Chapter 8

Chapter 8 Cost Estimation and Budgeting

8.1 True/False

1) Direct costs are those clearly assigned to the aspect of the project that generated the cost.Answer: TRUEDiff: 1Section: 8.1 Cost ManagementSkill: FactualAACSB Tag: Reflective

2) Material is an example of a cost that is recurring, variable and direct.Answer: TRUEDiff: 2Section: 8.1 Cost ManagementSkill: FactualAACSB Tag: Reflective

3) An expedited cost is one that does not vary with respect to their usage.Answer: FALSEDiff: 2Section: 8.1 Cost ManagementSkill: FactualAACSB Tag: Reflective

4) An order of magnitude estimate is usually more accurate than a ballpark estimate.Answer: FALSEDiff: 1Section: 8.2 Cost EstimationSkill: FactualAACSB Tag: Reflective

5) Comparative estimates are more accurate than definitive estimates when applied to the same project.Answer: TRUEDiff: 2Section: 8.1 Cost ManagementSkill: FactualAACSB Tag: Reflective

6) A learning rate of 90% means that for every doubling of output, the time required by the activity falls by 10%.Answer: FALSEDiff: 2Section: 8.3 Creating a Project BudgetSkill: FactualAACSB Tag: Reflective7) There is a tendency for different departments or functions to compete for scarce resources in a zero-sum game when bottom-up budgeting is used to develop a project budget.Answer: FALSEDiff: 2Section: 8.3 Creating a Project BudgetSkill: FactualAACSB Tag: Reflective

8) Activity-based costing is based on the notion that projects consume activities and activities consume resources.Answer: TRUEDiff: 2Section: 8.3 Creating a Project BudgetSkill: FactualAACSB Tag: Reflective

9) A time-phased budget allocates costs across both project activities and the anticipated time in which the budget is to be expended.Answer: TRUEDiff: 2Section: 8.3 Creating a Project BudgetSkill: FactualAACSB Tag: Reflective

10) A budget contingency of $1 million on a $10 million project means that the project will be planned for a cost of $10 million, but the project organization receives an extra $1 million to guard against unforeseen cost overruns.Answer: FALSEDiff: 1Section: 8.3 Creating a Project BudgetSkill: FactualAACSB Tag: Analytic Skills

8.2 Fill in the Blank

1) Employing an overhead multiplier is sometimes referred to as the __________ rate for direct labor costs.Answer: fully-loadedDiff: 1Section: 8.1 Cost ManagementSkill: FactualAACSB Tag: Reflective

2) __________ costs might be those associated with charges applied once at the beginning or end of a project.Answer: NonrecurringDiff: 1Section: 8.1 Cost ManagementSkill: FactualAACSB Tag: Reflective3) Unplanned costs incurred when steps are taken to speed up the project's completion are __________.Answer: expedited costsDiff: 2Section: 8.1 Cost ManagementSkill: DefinitionAACSB Tag: Reflective

4) The unofficial rule of thumb for __________ estimates is to aim for an accuracy of plus or minus 30%.Answer: ballpark or order of magnitudeDiff: 2Section: 8.2 Cost EstimationSkill: DefinitionAACSB Tag: Reflective

5) __________ cost estimates can only be given upon the completion of most of the design work at a point when the scope and capabilities of the project are well-understood.Answer: DefinitiveDiff: 2Section: 8.2 Cost EstimationSkill: FactualAACSB Tag: Reflective

6) Cost estimates can be too low if issues outside a firm's control affect the project organization's ability to complete the project. These __________ might include inflation or political instability.Answer: external factorsDiff: 2Section: 8.2 Cost EstimationSkill: FactualAACSB Tag: Reflective

7) The __________ is a plan that identifies the allocated resources, the project's goals, and the schedule that allows an organization to achieve those goals.Answer: project budgetDiff: 2Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

8) __________ begins with the work packages of the work breakdown structure and specifies funds that are needed to support the tasks. These costs are aggregated by managers and duplicate costs are removed as managers' budgets are combined.Answer: Bottom-up budgetingDiff: 2Section: 8.3 Creating a Project BudgetSkill: FactualAACSB Tag: Reflective9) Activity-based costing is a budgeting method that identifies __________ associated with activities that consume resources.Answer: cost driversDiff: 2Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

10) __________ is typically added to the project's budget following the identification of all project costs; that is, the project does not include __________ as part of the activity-based costing process.Answer: Contingency money (funds), contingencyDiff: 3Section: 8.3 Creating a Project BudgetSkill: FactualAACSB Tag: Reflective

