Cost Performance Index (CPI)

Cost Performance Index (CPI)

 

Definition –

According to the PMBOK Guide, “The Cost Performance Index (CPI) is a measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost.”

Cost Performance Index (CPI) gives us a measure of how much value is added for every dollar spent. It measures the value of the work completed for the amount of cost being spent on it.

Cost Performance Index (CPI) Formula –

The Cost Performance Index can be determined by dividing earned value by actual cost.

Cost Performance Index = (Earned Value) / (Actual Cost)

CPI = EV / AC

With the above formula, you can conclude that:

  • If the CPI is < 1 , you are over budget.
  • If the CPI is > 1,  you are under budget.
  • If the CPI is = 1, you can say that you are proceeding exactly as per the planned budget spending.

Sample Questions on Cost Performance Index (CPI)

1. You are the project manager for a public sector website application. The budget allocated for the project is 1,000,000 dollars to complete it by 10 months. After 6 months you have got the report that the project is 50% completed but 400,000 dollars has already been spent. Which of the following statements is right in this scenario?

           A) CPI is > 1 which is not good

           B) CPI is > 1 which is good

           C) CPI is < 1 which is not good

           D) CPI is < 1 which is good

           E) CPI is = 1 which is neither good nor bad

Correct Answer – According to the formula for Cost Performance Index – CPI = EV/AC

                               Here AC is Actual cost = 400,000 dollars

                               EV = 50% of 1,000,000 dollars = 500,000 dollars

                              CPI = (500,000) / (400,000) = 1.25

If CPI is greater than 1, we are under budget which is good. Option B is the right answer.

 

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