Actual cost

Actual cost
See also

Actual cost (value) is an accounting term that means the amount that was paid to buy a product (that is, the cost of the product based on the cost of materials, labor required to produce it and the costs to deliver) or an asset. This value can be the historical, past or current value of the product.

Actual Cost in project management

Is the total cost, to-date, spent on the finished project work[1][2]:

  • Overview of actual cost in project management. Contrary to the type of organization, projects are still expensive to implement. The cost of the project varies depending on the mustu factors, e.g. deadlines, project size, capabilities, complexity, human and physical resources. Usually, as a project manager, your responsibilities include budgeting, keeping an eye on project expenditure against the budget, and taking into account periodic reports of actual project costs.
  • Definition of actual cost in project management. The Knowledge Base of the Project Management Body (PMBOK guide) defines the actual cost as any work done by you and your team in the project, as well as all costs (direct and indirect) incurred for the project in a given period.
  • Formula of actual cost in project management. The formula for real cost is: real cost = sunken costs + indirect costs + fixed costs + direct costs + variable costs. As you can see, the actual cost consists of several types of project costs, which are:
  1. Sunk costs: the costs have been incurred, there is always a very high probability of errors and mistakes as well as mistakes or changes in scope during. However, this cost should be taken into account in the total final cost of the project.
  2. Direct costs: the costs directly related to your projects are obvious and generally easy to verify; fixed and variable costs are examples of direct costs.
  3. Variable costs: costs that change during the project, for example, hours for the project designer may be higher at the beginning of the project, and then the architect may collapse, the project during the project.
  4. Fixed costs: costs that are unchanged throughout the project, such as the cost of renting equipment.
  5. Indirect costs: costs related to the implementation of projects are usually calculated and are not as light to sum up as administrative services.

Example

"For example, a financial organization decided to develop a risk management software to monitor stock trades for all stocks trading on the American Stock Exchange; the estimated project duration was 10 months. In the 3rd month, the client learned the software included monitoring the S&P 500 Exchange, based on an assumption made by one of the developers, and the client requested the project manager to remove the S&P 500 Exchange, because it was out of scope (that is, it was not included in the original scope). At the end of the 4th month, the project sponsor requested to know the actual cost of the project." Below is the actual cost of the project as of the end of the 4th month[3]:

  • Variable Costs (project teams' hours -$1000) + Indirect Costs (utilities expense - $2500) + Fixed Costs(computer server rental and monthly cloud rental free - $3500) + Direct Costs (monthly software license free - $5000) + Sunken Costs (S&P 500 Exchange/unauthorized scope change - $9000) = Actual Cost (at the end of the 4-th month - $21000).

Footnotes

  1. Corrson S.V., Belverd E. Needles, (2011), Managerial Accouting, Santa Fe Collage/DePaul Uniwersyti, Manson, p.72
  2. Drury C., (2008), Management and Cost Accounting, Uniwersyti of Huddersfield, Huddersfield, p.65
  3. Brown A., (2019), Actual Cost in Project Management: Definition & Formula

References

Author: Andrii Poliman