Chapter 8 Cost Estimation and Budgeting

A) Greater than or equal to 97 percent

26) What learning rate is being demonstrated if the first unit takes 25 hours and the third unit takes 24 hours to complete? A) Greater than or equal to 97 percent B) Less than 97 percent but greater than or equal to 95 percent C) Less than 95 percent but greater than or equal to 93 percent D) Less than 93 percent

A) $131,279

55) What is the total project budget for design in this time-phased budget? A) $131,279 B) $155,330 C) $124,688 D) $146,983

B) $18,409

56) What is the project budget for November in this time-phased budget? A) $8,186 B) $18,409 C) $389,828 D) $408,237

C) Not usually a part of the activity-based costing process.

58) Contingency money is: A) The money that must be received before any project work can begin. B) Money that is spent first to lock-in all contract guarantees. C) Not usually a part of the activity-based costing process. D) Valued at a higher rate than non-contingency money when determining project costs.

B) Added to the project's budget following the identification of all project costs.

59) Contingency money is: A) Not formally in the project budget, but held in a separate company account for all projects. B) Added to the project's budget following the identification of all project costs. C) The first line item in any project budget at an amount dictated by company policy. D) Not in the project's budget, but calculated and set aside once the project budget is completed.

B) $3,200.

6) A systems analyst is paid at the rate of $50/hour and will be needed for 40 hours. Her employer uses an overhead multiplier of 60% and does not factor in personal time. Her total direct labor cost should be billed at: A) $2,000. B) $3,200. C) $1,250. D) $4,500.

C) Murphy's Law.

62) "If anything can go wrong it often will" is an articulation of: A) Taylor's Theorem. B) Pinto's Postulate. C) Murphy's Law. D) The Pareto Principle.

A) Labor

1) Which of the following is a direct cost? A) Labor B) Rent C) Depreciation on equipment D) Health benefits

A) Expedited costs.

13) Unplanned costs incurred when steps are taken to speed up a project's completion are called: A) Expedited costs. B) Accelerated costs. C) Pass-through costs. D) Normal costs.

B) Cost the project on a work package and task basis.

14) A key for developing project cost estimates is to: A) Cost the project while considering the total package. B) Cost the project on a work package and task basis. C) Cost the project on a major module basis. D) Cost the project and add 33% for contingency.

A) The work breakdown structure, the budget, and the schedule.

38) The project plan is supported by: A) The work breakdown structure, the budget, and the schedule. B) The work breakdown structure, the budget, and the work packages. C) The work breakdown structure, the work packages, and the schedule. D) The work breakdown structure, the schedule, and the contingency plan.

B) Top-down budgeting.

39) Input is received from an organization's management to create a project budget in: A) Zero-based budgeting. B) Top-down budgeting. C) Bottom-up budgeting. D) Activity-based budgeting.

C) 3.135 hours

27) An activity with a learning rate of 0.8 takes 30 hours for the first six units. How long will it take to complete this task for the 12th time? A) 2.985 hours B) 3.055 hours C) 3.135 hours D) 3.325 hours

C) 218.46 hours

28) If it takes 40 hours to complete the first unit and the company knows from experience that the learning rate should be 0.75, how fast can they be expected to finish all ten units? A) 208.48 hours B) 213.52 hours C) 218.46 hours D) 223.54 hours

C) $288

3) Three workers complete a full 8-hour day finishing concrete for a terrace. All three workers are paid $12 an hour and the job bills to the customer for $450. What are the total direct labor costs? A) $450 B) $12 C) $288 D) $96

D) Interaction costs.

60) It was fortunate that the project budget included contingency funding; the top manager had not foreseen that the project would need the services of their elite slide rule squad in more than one area at the same time. Design couldn't complete their work without their services, nor could marketing, or production. Contingency funds came in handy to meet the unanticipated: A) Change in project scope. B) Abnormal project conditions. C) Consequences of Murphy's Law. D) Interaction costs.

D) Normal conditions.

63) Project cost estimates usually anticipate that resources will be available, that the weather will not be extreme, and that funding will materialize, creating what are called: A) Hyperactivity. B) Standard operating procedures. C) Standard duress. D) Normal conditions.

B) $87,550

52) What is the total project budget in this time-phased budget? A) $85,450 B) $87,550 C) $82,050 D) $86,550

C) $408,237

53) What is the total project budget in this time-phased budget? A) $251,382 B) $389,828 C) $408,237 D) $478,300

D) $251,382

54) What is the cumulative project budget for September in this time-phased budget? A) $96,052 B) $155,330 C) $152,927 D) $251,382

D) Unexpected technical difficulties.

