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38 Cards in this Set

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Describe the Project Cost Management ka.
Project Cost Management includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.
Describe the 3 processes of cost management?
1. Cost Estimating - The process of developing an approximation of the monetary resources needed to complete project activities.
2. Cost Budgeting - The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.
3. Cost Control - The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.
What is the difference between Cost Estimating and Pricing?
Cost estimating is the process of estimating the cost of the project, considering the tradeoffs between time and cost and evaluating the overall impact of costs on the project. Pricing is a business decision about what the customer or client should be charged for the product or service produced by the project. Cost is part of the pricing decision but they are separate entities.
Describe the 3 tools for estimating cost.
1. Analogous Estimating (a.k.a. Top-Down Estimating) - uses the values of parameters, such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity, from a previous, similar project as the basis for estimating the same parameter or measure for a current project. Analogous cost estimating is generally less costly and time consuming than other techniques, but it is also generally less accurate.
2. Parametric Estimating (a.k.a. Quantitatively-Based Estimating) - uses a statistical relationship between historical data and other variables (e.g., square footage in construction) to calculate an estimate for activity parameters, such as cost, budget, and duration. This technique can produce higher levels of accuracy depending upon the sophistication and underlying data built into the model.
3. Bottom-Up Estimating - a method of estimating a component of work. The cost of individual work packages or activities is estimated with the greatest level of specified detail. The detailed cost is then summarized or “rolled up” to higher levels for subsequent reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating is typically influenced by the size and complexity of the individual activity or work package.
Describe the 5 types and ranges of estimates.
1. Order of Magnitude Estimate - (also known as a feasibility, conceptual or ball-park estimate): an approximate estimate made with no detailed data to back up the estimate. Used in the initial concept phase. Range: −25% to +75%, although the PMBOK mentions that it can be as great as −50% to +100%.
2. Preliminary Estimate - (also called an Analogous Estimate): a more refined estimate than the order of magnitude, based on a more detailed understanding of the project scope. It is often based on similar projects already completed. Range: −15% to +50%.
3. Budget Estimate - (also called an Appropriations or Semi-Detailed Estimate): an estimate used to obtain funds and approval for a project. Range: −10% to +25%.
4. Definitive Estimate - (also called a Bottom-Up Estimate): an estimate prepared from well-defined specifications or detailed data. It is often used for bid proposals, legal claims, permits or government approvals. Range: −5% to +10%.
5. Final Estimate - actual expenditures for the project. Range: −0% to +0%.
What is Reserve Analysis?
Reserve Analysis yields contingency reserves on individual activities or groups of related activities. These allowances are in response to uncertainty or potential risk events. Uncertainty can be defined in terms of knowns and unknowns.
What is a Management Contingency Reserve?
The amount of funds, budget or time needed above the estimate to reduce the risk of overruns of project objectives to a level acceptable to the organization.

May be established for potential required changes to scope at the project level. Sometimes simply called Contingency Reserve, Management contingency reserves are NOT part of the cost baseline, but are in the project budget.
What are the 3 types of uncertainty?
1. Known items are those things you plan for.
2. Known Unknowns are those things you hedge for (contingency).
3. Unknown Unknowns are those items that were never part of the scope and should be addressed through a well-defined change control process.
What is, and how do you create an S-Curve?
S-curves are a graphical representation of accumulated budgeted costs over time. Typically, costs rise gradually early in the project, accelerate during execution and taper off as a project closes, creating a curve that resembles an "S."

The source of S-curves is what you have already worked on: the WBS, project schedule and histogram. Now all you have to do is add your material costs and factors for overhead items and you have your curve.
Describe Crashing.
Crashing is a strategy to compress the project schedule without reducing project scope. Crashing requires using alternative strategies for completing project activities (such as using outside resources) for the least additional cost.
Define PV.
Planned Value (PV) is the sum of the approved cost estimates for activities scheduled to be performed during a given period.
Define AC.
Actual Cost (AC) is the amount of money actually spent in completing work in a given period.
Define EV.
Earned Value (EV) is the sum of the approved cost estimates for activities completed during a given period.
Define CV and its formula.
Cost Variance (CV) is earned value (EV) minus actual cost (AC). It is the difference between the budgeted cost of the work completed and the actual cost of completing the work. A negative number means the project is over budget.

CV = EV − AC
Define SV and its formula.
Schedule Variance (SV) is earned value (EV) minus planned value (PV). It represents the difference between what was accomplished and what was scheduled. A negative number means the project is behind schedule.

SV = EV − PV
Define CPI and its formula.
Cost Performance Index (CPI) is earned value (EV) divided by actual cost (AC). It is the ratio of what was completed to what it cost to complete it. Values less than 1.0 indicate we are getting less than a dollar's worth of value for each dollar we have actually spent. CPI measures cost efficiency.

Define SPI and its formula.
Schedule Performance Index (SPI) is earned value (EV) divided by planned value (PV). It is the ratio of what was actually completed to what was scheduled to be completed in a given period. Values less than 1.0 mean the project is receiving less than a dollar's worth of work for each dollar we were scheduled to spend. SPI measures schedule efficiency.

Define BAC.
Budget At Completion (BAC) is the estimated total cost of the project when completed.
Define EAC and its 4 formulae.
Estimate At Completion (EAC) is the amount we expect the total project to cost on completion and as of the "data date" (time now). There are 3 formulas listed in the PMBOK Guide for computing EAC. Each of these starts with AC(c) or actual costs to date and adds a slightly different formula for the work remaining to be completed. The question of which to use depends on the individual situation and the credibility of the actual work performed compared to the budget up to that point.

