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Quizzes > Business & Finance > Marketing & Management

Project Cost Management Principles Quiz: Ready to Test Your Knowledge?

Challenge Your Skills with Activity-Based Costing and Estimation Methods

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art illustration of calculator coins chart and puzzle pieces on sky blue background for project cost management quiz

Think you have what it takes to keep a project on budget? Our project cost management principles quiz is your chance to find out! This free cost estimation methods quiz - exploring how analogous estimates are called activity-based costing - tests you on real-world project cost management questions. Designed for pros and students alike, you'll sharpen skills and boost confidence. Plus, if you're warming up, check out our project scope management quiz or try our project management quiz next. Ready to elevate your expertise? Start now and ace every calculation!

What is the primary purpose of the cost baseline in project cost management?
To determine the project schedule
To provide a time-phased budget against which project performance can be measured
To identify stakeholder communication channels
To establish the project's quality metrics
The cost baseline is the approved version of the time-phased budget, used to measure and monitor cost performance throughout the project lifecycle. It integrates the estimated costs of all project activities and provides a reference point for earned value analysis and variance measurement. This baseline helps in forecasting and controlling costs by comparing actual spending to planned budgets. Source
Which process involves aggregating the estimated costs of individual activities to establish an authorized cost estimate?
Estimate Costs
Plan Cost Management
Determine Budget
Control Costs
Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline and budget. It includes time-phasing of the cost estimates and reserving funds for identified risks. This output is used to monitor and control project costs. Source
Analogous estimating is best described as which of the following?
Detailing every activity's cost and summing them
Using historical data from similar projects to estimate costs
Using three-point estimates to calculate expected costs
Applying parametric cost models based on variables
Analogous estimating uses historical information and expert judgment from previous similar projects to estimate costs for the current project. It is less time-consuming but generally less accurate than more detailed methods. This approach is useful in early project stages when limited information is available. Source
Parametric estimating uses which of the following to calculate costs?
A three-point distribution of optimistic, pessimistic, and most likely
A breakdown of resources by type
Only expert judgment without data
A statistical relationship between historical data and other variables
Parametric estimating applies statistical modeling to historical data and project parameters to predict costs. For example, cost per square foot multiplied by the estimated square footage. It can be more accurate than analogous estimates if the underlying data is reliable. Source
Which estimation technique involves estimating the cost of individual work items and then summing them to get a project total?
Analogous estimating
Three-point estimating
Reserve analysis
Bottom-up estimating
Bottom-up estimating estimates costs for each work package or activity in detail and then aggregates them to form the project total. This method provides high accuracy but requires significant time and effort. It is often used when the project scope is well-defined. Source
Three-point estimating includes optimistic, pessimistic, and which other estimate?
Contingency
Reserve
Most likely
Actual
Three-point estimating uses optimistic, pessimistic, and most likely estimates to calculate an expected cost using weighted averages. This technique accounts for uncertainty and risk in cost estimation. It is derived from PERT analysis. Source
What is a contingency reserve used for in project cost management?
To cover unknown-unknown risks
To adjust for currency fluctuations
To cover identified risks with active response strategies
To pay for quality improvements
Contingency reserves are funds set aside to address identified risks that have active response strategies. They are part of the cost baseline and are controlled by the project manager. Unknown-unknown risks are addressed with management reserves. Source
In earned value management, what does 'ETC' stand for?
Expected Time of Completion
Earned Time Control
Estimate of Total Cost
Estimate to Complete
ETC stands for Estimate to Complete, which is the expected additional cost needed to finish all remaining project work. It is used along with AC and EV to forecast the Estimate at Completion (EAC). Source
In earned value management, what does 'AC' represent?
Actual Cost
Accrued Cost
Authorized Cost
Allocated Cost
AC stands for Actual Cost, which is the total cost incurred for the work performed on an activity during a given time period. It is compared with Earned Value to calculate performance indices. Source
In earned value management, what is 'PV' commonly referred to as?
Planned Value
Previous Value
Projected Value
Potential Value
PV stands for Planned Value, which is the authorized budget assigned to scheduled work to be accomplished by a specified time. It serves as the baseline for measuring schedule performance. Source
What does Variance at Completion (VAC) indicate?
Difference between Budget at Completion (BAC) and Estimate at Completion (EAC)
Total contingency reserve remaining
Planned cost minus actual cost to date
Difference between Earned Value (EV) and Actual Cost (AC)
