## Info

BAC =

\$600,000

For simplicity's sake, let us use the following formula for EAC:

Therefore,

If we add together both EACs, the estimated cost at completion will be \$1,575,000, which is \$25,000 below the planned budget. If the costs are combined before we calculate EAC, then

EAC = [(\$450,000 + \$90,000)/\$500,000] X (\$1,600,000) = \$1,728,000

which is a \$128,000 overrun. Therefore, it is usually best to separate material from labor in status reporting.

Another major problem is how to account for the costs of material placed on order, which does not reflect the cost of work completed and is not normally used in status reporting. For performance measurement purposes, it is desirable that material costs be recorded at the time that the materials are received, paid for, or used rather than as of the time that they are ordered. Therefore, the actual costs reported for materials should be derived in accordance with established procedures, and normally will be recorded for earned value measurement purposes at or after time of material receipt. In addition, costs should always be recorded on the same basis as budgets are prepared in order to make comparisons between budgeted and actual costs meaningful. For example, material should not be budgeted on the basis of when it is used and then have its costs collected/reported on the basis of when it is received. Consider the following situations:

Situation I: An equipment manufacturer receives a contract to build five machines for the same customer, but each machine is slightly different. The manufacturer purchases and receives five of the same electric motors, one for each machine. What is the earliest time that the manufacturer should take credit for the electric motors?

a. When ordered b. When received c. When paid for d. When withdrawn from inventory e. When installed

Situation II: The same manufacturer has purchased large quantities of steel plate for the five machines as well as for machines for other customers. By ordering in large quantities, the manufacturer received a substantial price break. What is the earliest time the manufacturer should take credit for the steel plate?

a. When ordered b. When received c. When paid for d. When withdrawn from inventory e. When installed

Situation III: Assume that the manufacturer in Situation II purchases the steel plate for a single customer rather than for multiple customers. What is the earliest time the manufacturer should take credit for the steel plate?

a. When ordered b. When paid for c. When received d. When applied

In Situations I and III, the recommended answer is "when received." In Situation II, any answer can be argued, but the preferred answer is "when installed."

The Material Accounting Criterion

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