Chapter 7 Project Cost Management Essay

Chapter 7 - Project Cost Management Essay 94. List and briefly describe the four project cost management processes. ANSWER: The four processes for project cost management are as follows: (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. POINTS: 1 DIFFICULTY: Difficulty: Moderate REFERENCES: p.288 QUESTIONTYPE:Essay HASVARIABLES:False LEARNINGOBJE INFO.SCHW.14.48 - LO: 7-1 CTIVES: NATIONALSTAND United States - BUSPROG: Analytic ARDS: TOPICS: The Importance of Project Cost Management KEYWORDS: Bloom's: Comprehension DATECREATED: DATEMODIFIED:  95. What are tangible and intangible costs? Distinguish between direct and indirect costs and give examples of each. ANSWER: Tangible and intangible costs and benefits are categories for determining how well an organization can define the estimated costs and benefits for a project. Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars. Conversely, intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms. Intangible benefits for projects often include items like goodwill, prestige, and general statements of improved productivity that an organization cannot easily translate into dollar amounts. Because intangible costs and benefits are difficult to quantify, they are often harder to justify. Direct costs are costs that can be directly related to producing the products and services of the project. One can attribute direct costs directly to a certain project. Project managers should focus on direct costs, since they can control them. For example, direct costs include the salaries of people working full time on the project and the cost of hardware and software purchased specifically for the project. Indirect costs are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project. For example, the cost of electricity, paper towels, and so on in a large building housing a thousand employees who work on many projects would be indirect costs. Indirect costs are allocated to projects, and project managers have very little control over them. Page43 Chapter 7 - Project Cost Management POINTS: 1 DIFFICULTY: Difficulty: Moderate REFERENCES: p.292 QUESTIONTYPE:Essay HASVARIABLES:False LEARNINGOBJE INFO.SCHW.14.49 - LO: 7-2 CTIVES: NATIONALSTAND United States - BUSPROG: Analytic ARDS: TOPICS: Basic Principles of Cost Management KEYWORDS: Bloom's: Comprehension DATECREATED: DATEMODIFIED:  96. What are the three basic types of cost estimating? Describe each type. ANSWER: The three basic types of cost estimating are as follows: (1) A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. This type of estimate is done very early in a project or even before a project is officially started. Project managers and top management use this estimate to help make project selection decisions. The timeframe for this type of estimate is often three or more years prior to project completion. A ROM estimate’s accuracy is typically –50 percent to +100 percent, which means that the project’s actual costs could be 50 percent below the ROM estimate or 100 percent above. For information technology project estimates, this accuracy range is often much wider. (2) A budgetary estimate is used to allocate money into an organization’s budget. Many organizations develop budgets at least two years into the future. Budgetary estimates are made one to two years prior to project completion. The accuracy of budgetary estimates is typically –10 percent to +25 percent, meaning the actual costs could be 10 percent less or 25 percent more than the budgetary estimate. (3) A definitive estimate provides an accurate estimate of project costs. Definitive estimates are used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs. Definitive estimates are made one year or less prior to project completion. A definitive estimate should be the most accurate of the three types of estimates. The accuracy of this type of estimate is normally –5 percent to +10 percent, meaning the actual costs could be 5 percent less or 10 percent more than the definitive estimate. POINTS: 1 DIFFICULTY: Difficulty: Moderate REFERENCES: p.295 QUESTIONTYPE:Essay HASVARIABLES:False LEARNINGOBJE INFO.SCHW.14.51 - LO: 7-4 CTIVES: NATIONALSTAND United States - BUSPROG: Analytic ARDS: Page44 Chapter 7 - Project Cost Management TOPICS: Estimating Costs KEYWORDS: Bloom's: Comprehension DATECREATED: DATEMODIFIED:  97. Describe three tools used in developing a good cost estimate. ANSWER: Several tools and techniques can be used to create a cost estimate. Three of such tools are as follows: (1) Analogous estimates use the actual cost of a previous, similar project as the basis for estimating the cost of the current project. This technique requires a good deal of expert judgment and is generally less costly than other techniques, but it is also less accurate. Analogous estimates are most reliable when the previous projects are similar in fact, not just in appearance. In addition, the groups preparing cost estimates must have the needed expertise to determine whether certain parts of the project will be more or less expensive than analogous projects. (2) Bottom-up estimates involve estimating the costs of individual work items or activities and summing them to get a project total. This approach is sometimes referred to as activity-based costing. The size of the individual work items and the experience of the estimators drive the accuracy of the estimates. Using smaller work items increases the accuracy of the cost estimate because the people assigned to do the work develop the cost estimate instead of someone unfamiliar with the work. The drawback with bottom-up estimates is that they are usually time-intensive and therefore expensive to develop. (3)Three-point estimates involve estimating the most likely, optimistic, and pessimistic costs for items. (4) Parametric estimating uses project characteristics (parameters) in a mathematical model to estimate project costs. Parametric models are most reliable when the historical information used to create the model is accurate, the parameters are readily quantifiable, and the model is flexible in terms of the project’s size. POINTS: 1 DIFFICULTY: Difficulty: Moderate REFERENCES: p.297-298 QUESTIONTYPE:Essay HASVARIABLES:False LEARNINGOBJE INFO.SCHW.14.51 - LO: 7-4 CTIVES: NATIONALSTAND United States - BUSPROG: Analytic ARDS: TOPICS: Estimating Costs KEYWORDS: Bloom's: Comprehension DATECREATED: DATEMODIFIED: Page45  98. Earned value management involves calculating three values for each activity or summary activity from a project’s WBS. Describe each of these three values with examples. ANSWER: (1) The planned value (PV) is the authorized budget assigned to scheduled work. Suppose that a project included a summary activity of purchasing and installing a new web server. Suppose further that, according to the plan, it would take one week and cost a total of $10,000 for the labor hours, hardware, and software. Therefore, the planned value (PV) for the activity that week is $10,000. (2) The actual cost (AC) is the realized cost incurred for the work performed on an activity during a specific time period. For example, suppose that it actually took two weeks and cost $20,000 to purchase and install the new web server. Assume that $15,000 of these actual costs were incurred during Week 1 and $5,000 was incurred during Week 2. These amounts are the actual cost (AC) for the activity each week. (3) The earned value (EV) is the measure of work performed expressed in terms of the budget authorized for that work. It cannot be greater than the authorized PV budget for a component as it is calculated as the sum of the PV of the completed work. POINTS: 1 Chapter 7 - Project Cost Management DIFFICULTY: Difficulty: Moderate REFERENCES: p.307 QUESTIONTYPE:Essay HASVARIABLES:False LEARNINGOBJE INFO.SCHW.14.53 - LO: 7-6 CTIVES: NATIONALSTAND United States - BUSPROG: Analytic ARDS: TOPICS: Controlling Costs KEYWORDS: Bloom's: Comprehension DATECREATED: DATEMODIFIED:  Page46