VAC is the difference between the original Budget at Completion and the forecasted Estimate at Completion. A positive VAC indicates under budget, while a negative VAC indicates an overrun. It is used to assess if the project will meet its cost targets. Source
Which of the following tools is used to visualize cost performance over time?
S-curve chart
RACI matrix
PERT chart
Fishbone diagram
An S-curve chart graphs cumulative costs, labor hours, or other quantities over time, showing planned versus actual performance. It helps in identifying trends and deviations early. This visualization is common in cost control exercises. Source
What does the Cost Performance Index (CPI) measure?
Accuracy of schedule estimates
Quality of deliverables
Amount of contingency reserves used
Efficiency of cost utilization
CPI is calculated as EV divided by AC and measures the cost efficiency of budgeted resources. A CPI greater than 1 indicates under budget, while less than 1 indicates over budget. It is a key metric in earned value management. Source
What is the formula for Estimate to Complete (ETC) when using the bottom-up ETC method?
BAC divided by CPI
Sum of remaining activity estimates
EV minus PV
EAC minus AC
Bottom-up ETC involves re?estimating the remaining work at the activity level and summing those estimates. This approach is often used when project performance has deviated significantly from the plan. Source
Which reserve is used for known-unknown risks with identified cost responses?
Contingency reserve
Management reserve
Change reserve
Quality reserve
Contingency reserves are allocated for identified risks based on quantitative risk analysis and risk response planning. Management reserves cover unforeseen risks (unknown-unknowns). Contingency is part of the cost baseline. Source
What is life cycle costing in project cost management?
Budgeting insurance costs post-project
Estimating total cost from inception through disposal of the product
Estimating only initial capital expenses
Calculating staffing costs during execution
Life cycle costing considers all costs incurred over the entire life of a product, service, or result, from initial concept through disposal. It helps in long-term decision making and understanding total cost of ownership. Source
Which of the following is considered an indirect cost?
Project-specific equipment rental
Administrative overhead
Direct labor
Direct materials
Indirect costs cannot be directly traced to a specific project activity and often include administrative overhead, facility costs, and utilities. They are allocated to projects using cost allocation methods. Source
Which of the following is a direct cost?
Cost of building materials
Company CEO salary
Organizational facility overhead
Office electricity bill
Direct costs are expenses that can be directly attributed to the production of specific deliverables, such as raw materials or direct labor. These costs are charged directly to the project budget. Source
What is the purpose of funding limit reconciliation in project cost management?
Generate variance reports
Align funding with spending limits set by the funding organization
Allocate more funds to high-risk activities
Approve change requests
Funding limit reconciliation ensures that the planned expenditures do not exceed the funding constraints imposed by the sponsor or organization. It may result in adjusting the project schedule or scope to match available funds. Source
In cost control, what does forecasting refer to?
Establishing the initial cost baseline
Assigning costs to work packages
Conducting risk response planning
Predicting future project performance based on current data
Forecasting uses current project performance data such as CPI and SPI to predict future outcomes like EAC and ETC. It helps project managers make informed decisions on corrective actions. Source
Which technique identifies the causes and degree of difference between baseline and actual performance?
Variance analysis
Inspection
Monte Carlo simulation
Earned schedule
Variance analysis compares planned performance against actual performance to determine deviations. It helps in identifying root causes of cost and schedule variances and supports corrective action planning. Source
Which document formally authorizes a project or phase to start and funds to be allocated?
Project charter
Risk register
Stakeholder register
Cost management plan
The project charter authorizes the project, appoints the project manager, and provides the initial funding and high-level requirements. It is the formal kickoff document for any project or phase. Source
What is resource leveling in project cost management?
Adding funds to contingency reserves
Adjusting start and finish dates based on resource constraints
Measuring cost variances
Determining budget allocations
Resource leveling smooths resource usage by adjusting activity schedules to not exceed resource availability. It can impact the project schedule and may increase cost if extended durations incur indirect costs. Source
What is the purpose of a cost change control system?
To allocate contingency reserves to activities
To ensure that all cost changes are processed through a formal integrated change control process
To generate cost estimates for unknown work packages
To calculate schedules for cost-loaded activities
A cost change control system documents the procedures by which project costs are monitored and controlled. It ensures that cost baseline changes are reviewed, approved, and communicated. This process prevents unauthorized budget alterations. Source
Which analysis technique uses statistical methods to determine relationships between cost drivers and project costs?
Delphi technique
SWOT analysis
Regression analysis
Monte Carlo simulation
