Pmp Exam Practice Test - 1D Project Cost Management

Front 1

You are using earned value progress reporting for your current project in an effort to teach your software developers the benefits of earned value. You plan to display project results on the cafeteria bulletin board so that the team knows how the project is progressing. Use the current status, listed below, to answer questions 1 through 4:

PV = $2,200
EV = $2,000
AC = $2,500
BAC = $10,000

According to earned value analysis, the SV and status of the project described above is—

a. –$300; the project is ahead of schedule
b. +$8,000; the project is on schedule
c. +$200; the project is ahead of schedule
d. –$200; the project is behind schedule

Back 1

d. –$200; the project is behind schedule

SV is calculated as EV – PV (in this case, $2,000 – $2,200). A negative variance means that the work completed is less than what was planned for at that point in the project. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224

Front 2

What is the CPI for this project, and what does it tell us about cost performance thus far?

a. 0.20; actual costs are exactly as planned
b. 0.80; actual costs have exceeded planned costs
c. 0.80; actual costs are less than planned costs
d. 1.25; actual costs have exceeded planned costs

Back 2

b. 0.80; actual costs have exceeded planned costs

CPI is calculated as EV/AC (in this case, $2,000/$2,500). EV measures the budgeted dollar value of the work that has actually been accomplished, whereas AC measures the actual cost of getting that work done. If the two numbers are the same, work on the project is being accomplished for exactly the budgeted amount of money (and the ratio will be equal to 1.0). If actual costs exceed budgeted costs (as in this example), AC will be larger than EV, and the ratio will be less than 1.0. CPI is also an index of efficiency. In this example, an index of 0.80 (or 80 percent) means that for every dollar spent on the project only 80 cents worth of work is actually accomplished. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224

Front 3

The CV for this project is—

a. 300
b. –$300
c. 500
d. –$500

Back 3

d. –$500

CV is calculated as EV – AC (in this case, $2,000 – $2,500). A negative CV means that accomplishing work on the project is costing more than was budgeted. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224

Front 4

What is the EAC for this project, and what does it represent?

a. $12,500; the revised estimate for total project cost (based on performance thus far)
b. $10,000; the revised estimate for total project cost (based on performance thus far)
c. $12,500; the original project budget
d. $10,000; the original project budget

Back 4

a. $12,500; the revised estimate for total project cost (based on performance thus far)

EAC is calculated as BAC/CPI (in this case, $10,000/0.80). It is now known that the project will cost more than the original estimate of $10,000. The project has been getting only 80 cents worth of work done for every dollar spent (CPI), and this information has been used to forecast total project costs. This approach assumes that performance for the remainder of the project will also be based on a CPI of 0.80. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224

Front 5

You have now prepared your cost management plan so now you are preparing your project’s cost estimate. You decided to use analogous estimating. Which of the following is NOT characteristic of analogous estimating?

a. Supports top-down estimating
b. Is a form of expert judgment
c. Has an accuracy rate of ±10% of actual costs
d. Involves using the cost of a previous, similar project as the basis for estimating current project cost

Back 5

c. Has an accuracy rate of ±10% of actual costs

A frequently used method of estimate costs, the analogous technique relies on experience and knowledge gained to predict future events. This technique provides planners with some idea of the magnitude of project costs but generally not within ±10%. [Planning]
PMI®, PMBOK® Guide, 2013, 204–205

Front 6

All the following are outputs of the estimate cost process EXCEPT—

a. Activity cost estimates
b. Basis of estimates
c. Documented constraints
d. Cost baseline

Back 6

d. Cost baseline

Cost baseline is an output from the determine budget process. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 212–213

Front 7

You must consider direct costs, indirect costs, overhead costs, and general and administrative costs during cost estimating. Which of the following is NOT an example of a direct cost?

a. Salary of the project manager
b. Subcontractor expenses
c. Materials used by the project
d. Electricity

