Chapter 9 - Calculation and budgeting

Question 1

Project cost

Answer 1

Costs for the resources in the project

Question 2

Product cost

Answer 2

Related to materials needed to produce the product

Question 3

Lifecycle cost

Answer 3

• All costs arising during all phases of a product’s lifecycle
• Often discussed in larger projects or investments

Question 4

Top Down

Answer 4

A rough estimate of costs by comparison with similar projects already executed

Question 5

Self-costing estimate

Answer 5

• Based on the idea that the project should bear all its own costs
• Both direct (can be attributed to a certain activity/cost unit) and indirect (overhead, common to several cost units) costs should be included

Question 6

Bottom Up

Answer 6

Detailed calculation based on a careful analysis of each activity in the project

Question 7

Internal pricing

Answer 7

• Might be hard to distribute indirect costs

- You should evaluate work efforts and other resources in the fairest way possible

Question 8

Contribution estimate

Answer 8

• Based on project being burdened only with the cost that arise if the project is preformed, so-called specific costs
• Useful in prioritising between different courses of action
• Alternative with largest contribution margin should be chosen

Question 9

Specific revenue

Answer 9

The revenue that arises through execution of the project

Question 10

Specific cost

Answer 10

The cost that arises through execution of the project

Question 11

How do you calculate the Contribution margin?

Answer 11

Specific revenue - Specific cost

Question 12

Describe Income - expenditure

Answer 12

• Income arises at the time of sale
• Expenditure arises at the time of purchase
• For external reporting and tax calculations

Question 13

Describe Revenue - cost

Answer 13

• Distributed incomes and expenditures
• Value created of consumed during a certain period
• Financial result = Revenue - Cost

Question 14

Describe Payment - disbursement

Answer 14

• Occur at the time of cast receipt

- When an invoice or other bill is paid

Question 15

Pre-estimates

Answer 15

• Connect the project estimates to the schedule
• Items in budget should be possible to connect to activities and resources
• Estimating cost for each activity in the schedule

Question 16

Variable costs are

Answer 16

Affected by volume

Question 17

Fixed costs are

Answer 17

Independent

Question 18

Cost estimates in agile projects

Answer 18

• Cost for each sprint is fixed
• Because sprint length is set and staffing of team should not be changed
• Project cost is determined by number of Scrum teams working on the project and number of sprints to achieve the goal

Calculation of cost for scrum team on p. 220

Question 19

Accrual-basis accounting

Answer 19

• Advance estimate should be based on it, presented in table or graphically, in chart, to be used during execution
• Schedule and estimated activity costs are important information sources in order to enable it

Question 20

Resource histogram

Answer 20

Provides overview of the distribution of project costs over time

Question 21

A projects S-curve or Cost baseline

Answer 21

Visual presentation of the advanced estimate, as shown on p. 221

Question 22

Methods most suitable when uncertainty is high

Answer 22

• Rolling wave planning
• Agile work methods
• This gives control over costs and risks, however requires PO to keep cool and be ready to give a loose mandate to the project

Question 23

Uncertainty analysis

Answer 23

Estimating uncertainty
Base the values on similar projects, or estimates from groups with members having different ideas of the final costs
- The closer to the upper intervals you are, the larger the risk of exceeding budget is
See p. 223 for formula and example

Question 24

What needs to be done if the budget and advance estimate isn’t in balance

Answer 24

• Review calculations and try to find cheaper resources
• Re-plan project and find another way to achieve the goal
• PM must ask PO for larger budget or decreased project scope

Question 25

What is Crashing?

Answer 25

• Method for when the critical path is too long

- Identifying which activities on the critical path cost the least to shorten

Question 26

The Pay-back method

Answer 26

Estimate the time that passes before an investment, a project, has earned back the capital invested

Question 27

Pay-back time

Answer 27

• The time it takes before a project has earned back the capital invested
• The most profitable project is the one with the shortest Pay-back time

Question 28

The net present value method

Answer 28

• Method for estimating investments, taking into account payments and expenditures that occur at different time points
• Thought behind: recalculate the value of all expected payments and expenditures of the investment at a certain time: the present net value or capital value

Question 29

Cost of capital

Answer 29

• Recalculation factor/discounting factor in net present value method
• Often set to the interest rate an alternative placement of capital would have yielded

Question 30

ROI

Answer 30

• Return on Investment

- Increased fourfold if you send an invoice every quarter, instead of once at the end of the year

Question 31

The internal rate of return method

Answer 31

Method based on determining the interest rate at which the net present value of the investment (project) is zero

Question 32

Interest rate

Answer 32

• Called internal interest rate of the investment

- Reveals the annual ROI or yield that the investment options give on the invested capital

Question 33

Expected monetary value, EMV

Answer 33

Based on risk probabilities and risk values

Example of calculation on p.228