Regression analysis examines the relationship between dependent variables (costs) and independent variables (cost drivers) to predict future costs. It is valuable for parametric estimating and forecasting. Source
Which of the following cost estimation methods is most time-consuming but provides the highest accuracy?
Top-down estimating
Bottom-up estimating
Analogous estimating
Parametric estimating
Bottom-up estimating requires detailed analysis of each work package or activity, making it the most accurate but also the most time-consuming. It reduces uncertainty but demands significant resources. Source
Which forecasting formula incorporates both schedule and cost performance?
EAC = AC + (BAC - EV) / (CPI * SPI)
EAC = AC + ETC
EAC = AC + BAC - EV
EAC = BAC / CPI
The formula EAC = AC + (BAC - EV) / (CPI * SPI) accounts for both cost efficiency (CPI) and schedule efficiency (SPI), providing a more realistic forecast when cost and schedule variances are expected to impact remaining work. Source
What is Trend analysis in cost control?
Using historical results to predict future performance based on past cost trends
Adjusting reserves for inflation
Comparing cost estimates to physical progress
Evaluating the cost baseline against the risk register
Trend analysis reviews project performance data over time to identify patterns and forecast future outcomes. It helps in proactive decision-making and early detection of potential overruns. Source
What does the cost baseline typically include?
Only contingency reserves
Unapproved cost estimates
Management reserve amounts
Authorized budgets time-phased by schedule activities
The cost baseline includes the approved, time-phased budget that the project manager uses to monitor and control costs. It consists of all approved project budgets excluding management reserves. Source
What is Estimate at Completion (EAC)?
The expected total cost of completing all project work
The remaining funds in contingency reserve
The duration remaining for project completion
The initial budget approved
EAC is the forecasted total cost of the project when all work is complete. It is calculated using various formulas depending on assumptions about future performance. Source
What does depreciation represent in project cost management?
Immediate expense of purchasing equipment
Allocation of capital asset cost over its useful life
Contingency for unknown costs
Cost of quality activities
Depreciation spreads the cost of capital assets over their expected useful lives. In projects, it allocates the equipment cost as an expense across multiple periods. This ensures accurate financial reporting. Source
The Theory of Constraints in project management focuses primarily on improving project performance by addressing what?
Increasing contingency reserves
Reducing schedule variance
The system's bottleneck
Enhancing stakeholder engagement
The Theory of Constraints identifies the single limiting factor (bottleneck) that prevents the system from meeting its goal. By improving or eliminating the bottleneck, overall performance is enhanced. Source
How are the costs of quality classified in project cost management?
Capital, overhead, and labor costs
Prevention, appraisal, and failure costs
Fixed, variable, and sunk costs
Direct, indirect, and operational costs
Cost of quality is categorized into prevention costs (avoiding defects), appraisal costs (inspections), and failure costs (internal and external failures). Understanding these helps in balancing cost of quality with benefits. Source
Which reserve addresses unidentified risks (unknown-unknowns)?
Budget reserve
Contingency reserve
Quality reserve
Management reserve
Management reserves are budgets set aside for unforeseen work that is within project scope but outside the scope of the cost baseline. They address unknown-unknown risks. Source
In funding limit reconciliation, excess funding causes what?
Periods of unfunded project work
Resource leveling to adjust schedule
Increase in contingency reserves
Reduction in BAC
When planned expenditures exceed funding limits, some work becomes unfunded in certain periods, creating periods of unfunded project work. Funding limit reconciliation adjusts the schedule or scope to fit funding constraints. Source
If a project has a BAC of $25,000, AC of $20,000, EV of $15,000, and a CPI of 0.75, what is the Estimate at Completion (EAC) using the formula EAC = (BAC - EV) / CPI + AC?
$28,000
$30,000
$33,333
$35,000
Using the formula EAC = (BAC - EV) / CPI + AC: (25,000 - 15,000) / 0.75 + 20,000 = 13,333 + 20,000 = 33,333. This forecast accounts for current cost performance. Source
Using PERT three-point estimating, what is the expected cost when optimistic is $10,000, most likely is $20,000, and pessimistic is $50,000?
$18,333
$25,000
$30,000
$23,333
The PERT expected cost is calculated as (Optimistic + 4×Most Likely + Pessimistic) ÷ 6 = (10,000 + 80,000 + 50,000) ÷ 6 = 140,000 ÷ 6 ? 23,333. Source
What forecasts future cost performance most accurately when cost variances are expected to continue at current efficiency?
EAC = BAC / CPI
EAC = AC + BAC - EV
EAC = AC + (BAC - EV) / (CPI * SPI)
EAC = AC + ETC
When future work is expected to perform at the same cost efficiency as past work, EAC = BAC / CPI provides the most accurate forecast. It adjusts the total budget by current efficiency levels. Source
In activity-based costing, what drives the allocation of indirect costs?
Proportion of contingency reserves
Number of project deliverables
Experience level of the project manager
Cost driver units such as machine hours or labor hours
Activity-based costing assigns indirect costs to products or services based on cost drivers, which are measures of activities like machine hours or labor hours. This provides more accurate cost allocation than blanket overhead rates. Source
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Study Outcomes