Back 7

d. Electricity

Direct costs are incurred for the exclusive benefit of a project (for example, salary of the project manager, materials used by the project, and subcontractor expenses). Indirect costs, also called overhead costs, are allocated to a project by its performing organization as a cost of doing business. These costs cannot be traced to a specific project and are accumulated and allocated equitably over multiple projects (for example, security guards, fringe benefits, and electricity). [Planning]
PMI®, PMBOK® Guide, 2013, 202

Front 8

If the cost variance is the same as the schedule variance and both numbers are greater than zero, then—

a. The cost variance is due to the schedule variance
b. The variance is favorable to the project
c. The schedule variance can be easily corrected
d. Labor rates have escalated since the project began

Back 8

b. The variance is favorable to the project

A positive schedule variance indicates that the project is ahead of schedule. A positive cost variance indicates that the project has incurred less cost than estimated for the work accomplished; therefore, the project is under budget. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224

Front 9

You are responsible for preparing a cost estimate for a large World Bank project. You decide to prepare a bottom-up estimate because your estimate needs to be as accurate as possible. Your first step is to—

a. Locate a computerized tool to assist in the process
b. Use the cost estimate from a previous project to help you prepare this estimate
c. Identify and estimate the cost for each work package or activity
d. Consult with subject matter experts and use their suggestions as the basis for your estimate

Back 9

c. Identify and estimate the cost for each work package or activity

Bottom-up estimating is derived by first estimating the cost of the project’s elemental tasks at the lower levels of the WBS or for an activity and then aggregating those estimates at successively higher levels of the WBS for subsequent reporting and tracking purposes. [Planning]
PMI®, PMBOK® Guide, 2013, 205

Front 10

Management has grown weary of the many surprises, mostly negative, that occur on your projects. In an effort to provide stakeholders with an effective performance metric, you will use the to-complete performance index (TCPI). Its purpose is to—

a. Determine the schedule and cost performance needed to complete the remaining work within management’s financial goal for the project
b. Determine the cost performance needed to complete the remaining work within management’s financial goal for the project
c. Predict final project costs
d. Predict final project schedule and costs

Back 10

b. Determine the cost performance needed to complete the remaining work within management’s financial goal for the project

The TCPI takes the value of work remaining and divides it by the value of funds remaining to obtain the cost performance factor needed to complete all remaining work according to a financial goal set by management. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224

Front 11

If operations on a work package were estimated to cost $1,500 and finish today but, instead, have cost $1,350 and are only two-thirds complete, the cost variance is—

a. $150
b. –$150
c. –$350
d. –$500

Back 11

c. –$350

CV is calculated by EV – AC, or $1,500(2/3) – $1,350 = –$350. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224

Front 12

When you review cost performance data on your project, different responses will be required depending on the degree of variance or control thresholds from the baseline. For example, a variance of 10 percent might not require immediate action, whereas a variance of 100 percentwill require investigation. A description of how you plan to manage cost variances should be included in the—

a. Cost management plan
b. Change management plan
c. Performance measurement plan
d. Variance management plan

Back 12

a. Cost management plan

The management and control of costs focuses on variance thresholds. Certain variances are acceptable, and others, usually those falling outside a particular range, are unacceptable. They are typically expressed as percentage deviations from the baseline plan. The actions taken by the project manager for variances are described in the cost management plan. [Planning]
PMI®, PMBOK® Guide, 2013, 199

Front 13

As of the fourth month on the Acme project, cumulative planned expenditures were $100,000. Actual expenditures totaled $120,000. How is the Acme project doing?

a. It is ahead of schedule.
b. It is in trouble because of a cost overrun.
c. It will finish within the original budget.
d. The information is insufficient to make an assessment.

Back 13

d. The information is insufficient to make an assessment.

