Planned cost is the estimated cost of a particular product. It is determined based on historical data of that product before the manufacturing of the particular product.
It includes the components like direct raw material charge and direct labor charge.
Planned cost principles
While estimating the cost you need to follow certain principles. They are listed below
- Must know industry and market well: It is very important to understand the product industry which you are going to estimate and simultaneously you must have the knowledge about the market value of that product.
- Understand the estimating techniques: To increase the accuracy of estimation, understand the different estimating techniques such as plus-minus tolerance, bottom-up, top-down, etc and choose the right one for your business.
- Use the suitable tools: Estimating tools help you to improve the accuracy by 30%.
- Study the historical data and management review: They allow you to cross-check your estimation and help to reach the business standards.
Difference between planned cost(PC) and actual cost(AC)
Before talking about the difference we must know what is the actual cost is. The actual cost is the amount spent on a product for its production.
This includes factors such as labor costs, delivery charges, and indirect expenses.
- PC determines before the production of a particular product, whereas AC determines after the production of that particular product
- PC calculation includes only direct costs like labor costs and raw material costs, but AC calculation includes direct costs, indirect costs, fixed costs, variable costs, and sunken costs
- PC is an assumption, but AC is the exact amount spent
Earned value management system
It is a measuring process for a project at any given point of time, integrated with cost baseline and schedule baseline.
Earned value management system contains 3 elements. They are Planned value, earned value, and actual cost.
- Planned value: It is the cost or budget reserved to complete the work in a given time. It is also called as Budgeted Cost for Work Scheduled (BCWS)
- Earned value: It is the value of completed tasks to date. It is also called as Budgeted Cost of Work Performed (BCWP)
- Actual cost: It is the total cost that you have spent on a project or work. It is also called as Actual Cost of Work Performed (ACWP)
If the actual cost is less than the planned cost, then it is called favorable or positive variance, If the actual cost is greater, then it is called unfavorable or negative variance.
What is the difference between planned cost and budget?
Budget is the amount of money readily at hand to spend on products or projects over a period of time. Generally, the budget is set by the customer.
But the planned cost is the estimated cost to produce the final product or complete a project. It is estimated by the manufacturer or vendor.
Get more definitions about Planned cost and other ERP-related terms here.