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PMP Exam BL > 7. Cost > Flashcards

7. Cost Flashcards

1
Q

What is life cycle costing?

A

Life Cycle Costing (LCC) is an important economic analysis used in the selection of alternatives that impact both pending and future costs. It compares initial investment options and identifies the least cost alternatives for a twenty-year period

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2
Q

What is value engineering / analysis?

A

Finding a less costly way of doing essentially the same work.
Value engineering is a systematic method to improve the “value” of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be manipulated by either improving the function or reducing the cost.

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3
Q

What are the calculations used to make funding decisions for an organisation?

A 
• PV, NPV
• ROI
• IRR
• Payback period
• Cost-Benefit analysis
• EVA: Economic Value Added
• Discounted Cash Flow
(Definitions are in the Integration section)
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4
Q

What are the types of costs?

A
  • Variable costs: change with the amount of production or amount of work (material, supplies, wages)
  • Fixed costs: do not change as production changes (cost of setup, rent, utilities…)
  • Direct: expenses billed directly to the project
  • Indirect: costs that are shared and allocated among several or all projects.
  • Sunk: invested cost unrecoverable
  • Opportunity; cost of the loss of potential benefit from the alternatives when a choice is made that excludes those alternatives.
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5
Q

What is Planned Value (PV)?

A

Or Budgeted Cost of Work Scheduled.
As of today, what is the estimated value of the work planned to be done?
PV = Planned % complete x BAC

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6
Q

What is Earned Value (EV)?

A

Or Budgeted Cost of Work Performed.
As of today, what is the estimated value of the work actually accomplished?
EV = Actual % complete x BAC

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7
Q

What is Actual Cost (AC) or total cost?

A

Or Actual Cost of Work Performed.

As of today, what is the actual cost incurred for the work accomplished? Sum of the costs for the given period of time.

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8
Q

What is Budget At Completion (BAC), the cost baseline?

A

How much did we budget for the total project effort?

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9
Q

What is Estimate At Completion (EAC)?

A

As of now, what do we currently expect the total project to cost (a forecast)?
EAC = BAC / CPIc

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10
Q

What is Estimate To Complete (ETC)?

A

From this point on, how much more do we expect it to cost to finish the project (a forecast)?
ETC = EAC - AC

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11
Q

What is Variance At Completion (VAC)?

A

As of today, how much over or under budget do we expect to be at the end of the project?
VAC = BAC - EAC

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12
Q

What is Cost Variance (CV)?

A

CV = EV - AC
How much actual cost differ from planned costs.
Negative is over budget, positive is under budget.

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13
Q

What is Schedule Variance (SV)?

A

SV = EV - PV
Difference between where we planned to be in the schedule and where we are in the schedule.
Negative is behind schedule, positive is ahead of schedule.

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14
Q

What is Cost Performance Index (CPI)?

A

CPI = EV / AC
How much we are getting for every $ we spend.
Greater than one is good, less than one is bad.

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15
Q

What is Schedule Performance Index (SPI)?

A

SPI = EV / PV
How fast the project is progressing compared to the project plan.
Greater than one is good, less than one is bad.
We are progressing at x% of the rate originally planned.

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16
Q

EAC: This formula calculates actual costs to date plus a revised estimate for all the remaining work. It is used when the original estimate was fundamentally flawed.

A

EAC = AC + Bottom-up ETC

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17
Q

EAC: This formula is used if no variances from the BAC have occurred or if you will continue at the same rate of spending (as calculated in your cumulative CPI or based on the trends that have led to the current CPI).

A

EAC = BAC / CPIc

18
Q

EAC: This formula calculates actual costs to date plus remaining budget. It is used when current variances are thought to be atypical of the future. It is essentially AC plus the remaining value of work to perform.

A

EAC = AC + (BAC - EV)

19
Q

EAC: This formula calculates actual to date plus the remaining budget modified by performance. It is used when current variances are thought to be typical of the future and when project schedule constraints will influence the completion of the remaining effort. So for example, it might be used when the cumulative CPI is less than one and a firm completion date must be met.

A

EAC = (BAC - EV) / (CPIc x SPIc)

20
Q

TCPI: This formula divides the value of the work remaining to be done by the money remaining to do it. It answers the question “To stay within budget, what rate do we need to meet for the remaining work?

