Chapter 7 Cost Management

18. The best definition of Earned Value is: A. The measure of work performed expressed in terms of the budget authorized to perform that work. B. Actual % Complete x the BAC. C. The value of the project at a point in time expressed in terms of the work performed. D. Managing project performance in order to achieve expected results.

Answer A

3. Activity cost estimates are used as an input into which process? A. Estimate Costs B. Determine Budget C. Analyze Costs D. Control Costs

B Determine Budget takes the activity cost estimates and uses them (along with other inputs) to create a budget. 'A' is incorrect because Estimate Costs is the process that creates the activity cost estimates, so it stands to reason that they would be an output and not an input. 'C' sounds like decent guess, but it is not a real process. 'D' is incorrect because the process of Control Costs is not concerned with just the individual activity cost estimates. Instead, it uses inputs of the cost baseline.

14. If earned value = $10,000, planned value = $8,000, and actual cost = $3,000, what is the schedule variance? A. -$2,000 B. $2,000 C. $5,000 D. -$5,000

B Schedule Variance is calculated as EV-PV. In this example, $10,000 - $8,000 = $2,000.

15. Estimate to complete indicates: A. The total projected amount that will be spent, based on past performance B. The projected remaining amount that will be spent, based on past performance C. The difference between what was budgeted and what is expected to be spent D. The original planned completion cost minus the costs incurred to date

B The estimate to complete is what we expect to spend from this point forward, based on our performance thus far.

11. Your project office has purchased a site license for a computerized tool that assists in the task of cost estimating on a very large construction project for a downtown skyscraper. This tool asks you for specific characteristics about the project and then provides estimating guidance based on materials, construction techniques, historical information, and industry practices. This tool is an example of: A. Bottom-up estimating B. Parametric modeling C. Analogous estimating D. Activity duration estimating

B This is an example of parametric modeling. Parametric modeling is common in some industries, where you can describe the project in detail, and the modeling tool will help provide estimates based on historical information, industry standards, etc.

8. Which of the following process sequences is correct? A. Create WBS, then Determine Budget, then Estimate Costs B. Create WBS, then Estimate Costs, then Determine Budget C. Determine Budget, then Estimate Costs, then Create WBS D. Estimate Costs, then Budget Costs, then Create WBS

B This question may not look like it is about inputs and outputs, but it actually is. Create WBS is performed first out of the three processes, and the output is the Work Breakdown Structure (WBS). The WBS is used as an input for the next process of the three. Estimate Costs, where the costs of the activities are estimated and aggregated back to the WBS. Finally, the output of that process, the Activity Cost Estimates, is used as an input into Cost Budgeting, which occurs last out of the three processes listed. By understanding how the outputs of one process become the inputs into another, it becomes simpler to understand the logical order of many of these processes.

25. You have spent $322,168 on your project to date. The program manager wants to know why costs have been running so high. You explain that the resource cost has been greater than expected and should level out over the next six months. What does the $322,168 represent to the program manager? A. Earned value B. Actual cost C. Planned value D. Cost performance index

B. Look at the first sentence "You have spent $322,168 ... " Actual cost is what you have spent to date on the project.

16. The project team has been working significant overtime on a project for the past three months. The sponsor wants to know what the CPI will need to be from this point forward in order to meet original cost expectations. You know that at this point the Earned Value is $1,124,767, the total budget is $3,111,845, the Planned Value is $ 950,000, and the project has spent $1,000,975. What should you tell the sponsor? A. 0.84 B. 0.94 C. 1.0 D. 1.21

B. 0.94 To-Complete Performance TCPIc = (BAC-EV)/ Remaining funds. TCPIc = ($3,111,845-$1,124,767)/ $2,110,870 TCPIc= 1,987,078/ $2,11,870 TCPIc = 0.94

19. Project A would yield $100,000 in benefit. Project B would yield $250,000 in benefit. Because of limited resources, your company can perform only one of these. They elect to perform Project B because of the higher benefit. What is the opportunity cost of performing Project B? A. -$150,000 B. $150,000 C. -$100,000 D. $100,000

D Opportunity cost is simply how much benefit you are passing up. In this case, by choosing project B, you are forgoing $100,000 in expected benefit from project A, and that $100,000 represents the opportunity cost.

24. If budgeted at complete = $500, estimate to complete = $400, earned value = $100, and actual cost = $100, what is the estimate at complete? A. $0 B. $150 C. $350 D. $500

D The estimate at complete is what we expect to have spent at the end of the project. It is calculated by taking our budgeted at complete and dividing it by our cast performance index. Step 1 is to calculate our cast performance index. It is earned value / actual cost, and in this case, it equals 1. Budgeted at complete is $500, and $500 / 1 = $500. Therefore, 'D' is the correct answer, indicating that we are progressing exactly as planned. Note that there are many ways to calculate the EAC, and not all of them agree perfectly. One other common way is EAC = AC + ETC, which yields the same answer of $500 for this example.

9. One of your team members makes a change to the budget with your approval. In what process is he engaged? A. Plan Costs B. Estimate Costs C. Cost Management D. Control Costs

D The main clue here is "change." If they are making approved changes, they are in a control process. 'A' is not areal process. 'B' is incorrect since Estimate Costs is the process where the original estimates are developed and not where they are updated. 'C' is the knowledge area. Be careful not to get these confused with processes.

4. Based on the following Benefit Cost Ratios, which project would be the best one to select? A. BCR = -1 B. BCR = 0 C. BCR = 1 D. BCR = 2

D With Benefit Cost Ratios, the bigger the better! BCR is calculated as benefit / cost, so the more benefit, and the less cost, the higher the number.