C) Low initial estimate is a common reason for a cost overrun. 33) Whether it is the Boeing V-22 Osprey or a simple storm door installation for a do-it-yourselfer, nothing is ever completed as quickly or as cheaply as initial estimates due to: A) Lack of definition. B) Low initial estimates. C) Specification changes. D) Unexpected technical difficulties.

B) Equipment rental.

10) The charge that is most likely a fixed cost is for: A) Materials. B) Equipment rental. C) Direct labor. D) Utilities.

C) Materials.

11) You are probably looking at a bill for a variable cost when you are paying for: A) Leased capital equipment. B) Salaries. C) Materials. D) Health insurance.

D) The aggressive baseline plan is adhered to.

12) A normal cost is incurred when: A) Overtime is used more than originally planned. B) Shipments are expedited. C) Additional temporary workers are brought on site. D) The aggressive baseline plan is adhered to.

C) Information or time is scarce.

15) The order of magnitude cost estimate is used when: A) Ballpark estimates are not considered accurate enough. B) Historical data are readily available. C) Information or time is scarce. D) Parametric estimation has already been performed.

D) Ballpark.

16) When asked to provide an estimate of an irrigation system, Pete looked from one end of the field to the other, licked a finger and held it in the air, squinted into the sun and said $25,000, give or take 30%. The technique employed for cost estimation is: A) Parametric. B) Comparative. C) Definitive. D) Ballpark.

A) Comparative estimates.

17) Estimates based on the assumption that historical data can be used as a frame of reference for current estimates are: A) Comparative estimates. B) Ballpark estimates. C) Definitive estimates. D) Feasibility estimates.

B) The brick mason

2) Which worker's wages would constitute a direct cost for a construction project? A) The project's cost accountant B) The brick mason C) The architect's assistant D) The foreman

D) Taxes

4) Which of these indirect costs is typically classified as an overhead cost? A) Advertising B) Shipping C) Sales commissions D) Taxes

B) Parametric estimation, was highly accurate.

18) When their baby was ready to head off to college, the beleaguered parents pulled out the college folder from their file cabinet and added up the cost of putting their first child through college from 1995-2000. The mother whimpered as she factored in the rising cost of tuition, fees, books, and inflation by multiplying the total by 2.5. The father felt a searing pain go through his chest as he saw the total, knowing full well that their cost estimation approach, called: A) An order of magnitude estimate, was highly accurate. B) Parametric estimation, was highly accurate. C) Feasibility estimation, was highly accurate. D) Definitive estimation, was highly accurate.

C) True comparability between the current project and previous project work.

19) Effective comparative estimates rely most heavily on: A) An accurate inflation factor. B) The correct number of years elapsed between the old project and the current one. C) True comparability between the current project and previous project work. D) The correct number of employees on the new project compared with the previous one.

D) Feasibility estimates.

20) Cost estimates that are based as a guideline on real numbers, or figures derived after the completion of preliminary design work, are: A) Definitive estimates. B) Order of magnitude estimates. C) Parametric estimates. D) Feasibility estimates.

A) definitive estimate

21) Once most of the design work is complete, at a point when the scope and capabilities of the project are quite well understood, a ________ may be developed. A) definitive estimate B) comparative estimate C) parametric estimate D) non-parametric estimate

B) Definitive

22) Which of these estimates should be the most accurate? A) Parametric B) Definitive C) Comparative D) Order of magnitude

D) 13.25 hours

23) An activity with a learning rate of 0.85 takes 25 hours for the first iteration. How long will it take to complete this task for the 15th time? A) 12.55 hours B) 12.85 hours C) 13.15 hours D) 13.25 hours

B) 289 hours

24) If it takes 40 hours to complete the first unit and the company knows from experience that the learning rate should be 0.80, how fast can they be expected to finish all twelve units? A) 18 hours B) 289 hours C) 264 hours D) 316 hours

C) 38 hours and 16 minutes, give or take.

25) It took 44 hours of analysis to complete the first phase, but the second phase was done in 42 hours. If this learning rate continues, then the 8th analysis should take a mere: A) 36 hours and 26 minutes, give or take. B) 37 hours and 36 minutes, give or take. C) 38 hours and 16 minutes, give or take. D) 39 hours and 6 minutes, give or take.

C) 54 hours and 33 minutes, give or take.

29) It took 66 hours of analysis to complete the first phase, but the second phase was done in 61 hours. If this learning rate continues, then the 8th analysis should take a mere: A) 52 hours and 11 minutes, give or take. B) 53 hours and 22 minutes, give or take. C) 54 hours and 33 minutes, give or take. D) 55 hours and 44 minutes, give or take.