8.3 Multiple Choice

1) Which of the following is a direct cost?A) laborB) rentC) depreciation on equipmentD) health benefitsAnswer: ADiff: 1Section: 8.1 Cost ManagementSkill: FactualAACSB Tag: Reflective

2) Which worker's wages would constitute a direct cost for a construction project?A) the project's cost accountantB) the brick masonC) the architect's assistantD) the foreman'sAnswer: BDiff: 1Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

3) Three workers complete a full 8-hour day finishing concrete for a terrace. All three workers are paid $12 an hour and the job bills to the customer for $450. What are the total direct labor costs?A) $450B) $12C) $288D) $96Answer: CDiff: 1Section: 8.1 Cost ManagementSkill: AnalyticalAACSB Tag: Analytic Skills4) Which of these indirect costs is typically classified as an overhead cost?A) advertisingB) shippingC) sales commissionsD) taxesAnswer: DDiff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

5) Which of these indirect costs is typically classified as a selling or administrative cost?A) secretarial supportB) utilitiesC) insuranceD) depreciationAnswer: ADiff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

6) A systems analyst is paid at the rate of $50/hour and will be needed for 40 hours. Her employer uses an overhead multiplier of 60% and does not factor in personal time. Her total direct labor cost that should be billed at:A) $2,000.B) $3,200.C) $1,250.D) $4,500.Answer: BDiff: 2Section: 8.1 Cost ManagementSkill: AnalyticalAACSB Tag: Analytic Skills

7) Workers paid $15.00 per hour with an overhead charge of 1.45 and a personal time allowance of 1.15, have what total direct labor cost for an 8-hour work day?A) $151.30B) $174.00C) $200.10D) $236.80Answer: CDiff: 2Section: 8.1 Cost ManagementSkill: AnalyticalAACSB Tag: Analytic Skills8) Which of these is typically a recurring cost?A) preliminary market analysisB) personnel trainingC) outplacement servicesD) logisticsAnswer: DDiff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

9) Which of these is typically a nonrecurring cost?A) site studyB) laborC) materialD) salesAnswer: ADiff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

10) The charge that is most likely a fixed cost is for:A) materials.B) equipment rental.C) direct labor.D) utilities.Answer: BDiff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

11) You are probably looking at a bill for a variable cost when you are paying for:A) leased capital equipment.B) salaries.C) materials.D) health insurance.Answer: CDiff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective12) A normal cost is incurred when:A) overtime is used more than originally planned.B) shipments are expedited.C) additional temporary workers are brought on site.D) the aggressive baseline plan is adhered to.Answer: DDiff: 2Section: 8.1 Cost ManagementSkill: FactualAACSB Tag: Reflective

13) Unplanned costs incurred when steps are taken to speed up project's completion are called:A) expedited costs.B) accelerated costs.C) pass-through costs.D) normal costs.Answer: ADiff: 2Section: 8.1 Cost ManagementSkill: DefinitionAACSB Tag: Reflective

14) A key for developing project cost estimates is to:A) cost the project while considering the total package.B) cost the project on a work package and task basis.C) cost the project on a major module basis.D) cost the project and add 33% for contingency.Answer: BDiff: 2Section: 8.2 Cost EstimationSkill: FactualAACSB Tag: Reflective

15) The order of magnitude cost estimate is used when:A) ballpark estimates are not considered accurate enough.B) historical data are readily available.C) information or time is scarce.D) parametric estimation has already been performed.Answer: CDiff: 2Section: 8.2 Cost EstimationSkill: FactualAACSB Tag: Reflective16) When asked to provide an estimate of an irrigation system, Pete looked from one end of the field to the other, licked a finger and held it in the air, squinted into the sun and said $25,000, give or take 30%. The technique employed for cost estimation is:A) parametric.B) comparative.C) definitive.D) ballpark.Answer: DDiff: 2Section: 8.2 Cost EstimationSkill: DefinitionAACSB Tag: Reflective

17) Estimates based on the assumption that historical data can be used as a frame of reference for current estimates are:A) comparative estimates.B) ballpark estimates.C) definitive estimates.D) feasibility estimates.Answer: ADiff: 2Section: 8.2 Cost EstimationSkill: DefinitionAACSB Tag: Reflective

18) When their baby was ready to head off to college, the beleaguered parents pulled out the college folder from their file cabinet and added up the cost of putting their first child through college from 1995-2000. The mother whimpered as she factored in the rising cost of tuition, fees, books, and inflation by multiplying the total by 2.5. The father felt a searing pain go through his chest as he saw the total, knowing full well that their cost estimation approach, called:A) an order of magnitude estimate, was highly accurate.B) parametric estimation, was highly accurate.C) feasibility estimation, was highly accurate.D) definitive estimation, was highly accurate.Answer: BDiff: 2Section: 8.2 Cost EstimationSkill: DefinitionAACSB Tag: Reflective

