MIS 578 Chapter 10: Budgeting Projects

Question 1

Cost planning

Answer 1

This is developing the cost management plan to document how you will plan, structure, and
control project costs. Cost and schedule are closely related.

Question 2

Cost estimating

Answer 2

This process of determining the approximate project costs is an outgrowth of scope, schedule, and
resource planning.

Question 3

Cost estimating

Types of cost

Answer 3

• Fixed vs. Variable costs
  Project managers sometimes can choose between alternative methods and the relative fixed
  and variable costs of each method along with expected volume can help determine the most
  cost-effective approach.
• Direct vs. Indirect costs
  Direct costs only occur because of the project, but other costs of running the company are
  allocated as indirect costs to projects. Project managers need to understand how these costs
  are allocated.
• Recurring vs. Nonrecurring costs
  One-time or nonrecurring costs tend to occur near project start and conclusion, while
  repetitive or recurring costs occur during project execution.
• Regular vs. Expedited costs
  On projects where time is critical, extra charges may be incurred to speed up work.
  Other cost classifications

Question 4

Accuracy and timing of cost estimates

Answer 4

Projects often need preliminary (and perhaps not very accurate) estimates early and more accurate estimates later to support various decisions.

 Order of magnitude estimates
These initial estimates are often made quite early in the project with little detail, and
therefore little expectation of accuracy. They help screen out impractical projects.
 Budget and definitive estimates
As more detailed planning occurs, estimates can become more accurate. These can serve as a
basis for budgets.

Question 5

Methods of estimating costs

Answer 5

Methods for estimating costs vary from highly aggregated approximations to highly detailed
estimates. Each have a time and purpose.

 Analogous estimating
This compares the proposed project to a previous one on an overall basis and adjusts for
differences in factors such as size and complexity to quickly estimate total project costs.
 Parametric estimating
This is a bit more detailed and relies on one or more statistical relationships to estimate.
 Bottom-up estimating
This highly detailed method estimates the costs of each individual part of a project. It is vital
to make sure all portions of the project are included in this estimate as those not included
are underestimated by 100%.

Question 6

Project cost estimating issues

Answer 6

 Supporting detail
- By identifying the scope, estimating methods, assumptions, constraints, and range of
possible outcomes for the estimate, people will know how much confidence to place in it.
 Causes of variation
- All projects have variation. Those with a high percentage of novel work and human
interaction have more variation. Variation can be normal or expected given the work
methods or it can be special – meaning something unusual might happen. Understanding
the type of variation helps to explain and reduce it.
 Vendor bid analysis
- This is determining how reasonable a vendor’s bid is. On projects with substantial
expense in purchased products and services, this becomes more important.
 Value engineering
- This is double checking of all the methods used and features included in a project, and
often uncovers ways to save money and still deliver necessary results.
 Activity-based costing
- This is a modern method of allocating indirect costs more accurately based upon four
different types of cost drivers.
 Life cycle costing
- This method seeks to understand full costs of producing the project and also using the
results of the project for its entire useful life including final disposition.
 Time value of money and international currency fluctuations
These are issues on some projects that are large either in terms of lengthy time and/or multiple
locations.

Question 7

Cost budgeting

Answer 7

This is the process of establishing a cost baseline of when each cost is expected to occur. This
approved budget is part of the overall project management plan and is used for project control.

Question 8

Aggregating costs

Answer 8

This is the process of establishing a cost baseline of when each cost is expected to occur. This approved budget is part of the overall project management plan and is used for project control.

-Aggregating costs
 The budget is aggregated based upon when each work package is scheduled.
-Analyzing reserve needs
 Known knowns are estimated directly and do not require reserves. Known unknowns are
discovered during risk identification and are covered by contingency reserves. Unknown
unknowns (unk unks) are totally unexpected and are covered by management reserves.
o Determining cash flow
Cash outflows on projects often occurs almost continuously (although not necessarily evenly).
Cash inflows often occur in increments – with those from customers often occurring long after
expenses are incurred. Project managers need to understand both to ensure that at no time the
project is without cash to handle expenses.

Question 9

Establishing cost control

Answer 9

The approved project budget serves as a baseline for cost control. Milestones serve as useful
intermediate points to measure progress both in terms of cost and schedule.

Question 10

Cost estimating is closing linked with __________________, _______________________, and ______________________.

Answer 10

Scope, schedule, and resource planning.

Question 11

It is better to begin cost negotiations with project stakeholders before conducting a cost estimate. True or false.

Answer 11

False

Question 12

____________ costs do not depend on the size of the project.

Answer 12

Fixed

Question 13

For a cake baker, ingredients such as flour and eggs are examples of __________________ costs while her
oven is an example of a _______________ cost.