The information provided tells us that, as of the fourth month, more money has been spent than was planned. However, we need to know how much work has been completed to determine how the project is performing. In earned value terms, we are missing the EV. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 218

Front 14

On your project, you need to assign costs to the time period in which they are incurred. To do this, you should—

a. Identify the project components so that costs can be allocated
b. Use the project schedule as an input to determine budget
c. Prepare a detailed and accurate cost estimate
d. Prepare a cost performance plan

Back 14

b. Use the project schedule as an input to determine budget

Accurate project performance measurement depends on accurate cost and schedule information. The project schedule includes planned start and finish dates for all activities tied to work packages and control accounts. This information is used to aggregate costs to the calendar period for which the costs are planned to be incurred. [Planning]
PMI®, PMBOK® Guide, 2013, 210

Front 15

You have a number of costs to track and manage because your project is technically very complex. They include direct costs and indirect (overhead) costs. You have found that managing overhead costs is particularly difficult because they—

a. Are handled on a project-by-project basis
b. Represent only direct labor costs
c. Represent only equipment and materials needed for the project
d. Are usually beyond the project manager’s control

Back 15

d. Are usually beyond the project manager’s control

Overhead includes costs such as rent, insurance, or heating, that pertain to the project as a whole and cannot be attributed to a particular work item. The amount of overhead to be added to the project is frequently decided by the performing organization and is beyond the control of the project manager. [Monitoring and Controlling]
Meredith and Mantel 2012, 301

Front 16

If you want to calculate the ETC based on your expectations that similar variances to those noted to date will not occur, you should use which of the following formulas?

a. ETC = BAC – EV
b. ETC = (BAC – EV)/CPI
c. ETC = AC + EAC
d. ETC = AC + BAC – EV

Back 16

a. ETC = BAC – EV

This formula assumes that the estimate to complete is based on the same cost efficiency level. [Monitoring and Controlling]
Meredith and Mantel, 454

Front 17

You receive a frantic phone call from your vice president who says she is going to meet with a prospective client in 15 minutes to discuss a large and complex project. She asks you how much the project will cost. You quickly think of some similar past projects, factor in a few unknowns, and give her a number. What type of estimate did you just provide?

a. Definitive
b. Budget
c. Order-of-magnitude
d. Detailed

Back 17

c. Order-of-magnitude

An order-of-magnitude estimate, which is referred to also as a ballpark estimate, has an accuracy range of –25% to 75% and is made without detailed data. [Planning]
PMI®, PMBOK® Guide, 2013, 201; Ward 2008, 295

Front 18

Your approved cost baseline has changed because of a major scope change on your project. Your next step should be to—

a. Estimate the magnitude of the scope change
b. Issue a change request
c. Document lessons learned
d. Execute the approved scope change

Back 18

b. Issue a change request

Before a revised cost baseline leading to a budget update can be prepared, it is necessary to issue a change request, which may include preventive or corrective action. These change requests then are reviewed and processed through the Perform Integrated Change Control process. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 225

Front 19

Which of the following is a tool for analyzing a design, determining its functions, and assessing how to provide those functions’ cost effectively?

a. Pareto diagram
b. Value analysis
c. Configuration management
d. Value engineering

Back 19

d. Value engineering

Value engineering considers possible cost trade-offs as a design evolves. The technique entails identifying the functions that are needed and analyzing the cost effectiveness of the alternatives available for providing them. It helps optimize project life cycle costs, save time, increase profits, improve quality, increase market share, solve problems, and contribute toward more effective resource use [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 566

Front 20

The cumulative CPI has been shown to be relatively stable after what percentage of project completion?

a. 5% to 10%
b. 15% to 20%
c. 25% to 35%
d. 50% to 75%

Back 20

b. 15% to 20%

The CPI has been proven to be an accurate and reliable forecasting tool. Researchers have found that the cumulative CPI does not change by more than 10% once a project is approximately 20% complete. The CPI provides a quick statistical forecast of final projectcosts. [Monitoring and Controlling]
Fleming and Koppelman 2000, 134

Front 21

The undistributed budget is part of the—

a. Management reserve
b. Performance measurement baseline
c. Level-of-effort cost accounts
d. General and administrative accounts

Back 21

b. Performance measurement baseline

The undistributed budget is applied to project work that has not yet been linked to WBS elements at or below the lowest level of reporting. It is, therefore, part of the performance measurement baseline and is expected to be used in the performance of project work. [Monitoring and Controlling]
Fleming and Koppelman 2000, 169, 206
PMI®, PMBOK® Guide, 2013, 205, 549