19) Effective comparative estimates rely most heavily on:A) an accurate inflation factor.B) the correct number of years elapsed between the old project and the current one.C) true comparability between the current project and previous project work.D) the correct number of employees on the new project compared with the previous one.Answer: CDiff: 2Section: 8.2 Cost EstimationSkill: FactualAACSB Tag: Reflective

20) Cost estimates that are based as a guideline on real numbers, or figures derived after the completion of preliminary design work, are:A) definitive estimates.B) order of magnitude estimates.C) parametric estimates.D) feasibility estimates.Answer: DDiff: 2Section: 8.2 Cost EstimationSkill: DefinitionAACSB Tag: Reflective

21) Once most of the design work is complete, at a point when the scope and capabilities of the project are quite well understood, a __________ may be developed.A) definitive estimateB) comparative estimateC) a parametric estimateD) a non-parametric estimateAnswer: ADiff: 2Section: 8.2 Cost EstimationSkill: ConceptualAACSB Tag: Reflective

22) Which of these estimates should be the most accurate?A) parametricB) definitiveC) comparativeD) order of magnitudeAnswer: BDiff: 2Section: 8.2 Cost EstimationSkill: DefinitionAACSB Tag: Reflective

23) An activity with a learning rate of 0.9 takes 20 hours for the first iteration. How long will it take to complete this task for the 10th time?A) 0.9 hoursB) 10 hoursC) 14 hoursD) 17 hoursAnswer: CDiff: 2Section: 8.2 Cost EstimationSkill: AnalyticalAACSB Tag: Analytic Skills

24) If it takes 50 hours to complete the first unit and the company knows from experience that the learning rate should be 0.85, how fast can they be expected to finish all ten units?A) 29 hoursB) 500 hoursC) 234 hoursD) 356 hoursAnswer: ADiff: 3Section: 8.2 Cost EstimationSkill: AnalyticalAACSB Tag: Analytic Skills

25) It took 80 hours of analysis to complete the first phase, but the second phase was done in 74 hours. If this learning rate continues, then the 8th analysis should take a mere:A) 63 hours and 20 minutes, give or take.B) 68 hours and 30 minutes, give or take.C) 57 hours and 15 minutes, give or take.D) 52 hours and 45 minutes, give or take.Answer: ADiff: 3Section: 8.2 Cost EstimationSkill: AnalyticalAACSB Tag: Analytic Skills

26) What learning rate is being demonstrated if the first unit takes 15 hours and the third unit takes 14 hours to complete?A) greater than or equal to 97 percentB) less than 97 percent but greater than or equal to 95 percentC) less than 95 percent but greater than or equal to 93 percentD) less than 93 percentAnswer: BDiff: 3Section: 8.2 Cost EstimationSkill: AnalyticalAACSB Tag: Analytic Skills

27) Which statement about the use of learning curves is best?A) Learning curve effects stay constant across projects.B) A job that is substantially re-engineered will have no disruption of its learning curve.C) It may be more likely to see learning curve effects in construction than in research and development.D) Every worker performing an identical task will exhibit the same learning effect.Answer: BDiff: 1Section: 8.2 Cost EstimationSkill: FactualAACSB Tag: Reflective

28) There was no way that the study tour to Italy could cost only $1500 for 14 days and 13 nights and include all transportation, meals and hotels, but the smarmy professor knew that students would balk at a higher advertised price. Once they were thousands of miles away from home in a country where none of them spoke the language it would be easier to tell them about unanticipated charges and approach the more realistic price of $3500 per person. This type of:A) specification change is a common reason for a cost overrun.B) lack of definition is a common reason for a cost overrun.C) low initial estimate is a common reason for a cost overrun.D) unexpected technical difficulty is a common reason for a cost overrun.Answer: CDiff: 1Section: 8.2 Cost EstimationSkill: ConceptualAACSB Tag: Reflective

29) Whether it is the Boeing V-22 Osprey or a simple storm door installation for a do-it-yourselfer, nothing is ever completed as quickly or as cheaply as initial estimates due to:A) lack of definition.B) low initial estimates.C) specification changes.D) unexpected technical difficulties.Answer: DDiff: 2Section: 8.2 Cost EstimationSkill: ConceptualAACSB Tag: Reflective

30) Poor initial scope development and work breakdown structure often creates cost overruns that are attributable to:A) lack of definition.B) deliberate low initial estimates.C) unexpected technical difficulties.D) external factors.Answer: ADiff: 2Section: 8.2 Cost EstimationSkill: ConceptualAACSB Tag: Reflective

