Cost Management Flashcards
what is value analysis or value engineering?
reducing cost without affecting scope
Name 7 cost benefit analysis methods
Plan Cost Management
All are cost benefits analysis methods:
- BCR - benefit to cost ratio used to predict future returns. BCR <1 = investment will lose money, BCR >1 = profitable
- ROI - return on investment, measures efficiency of investment, a ratio to measure actual returns. Higher is better
- Internal Rate of Return IRR - interest rate when inflows and outflows equal 0
- Payback period - shorter is better
- Present value (time value of money) - today’s value of future money
- Net Present value - sum of all cash inflows minus outflows
- Depreciation - decrease in value over time
What is ROI?
Plan Cost Management
a ratio that shows the return of an investment in relationship to the cost of the investment used to show actual returns
the efficiency of investment
ROI > 1 project is profitable
ROI < 1 project isn’t profitable
The higher the ROI the more favorable the project is to the organization
What is IRR?
Plan Cost Management
an indicator of the profitability of a series of cash flows.
It is the interest rate at which cash inflows and outflow equal 0
Example 22%
The higher the IRR the better financial value if brings the organization
What is PBP Payback period?
Plan Cost Management
the length of time to recover the investment, when cash flows are positive
payback period = initial investment / periodic cash flow
Ex. 10,000 / 1,000/month = 10 months
what is present value?
Plan Cost Management
Present Value (PV) - the future value in terms of todays money adjusted for inflation PV = value / (1+interest rate)^year
What is NPV?
Plan Cost Management
one single figure that represents the expected net value of all cost and benefit.
It is the sum of all cash inflows (in present value) minus the initial cost
An effective tool to determine if a project is profitable
NPV > 0 = profitable
NPV<0 = project will lose money
The larger the NPV, the more profitable the project will be
Name 3 kinds of depreciation
Plan Cost Management
decrease in value of assets over time
Straight line
Double declining balance (accelerated) - reduction in value is twice as much as straight line in the first year and lower later (like a new car)
Sum of year depreciation (accelerated) - greater depreciation in the earlier years and less later
Ex. 5 yrs = 1+2+3+4+5=15. Yr 1 is 5/15, yr 2 is 4/15, yr 3 is 3/15..
What is lifecycle costing? what’s included?
Plan Cost Management
life cycle costing, total cost of ownership
production cost + running + maintenance cost, etc. How much will it cost to maintain the project
What is Earned schedule Analysis
Plan Cost Management
Expansion of EVM to include the concept of EARNED SCHEDULE (ES and AT, actual time).
Variances, >1 is ahead of schedule
SPI with ES/AT measures efficiency
What is agile estimating?
Plan Cost Management
If there’s a high degree of uncertainty or undefined scope, detailed estimates may not be useful. Instead lightweight, fast methods can be used to create a high-level forecast of labor costs, which can be adjusted with change
Detailed estimates are reserved for short-term planning, just-in-time horizon
What does the Cost Management plan include?
- Level of accuracy - range
- Level of precision - how estimates are rounded up and down
- Unit of measurement
Control threshold - Rules of performance measurement - when and how reports will be made
- Reporting formats
What’s included in cost estimates?
Estimate Costs
WBS estimates contingency reserves indirect costs vendor bids cost of quality Range % EEFs- exchange rates, inflation
What is an agile estimate?
Estimate Costs
lightweight, high-level forecast and only provide detailed estimates at the last responsible moment. Progressive elaboration
Estimating techniques (4)
Estimate Costs
Analogous - fast / not accurate
Paremetric - good for repetition - fast / accuracy depends
Bottoms-up - slow / accurate
Three point (triangular and PERT distribution)
PERT estimating formulas?
Estimate Costs
Triangular distribution O+M+P/3
PERT/Beta distribution O+4M+p/6
Cost types (4)?
Estimate Costs
Fixed - expenses don’t change, rent for the next year
Variable - generally based on quality or amount, (utility bills)
Direct - billed to a project (labor)
indirect - cost cannot be allocated to specific activities (power consumption)
Alternatives analysis
Reserve Analysis
Cost of quality
Estimate Costs
Alternatives analysis - make/buy/lease, share resources
Reserve analysis - estimates include contingency reserves. The budget within the cost baseline allocated for identified risks
cost of conformance + cost of non-conformance. Evaluate cost impact of additional investment in conformance. Short-term cost reductions vs. more problems later
Cost of quality?
Estimate Costs
Cost of Conformance - build quality into project processes. Costs incurred by activities that ensure project and deliverables conform to quality requirements and avoid failure.
Two categories
1. Prevention costs - prevent defects from arising:
Training, documentation, following quality assurance, equipment maintenance
- Appraisal costs - money spent to inspect and dig out defects to prevent defects from getting into hands of customer
Testing and inspection
Quality control activities
Corrective Action
Cost of Nonconformance - cost incurred when defects are found in deliverables that have been delivered to customer and are in use.
DEFECT REPAIR
External failure - failure costs that are identified by the customer
-Warranty work
Liabilities
-Life and limb
Loss of business / good will / reputation
usually to be expressed in a range of values
Cost of rework can be 5,000 x the cost of carrying out unit testing
Basis of estimates
ditional details on how the cost estimate was derived