Front 22

It is expensive to lease office space in cities around the world. Office space can cost approximately USD $80 per square foot in Tampa, Florida. And it can cost approximately ¥50,000 per square meter in Tokyo. These “averages” can help a person to determine how much it will cost to lease office space in these cities based on the amount of space leased. These estimates are examples of—

a. Variance analysis
b. Parametric estimating
c. Bottom-up estimating
d. Reserve analysis

Back 22

Parametric estimating

Parametric estimating involves using statistical relationships between historical data and other variables to calculate or estimate for activity parameters, such as cost, budget, or duration. The example is representative of a simple parametric model. [Planning]
PMI®, PMBOK® Guide, 2013, 205

Front 23

Your project manager has requested that you provide him with a forecast of project costs for the next 12 months. He needs this information to determine if the budget should be increased or decreased on this major construction project. In addition to the usual information sources, which of the following should you also consider?

a. Cost estimates from similar projects
b. WBS
c. Project schedule
d. Costs that have been authorized and incurred

Back 23

d. Costs that have been authorized and incurred

These costs are part of work performance data about project progress. In addition data include information about project progress such as which activities have started, their progress, and which deliverables have finished Updating the budget requires knowledge about the actual costs spent to date, and any budget changes are approved according to the Perform Integrated Change Control process. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 216–217

Front 24

There are a number of different earned value management rules of performance measurement that can be established as part of the cost management plan. Which one of the following is NOT an example of such a rule?

a. Code of accounts allocation provision
b. Formulas to determine the ETC
c. Earned value credit criteria
d. Definition of the WBS level

Back 24

a. Code of accounts allocation provision

Rules of earned value performance measurement are part of the cost management plan and may (1) define the points in the WBS where measurement of control accounts will be performed; (2) establish the EV measurement techniques such as weighted milestones, fixed-formula, percent complete, etc., to be used; and (3) specific tracking methods and EV equations for calculating the EAC forecasts to provide a validity check on the bottom-up EAC. [Planning]
PMI®, PMBOK® Guide, 2013, 199

Front 25

Which of the following calculations CANNOT be used to determine EAC?

a. EV to date plus the remaining project budget
b. Accepts actual costs and predicts future ETC work will be done at the budgeted rate
c. Assumes what the program has experienced can be expected to continue
d. ETC will be performed at an efficiency rate considering both the CPI and SPI

Back 25

a. EV to date plus the remaining project budget

EAC is a forecast of the most likely total value based on project performance and risk quantification. To calculate EAC, the AC of a project must be known and used in the calculation. Any calculation that relies solely on the EV will not yield an accurate measure of cost performance. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 220–221

Front 26

Typically, the statement “no one likes to estimate, because they know their estimate will be proven incorrect” is true. However, you have been given the challenge of estimating the costs for your nuclear reactor project. A basic assumption that you need to make early in this process is—

a. How direct and indirect costs will be handled
b. Whether or not experts will be available to assist you in this process
c. If there will be a multiyear project budget
d. Whether the project has required delivery dates

Back 26

a. How direct and indirect costs will be handled

The scope statement, as part of the scope baseline, is a key input in the estimate costs process and should be reviewed. It provides the project description, acceptance criteria, key deliverables, boundaries, assumptions, and constraints about the project. It also notes one basic assumption that must be made as costs are estimated is whether the estimates will be limited only to direct project costs or whether they also will include indirect project costs. [Planning]
PMI®, PMBOK® Guide, 2013, 202

Front 27

By reviewing cumulative cost curves, the project manager can monitor—

a. EV
b. PV
c. CVs
d. CPI

Back 27

c. CVs

Cumulative cost curves, or S-curves, enable the project manager to monitor cost variances at a glance. The difference in height between the planned-expenditure curve and the actual-expenditure curve represents the monetary value of variances at any given time. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 219

Front 28

Control accounts—

a. Are charge accounts for personnel time management
b. Summarize project costs at level 2 of the WBS
c. Identify and track management reserves
d. Represent the basic level at which project performance is measured and reported