31) It began as a simple macro that would extract grades and post them on a web site, but once the web programmer began the work, he became obsessed with various charting features, grade summaries, and reports that could be added to make this the grandest web site in the tri-county area. As 2 hours of programming work grew to 20 and then 80, he knew that the client wouldn't be happy with the cost overrun. The only comment he mumbled as he finished his work was:A) "I had some technical difficulties, sorry."B) "There were some specification changes, sorry."C) "This project lacked definition from the outset, sorry."D) "I thought I'd never get the wizard's hat! Oh, by the way, your grades work."Answer: BDiff: 2Section: 8.2 Cost EstimationSkill: ConceptualAACSB Tag: Reflective

32) The 1974 model Eldorado is a three-ton behemoth with a 500-cubic-inch engine that is long on style but short on gas mileage. During its five-year development process no one could possibly have anticipated that gas prices would go through the roof in 1973, making it far more expensive to operate and subsequently less attractive to a gas-price-conscious public. Design engineers scrambled to change the car in the last few months leading up to its debut, adding a slimmed down version with a smaller engine. All of the design overtime meant that the project budget took a big hit though, thanks to:A) the initial low estimate.B) the unexpected technical difficulties.C) this external factor.D) the lack of definition.Answer: CDiff: 2Section: 8.2 Cost EstimationSkill: ConceptualAACSB Tag: Reflective

33) A plan that identifies the allocated resources, the project's goals, and the schedule that allows an organization to achieve those goals is:A) the work breakdown structure.B) the risk management plan.C) the statement of work.D) the project budget.Answer: DDiff: 2Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

34) The project plan is supported by the work breakdown structure,:A) the budget, and the schedule.B) the budget, and the work packages.C) the work packages, and the schedule.D) the schedule, and the contingency plan.Answer: ADiff: 2Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

35) Input is received from an organization's management to create a project budget in:A) zero-based budgeting.B) top-down budgeting.C) bottom-up budgeting.D) activity-based budgeting.Answer: BDiff: 1Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

36) An advantage of top-down budgeting is:A) that top management estimates of project costs are often quite accurate, at least in aggregate.B) an elimination of the friction between top and lower levels in the competition for budget money.C) that projects are no longer a zero-sum game among lower level managers.D) top management budgets, by definition, cannot experience overruns.Answer: ADiff: 2Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

37) A budget that is created by starting with the work breakdown structure, determining costs for each work package, and then adding these costs together is:A) zero-based budgeting.B) top-down budgeting.C) bottom-up budgeting.D) activity-based budgeting.Answer: CDiff: 1Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

38) When properly performed, bottom-up budgeting has the disadvantage of:A) a lack of detail needed in project plans.B) a lack of coordination among project managers and functional department heads.C) being a hindrance to top managers when prioritizing projects that are competing for the same scarce resources.D) a reduction of top management's control of the budget process to one of oversight.Answer: DDiff: 3Section: 8.3 Creating a Project BudgetSkill: ConceptualAACSB Tag: Reflective

39) A budgeting method that assigns costs first to activities and then to projects based on each project's use of resources is:A) activity-based budgeting.B) zero-based budgeting.C) top-down budgeting.D) bottom-up budgeting.Answer: ADiff: 1Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

40) Activity-based costing and bottom-up budgeting share the step of:A) identifying cost drivers associated with each activity.B) identifying activities that consumer resources and assigning costs to them.C) assigning costs to projects by multiplying the cost driver rate times the volume of units.D) tending to overestimate project costs due to the lack of involvement by top management.Answer: BDiff: 2Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

41) The new dock would require 24 piers to support it and it was known that each time a pier is sunk into the harbor it would take 300 man hours of labor at $25 per hour. An activity-based costing of the entire pier system results in a total cost of how much?A) $600B) $7,500C) $300,000D) $180,000Answer: DDiff: 2Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

42) A budget containing disaggregated figures across the schedule when work is planned is a:A) time-phased budget.B) chronic budget.C) temporal budget.D) calendar budget.Answer: ADiff: 2Section: 8.3 Creating a Project BudgetSkill: DefinitionAACSB Tag: Reflective

43) Which of the following is NOT contained in a typical time-phased budget?A) total expenses for each activityB) total expenses for each time unitC) cumulative expenses for each time unitD) cumulative time for each expenseAnswer: DDiff: 2Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

44) What is the cumulative cost in February in this time-phased budget?

ActivityJanuaryFebruaryMarchAprilSurvey5,000Design3,0003,000Dirt4,000Foundation10,000Framing35,000Plumb6,000Wire5,500A) $25,000B) $17,000C) $14,000D) $0Answer: ADiff: 2Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

45) What is the total amount budgeted for design costs in this time-phased budget?

