Chapter 7 - Project Cost Management

List and briefly describe the four project cost management processes.

(1) Planning cost management involves determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost. The main output of this process is a cost management plan. (2) Estimating costs involves developing an approximation or estimate of the costs of the resources needed to complete a project. The main outputs of the cost estimating process are activity cost estimates, basis of estimates, and project document updates. (3) Determining the budget involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. The main outputs of the cost budgeting process are a cost baseline, project funding requirements, and project document updates. (4) Controlling costs involves controlling changes to the project budget. The main outputs of the cost control process are work performance information, cost forecasts, change requests, project management plan updates, project documents updates, and organizational process assets updates.

A negative schedule variance means that it took less time than planned to perform the work.

False

Analogous estimates are called activity-based costing.

False

Overrun is the additional percentage amount by which estimates exceed actual costs.

False

The primary output of the planning cost management process is a change request.

False

When deciding what projects to invest in or continue, one should include sunk costs.

False

A cost management plan can include organizational procedures links, control thresholds, and process descriptions.

True

A schedule performance index of one means that the project is on schedule.

True

Budgetary estimates are made even before a project is officially started.

True

Definitive estimates are made one year or less prior to project completion.

True

Determining the budget involves allocating the project cost estimate to individual work items over time.

True

Estimates should become more accurate as time progresses.

True

IT project managers must be able to present and discuss project information both in financial and technical terms.

True

If an important supplier goes out of business, management reserves can be set aside to cover the resulting costs.

True

In a bottom-up estimate, the size of the individual work items is one of the factors that drives the accuracy of the estimates.

True

Supporting details for an estimate include the ground rules and assumptions used in creating the estimate.

True

Which statement is true of contingency reserves? a. They allow for future situations that can be partially planned for. b. They are also known as unknown unknowns. c. They are not included in a cost baseline. d. They allow for dollar amounts to be used to cover existing, fixed costs.

a. They allow for future situations that can be partially planned for.

What type of estimate is a cost estimation tool used to allocate money into an organization's budget? a. budgetary b. definitive c. rough order of magnitude d. ballpark

a. budgetary

The main goal of which process is to produce a cost baseline for measuring project performance and project funding requirements? a. cost budgeting b. cost planning c. cost controlling d. cost estimating

a. cost budgeting

Which process involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance? a. determining the budget b. finalizing policies for project costs c. controlling costs d. estimating costs

a. determining the budget

Newtech Inc. hires John for the position of a software programmer to work on their new project. Salary paid to John by Newtech Inc. would be an example of which type of costs? a. direct b. indirect c. sunk d. intangible

a. direct

Variances are calculated by subtracting the actual cost from which value? a. earned value b. schedule variance c. planned value d. rate of performance

a. earned value

Which statement best defines schedule variance? a. earned value minus the planned value b. earned value minus the actual cost c. planned value plus the earned value d. planned value plus the rate of performance

a. earned value minus the planned value

Which method is used for determining the estimated annual costs and benefits for a project? a. Critical path analysis b. Cash flow analysis c. Present value analysis d. Requirements analysis

b. Cash flow analysis

Which statement is true of a order of magnitude estimate? a. It is used to allocate money into an organization's budget. b. It provides an estimate of what a project will cost. c. Its timeframe is always less than a year prior to project completion. d. It is a type of estimate that is done in the final stages of a project.

b. It provides an estimate of what a project will cost.

Which reserves allow for future situations that are unpredictable? a. Contingency reserves b. Management reserves c. Known unknowns d. Cost baseline reserves

b. Management reserves

Which is most likely to be a reason for inaccuracies in information technology cost estimates? a. Estimates take a long time to be worked out. b. People lack estimating experience. c. Human beings are biased toward overestimation. d. Only software development provides the scope for estimates to be accurate.

b. People lack estimating experience.

Which statement is true of tangible costs? a. They cannot be calculated in monetary terms. b. They can be easily measured. c. They are difficult to quantify. d. Their examples include goodwill and prestige.

b. They can be easily measured.

What type of estimate is used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs? a. budgetary b. definitive c. rough order of magnitude d. final

b. definitive

Which type of estimate should be used if the cost estimate for a project is used a basis for contract awards and performance reporting? a. budgetary b. definitive c. rough order of magnitude d. analogous

b. definitive

Which statement best defines cost variance? a. planned value plus actual costs b. earned value minus the actual cost c. rate of performance minus earned value d. planned value minus the rate of performance

b. earned value minus the actual cost

What is the purpose of a cost performance index (CPI)? a. indicate that a project is under budget if CPI is less than one b. estimate the projected cost of completing the project c. indicate that the planned and actual costs are equal if CPI is more than one d. estimate the ratio of earned value to planned value

b. estimate the projected cost of completing the project

What does the process of controlling costs primarily involve? a. determining the policies for project costs b. managing changes to the project budget c. finalising the procedures for project costs d. determining a basis for estimates

b. managing changes to the project budget

Which type of estimating uses project characteristics in a mathematical model to estimate project costs? a. rough order of magnitude estimating b. parametric c. bottom-up d. analogous

