Process Earned Value
Business Process Management Uses Process Earned Value
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What is Earned Value, Earned Value Calculation, Benefits, Reporting ? SiteMap

James Brimson in his book "The Handbook of Process-based Accounting, Leveraging Processes to Predict Results published by American Institute of Certified Public Accountants, page 84says:

  • "Earned Value is monetary value at a standard resource consumption rate needed to complete a unit of output.
"For all primary activities, earned value is computed by multiplying actual work accomplished by the process standard. "

A primary process is one that has output provided to another department or external customer. The opposite of a primary process is a secondary process where the process output is provided internal to the cost center or department. For example, management department would be a secondary process.

A process standard consists of all identifiable resources that are required to produce one unit of process output.

So an easy example would be to think of a restaurant. When you order one pizza the resources are so much flour, so much tomato sauce, so much cheese, so much oven time, a platter for pizza, cooks time, gas for oven, etc.  All processes can have a standard.

If people's time and equipment time is not fully used, then those unused resources are put into unused capacity.  Once you see how much resources are in unused capacity, you can decide to:

  • sell off unused capacity
  • use part time staff as they do in a call center
  • make additional sales to utilize that unused capacity

Earned Value Reporting

Earned Value Reporting shows how much value for the reporting period was earned. So lets take a simple example. Assume the following expenses for a one person accounts payable cost center of $15 per hour or $30,000 per year.
  • accounts payable clerk earns $10 per hour based on working 2,000 hour per year
  • desk, phone, computer, office space, and supplies come to $5 per hour

So if the clerk processes: 1,700 accounts payable invoices @ 1 hour per invoice, then this cost center earned 1,600 hours.

1,600 earned hours times $15/hour equals earned value of $24,000

400 unearned hours times $15/hour equals unearned value of $6,000

This is not the clerks fault necessarily that she processed less invoices if less invoices came in to be paid. The more important questions are:

  • What did the clerk do to add value to the organization during those 300 earned hours?
  • Did the clerk process the invoices accurately and pay them on time?
  • Did the clerk process the invoices in one hour on average?

Earned value reporting is a very powerful tool and provides much more useful information than reporting department expenses.

Calculating Earned Value Variance

Continuing our example let's now look at Calculating Earned Value Variance: Lets assume that the clerk still processes 1,600 invoices, but it takes the clerk 1.25 hours.

In this example, we would say:

Earned value: 1,600 invoices @ 1 hour per invoice equals 1,600 hours earned @$15/hour equals $24,000

Actual Cost: actual hours worked on invoices 1,700 hours @$15/hour equals Actual Cost of $25,500

Earned value variance:

Earned Value:                  $24,000
Actual Cost:                      $25,500
Earned Value Variance: $ 1,500

Unused Capacity              $4,500 (300 hours times $15/hour )

Earned Value Benefits:

  1. Understand unused capacity and can take action to see how best to use this capacity
  2. Understand how much of total variance was due to volume rather than inefficiency

Call John Antos, Jim Brimson or Pat Dowdle at 972-980-7407 to find out more about Earned Value Reporting and Benefits.

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