ActivityJanuaryFebruaryMarchAprilSurvey5,000Design3,0003,000Dirt4,000Foundation10,000Framing35,000Plumb6,000Wire5,500A) $3,000B) $6,000C) $10,000D) $17,000Answer: BDiff: 1Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

46) What is the total amount budgeted for March in this time-phased budget?

ActivityJanuaryFebruaryMarchAprilSurvey5,000Design3,0003,000Dirt4,000Foundation10,000Framing35,000Plumb6,000Wire5,500A) $6,000B) $35,000C) $41,000D) $66,000Answer: CDiff: 2Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

47) What is the total project budget in this time-phased budget?

ActivityJanuaryFebruaryMarchAprilSurvey5,000Design3,0003,000Dirt4,000Foundation10,000Framing35,000Plumb6,000Wire5,500A) cannot be determined from the information givenB) $61,000C) $35,000D) $71,500Answer: DDiff: 1Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

48) What is the total project budget in this time-phased budget? ActivityJulyAugustSeptemberOctoberNovemberRFP31,000Analysis3,00015,000Design23,00034,000Coding46,000Testing10,000Training15,00015,000Roll-Out18,000A) $210,000B) $193,000C) $184,500D) $178,300Answer: ADiff: 1Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

49) What is the cumulative project budget for September in this time-phased budget? ActivityJulyAugustSeptemberOctoberNovemberRFP31,000Analysis3,00015,000Design23,00034,000Coding46,000Testing10,000Training15,00015,000Roll-Out18,000A) $210,000B) $152,000C) $137,800D) $80,000Answer: BDiff: 2Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

50) What is the total project budget for design in this time-phased budget?

ActivityJulyAugustSeptemberOctoberNovemberRFP31,000Analysis3,00015,000Design23,00034,000Coding46,000Testing10,000Training15,00015,000Roll-Out18,000A) $152,000B) $106,000C) $57,000D) $34,000Answer: CDiff: 1Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

51) What is the project budget for November in this time-phased budget?

ActivityJulyAugustSeptemberOctoberNovemberRFP31,000Analysis3,00015,000Design23,00034,000Coding46,000Testing10,000Training15,00015,000Roll-Out18,000A) $21,000B) $15,000C) $18,000D) $33,000Answer: DDiff: 2Section: 8.3 Creating a Project BudgetSkill: AnalyticalAACSB Tag: Analytic Skills

52) An allocation of extra funds to cover uncertainties and improve chances that the project can be completed within the timeframe originally specified is a(n):A) setback.B) budget contingency.C) reallocation budget.D) reserve line budget.Answer: BDiff: 2Section: 8.4 Developing Budget ContingenciesSkill: DefinitionAACSB Tag: Reflective

53) Contingency money is:A) the money that must be received before any project work can begin.B) money that is spent first to lock-in all contract guarantees.C) not usually a part of the activity-based costing process.D) valued at a higher rate than non-contingency money when determining project costs.Answer: CDiff: 2Section: 8.4 Developing Budget ContingenciesSkill: DefinitionAACSB Tag: Reflective

54) It was fortunate that the project budget included contingency funding; the top manager had not foreseen that the project would need the services of their elite slide rule squad in more than one area at the same time. Design couldn't complete their work without their services, nor could marketing, or production. Contingency funds came in handy to meet the unanticipated:A) change in project scope.B) abnormal project conditions.C) consequences of Murphy's Law.D) interaction costs.Answer: DDiff: 2Section: 8.4 Developing Budget ContingenciesSkill: ConceptualAACSB Tag: Reflective

55) After years of tinkering and reverse engineering initiatives, Kimray had finally unlocked the secrets of the Beta tape format. A quick trip to the rental store was an epiphany for company leadership when they realized that only a handful of Beta tapes were available; the rest of the world had adopted the VHS format seemingly overnight. Now they would have to buy a few of those newfangled VHS machines to see how they ticked. The contingency funds that management had set aside would be put to good use on this:A) change in project scope.B) abnormal condition.C) unanticipated interaction cost.D) latest evidence of Murphy's Law.Answer: ADiff: 2Section: 8.4 Developing Budget ContingenciesSkill: ConceptualAACSB Tag: Reflective

56) "If anything can go wrong it often will" is an articulation of:A) Taylor's Theorem.B) Pinto's Postulate.C) Murphy's Law.D) the Pareto PrincipleAnswer: CDiff: 1Section: 8.4 Developing Budget ContingenciesSkill: DefinitionAACSB Tag: Reflective