Answer 13

Variable, fixed

Question 14

The salary of a Vice President of an organization is an example of a(n)____________ cost while the salary of
an electrician hired to work on a construction project is an example of a(n) ___________ cost.

Answer 14

Indirect, direct

Question 15

Recurring costs typically occur during the _____________________ phase of a project.

Answer 15

Execution

Question 16

___________________________ is a method in which transactions are recorded when then the expense is
actually occurred.

Answer 16

Accrual accounting

Question 17

_________________________ is a method of accounting where transactions are recorded when the money is actually spent.

Answer 17

Cash accounting

Question 18

_________________________ estimates are often created during the beginning of the project and likely to
be less accurate than later estimates.

Answer 18

Order of magnitude

Question 19

Which cost estimating technique requires the organization to use a larger amount of information,
analogous estimating or parametric estimating?

Answer 19

Parametric

Question 20

Rank the following cost estimating techniques in order from the least time consuming to the most time
consuming.

Analogous estimating
Bottom-up estimating
Parametric estimating

Answer 20

Analogous, parametric, bottom-up

Question 21

It is possible to completely avoid variation in a project. True or false.

Answer 21

False

Question 22

________________________ is used to determine whether a vendor’s bid is reasonable.

Answer 22

Vendor bid analysis

Question 23

It is important that project managers calculate the ___________________ of money when considering
costs in the future.

Answer 23

Time value

Question 24

What is a good management reserve?

Answer 24

10% is a good rule of thumb

Question 25

Explain the importance of creating a cost management plan.

Answer 25

The cost management plan shows how you will ensure accurate estimates are made, secure funding, and develop cost reporting procedures to ensure money is spent correctly. It helps various stakeholders have confidence that the project costs will be well managed.

Question 26

What is cost estimating?

Answer 26

It is the process of estimating the cost of the resources that will be needed to complete a project.

Question 27

Why is it important for project managers to understand the fixed and variable costs of their project?

Answer 27

Understanding the various costs allows them to structure the work in the most cost effective
manner – for example, choosing a work method with higher fixed and lower variable costs if the
project volume of work is large enough for that to be the lower total cost alternative.

Question 28

Describe the difference between direct and indirect project costs.

Answer 28

Direct costs only occur because the project is being undertaken. Indirect costs occur within the
organization so that it can run properly. They are not directly attributable to one specific project.

Question 29

During which phase(s) of a project do nonrecurring costs typically occur in a project? Give an example of a nonrecurring cost.

Answer 29

Nonrecurring costs typically happen during the planning and closing phases of a project. Examples
will vary.

Question 30

Why do project managers prefer to use regular project costs?

Answer 30

Regular costs are incurred when a project is being conducted during normal working hours. The
other alternative is for the project to incur expedited costs. This happens when the project needs to
be completed faster and premiums are charged for the goods/services being used. Regular costs are
preferred by Project managers because they are less expensive and help to keep the project on
budget.

Question 31

List three things that must be in place in order for an analogous estimate to be effective

Answer 31

• The organization must have experience in performing similar projects and know the cost of these
past projects.
• Second, the organization needs to have an understanding of how the current project is different
from previous projects.
• Third, the estimator must have experience with the methods by which the project will be performed

Question 32

Why is it important for assumptions to be listed in the cost estimate?

Answer 32

Helps to ensure that everyone who looks at the estimate is on the same page. Assumptions also
help to give readers of the estimate a basis for the cost. Also, if any of the assumptions prove to be
untrue, it signals that the cost estimates may need to be reconsidered.

Question 33

What is a cost baseline and what types of costs does it include?

Answer 33

A cost baseline is a budget that will be used to compare the project execution. It is useful for
management to monitor and control the project’s costs. A cost baseline contains both direct and
indirect costs associated with the project.

Question 34

What is activity based costing and what impact does it have on project budgeting?

Answer 34

Activity based costing is an accounting approach whereby indirect costs are allocated based upon
the four cost drivers of number of units produced, number of batches run, number of product
variations, and amount of facility utilized. Project managers need to understand this so they can
estimate how much indirect cost will be assigned to their budget.

Question 35

A baker has a contract to bake 3 dozen chocolate chip cookies for a customer’s party. Create a bottom-up
estimate which includes both items needed for their project and their cost. According to your estimate,
how much should the baker charge for the cookies?

Answer 35

Answers will vary.

Should list out various ingredients such as eggs, flour, sugar, chocolate chips etc. with their corresponding cost. Answer should also include the cost of the baker’s time and indirect costs.