b. parametric

What is the first step in project cost management? a. allocate project cost estimates to individual material resources b. plan how costs will be managed c. control project costs and monitor cost performance d. develop several estimates of costs for different types of resources

b. plan how costs will be managed

Which is an input of the process of controlling costs? a. cost forecasts b. work performance data c. change requests d. scope baseline

b. work performance data

Soles is a footwear company which has recently set up its store in Ambrosia. To manufacture its products, Soles incurs a range of different costs. Which would be an example of an indirect cost? a. Cost of machines to produce shoes b. Salary paid to factory workers c. Electricity used to run its factories d. Cost of leather used to manufacture shoes

c. Electricity used to run its factories

Which is true of earned value? a. It is the actual cost plus the planned cost. b. It is based solely on the total cost estimate to be spent on an activity. c. It is an estimate of the value of the physical work actually completed. d. It is also known as the planned value.

c. It is an estimate of the value of the physical work actually completed.

Which statement is true of analogous estimates? a. Their main disadvantage is that they cost more than other techniques. b. They are the only technique which do not require expert judgement. c. They are most reliable when previous projects are similar in fact with current projects. d. They use project characteristics in a mathematical model to estimate project costs.

c. They are most reliable when previous projects are similar in fact with current projects.

What type of estimate is a cost estimation tool that involves estimating individual work items or activities and summing them to get a project total? a. budgetary b. parametric c. bottom-up d. analogous

c. bottom-up

Good Earth, a company manufacturing packaged food products, sets up its stores in Baltonia. However, a year later, the company closes the store down due to high operating costs. In such a scenario, the money spent in paying for the rent of the store in Baltonia would be an example of which costs? a. recurring b. direct c. sunk d. intangible

c. sunk

Which statement is true of bottom-up estimates? a. They are based on the actual cost of a previous, similar project. b. They are also known as parametric estimating. c. They are most accurate when they involve large, extensive work items. d. They are time-intensive and expensive to develop.

d. They are time-intensive and expensive to develop.

What is a rough order of magnitude estimate also referred to as? a. definitive b. budgetary c. final d. ballpark

d. ballpark

Which process involves developing an approximation of the costs of resources needed to complete a project? a. determining the budget b. finalising the cost baseline c. controlling costs d. estimating costs

d. estimating costs

Which statement is true regarding indirect costs? a. directly related to performing the project. b. those that cannot be allocated to projects. c. those that can be easily controlled by managers. d. not directly related to the products or services of a project.

d. not directly related to the products or services of a project.

What is another term used for budget? a. earned value b. actual cost c. indirect cost d. planned value

d. planned value

What type of management includes the processes required to ensure that a project team completes a project within an approved budget? a. project scope management b. project quality management c. project time management d. project cost management

d. project cost management

How are profits best defined? a. expenses plus net income b. costs plus revenues c. revenues plus expenses d. revenues minus expenditures

d. revenues minus expenditures

A budgetary estimate is the most accurate of the three types of estimates.

False

Analogous estimates are the most accurate technique to estimate costs.

False

Contingency reserves are also known as unknown unknowns.

False

If cost variance is a positive number, it means that performing the work costs more than planned.

False

If the cost performance index (CPI) is less than 100 percent, the project is under budget.

False

In an earned value chart, when the actual cost line is right on or above the earned value line, it indicates that costs are less than planned.

False

Intangible costs can be easily measured in monetary terms.

False

It is important for project managers to focus on indirect costs because they can be easily controlled.

False

It is important for project managers to understand that every cost estimate is unique.

True

One of the reasons why project cost estimates are inaccurate is because human beings are biased toward underestimation.

True

Parametric models are reliable when the models are flexible in terms of the project's size.

True

Project managers must conduct cash flow analysis to determine net present value.

True

Spreadsheets are a common tool for cost estimating, cost budgeting, and cost control.

True

The formulas for variances and indexes start with EV, the earned value.

True

The project management plan and project funding requirements are inputs of the process of controlling costs.

True

Which costs are difficult to measure in monetary terms? a. Intangible costs b. Direct costs c. Tangible costs d. Fixed costs

a. Intangible costs

Which is true of the schedule performance index (SPI)? a. It can be used to estimate the projected time to complete the project. b. It means that a project is behind schedule if an SPI is greater than one. c. It means that a project is ahead of schedule if SPI is lesser than one or hundred percent. d. It is the ratio of planned value to actual costs.

a. It can be used to estimate the projected time to complete the project.

Which is an output of the process of controlling costs? a. cost forecasts b. project funding requirements c. basis of estimates d. scope baselines

a. cost forecasts

What term is used for analogous estimates? a. bottom-up b. top-down c. parametric d. budgetary

b. top-down

Which process results in a cost baseline as a main output? a. cost controlling b. cost estimating c. cost budgeting d. cost planning

c. cost budgeting

Work performance information and cost forecasts are main outputs of which process? a. cost budgeting b. cost estimating c. cost control d. cost pricing

c. cost control

Which process helps develop an accurate projection of a project's financial expenses and benefits? a. critical path analysis b. fast tracking c. life cycle costing d. crashing

c. life cycle costing

Which type of estimate uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project? a. definitive estimates b. parametric estimates c. bottom-up estimates d. analogous estimates

d. analogous estimates