Chapter 6

Question 1

Cost management

Answer 1

• management of costs, reflects the project’s strategic goals, mission statement and business plan
• encompasses data collection, cost accounting and cost control

Question 2

Cost accounting and cost control

Answer 2

main mechanisms for identifying and maintaining control over project costs

Question 3

Cost estimation

Answer 3

• process that creates reasonable budget baseline for the project
• is the first step you take when determining is a project is viable
• identifies project resources, creating a time-phased budget

Question 4

Common sources of project cost: Labor

Answer 4

costs related to personnel to be employed in the development of the project

Question 5

Common sources of project cost: materials

Answer 5

material costs to apply to the specific equipment, required to complete tasks

Question 6

Common sources of project cost: subcontractors

Answer 6

cost of services to be provided to the project

Question 7

Common sources of project cost: equipment and facilities

Answer 7

costs of hiring equipment or facilities to be used in the development of the project

Question 8

common sources of project cost: travel

Answer 8

expenses related to business travel (car rental, airfare, hotels, meals, etc.)

Question 9

Types of costs

Answer 9

• Direct and indirect
• Fixed and variable
• Recurring and nonrecurring
• Normal and Expedited

Question 10

Direct costs and indirect costs

Answer 10

• direct costs are costs used to execute project activities (labour and materials)
• indirect costs are not used for the execution of the project (overhead and general administration)

Question 11

Fixed and Variable costs

Answer 11

• fixed costs do not vary
• variable costs increase in direct proportion to usage level

Question 12

Recurring and nonrecurring

Answer 12

• recurring typically continue to operate over the project’s life cycle (material, labour, logistics, sales costs)
• nonrecurring costs are applied once at the beginning or end of the project (personnel training, marketing analysis…)

Question 13

Normal and Expedited costs

Answer 13

• normal costs are carried out when the project is carried out as planned (labour, materials)
• expedited costs are unplanned and extra costs (paying overtime or temporary workers)

Question 14

What cost is direct labour?

Answer 14

direct cost, also recurring, fixed, and normal

Question 15

What cost would a building lease be considered?

Answer 15

indirect (or overhead), recurring, fixed, normal

Question 16

Cost estimation principles

Answer 16

1. the clearer you define the project’s costs in the beginning, the lesser the chance of making mistakes
2. if your initial cost is accurate, it is very likely that your project budget will match your project cost (higher chance of not going over the budget)

Question 17

Disaggregated basis

Answer 17

breaking down project costs into smaller parts called “work packages” when estimating costs, you figure the cost of each work package and then you add them all up for the final estimated cost

Question 18

Rough estimates

Answer 18

early estimates made when you don’t have enough time or information, gives a basic idea (30% accuracy)

Question 19

Comparative estimates

Answer 19

historical data from past projects to estimate the cost of the current one (15% accuracy)

Question 20

Feasibility estimates

Answer 20

based on real numbers after the project design is done, often done in construction where material costs can be calculated based on quantities (10%)

Question 21

Definitive estimates

Answer 21

can only be made after most of the design is complete (5% accuracy)

Question 22

Problems with cost estimation: low initial estimates

Answer 22

happens when the project costs are misunderstood either on purpose (to make it look cheaper so that it gets approved), or by mistake, and always leads to spending more than planned

Question 23

Problems with cost estimation: unexpected technical difficulties

Answer 23

estimating costs can go wrong when people estimate that there wont be technical problems, good estimates need to consider technical issues, delays, and other risks

Question 24

Problems with cost estimation: lack of definition

Answer 24

poorly defined features and objectives lead to poor cost estimates

Question 25

Problems with cost estimation: specification changes

Answer 25

changes to the project’s goals or features during development often increase costs

Question 26

Problems with cost estimation: external factors

Answer 26

things like inflation, raw material shortage, or other economic impacts can increase costs

Question 27

Creating a project budget

Answer 27

- involves planning resources, goals, and timeline needed to complete the project - the budget must match the project activities outlined in the WBS which helps create the project schedule, the budget then assigns the necessary resources to meet that schedule

Question 28

How can cost data be collected and interpreted?

Answer 28

through a top-down or bottom-up budgeting procedure

Question 29

Activity based costing (ABC)

Answer 29

method that assigns costs first to activities, and then to the projects based on each project’s use of resources

Question 30

Top-down budgeting

Answer 30

- starts with senior manager’s estimates of costs for future projects (first total cost, and then major work packages costs) - estimates are passed down the hierarchy to the net functional levels, where additional information is collected - each step down the hierarchy, the project becomes more detailed until the people doing the actual work provide input on the specific cost for each task

Question 31

Bottom-up budgeting

Answer 31

- starts by looking at individual tasks in WBS - the costs for all activities are then added together: first for individual tasks, then for work packages, then for deliverables and finally for the overall project

Question 32

Activity-based costing (ABC) steps

Answer 32

1. assign costs to activities 2. identify cost drivers (factors that cause costs for each activity) 3. calculate cost rate per unit of the cost driver (cost rate/unit = $cost/hour) 4. multiply the cost driver rate by the number of units used (Labour cost= ($40/hr) x (80 hours)= $3200)

Question 33

Time-phased budget

Answer 33

allocates costs across both project activities and the anticipated time in which the budget is to be expended

Question 34

Cumulative budgeted cost of the project

Answer 34

tracking chart that illustrated the expected budget expenditures by plotting the cumulative budgeted cost of the project against the baseline schedule