Price Vs. Usage Variance Analysis

Price vs. Usage Variance AnalysisAugust 2013

NAVY CEVM

#Welcome CEVM training on Price Vs. Usage AnalysisOutlinePrice vs. Usage Analysis ConceptPrice vs. Usage Analysis formulas for both labor and materialLabor Price vs. Usage exampleMaterial Price vs. Usage example

#In this session, well briefly discuss the concept of Price versus Usage Analysis and go over the formulas for analyzing both Labor and Material.

Well then demonstrate the analysis concept with three labor variance examples and three material variance examples.2Price vs Usage ConceptFor every variance, there is a price component and a usage componentLabor variances are driven by hours, labor rates, or bothMaterial variances are driven by units, unit cost, or bothFor both labor and material, understanding the relative contribution of price versus usage helps to:Validate the technical explanation in variance analysis reportingEnsures that management attention and corrective action are properly focused

#For every incurred variance, there is a price component and a usage component. For labor, the variance is either driven by the number of hours, or by the labor rates of the individuals performing the effort. In the case of material, its either the number of units or lots, or its the per unit (or per lot) cost.

Understanding the extent of price vs. usage components of the variance can play an important part in assessing the situation and taking corrective action.3Price vs Usage Variance Formulas* Material price vs. usage analysis can be performed at the unit level for high value material or at a higher level for bundled low value material purchases

#Listed here are the Price vs. Usage variance formulas for labor and material.

For labor, the usage variance is calculated by multiplying the budgeted labor rate times the difference between the budgeted and actual hours.The labor price variance is calculated by multiplying the actual hours times the difference between the budgeted and actual labor rates.

For material, the usage variance is calculated by multiplying the budgeted unit/lot cost times the difference between the budgeted and actual number of units/lots.The material price variance is calculated by multiplying the actual units/lots times the difference between the budgeted and actual unit/lot costs.

Material price vs. usage analysis can be performed at the unit level for high value material or at a higher level (lot) for low value material purchases4Scenario 1 Correct hours estimate, but more expensive labor grade requiredUsage Variance = (100 hrs 100 hrs) * $80/hr = $0Price Variance = ($80/hr $100/hr) * 100 hrs = ($2,000)

Scenario 2 Additional hours required, but performing labor grade correctUsage Variance = (100 hrs 125 hrs) * $80/hr = ($2,000)Price Variance = ($80/hr $80/hr) * 100 hrs = $0

Scenario 3 Additional hours required, more expensive labor grade requiredUsage Variance = (100 hrs 110 hrs) * $80/hr = ($800)Price Variance = ($80/hr $90.91/hr) * 110 hrs = ($1200)

Labor Price Vs. Usage ExampleHoursRate ($/Hr)Total CostNet VarianceBaseline all scenarios10080$8,000N/AACWP - scenario 1100100$10,000($2,000)ACWP - scenario 212580$10,000($2,000)ACWP - scenario 311090.91$10,000($2,000)

#On this chart, well apply the labor formulas to determine the price vs. usage variance for three different scenarios.For each scenario, the baseline is represented by the gray row in the table.

In the first scenario, there was no difference between budgeted and actual hours, but the actual labor rate shows that a more expensive labor grade was used to perform the effort. Given no difference between the budgeted and actual hours, the usage variance is zero; however, the $20 difference between the budgeted and actual rates resulted in a $2,000 price variance.

In the second scenario, ACWP hours exceeded the budget by 25 hours, but the actual labor rate was consistent with the budgeted rate. The additional 25 hours multiplied by the $80/hr labor rate resulted in a $2,000 usage variance; however, given no difference in rates, there was no price variance.

In the third scenario, both the actual hours and actual labor rates exceeded their corresponding budgeted values. Ten additional hours multiplied by the $80/hr budgeted rate resulted in an $800 usage variance. At the same time, the incurred rate delta of $10.91/hr multiplied by the 110 incurred hours resulted in $1,200 of price variance. Between the two, that fully explains the $2,000 net variance for this scenario.

Here we demonstrated three scenarios with the exact same net cost variance. Based upon the price vs. usage aspects of the different scenarios, you can imagine the corrective action plans might need to be quite different as well.5Scenario 1 additional parts required due to damage, prices increasedUsage Variance = (18 units 20 units) * $2,000/unit = ($4,000)Price Variance = ($2,000/unit $2,050/unit) * 20 units = ($1,000)

Scenario 2 reduced part usage (less loss than anticipated), price droppedUsage Variance = (18 units 17 units) * $2,000/unit = $2,000Price Variance = ($2,000/unit - $1,960/unit) * 17 units = $680

Scenario 3 alternate vendor with a higher minimum buy, but lower unit costUsage Variance = (18 units 25 units) * $2,000/unit = ($14,000) Price Variance = ($2,000/unit - $1,400/unit) * 25 units = $15,000

Material Price Vs. Usage ExampleUnitsPer Unit CostTotal CostNet VarianceBaseline all scenarios182,000$36,000N/AACWP - scenario 1202,050$41,000($5,000)ACWP - scenario 2171,960$33,320$2,680ACWP - scenario 3251,400$35,000$1,000

#On this chart, well apply the material formulas to determine the price vs. usage variance for three different scenarios.Just like the last chart, the baseline is represented by the gray row in the table.

In the first scenario, two additional material units were required, and the per unit cost went up $50 relative to the baseline. Given two additional units multiplied by the $2,000/unit baseline cost, the usage variance is $4,000. Multiplying the $50/unit cost increase times the 20 actual units, we can calculate a $1,000 price variance. Summing the two, we reconcile to the $5,000 net variance.

In the second scenario, the contractor was able to complete the effort using 17 of the 18 budgeted units, resulting in a favorable $2,000 usage variance. On top of that, the actual per unit cost came down by $40. Multiplying the unit cost delta times the 17 actual units, we get a $680 price variance. Summing the two, we reconcile to the $2,680 favorable net variance.

In the third scenario, by identifying an alternate source, the contractor was able to obtain the parts at an actual per unit cost a full $600 lower than the baseline per unit cost. In order to do so, they committed to a minimum buy that exceeded the baseline by 7 parts. Multiplying the 7 additional parts times the baseline rate yields an unfavorable $14,000 usage variance. Fortunately, this was more than offset by a favorable price variance of $15,000 which can be calculated by multiplying the $600 per unit cost delta by the 25 actual units purchased. Summing the two, that reconciles with the $1,000 favorable net variance.

6Point of ContactNavy Center for Earned Value Management

(703) 695-0510

http://acquisition.navy.mil/acquisition_one_source/cevm

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