Back 28

d. Represent the basic level at which project performance is measured and reported

Control accounts represent a management control point where scope, budget (resource plans), actual costs, and schedule are integrated and compared to earned value for performance measurement. [Planning]
PMI®, PMBOK® Guide, 2013, 132, 199, and 533

Front 29

Performance review meetings are held to assess schedule activity and work packages over-running or under-running the budget and to determine any estimated funds needed to complete work in progress. Typically, if EV is being used, all but which of the following information is determined?

a. Variance analysis
b. Trend analysis
c. Time reporting systems
d. Earned value performance

Back 29

c. Time reporting systems

Variance analysis focuses on cost and schedule to help explain the cause, issue, and corrective action. Trend analysis examines project performance over time to determine performance status. Earned value performance compares the performance measurement baseline to actual schedule and cost performance. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 222–223

Front 30

Overall cost estimates must be allocated to individual activities to establish the cost performance baseline. In an ideal situation, a project manager would prefer to prepare estimates—

a. Before the budget is complete
b. After the budget is approved by management
c. Using a parametric estimating technique and model specific for that project type
d. Using a bottom-up estimating technique

Back 30

a. Before the budget is complete

Often project cost estimates are prepared after budgetary approval is provided. However, activity cost estimates should be prepared before the budget is complete. [Planning]
PMI®, PMBOK® Guide, 2013, 210

Front 31

According to learning curve theory, when many items are produced repetitively—

a. Unit costs decrease geometrically as production rates increase linearly
b. Unit costs decrease as production rates increase
c. Unit costs decrease in a regular pattern as more units are produced
d. Costs of training increase as the level of automation increases

Back 31

c. Unit costs decrease in a regular pattern as more units are produced

Learning curve theory indicates that human performance usually improves when a task is repeated. Specifically, each time output doubles, worker hours per unit decrease by a fixed percentage. This percentageis called the learning rate. [Planning]
Meredith and Mantel 2012, 301–303

Front 32

The method of calculating the EAC by assuming the ETC work will be performed at the same cumulative CPI incurred by the project to date is used most often when—

a. Current variances are viewed as atypical ones
b. Original estimating assumptions are no longer reliable because conditions have changed
c. Current variances are viewed as typical of future variances
d. Original estimating assumptions are considered to be fundamentally flawed

Back 32

c. Current variances are viewed as typical of future variances

Past performance is indicative of future performance; therefore, EAC = BAC/CPI. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 201

Front 33

Increased attention to return on investment (ROI) now requires you to complete a financial analysis of the payback period on your project. Such an analysis identifies the—

a. Ratio of discounted revenues over discounted costs
b. Future value of money invested today
c. Amount of time before net cash flow becomes positive
d. Point in time where costs exceed profit

Back 33

c. Amount of time before net cash flow becomes positive

Payback period analysis determines the time required for a project to recover the investment in it and become profitable. A weakness of this approach is a lack of emphasis on the magnitude of the profitability. [Planning]
Kerzner 2009, 614–615; PMI® PMBOK® Guide, 2013, 195; Ward 2008, 305

Front 34

A revised cost baseline may be required in cost control when—

a. CVs are severe, and a realistic measure of performance is needed
b. Updated cost estimates are prepared and distributed to stakeholders
c. Corrective action must be taken to bring expected future performance in line with the project plan
d. EAC shows that additional funds are needed to complete the project even if a scope change is not needed

Back 34

a. CVs are severe, and a realistic measure of performance is needed

After the CVs exceed certain ranges, the original project budget may be questioned and changed as a result of new information. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 226

Front 35

As project manager, you identified a number of acceptable tolerances as part of your earned value management system. During execution, some “unacceptable” variances occurred. After each “unacceptable” variance occurred, you did which one of the following first?

a. Updated the budget
b. Prepared a revised cost estimate
c. Adjusted the project plan
d. Documented lessons learned