57) Project cost estimates usually anticipate that resources will be available, that the weather will not be extreme, and that funding will materialize, creating what are called:A) hyperactivity.B) standard operating procedures.C) standard duress.D) normal conditions.Answer: DDiff: 1Section: 8.4 Developing Budget ContingenciesSkill: ConceptualAACSB Tag: Reflective58) A disadvantage of contingency funds is:A) a recognition that the future contains both knowns and unknowns and the problems that might arise will impact the budget.B) it is difficult to ascertain across what project activities contingency funds should be applied.C) that application to the contingency fund gives an early warning signal of a potential overdrawn budget.D) that provision is made in the company plans for an increase in project cost.Answer: BDiff: 2Section: 8.4 Developing Budget ContingenciesSkill: ConceptualAACSB Tag: Reflective

59) A contingency rate of 10% on a building project budgeted at $20 million means:A) the project organization is hoping to bring the project in for around $22 million.B) the project organization is hoping to bring the project in for around $2 million.C) the project organization is hoping to bring the project in for around $18 million.D) the project organization is hoping to bring the project in for around $200 million.Answer: CDiff: 2Section: 8.4 Developing Budget ContingenciesSkill: AnalyticalAACSB Tag: Analytic Skills

60) An early warning signal for the potential of an overdrawn budget is created when:A) activity-based costing cannot identify drivers.B) a bottom-up budget never makes it up the chain of command.C) contingency funds are applied for.D) a top-down process moves too quickly down to the functional managers.Answer: CDiff: 2Section: 8.4 Developing Budget ContingenciesSkill: ConceptualAACSB Tag: Reflective

8.4 Essay

1) What are four major categories of costs? Provide descriptions for each category.Answer: Some of the more common project costs include labor, materials, subcontractors, equipment and facilities, and travel. Labor costs are those associated with hiring and paying the various personnel involved in developing the project. Material costs apply to the specific equipment and supplies the project team will require in order to complete the project tasks. Subcontractors may provide resources (and in the case of consultants, expertise) for the project, their costs must be factored into the preliminary cost estimate and be reflected in the budget. Firms commonly include rental of equipment and facilities as a charge against the cost of the project when the project is developed away from the firm's home office. If necessary, expenses that are related to business travel can be applied to the project as an up-front charge.Diff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective2) Provide examples and discuss the differences between direct and indirect costs.Answer: Direct costs are those clearly assigned to the aspect of the project that generated the cost. Examples include labor that is hands-on in the production of the project and materials that are used and sold or consumed in the creation of the project. Indirect costs are generally linked to two features: overhead and selling and general administration. Health benefits for the labor force, taxes, insurance, depreciation and repairs are all indirect costs. Direct costs of materials and labor are generally easier to calculate than indirect costs, which are often calculated as a multiplier of some of the direct costs.Diff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

3) Explain the difference between normal and expedited costs, fixed and variable costs, and recurring or nonrecurring costs. Create a 2x2x2 matrix and provide one example each (8 total examples) of each combination of these costs.Answer: Examples may vary.Nonrecurring costs might be those charges applied once at the beginning or end of the project while recurring costs are those that typically continue to operate over the project's life cycle. Fixed costs do not vary with their usage but variable costs accelerate through usage. Normal costs are those incurred through the routine process of working to complete the project according to the original schedule but expedited costs are unplanned costs incurred when steps are taken to speed up the project's completion.Diff: 3Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

4) Rank the four different types of cost estimates from most to least accurate and explain what the inputs are to each type.Answer: The cost estimates as ranked from most accurate to least accurate are definitive estimates, feasibility estimates, comparative estimates, and ballpark, or order of magnitude estimates. Definitive estimates are expected to have an accuracy of plus or minus 5% and can be competed only after the completion of most design work, at a point when the scope and capabilities of the project are quite well understood. Feasibility estimates are within plus or minus 10% and are made after completion of the preliminary design work following initial scope development upon receiving quotes from suppliers and subcontractors. Comparative estimates approach plus or minus 15% accuracy and are based on the assumption that historical data can be used as a frame of reference for current estimates on similar projects. Ballpark estimates are created when information or time (or both) are scarce and are targeted at plus or minus 30%.Diff: 3Section: 8.2 Cost EstimationSkill: ConceptualAACSB Tag: Reflective5) What are parametric cost estimates and how are they developed?Answer: Parametric estimates are a form of comparative estimates, which are based on the assumption that historical data can be used as a frame of reference for current estimates on similar projects. Parametric estimation takes older work and uses a multiplier to account for the impact of inflation, labor and materials increases, and other reasonable costs.Diff: 2Section: 8.1 Cost ManagementSkill: ConceptualAACSB Tag: Reflective

