Cost Knowledge Area

Cost Knowledge Area is concerned with establishing a budget (or planned expenses) for your project. Once the work starts, you need to estimate variances between the actual incurred expenses and the planned expenses.

The image below shows the components of a project budget.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note that the cost baseline (also called the budget at completion, or BAC) includes contingency reserves but not management reserves.

 

However, the project budget includes management reserves.

 

It is the sum of the cost baseline (or BAC) and management reserves.

 

The image below shows the terms and concepts in earner value analysis (EVA). The cost and schedule variances are used to compare the project actuals with the approved cost baseline.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

List of acronyms:

  • AC: actual cost

  • BAC: budget at completion

  • CPI: Cost Performance Index

  • CV: cost variance

  • EAC: estimate at completion

  • ETC: Estimate to Complete

  • EV: earned value

  • PV: planned value

  • SPI: Schedule Performance Index

  • SV: schedule variance

  • TCPI: To Complete Performance Index

  • VAC: Variance at completion

 

Questions for the Cost Knowledge Area
 
QUESTION 1
  • Which of the following is not true for contingency reserves?

    1. It is kept for cost uncertainty, rework for project deliverables and other identified risks.

    2. It is meant to cover for known-unknowns.

    3. It is a percentage of the estimated cost or a fixed amount.

    4. It is not part of the cost baseline

QUESTION 2

  • Your project has a budget of $50,000. Halfway down the project duration, you see that you have completed only 20% of the work and spent $20,000 so far. What is the cost performance index (CPI)?

    1. 0.25

    2. 0.60

    3. 0.40

    4. 0.50

QUESTION 3

  • For a given project, the estimate at completion (EAC) is $100,000 and the budget at completion (BAC) is $75,000. The actual cost (AC) has been $80,000. What is the estimate to complete (ETC)?

  1. $75,000

  2. $25,000

  3. $20,000

  4. -$20,000

 

 

QUESTION 4

  • The budget at completion (BAC) for your 10-month project is $40 million. After a month of execution, you assess that the completed work is worth $3,800,000. The planned value is now $4 million. The incurred cost has been $5M. What can you say about this project?

  1. The project is ahead of schedule

  2. The project is behind schedule

  3. The project is over budget

  4. The project is behind schedule and over-budget

 

 

QUESTION 5

  • You are managing a project, where the allocated budget at completion (BAC) is $300,000 and the assigned duration is 4 months. After two months, you see that you have completed work that is worth $100,000. But you have spent $125,000 so far. What is the cost variance (CV)?

    1. $100,000

    2. $ -25,000

    3. $125,000

    4.  $25,000

 

QUESTION 6

  • Which of the following is not something you would do when trying to control costs?

    1. Make sure that the cost remains under what has been authorized at the work package, control account and project levels.

    2. Establish management reserves for unforeseen work as you get more clarity about the scope and as the project activities are being done

    3. Bring cost overruns within acceptable limits

    4. Estimate variances and include those in the work performance reports

 

QUESTION 7

  • While doing an earned value analysis, you see that the earned value (EV) is less than the planned value (PV). What does this mean for schedule variance (SV) and schedule performance index (SPI)?

    1. SV is positive, and SPI is less than 1.

    2. SV is negative, and SPI is less than 1

    3. SV is positive, and SPI is more than 1.

    4. SV is negative, and SPI is more than 1.

 

QUESTION 8

  • Susan Zanders is preparing a budget for a new project. She has a detailed project schedule, activity list and a WBS. Which of the following would not be a suitable technique for her to include while preparing a budget?

    1. Reserve analysis

    2. Cost aggregation

    3. Expert judgment

    4. All the above are suitable techniques for preparing a project budget

 

Answers

Answer 1

     The correct answer is 4. 

Contingency reserves are part of the cost baseline. Choice D is the correct answer, The other choices are true for contingency reserves. 

 

On the other hand, management reserves are part of the project budget, but not part of the cost baseline.

 

Answer 2

       The correct answer is 4.   

In these problems, you need to first write whatever has been provided:

  • BAC (budget at completion) = $50,000

  • PV (planned value) = 50% (halfway) of $50,000 = $25,000

  • EV (earned value) = 20% of $50,000 = $10,000 and

  • AC (actual cost) = $20,000

 

You then compute for what has been asked.

The question asks for CPI which is EV/AC = $10,000/ $20,000 = 0.5 

Answer 3

       The correct answer is 3.  

ETC = EAC – AC = $100,000 - $80,000 = $20,000. ETC is the expected cost to complete the remaining project work.

Answer 4

      The correct answer is 4.  

The project is behind schedule and over-budget.  When a question is about a project being ahead or behind schedule, compute the SPI (schedule performance index) which is EV/PV = $3.8M/$4M, SPI is less than 1 and therefore, the project is behind schedule.

For a project being over or under-budget, compute the CPI, which in this case is EV/AC = $3.8M/$5M. This is also less than 1 and hence, the project is over-budget.

Answer 5

      The correct answer is 2. 

CV (cost variance) = EV (earned value) minus AC (actual cost).

In this case EV = $100,000 and AC=$125,000. Therefore CV = $100,000 - $125,000 = - $25,000.

Answer 6

      The correct answer is 2. 

Establishing management reserves must be done during project planning and not when you are trying to control cost based on cost variances. While controlling costs, you can, however, make

updates to the management reserves.

Answer 7

      The correct answer is 2.

 

      Schedule variance (SV) is negative and schedule performance index (SPI) is less than 1.

  • SV = EV – PV. Since EV < PV, SV is negative.

  • SPI = EV/PV. Since EV < PV, SPI is less than 1.

 

Answer 8

      The correct answer is 4. 

       All the choices are techniques for budget preparation.

       See Page 252 in the PMBOK®.

This guide is based on the PMBOK 6th Edition® and is meant for PMP® Exams conducted until December 31, 2020