This formula is most applicable when future variances are projected to approximate the same level as current variances:
EAC = AC(c) + (BAC − EV(c))/CPI(c)

This is most applicable when the actual performance to date shows that the original estimates were fundamentally flawed or when they are no longer accurate because of changes in conditions relating to the project:
EAC = AC(c) + New Estimate for Remaining Work

This formula is most applicable when actual variances to date are seen as being the exception and the expectations for the future are that the original estimates are more reliable than the actual work effort to date:
EAC = AC(c) + (BAC − EV(c))

This is another formula that might appear on the exam. It is similar to the first EAC formula above but is not included in the PMBOK Guide. This is applicable when the project manager desires to make in adjustment to the budget based on the level of work variance to date:
Define ETC and its 3 formulae.
Estimate to Complete (ETC) is the expected additional costs to complete an activity(-ies) or the project. Like the EAC, there are 3 ways to compute ETC, depending on an assessment of variances to date.
ETC = BAC − EV(c) for atypical variances
ETC = (BAC − EV(c))/CPI(c) for typical variances
ETC = revised estimate for each remaining work package when prior estimates are flawed
Define VAC and its formula.
Variance at Completion (VAC) is the difference between the total amount the project was supposed to cost (BAC) and the amount the project is now expected to cost (EAC).
How do you calculate Depreciation, both straight line and accelerated?
- Straight Line Method: an equal credit is taken during each year of the useful life of an asset. For example, a $5,000 computer depreciated over 3 years with a $200 salvage value, using the straight line method, gives $1,600 each year: $5,000 − $200 = $4,800 and $4,800/3 = $1,600.

- Accelerated Method: more credit is taken during certain years, so the asset depreciates faster than the straight line method. There are 2 types of accelerated depreciation that may show up on the exam:
- Sum of the Years: this method uses the sum of the digits of the years of useful life to get the denominator and uses the number of years remaining as the numerator to calculate a percentage to be depreciated. Our computer with 3 years of useful life would give 6 (3 + 2 + 1) as the denominator and therefore 3/6 (50%) depreciation the first year, 2/6 (33.3%) of the original depreciable value the second year and 1/6 (16.67%) the third year.
- Double Declining Balance: in this method, the percentage of depreciation that would be taken the first year using the straight line method is doubled. This percent is then used to calculate the accelerated depreciation. Each succeeding year, the same percentage is used but it is taken against the remaining asset value.
What are Crashing Costs?
Costs incurred as additional expenses above the normal estimates to speed up an activity.
What are Direct Costs?
Costs incurred directly by a project.
What are Fixed Costs?
Nonrecurring costs that do not change if the number of units is increased.
What are Indirect Costs?
Costs that are part of doing business and are shared among all ongoing projects.
What are Opportunity Costs?
Costs of choosing one alternative over another and giving up the potential benefits of the other alternative.
What are Sunk Costs?
Money already spent; there is no more control over these costs. Since there are expended costs they should not be included when determining alternative courses of action.
What are Variable Costs?
Costs that increase directly with the size or number of units.
What are the 6 steps involved in crashing costs?
1. Isolate the critical path; crashing should be performed on activities on the critical path.
2. Calculate cost for the estimated duration of each activity.
3. Calculate crash cost per time unit (usually days) for each activity.
4. Begin with those activities in which the crash cost per time unit saved is the lowest.
5. Continue with the next lowest crash cost per time unit saved activity until the desired reduction in project schedule is achieved.
6. Note that crashing the critical path may result in additional or new critical paths where additional crashing of activities must occur.
What is CPI(c) used for and what is its formula?
NOTE: (c) denotes the superscript in each formula below.

Cumulative CPI (CPI(c)) is the sum of the periodic earned value (EV(c)) divided by the sum of the individual actual costs (AC(c)). It is used to forecast project costs at the completion of the project.
CPI(c) = EV(c)/AC(c)
What is the formula for Percent complete?
What is the formula for Percent Spent?
What does ROS measure, and what are its formulae?
Return on Sales (ROS) measures the ratio of profit to total sales.

* ROS = Gross Profit/Total Sales
* ROS = Net Profit/Total Sales
What does ROI measure, and what are its formulae?
Return on Investment (ROI) measures the ratio of profit to total investment or to total assets, in which case it is called Return on Assets (ROA).

* ROI = Net Profit/Total Investment
* ROA = Net Profit/Total Assets
What is Present Value and its formulae?
Present Value (PV) (not to be confused with planned value) is the value today of future cash flows, based on the concept that payment today is worth more than payment in the future because we can invest the money today and earn interest on it.
- PV = M/(1+r)t where M = amount of payment t years from now, and r is the interest rate (also known as the discount rate)
- For example: if we think we can get 2% interest for the next 2 years, how much must we invest now in order to have $1,000 2 years from now?
PV = 1,000/(1 + 0.02)2
= 1,000/1.0404
= 961.17
- For Net Present Value (NPV) (as of a cash flow), add up the PVs over the number of years
What is IRR?
Internal Rate of Return (IRR) is the percentage rate that makes the present value of costs equal to the present value of benefits.
What is the BCR and its formula? What value must it be before considering a project?
Benefit Cost Ratio (BCR) is just that, a ratio of benefits to costs. The BCR should be > 1.3 before considering the project.
- BCR = PV(revenue)/PV(cost)