A

To Complete Performance Index
TCPI = (BAC - EV) / (BAC - AC)
Greater than one is bad, less than one is good.
For calculation on current forecast or estimation:
TCPI = (BAC - EV) / (EAC - AC)
(BAC - AC: for original budget) and (EAC - AC: for current forecast) = remaining funds

21
Q

ETC: This formula calculates the total project cost as of today minus what has been spent to date.

A

ETC = EAC - AC

Other option for ETC is to reestimate the remaining work from the bottom-up.

22
Q

How much over or under budget will we be at the end of the project?

A

VAC = BAC - EAC

23
Q

What is the difference between direct and indirect costs?

A
  • Direct: directly attributable to the work on the project.
  • Indirect: overhead items or cost incurred for the benefit of more than one project (taxes, fringe benefits, janitorial services)
24
Q

What is the process of cost management?

A
  • Plan cost management
  • Estimate Costs
  • Determine Budget
  • Control Costs
25
Q

What are the key inputs to the Estimate Costs process?

A
  • Cost Management Plan
  • Quality Management Plan
  • Scope Baseline
  • Lessons Learned Register
  • Project Schedule
  • Resource requirements
  • Risk Register
  • Enterprise Environmental Factors
  • Organisational Process Assets
  • Project Management Costs
26
Q

What are the key outputs of the Estimate Costs process?

A
  • Cost Estimates
  • Basis of Estimates
  • Updates to project documents
27
Q

What are the key outputs of the Determine Budget process?

A
  • Cost baseline
  • Project funding requirements
  • Updates to project documents
28
Q

What are the key outputs of the Control Costs process?

A
  • Work performance information
  • Cost forecasts
  • Change requests
  • Updates to project management plan and project documents
29
Q

What three knowledge areas use the concept of cost risk?

A
  • Cost
  • Procurement
  • Risk
30
Q

What calculations can be used to determine whether the project will be paid for with the organisation’s existing funds or will be funded through equity or debt?

A
  • Net Present Value: NPV
  • Return on Investment: ROI
  • Payback period
  • Internal Rate of Return: IRR
31
Q

What is discounted cash flow?

A

A technique used in project selection to estimate the attractiveness of an investment by predicting how much money will be received in the future and discounting it to its current value.
In cost management planning, it is used to evaluate the potential revenue to be earned from specific project work.

32
Q

What are control thresholds? When are they determined?

A

The amount of variation allowed before you need to take action.
Determined while creating the cost management plan.

33
Q

How do variable costs differ from fixed costs?

A

Variable costs change with the amount of production or amount of work done on the project.
Fixed costs do not change as production changes.

34
Q

What are the advantages of analogous estimating?

A
  • Quick
  • Activities do not need to be identified
  • Less costly to create
  • Project manager will have data to evaluate high-level project feasibility
  • Overall project costs will be capped
35
Q

What are the advantages of bottom-up estimating?

A
  • Mode accurate
  • Gains buy-in from the team
  • Based on a detailed analysis of the project and the deliverables
  • Provides a basis for monitoring and controlling, performance measurement, and management
36
Q

What is reserve analysis?

A

Reserve analysis involves identifying which activities on the project have significant risk and determining how much time and money to set aside to account for those risks in case they occur.

37
Q

What is the difference between a contingency reserve and a management reserve?

A
  • Contingency reserves are used for known risks, which are specifically identified risks.
  • Management reserves are used to accommodate unknown or unidentified risks.
38
Q

What is cost of quality?

A

The cost of work added to the project to accommodate quality efforts.

39
Q

Name the typical range for the following:
• Rough Order of Magnitude: ROM estimate
• Budget estimate
• Definitive estimate

A
  • ROM estimate: -25 to +75% from actual
  • Budget estimate: -10 to +25% from actual
  • Definitive estimate: +/- 10% from actual
40
Q

What is the difference between a cost budget and a cost baseline?

A

The cost budget = management reserves + cost baseline.

41
Q

What is Earned Value Analysis, and how is it used?

A

It is used in performance review to measure project performance against the scope, schedule, and cost baselines.
Using the work performance information gathered through earned value analysis, a project manager can create reports, including cost forecasts, and other communications related to the project’s progress; it may also result in change requests.

42
Q

How long will the project take if our schedule performance efficiencies don’t improve?

A

Given activity or project duration = Planned duration / SPI

PMP Exam BL (13 decks)

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