual hours
x
Actual rate
Actual hours
x
Standard rate
Rate variance
(fav, unf)
Standard hours
x
Standard rate
Efficiency variance
(fav, unf)
Total variance
(fav, unf)
Labor variance example
•
Forming a concrete wall
o Standard efficiency = 0.025 hrs/sf
o Actual quantity = 70 hrs for 3000 sf
o Standard rate = $20/hr
o Actual rate = $21/hr
Actual hours
x
Actual rate
Actual hours
x
Standard hours
x
Standard rate
Standard rate
Rate variance
Efficiency variance
Total variance
Job (variable) OH standards
•
Factors
•
Quantity applied as a function of a base
Rate applied as a function of the same base
Determining standards
o Historical data
o Professional judgment
o
o
Job OH variances
•
•
Efficiency variance results from using more or less labor than was anticipated
Spending variance results from realizing higher or lower variable OH than was
anticipated
Job OH variance computation
Actual units
x
Actual rate
Actual units
x
Standard rate
Spending variance
(fav, unf)
Standard units
x
Standard rate
Efficiency variance
(fav, unf)
Total variance
(fav, unf)
Job OH variance example
•
Base is project labor hours
o Standard quantity = 1950 hrs
o Actual quantity = 2000 hrs
o Standard rate = $4/hr
o Actual OH = $8200
Actual units
x
Actual rate
Actual units
x
Standard units
x
Standard rate
Standard rate
Spending variance
Efficiency variance
Total variance
General (fixed) OH standards
•
Factors
•
Quantity applied as a function of a base
Rate applied as a function of the same base
Determining standards
o Historical data
o Professional judgment
o
o
General OH variances
•
•
Volume variance results from supporting more or less field labor than was
anticipated
Budget variance results from realizing higher or lower fixed OH than was
anticipated
General OH variance computation
Actual units
x
Actual rate
Standard units
x
Standard rate
Actual units
x
Standard rate
Budget variance
(fav, unf)
Volume variance
(fav, unf)
Total variance
(fav, unf)
General OH variance example
•
Base is monthly labor hours
o Standard quantity = 10,000 hrs
o Actual quantity = 12,000 hrs
o Standard OH = $50,000
o Actual OH = $62,000
Actual units
x
Standard units
x
Actual rate
Standard rate
Budget variance
Actual units
x
Standard rate
Volume variance
Total variance