Back 35

d. Documented lessons learned

Lessons learned but not documented are “lessons lost.” The lessons learned knowledge database will help current project members, as well as people on future projects, make better decisions. Accordingly, the reasons for the variance, the rationale supporting the corrective action, and other related informationmust be documented. They require updates as part of updates to organizational process assets as an output of control costs in terms of correctiveactions taken and why they wre selected. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 226

Front 36

Assume that the project cost estimates have been prepared for each activity and the basis of these estimates has been determined. Now, as the project manager for your nutrition awareness program in your hospital, you are preparing your budget. Because you have estimates for more than 1,200 separate activities, you have decided to first—

a. Aggregate these estimates by work packages
b. Aggregate these estimates by control accounts to facilitate the use of earned value management
c. Use the results of previous projects to predict total costs
d. Set your cost performance baseline

Back 36

a. Aggregate these estimates by work packages

The WBS provides the relationship among all the project deliverables and their components and should be reviewed before the budget is developed. As the budget is determined, the cost estimates for the activities should be aggregated by the work packages in the WBS. Then, later, they are aggregated for the control accounts and finally for the entire project. [Planning]
PMI®, PMBOK® Guide, 2013, 213

Front 37

The cumulative cost curve for planned and actual expenditures—

a. Helps to monitor project performance at a glance
b. Is used for calculating the CPI
c. Is also known as a histogram
d. Forecasts total project expenditures

Back 37

a. Helps to monitor project performance at a glance

Cost curves for planned and actual expenditures are created by adding each month’s costs to the previous reporting period’s expenditures. By doing so, one can quickly see how the project is performing. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 219

Front 38

The reason that the cost performance index (CPI) is shown as a ratio is to—

a. Enable a detailed analysis of the schedule regardless of the value of the schedule variance
b. Distinguish between critical path and noncritical path work packages
c. Provide the ability to show performance for a specified time period for trend analysis
d. Measure the actual time to complete the project

Back 38

c. Provide the ability to show performance for a specified time period for trend analysis

Because schedule performance index (SPI) and cost performance index (CPI) are expressed as ratios, they can be used to show performance for a specific time period or trends over a long-time horizon. Additionally, there is no need to disclose confidential financial data to convey the project’s status to one’s customers; they should not have a need to know such information, unless there is a contractual requirement to do so. [Monitoring and Controlling]
Kerzner 2009, 665–666
PMI®, PMBOK® Guide, 2013, 219

Front 39

Assume that your actual costs are $800; your planned value is $1,200; and your earned value is $1,000. Based on these data, what can be determined regarding your schedule variance?

a. At +$200, the situation is favorable as physical progress is being accomplished ahead of your plan.
b. At –$200, the physical progress is being accomplished at a slower rate than is planned, indicating an unfavorable situation.
c. At +$400, the situation is favorable as physical progress is being accomplished at a lower cost than was forecasted.
d. At –$200, you have a behind-schedule condition, and your critical path has slipped.

Back 39

b. At –$200, the physical progress is being accomplished at a slower rate than is planned, indicating an unfavorable situation.

Schedule variance is calculated: EV – PV or $1,000 – $1,200 = –$200. Because the SV is negative, physical progress is being accomplished at a slower rate than planned. [Monitoring and Controlling]
Kerzner 2009, 648–649
PMI®, PMBOK® Guide, 2013, 218, 224

Front 40

The CPI on your project is 0.84. This means that you should—

a. Place emphasis on improving the timeliness of the physical progress
b. Reassess the life-cycle costs of your product, including the length of the life-cycle phase
c. Recognize that your original estimates were fundamentally flawed, and your project is in an atypical situation
d. Place emphasis on improving the productivity by which work was being performed

Back 40

d. Place emphasis on improving the productivity by which work was being performed

CPI = EV/AC and measures the efficiency of the physical progress accomplished compared to the baseline. A CPI of 0.84 means that for every dollar spent, you’re only receiving 84 cents of progress. Therefore, you should focus on improving the productivity by which work is being performed. [Monitoring and Controlling]
Kerzner 2009, 650–652
PMI®, PMBOK® Guide, 2013, 219, 224