Chapter 7 Project Cost management

Direct Costs

Can be directly related to creating the products and services of the project

Cost management plan includes

Level of accuracy; Units of measure; Organizational procedures links; control thresholds; Rules of performance measurement; Reporting formats; process descriptions

Budget at Completion (BAC)

The original total budget for a project

Project cost management

The processes required to ensure that the project is completed within the approved budget

baseline

a budget figure in the original project plan plus approved changes

Cash flow analysis

a method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow

cost

a resource sacrificed or foregone to achieve a specific objective//something given up in exchange

cost baseline

a time-phased budget that project managers use to measure and monitor cost performance

If a company loses $5 for every $100 in revenue for a certain product, what is the profit margin for that product? a. -5% b. 5% c. -$5 d. $5

a. -5%

You are preparing a cost estimate for a building based on its location, purpose, number of square feet, and other characteristics. What cost-estimating technique are you using? a. parametric b. analogous c. bottom-up d. top-down

a. parametric

management reserves

allow for future situations that are unpredictable (unknown unknowns)

Contingency reserves

allow for future situations that may be partially planned for and are included in the project cost baseline (known unknowns)

planned value (PV)

also called the budget, is the portion of the approved total cost estimate planned to be spent on an activity during a given period

earned value (EV)

an estimate of the value of the physical work actually completed

Rough order of magnitude (ROM) estimate

an estimate of what a project will cost, ballpark, guesstimate, swag, broad gauge

estimate at completion (EAC)

an estimated cost of completing a project based on performance to date

Which of the following is not an output of the project cost management process called estimating costs, according to the PMBOK Guide? a. activity cost estimates b. a cost baseline c. basis of estimates d. project documents updates

b. a cost baseline

If a project is halfway completed, its schedule performance index is 110 percent, and its cost performance index is 95 percent, how is it progressing? a. It is ahead of schedule and under budget b. It is ahead of schedule and over budget c. It is behind schedule and under budget d. It is behind schedule and over budget

b. it is ahead of schedule and over budget

What is the main goal of project cost management? a. to complete a project for as little cost as possible b. to complete a project within an approved budget c. to provide truthful and accurate cost information on projects d. to ensure that an organization's money is used wisely

b. to complete a project within an approved budget

______reserves allow for future situations that are unpredictable. a. Contingency b. Financial c. Management d. Baseline

c. management

_______ involves allocating the project cost estimate to individual material resources or work items over time a. Reserve analysis b. Life cycle costing c. Project cost budgeting d. Earned value analysis

c. project cost budgeting

_______ is a project performance measurement technique that integrates scope, time, and cost data. a. Reserve analysis b. Life cycle costing c. Project cost budgeting d. Earned value management

d. Earned value management

If the actual cost for a WBS item is $1,500 and its earned value is $2,000, what is its cost variance, and is it under or over budget? a. The cost variance is -$500, which is over budget b. The cost variance is -$500, which is under budget c. The cost variance is $500, which is over budget d. The cost variance is $500, which is under budget

d. The cost variance is $500, which is under budget

Accountants usually define___________as a resource sacrificed or foregone to achieve a specific objective a. money b. liability c. trade d.cost

d. cost

intangible costs or benefits

difficult to measure in dollars

reserves

dollar amounts included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict

Tangible costs or benefits

easy to measure in dollars

Typical problems with IT cost estimates

estimates are done too quickly; people lack estimating experience; human beings are biased toward underestimation; management desires accuracy

Bottom-up estimates

estimating the cost of individual work items or activities and summing them to get a project total. (activity-based costing)

Cost variance (CV)

is the earned value minus the actual cost

schedule variance (SV)

is the earned value minus the planned value (- took longer than planned +work took less time)

actual cost (AC)

is the total direct and indirect costs incurred in accomplishing work on an activity during a given period

Function points

means of measuring software size based on what the software does for end users

Sunk cost

money that has been spent in the past

Indirect costs

not directly related to the products or services of the project, but indirectly related to performing work on the project (electricity, paper towels, etc.)

What are the four processes for project cost management

planning cost management; Estimating costs; Determining the budget; Controlling costs

Earned value management (EVM)

project performance measurement technique that integrates scope, time, and cost data

Life cycle costing

provides a big-picture view of the cost of a project throughout its life cycle

definitive estimate

provides an accurate estimate of project costs (most accurate)

Profit margin

ratio of profits to revenues

Profits

revenues minus expenditures

What are the three types of cost estimates?

rough order of magnitude (ROM) estimate; budgetary estimate; definitive estimate

overrun

the additional percentage or dollar amount by which actual costs exceed estimates

rate of performance (RP)

the ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity

cost performance index (CPI)

the ratio of earned value to actual cost; used to estimate the projected cost of completing the project

schedule performance index (SPI)

the ratio of earned value to planned value; used to estimate the projected time to complete the project

Analogous estimates (top-down estimates)

use the actual cost of a previous, similar project as the basis for estimating the cost of the current project

budgetary estimate

used to allocate money into an organization's budget (-10 to +25 accuracy , two years in the future)

Parametric estimating

uses project characteristics (parameters) in a mathematical model to estimate project costs

Learning curve theory

when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced