KA- Project Cost Management

# Question

A project team budgeted $3000 for the work performed and has spent $4000, to
1 date. If they budgeted $5000 for the work schedule, what is the cost variance (CV)?

You are tracking your project using earned value management (EVM) and find you
are behind schedule but under budget. Your variances showed schedule variance
(SV) = -$50 million, cost variance CV = $100 million, and your actual cost are $500
2 million. What are the CPI, PV, and SPI?

3 To-completed performance index (TCPI) is represented by which of the following

4 The cost contingency reserve should be:

5 A cost baseline is an output of which cost management process?

6 What does estimated at completion (EAC) mean?

 7 All the following are components of cost management EXCEPT:

During project executing, the forecasted remaining hours exceed planned

remaining hours. Consequently, the project takes on a negative variance which
calculation is the project manager likely to use as a measurement tool to validate
8 this information?

9 During which project management process group are budget forecast created?

Company ABC is evaluating three consulting companies to find a consultant to

perform professional services. They request information on how the three
computing companies allocate fringe benefits to their clients. What type of cost is
10 company ABC asking about?

11 In Which parts of the cost management process is earned value (EV) used?

Aggregation, reserve analysis, and expert judgment are OLD tools of which
12 process?
 The project budget is proving to be inaccurate. The SPI is 1.1 the team has had
negative deviation from the activity attributes and the sponsor has inserted her
self on the change control board. What is the BEST thing for the project manager to
13 do.?

A project manager has run into cost difficulties. The project scope must be
14 completed, but at lest cost. The project manager should:

After analyzing the status of your project, you determine the earned value (EV) is
lower than the planed value (PV). What should you expect as and outcome if this
15 trend continues?

16 A cost management plan contains a description of:

What would be the BEST explanation for the following: Both the cost variance and
the schedule variance are negative but the cost variance is lower than the schedule
17 variance
18 Which of the following is a KEY way to improve activity cost estimates?

A project manager has completed a detailed WBS and cost estimates for each work
19 package. To create a cost baseline from this data, the project manager will:

Your boss is worried about the project schedule. There is a critical deliverable due
to the federal government in two weeks. If you miss the deliverable, you could lose
the entire contract. To help previous the boss`s stress, you show him the end value
calculations you just completed. They show your cost performance index (CPI) is
1.25. Your actual cost (AC) is $400 million, and your planed value (PV) is $490
20 million. Should your boss be comfortable?
A B C

$1,000 -$2,000 -$1,000

0.92, $550 million, 1.2 1.20, -$100 million, 0.92 1.20, $650 million, 0.92

A measure of the value of work A measure of progress

completed compared to the achieved compared to progress
actual cost or progress planned (BAC-EV) / (BAC-AC)

Added to each activity to Hidden to prevent

provide the customer whit a Maintained by management to management from disallowing
shorter critical path cover cost over runs the reserve

Control cost Estimate cost Estimate activity resources

Anticipated total cost at project Anticipated expenses at project Estimated average cost and
completion completion project completion
Estimate activity resources Vendor bid analysis Analogous estimating

EV/PV EV-AC EV/AC

Initiating Monitoring and controlling Planning

Variable Direct Indirect

Creating the cost baseline and Reserve analysis and cost Performance measurement and
the cost control system aggregation variance management planning

Determine schedule Control schedule Determine budget

 Encourage the sponsor to
Calculate the cost performance remove her self from the Reestimate the activity
index change control board attributes

Change the depreciation

methods for the equipment
used on the project Evaluate benefit cost ratios Perform a value analysis

The actual cost will be lower The project will finish behind The project will finish below
than planned the schedule the original cost estimate

The WBS level at which earned The budget and how they were
value will be calculated How resources are allocated calculated

The project underspent,

because costs were lower than The project under spent
The project activities took planned and activities were because all work was not
longer than expected but the easier to complete than completed, but overspent for
costs where lower planned work that was done
Let management create the
management reserve and the Base activity estimate on the Let the project manager create
activity cost estimate upper and lower control limits activity cost estimate

Roll up work package estimates

At the work package and risk into a project total an add Gain expert opinions of the
contingency reserved estimates management reserves project total cost

Yes, your CPI is 1.05 No, your CPI is too high He needs more data
D Answer

$2,000 C

0.92, $650 million, 1.08 C

AC + (BAC-EV) C

Added to the costs of the

project to account for risks D

Determine budget D

Each anticipated cost for the

project A
Earned value management A

EV-PV D

Executing B

Fixed C

Forecasting and project

performance reviews D

Quantitative risk analysis C

Recomputed the project
schedule A

Recover sunk cost C

The estimate at completion will

be lower at planned B

The project costs A

The project overspent due to

increased costs and yet
completed some activities
faster C
Use historical data D

Use the highest level of the

WBS to estimate analogously A

Yes, your SV is $10 million C

Explanation

A question like this is the reason you need to understand what each term means in common
terminology. CV = EV - AC. Here, EV is $3,000, AC is $4,000, so cost variance is $3,000 - $4,000 =
($1,000).

Source: PMP Exam Prep

Page: 267

First find EV = CV + AC = $600. Calculate CPI = EV/AC = $600/$500 = 1.20. Next, to find PV, you would
use the formula PV = EV - SV = $650. Now you can compute SPI = EV/PV = 600/650 = 0.923.

Source: PMP Exam Prep

Page: 267

The value of work completed relates to the cost performance index. A measure of progress achieved
relates to the schedule performance index. AC + (BAC - EV) is a formula for EAC. (BAC - EV)/(BAC -
AC) is the formula for TCPI and is therefore the correct response. This formula divides the work
remaining to be done by the money remaining to do it.

Source: PMP Exam Prep

Page: 268

Hiding the reserve is an inappropriate action. Adding cost to each activity will not shorten the
critical path, and thus is an incorrect statement. Management reserves, not contingency reserves,
are maintained by management to cover cost overruns. During the risk management process, you
determine appropriate contingency reserves to cover the cost of identified risks.

Source: PMP Exam Prep

Page: 263

A cost baseline is an output of the Determine Budget process.

Source: PMP Exam Prep

Page: 264

Estimate at completion means the total cost of the project at completion, based on current
information.

Source: PMP Exam Prep

Page: 267
Vendor bid analysis and analogous estimating are tools for Estimate Costs. Earned value
management is a part of performance measurement analysis in Control Costs. By the process of
elimination, Estimate Activity Resources is the correct response. It is a part of time management.

Source: PMP Exam Prep

Page: 206

Earned value (EV) minus planned value (PV) equals schedule variance (SV).

Source: PMP Exam Prep

Page: 267

Budget forecasts are an output of Control Costs, which is part of monitoring and controlling.

Source: PMP Exam Prep

Page: 279

Fringe benefits are included in overhead and are part of indirect costs.

Source: PMP Exam Prep

Page: 257

Creating the cost baseline and the cost control system, reserve analysis, and cost aggregation occur
during project planning. Earned value is not used for reserve analysis or cost aggregation. It is used
in forecasting and project performance reviews.

Source: PMP Exam Prep

Page: 266

Aggregation is only used in the Determine Budget process, to roll up work package costs to control
account costs and finally to project costs. The other tools listed are used in Determine Budget as
well as in other processes. This is a case where you must understand the purpose of each tool to
correctly answer the question.

Source: PMBOK Guide

Page: 208
The main problem in the data provided is the cost. Activity attributes are details, or characteristics
of the activities, including such things as the description, imposed dates, and other constraints and
assumptions. They do not include activity estimates themselves. "Negative deviation from the
attributes" does not provide enough information to determine a need to reestimate. It is
appropriate for the project sponsor to be included on the change control board. The fact that she is
joining now indicates that she has a concern about the progress of the project. It is important to find
the root cause of that concern. The SPI is more than 1, so the schedule is not an issue. Of the
choices provided, calculating the cost performance index is the best thing to do.

Source: PMP Exam Prep

Page: 267

How can changing the depreciation affect the total cost of the project? A benefit cost ratio is too
vague to help eliminate specific project costs. Sunk costs are expended costs and can never be
recovered.The project manager should perform a value analysis, looking for less costly ways to
complete the work.

Source: PMP Exam Prep

Page: 255

If earned value is lower than planned value, it indicates less work is occurring than was scheduled,
resulting in schedule slippage.

Source: PMP Exam Prep

Page: 267

The exam will ask you what the tools of project management contain in order to test whether you
really understand them. The cost management plan identifies the WBS level at which earned value
will be calculated.

Source: PMP Exam Prep

Page: 256

Remember, for variances, negative is bad. In this situation, both the variances are negative. To
answer the question, first look at which of the four choices exhibit negative variances for both cost
and schedule. Since the project underspent because all work was not completed, but overspent for
work that was done, both the cost and schedule variances are negative.

Source: PMP Exam Prep

Page: 267
Since team members should create the activity cost estimates whenever possible, having
management or the project manager create the estimates cannot be correct. Basing activity
estimates on the control limits makes no sense. A key way to improve activity cost estimates is to
use historical data.

Source: PMP Exam Prep

Page: 257

Analogous estimating and gaining expert opinions of project cost should have been completed
before the finalization of the cost baseline. A cost baseline does not include management reserves.
However, it must include a contingency reserve for risks. The project manager must total the work
package estimates and risk contingency reserve estimates to create the cost baseline.

Source: PMP Exam Prep

Page: 263

Although the SV is $10 million, this does not indicate all the activities are proceeding on schedule.
You need to find out if the activities leading up to the critical deliverable are on schedule, in order to
comfort your boss. Remember that earned value management (EVM) is a way to discover trends or
indications of the way the project is going. You need to examine the details to be sure. You cannot
determine schedule problems based on the CPI. The SPI is 1.02, not 1.05, but this does not tell you
all the activities are proceeding on schedule. To find SV and SPI you must first find EV. EV = CPI x AC
= 1.25 x $400M = $500M. So SV = EV - PV = $500M - $490M = $10M and SPI = EV / PV = $500M /
$490M = 1.020 (use 3-decimal place accuracy).

Source: PMP Exam Prep

Page: 267