C) Less than 96 percent but greater than or equal to 95 percent

30) What learning rate is being demonstrated if the first unit takes 25 hours and the seventh unit takes 22 hours to complete? A) Greater than or equal to 97 percent B) Less than 97 percent but greater than or equal to 96 percent C) Less than 96 percent but greater than or equal to 95 percent D) Less than 95 percent

B) A job that is substantially re-engineered will have no disruption of its learning curve.

31) Which statement about the use of learning curves is BEST? A) Learning curve effects stay constant across projects. B) A job that is substantially re-engineered will have no disruption of its learning curve. C) It may be more likely to see learning curve effects in construction than in research and development. D) Every worker performing an identical task will exhibit the same learning effect.

C) Low initial estimate is a common reason for a cost overrun.

32) There was no way that the study tour to Italy could cost only $1500 for 14 days and 13 nights and include all transportation, meals and hotels, but the smarmy professor knew that students would balk at a higher advertised price. Once they were thousands of miles away from home in a country where none of them spoke the language it would be easier to tell them about unanticipated charges and approach the more realistic price of $3500 per person. This type of: A) Specification change is a common reason for a cost overrun. B) Lack of definition is a common reason for a cost overrun. C) Low initial estimate is a common reason for a cost overrun. D) Unexpected technical difficulty is a common reason for a cost overrun.

A) Lack of definition.

34) Poor initial scope development and work breakdown structure often creates cost overruns that are attributable to: A) Lack of definition. B) Deliberate low initial estimates. C) Unexpected technical difficulties. D) External factors.

B) "There were some specification changes, sorry."

35) It began as a simple macro that would extract grades and post them on a web site, but once the web programmer began the work, he became obsessed with various charting features, grade summaries, and reports that could be added to make this the grandest web site in the tri-county area. As 2 hours of programming work grew to 20 and then 80, he knew that the client wouldn't be happy with the cost overrun. The only comment he mumbled as he finished his work was: A) "I had some technical difficulties, sorry." B) "There were some specification changes, sorry." C) "This project lacked definition from the outset, sorry." D) "I thought I'd never get the wizard's hat! Oh, by the way, your grades work."

C) This external factor.

36) The 1974 model Eldorado is a three-ton behemoth with a 500-cubic-inch engine that is long on style but short on gas mileage. During its five-year development process no one could possibly have anticipated that gas prices would go through the roof in 1973, making it far more expensive to operate and subsequently less attractive to a gas-price-conscious public. Design engineers scrambled to change the car in the last few months leading up to its debut, adding a slimmed down version with a smaller engine. All of the design overtime meant that the project budget took a big hit though, thanks to: A) The initial low estimate. B) The unexpected technical difficulties. C) This external factor. D) The lack of definition.

D) The project budget.

37) A plan that identifies the allocated resources, the project's goals, and the schedule that allows an organization to achieve those goals is: A) The work breakdown structure. B) The risk management plan. C) The statement of work. D) The project budget.

A) That top management estimates of project costs are often quite accurate, at least in aggregate.

40) An advantage of top-down budgeting is: A) That top management estimates of project costs are often quite accurate, at least in aggregate. B) An elimination of the friction between top and lower levels in the competition for budget money. C) That projects are no longer a zero-sum game among lower level managers. D) That top management budgets, by definition, cannot experience overruns.

C) Bottom-up budgeting.

41) A budget that is created by starting with the work breakdown structure, determining costs for each work package, and then adding these costs together is: A) Zero-based budgeting. B) Top-down budgeting. C) Bottom-up budgeting. D) Activity-based budgeting.

D) A reduction of top management's control of the budget process to one of oversight.

42) When properly performed, bottom-up budgeting has the disadvantage of: A) A lack of detail needed in project plans. B) A lack of coordination among project managers and functional department heads. C) Being a hindrance to top managers when prioritizing projects that are competing for the same scarce resources. D) A reduction of top management's control of the budget process to one of oversight.

A) Activity-based budgeting.

43) A budgeting method that assigns costs first to activities and then to projects based on each project's use of resources is: A) Activity-based budgeting. B) Zero-based budgeting. C) Top-down budgeting. D) Bottom-up budgeting.

B) Identifying activities that consumer resources and assigning costs to them.

44) Activity-based costing and bottom-up budgeting share the step of: A) Identifying cost drivers associated with each activity. B) Identifying activities that consumer resources and assigning costs to them. C) Assigning costs to projects by multiplying the cost driver rate times the volume of units. D) Tending to overestimate project costs due to the lack of involvement by top management.

B) $21,000.

45) The new bridge would require 14 piers to support it and it was known that each time a pier is sunk into the harbor it would take 30 man hours of labor at $50 per hour. An activity-based costing of the entire pier system results in a total labor cost of: A) $19,500. B) $21,000. C) $22,500. D) $24,000.

C) $2,625.

46) The new artisanal greenhouse would require 700 empty wine bottles be embedded in a frame made of clay and straw. The builder, a man with too much time on his hands, had determined that each time a bottle was added to the structure it would take 30 minutes of labor at $7.50 per hour in the blazing sun. An activity-based costing of the entire artisanal greenhouse revealed that the total labor cost would be: A) $2,525. B) $2,850. C) $2,625. D) $2,450.

A) Time-phased budget.

47) A budget containing disaggregated figures across the schedule when work is planned is a: A) Time-phased budget. B) Chronic budget. C) Temporal budget. D) Calendar budget.

D) Cumulative time for each expense

48) Which of the following is NOT contained in a typical time-phased budget? A) Total expenses for each activity B) Total expenses for each time unit C) Cumulative expenses for each time unit D) Cumulative time for each expense

B) $37,000

49) What is the cumulative cost in February in this time-phased budget? A) $23,750 B) $37,000 C) $45,050 D) $50,550

A) Secretarial support

5) Which of these indirect costs is typically classified as a selling or administrative cost? A) Secretarial support B) Utilities C) Insurance D) Depreciation

C) $9,750

50) What is the total amount budgeted for design costs in this time-phased budget? A) $5,250 B) $4,500 C) $9,750 D) $12,550

D) $45,050

51) What is the total amount budgeted for March in this time-phased budget? A) $37,250 B) $82,050 C) $41,000 D) $45,050

B) Budget contingency.

57) An allocation of extra funds to cover uncertainties and improve chances that the project can be completed within the timeframe originally specified is a: A) Setback. B) Budget contingency. C) Reallocation budget. D) Reserve line budget.

A) Change in project scope.

61) After years of tinkering and reverse engineering initiatives, Kimray had finally unlocked the secrets of the Beta tape format. A quick trip to the rental store was an epiphany for company leadership when they realized that only a handful of Beta tapes were available; the rest of the world had adopted the VHS format seemingly overnight. Now they would have to buy a few of those newfangled VHS machines to see how they ticked. The contingency funds that management had set aside would be put to good use on this: A) Change in project scope. B) Abnormal condition. C) Unanticipated interaction cost. D) Latest evidence of Murphy's Law.

B) Normal conditions are rarely encountered."

64) "If the weather holds and the utility service has correctly marked the location of the gas, telephone, and electric lines zigzagging across my property, I should be able to install the accent lighting in my back yard in an afternoon's time," the do-it-yourselfer commented to his jealous (and skeptical) neighbor. The only reply he received was his neighbor's, "Good luck with all that, I remember reading somewhere that: A) Project scope is fixed once the planning period is completed." B) Normal conditions are rarely encountered." C) There are no truly external factors in project execution." D) Activity based costing shouldn't be used in a project of this scale."

B) It is difficult to ascertain across what project activities contingency funds should be applied.

65) A disadvantage of contingency funds is: A) A recognition that the future contains both knowns and unknowns and the problems that might arise will impact the budget. B) It is difficult to ascertain across what project activities contingency funds should be applied. C) That application to the contingency fund gives an early warning signal of a potential overdrawn budget. D) That provision is made in the company plans for an increase in project cost.

C) $18 million.

66) A contingency rate of 10% on a building project budgeted at $20 million means the project organization is hoping to bring the project in for around: A) $22 million. B) $2 million. C) $18 million. D) $200 million.

C) Contingency funds are applied for.

67) An early warning signal for the potential of an overdrawn budget is created when: A) Activity-based costing cannot identify drivers. B) A bottom-up budget never makes it up the chain of command. C) Contingency funds are applied for. D) A top-down process moves too quickly down to the functional managers.

C) $200.10

7) Workers paid $15.00 per hour with an overhead charge of 1.45 and a personal time allowance of 1.15, have what total direct labor cost for an 8-hour work day? A) $151.30 B) $174.00 C) $200.10 D) $236.80

D) Logistics

8) Which of these is typically a recurring cost? A) Preliminary market analysis B) Personnel training C) Outplacement services D) Logistics

A) Site study

9) Which of these is typically a nonrecurring cost? A) Site study B) Labor C) Material D) Sales