6) Define learning curve theory and describe how learning curves are used in project management.Answer: Learning curve theory says that a task can be performed more quickly as repetitions increase, specifically a doubling of output results in a fixed percentage reduction in time required to complete the last unit produced. Learning curve rates can be used in a project if there is an activity that remains fairly constant and is performed repeatedly. Rather than using a direct multiplier of the number of repetitions times the time required to complete the first iteration, the project manager can use the learning curve equation:

Yx = aXb

to calculate the time required for successive units as long as the learning curve rate can be estimated. The result will be a time estimate lower than by direct multiplication, which might permit the project manager to more accurately gauge the amount of labor and time required and prepare a more competitive bid.Diff: 2Section: 8.2 Cost EstimationSkill: DefinitionAACSB Tag: Analytic Skills

7) Big Mike has to prepare a bid for the swimming pools to be placed in every backyard in a new housing addition. Each swimming pool represents only a slight variation on the other, so there is a good opportunity to leverage learning effects in the bid process. A swimming pool installation can be broken down into four major steps: excavation, concrete, plumbing, and finish work. Mike has found the best contractors and asks each of them how long it will take to complete work on the first pool and what their learning rates are. Amazingly, each contractor is intimately familiar with learning curve theory and knows what his learning rate is for this type of work. This information is summarized in the table. FunctionFirst PoolLearning RateExcavation22 hours.95Concrete32 hours.90Plumbing10 hours.85Finishing30 hours.85How long will it take to complete the 25th pool for the subdivision?How long will it take to complete all 25 pools for the subdivision?Answer: The twenty-fifth unit for each function is calculated as follows:

A full table for units one through twenty-five is below:

Rate0.95Rate0.9Rate0.85Rate0.85ExcavationConcretePlumbingFinishingUnit #UnitTotalUnitTotalUnitTotalUnitTotal12222323210103030220.942.928.860.88.518.525.555.5320.363.227.187.97.726.223.278.7419.983.025.9113.87.233.521.7100.4519.5102.625.1138.96.940.320.6120.9619.3121.824.4163.26.646.919.7140.6719.0140.923.8187.06.353.219.0159.7818.9159.723.3210.46.159.418.4178.1918.7178.422.9233.36.065.317.9196.01018.6197.022.6255.85.871.217.5213.51118.4215.422.2278.05.776.917.1230.61218.3233.721.9300.05.682.416.8247.31318.2251.921.7321.75.587.916.4263.81418.1270.021.4343.15.493.316.2279.91518.0288.021.2364.35.398.615.9295.81617.9305.921.0385.35.2103.815.7311.51717.8323.820.8406.15.1109.015.4326.91817.8341.520.6426.75.1114.115.2342.21917.7359.220.5447.25.0119.115.0357.22017.6376.920.3467.45.0124.014.9372.12117.6394.420.1487.64.9128.914.7386.82217.5411.920.0507.64.8133.814.5401.32317.4429.419.9527.54.8138.614.4415.72417.4446.819.7547.24.7143.314.2429.92517.3464.119.6566.84.7148.014.1444.0The total time for all twenty-five pools is:Total Time = 464.1 + 566.8 + 148 + 444 = 1623 hoursDiff: 2Section: 8.2 Cost EstimationSkill: AnalyticalAACSB Tag: Analytic Skills

8) What are the major issues with cost estimation of software projects?Answer: The software project industry has a very poor record when it comes to project performance. Research has shown that for large companies, less than 9% of IT projects are completed on schedule and budget and over half of the software projects will cost almost 200% of their original budget. A recent book by Steven McConnell offers some insights why software projects suffer. Among these findings are the common failure to budget adequate time and funding for project activities. Small IT projects spend the majority of their time in detailed design, coding and debugging, and unit testing. As the complexity of the projects rises, the focus of activity shifts to three other activitiesarchitecture, integration, and system testing. The implications suggest that IT project budgets must consider the size of the project as they calculate cost components so that the separate functions can be allocated an appropriate budget.Diff: 2Section: 8.2 Cost EstimationSkill: ConceptualAACSB Tag: Use of IT

9) Describe any three reasons that cost overruns occur in project work.Answer: The most common reasons for cost overruns are low initial estimates, unexpected technical difficulties, lack of definition, specification changes, and external factors. Low initial estimates may be created deliberately, perhaps as an effort to gain approval, or accidentally, through carelessness, but will almost always result in a cost overrun. Unexpected technical difficulties often occur in high-tech projects that require bleeding-edge technology. Lack of definition as a result of poor initial scope development creates projects with poorly defined features or goals, which spills over into poor cost estimates. Specification changes resulting in scope creep from the initial baseline project inevitably require more time and money to bring the project into alignment with the new, larger scope. External factors beyond the control of the project organization require a response, one that calls unanticipated resource requirements into the fray, resulting in cost overruns.Diff: 2Section: 8.3 Creating a Project BudgetSkill: ConceptualAACSB Tag: Reflective