  1. Comprehend Project Cost Management Principles -

    Grasp the foundational concepts tested in the project cost management principles quiz, including budgeting, forecasting, and cost control.

  2. Differentiate Cost Estimation Methods -

    Distinguish between approaches featured in the cost estimation methods quiz - such as analogous, parametric, and bottom-up estimating - for accurate budgeting.

  3. Apply Analogous Estimating Techniques -

    Leverage historical data and expert judgment to perform analogous estimates effectively and streamline early project cost forecasts.

  4. Analyze Activity-Based Costing -

    Interpret cost drivers and allocation methods as measured by the activity-based costing quiz to optimize indirect cost distribution.

  5. Evaluate Estimation Technique Effectiveness -

    Assess the strengths and limitations of each cost estimation method to select the most appropriate technique for diverse project scenarios.

  6. Tackle Project Cost Management Questions -

    Gain confidence in answering common project cost management questions by reinforcing key principles and estimation best practices.

Cheat Sheet

  1. Analogous Estimating -

    Analogous estimating leverages historical data from similar projects to quickly forecast costs, using a top-down approach endorsed by PMI's PMBOK Guide. It's perfect for the early stages of budgeting when details are sketchy, and you can remember it with the mnemonic "Analogy = Analogue." While speedy, it trades off some accuracy for rapid estimates.

  2. Parametric Estimating -

    Parametric estimating applies a unit-rate formula - Cost = Quantity × Unit Rate - to calculate budgets, as outlined in the University of Texas's Project Management resources. For example, if painting costs $5 per square foot and you have 1,000 sq ft, your estimate is $5,000. This method balances speed and accuracy when reliable parameters exist.

  3. Bottom-Up Estimating -

    Bottom-up estimating breaks the project into work packages, estimates each element in detail, then aggregates them for a precise total, as recommended by Harvard Business Review. It yields high accuracy but demands more time and effort, so apply it when precision matters most. You'll boost confidence in your figures by verifying each sub-estimate.

  4. Three-Point Estimating (PERT) -

    Three-point estimating uses the PERT formula - (Optimistic + 4×Most Likely + Pessimistic)❄6 - to incorporate uncertainty, a technique popularized by the U.S. Navy's Program Evaluation and Review Technique. This method smooths out risk by weighting the most likely outcome, making your estimates more realistic. Remember "O + 4ML + P" for a quick recall during your project cost management principles quiz.

  5. Activity-Based Costing (ABC) -

    Activity-based costing allocates overheads to specific activities using cost drivers like machine hours or labor rates, as detailed by the Chartered Institute of Management Accountants. By mapping costs to tasks, you gain granular insight into where money truly goes, perfect for refining your budget forecasts. Think "ABC = Activities Bring Costs" to keep ABC top of mind.

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