6. Kayla is reviewing the budget and spending to ensure that she has enough money to pay vendors for the next projected phase. The CFO of the company has provided extra funds to allow for contingencies but Kayla is not yet certain that is enough. Which process is Kayla most likely performing? A. Plan Cost Management B. Estimate Cost. C. Analyze Budget. D. Control Costs.

D. she is performing reserve analysis this process is control costs

22. If the EAC for a project is $201,500, the ETC is $25,010, the SPI is 1.0, and the CPIc is 1.06 , what is the BAC? A. 23,594. B. 190,094 C. 201,500 D. 213,590

D. The formula for EAC=BAC/CPIc, There is quite abit of information here,but the only numbers that are relevant are the EAC and the CPIc. In this case we can use simple algebra to restate the formula as BAC=EAC X CPI, or BAC=$21,3590,which is answer D

21. The value of all work that has been completed so far is: A. Earned value B. Estimate at complete C. Actual cost D. Planned value

A Earned value is defined as the value of all work completed to this point.

20. As a project manager, your BEST use of the project cost baseline would be to: A. Measure and monitor cost performance on the project B. Track approved changes C. Calculate team performance bonuses D. Measure and report on variable project costs

A The cost baseline is used to track cost performance based on the original plan plus approved changes.

23. If you have a schedule variance of $500, this would indicate: A. Planned value is less than earned value B. Earned value is less than the estimate at complete C. Actual cost is less than earned value D. The ratio of earned value to planned value is 5:1

A This is another tricky question because of the way it is worded. Schedule variance is calculated as earned value - planned value. In this case, schedule variance could only be positive if earned value is greater than planned value (or stated otherwise, if planned value is less than earned value). 'A' is the only choice that has to be true.

13. You are managing a project that is part of a large construction program. During the execution of your project you are alerted that the construction of a foundation is expected to experience a serious cost overrun. What would be your FIRST course of action? A. Evaluate the cause and size of the overrun B. Halt execution until the problem is solved C. Contact the program manager to see if additional funds may be released D. Determine if you have sufficient budget reserves to cover the cost overrun

A This question illustrates one of the biggest exam biases. Your job as a project manager is almost always to evaluate and understand first. Know what you are dealing with before you take action, and don't just accept anyone's word for it. Verify the information yourself!

2. If the CPI is 0.1, this indicates: A. The project is performing extremely poorly on cost B. The project is casting 10% over what was expected C. The project is only casting 90% of what was expected D. The project is performing extremely well on cost

A Understanding the concepts behind the earned value calculations is important for the exam and will help you with questions like this one. In this question, the terrible cost performance index indicates that we are getting ten cents of value for every dollar we spent; thus the project is doing very poorly on cost performance.

17. If a project has a CPI of 0.95 and an SPI of 1.01, this indicates: A. The project is progressing slower and costing more than planned B. The project is progressing slower and costing less than planned C. The project is progressing faster and costing more than planned D. The project is progressing faster and costing less than planned

C Did the wording trip you up on this one? Make sure you read the questions and answers carefully since things were switched around on this one. A schedule performance index greater than 1 means that the project is progressing faster than planned. A cost performance index that is less than 1 means that the project is costing more than planned. Therefore choice 'C' is the only one that fits.

7. Your best cost estimate for an activity is $200,000, but the estimate you document has a range of $100,000 to $400,000. This ranged estimate represents a(n): A. Cost estimate B. Budgeted estimate C. Order of magnitude estimate D. Variable estimate

C Order of magnitude estimates are -50% to +100%. In this example, $100,000 and $400,000 are -50% to +100% of $200,000.

1.Your schedule projected that you would reach 50% completion today on a road construction project that is paving 32 miles of new highway. Every 4 miles is scheduled to cost $5,000,000. Today, in your status meeting, you announced that you had completed 20 miles of the highway at a cost of $18,000,000. What is your Planned Value? A. $12,800,000 B. $18,000,000 C. $20,000,000 D. $40,000,000

C Planned value is calculated by multiplying the Budgeted At Completion by planned % complete. Our cost per mile is planned at $1,250,000 ($5,000,000 / 4 miles), and our Budgeted At Completion is 32 miles * $1,250,000/mile = $40,000,000. We planned to be 50% complete. Therefore, $40,000,000 * 0.50 = $20,000,000.

5. The difference between present value and net present value is: A. Present value is expressed as an interest rate, while net present value is expressed as a dollar figure B. Present value is a measure of the actual present value, while net present value measures expected present value C. Present value does not factor in costs D. Present value is more accurate

C There is a difference between present value and net present value. Present value tells the expected value of the project in today's dollars. Net present value is the same thing, but it subtracts the costs after calculating the present value.

10. After measuring expected project benefits, management has four projects from which to choose. Project 1 has a net present value of $100,000 and will cost $50,000. Project 2 has a net present value of $200,000 and will cost $75,000. Project 3 has a net present value of $500,000 and will cost $400,000. Project 4 has a net present value of$125,000 and will cost $25,000. Which project would be BEST? A. Project 1 B. Project 2 C. Project 3 D. Project 4

C This one was very tricky! Net present value already has costs factored in, so they can be ignored here. The net present value is the only value you need to consider, and bigger is better!

12. If the Earned Value of a project on January 16 was $123,253, the Budgeted at Completion was $275,000 and the Schedule Performance Index was 0.77, how much work was expected to have been completed at the point? A. $97,985 B. $127,253 C. $165,264 D $ 2111,750

C Formula of SPI = EV/PV. Using simple algebra, we can change it around to also say that PV=EV/SPI,or PV= $123,253/0.77 = 165,264