10) What's the relationship between WBS, scheduling, and budgeting?Answer: The central goal of a budget is the need to support, rather than conflict with the project's and organization's goals. The project budget is a plan that identifies the allocated resources, the project's goals, and the schedule that allows an organization to achieve those goals. The project budget must be coordinated with the project activities defined in the work breakdown structure, as the WBS sets the stage for creating the project schedule and the budget assigns the necessary resources to support the schedule.Diff: 1Section: 8.3 Creating a Project BudgetSkill: ConceptualAACSB Tag: Reflective

11) How are top-down and bottom-up budgets created? What advantages does each approach hold over the other?Answer: Top-down budgeting requires direct input from the organization's top management; in essence, this approach seeks to first ascertain the opinions and experiences of top management regarding estimated project costs. Bottom-up budgeting begins inductively from the work breakdown structure to apply direct costs to project activities that are then aggregated, first at the work package level, then at the deliverable level, at which point all task budgets are combined, and then higher up the chain to create an overall project budget. Top-down budgeting has the benefit of experienced senior personnel getting directly involved in project estimation, but can create friction between departments, functions, and managers at lower levels in the organization as they scramble for the largest share of the budget that they can grab. Bottom-up budgeting emphasizes the need to create detailed plans and facilitates coordination between project managers and functional department heads. Unfortunately, bottom-up budgeting reduces top management's control of the budget process to one of oversight and may result in a disconnect between their strategic plans and the direction the project is taking.Diff: 2Section: 8.3 Creating a Project BudgetSkill: ConceptualAACSB Tag: Reflective

12) What is activity-based costing and how is it performed?Answer: Activity-based costing (ABC) is a budgeting method that assigns costs first to activities and then to the projects based on each project's use of resources. It is based on the notion that projects consume activities and activities consume resources. Activity-based costing consists of four steps:- Identify the activities that consume resource and assign costs to them as is done in a bottom-up budgeting process.- Identify the cost drivers associated with the activity.- Compute a cost rate per cost driver unit or transaction.- Assign costs to projects by multiplying the cost driver rate times the volume of cost driver units consumed by the project.Diff: 1Section: 8.3 Creating a Project BudgetSkill: ConceptualAACSB Tag: Reflective

13) What is a time-phased budget and how does it help a project manager control costs?Answer: A time-phased budget allocates costs across both project activities and the anticipated time in which the budget is to be expended. The budget can be displayed as a table with one dimension representing time and the other dimension representing the major cost categories or the budget can be summarized by a time plot of dollars. A time-phased budget allows the project manager to match the project schedule with a budget baseline, identifying milestones for both schedule performance and project expense.Diff: 1Section: 8.3 Creating a Project BudgetSkill: ConceptualAACSB Tag: Reflective

14) What is a budget contingency and what are three reasons it might be useful?Answer: A budget contingency is the allocation of extra funds to cover uncertainties and improve the chances that the project can be completed within the timeframe originally specified. Contingency money is added to the project's budget following the identification of all project costs. The author identifies four reasons why it might make sense to include contingency funding in project cost estimates:Project scope is subject to change as the project moves through its development cycle external events or internal forces can require or call for a change in scope beyond what was initially planned for.Murphy's Law is always present if something can go wrong, it will, and this unfortunate circumstance necessitates additional funds to fix the problem.Cost estimation may not have anticipated interaction costs one event or work package interacts with another that requires more work from the first. This iteration can be accommodated with contingency funds.Normal conditions are rarely encountered projects are planned for a "normal" set of operating conditions and quite often, the abnormal occurs.Diff: 2Section: 8.4 Developing Budget ContingenciesSkill: ConceptualAACSB Tag: Reflective

15) What are three benefits to the use of contingency funds?Answer: Use of contingency funds is at first glance not a cause for celebration; however the author identifies three benefits derived from the use of these funds. The first benefit is that their use recognizes that the future contains unknowns and the problems that arise are likely to have a direct effect of the project budget. The project has a cushion of contingency to combat the time and money variance. The second benefit is that the company has already made provision for extra expense and as these funds are used, it opens management's eyes to the possibility of a significant budget increase on the horizon. Finally, application to the contingency funds givens an early warning signal of potential overdrawn budget so management can take a close look at the project and begin formulating additional plans in case the negative trend continues.