Deck 8: Cost Estimation and Budgeting

Question 1

Comparative estimates are more accurate than definitive estimates when applied to the same project.

Answer 1

True

Question 2

The __________ is a plan that identifies the allocated resources, the project's goals, and the schedule that allows an organization to achieve those goals.

Answer 2

project budget

Question 3

Employing an overhead multiplier is sometimes referred to as the __________ rate for direct labor costs.

Answer 3

fully-loaded

Question 4

A time-phased budget allocates costs across both project activities and the anticipated time in which the budget is to be expended.

Question 5

Cost estimates can be too low if issues outside a firm's control affect the project organization's ability to complete the project. These __________ might include inflation or political instability.

Question 6

Activity-based costing is a budgeting method that identifies __________ associated with activities that consume resources.

Question 7

A budget contingency of $1 million on a $10 million project means that the project will be planned for a cost of $10 million, but the project organization receives an extra $1 million to guard against unforeseen cost overruns.

Question 8

Activity-based costing is based on the notion that projects consume activities and activities consume resources.

Question 9

There is a tendency for different departments or functions to compete for scarce resources in a zero-sum game when bottom-up budgeting is used to develop a project budget.

Question 10

The unofficial rule of thumb for __________ estimates is to aim for an accuracy of plus or minus 30%.

Question 11

__________ cost estimates can only be given upon the completion of most of the design work at a point when the scope and capabilities of the project are well-understood.

Question 12

Direct costs are those clearly assigned to the aspect of the project that generated the cost.

Question 13

__________ costs might be those associated with charges applied once at the beginning or end of a project.

Question 14

An order of magnitude estimate is usually more accurate than a ballpark estimate.

Question 15

__________ is typically added to the project's budget following the identification of all project costs; that is, the project does not include __________ as part of the activity-based costing process.

Question 16

Material is an example of a cost that is recurring, variable and direct.

Question 17

An expedited cost is one that does not vary with respect to their usage.

Question 18

__________ begins with the work packages of the work breakdown structure and specifies funds that are needed to support the tasks. These costs are aggregated by managers and duplicate costs are removed as managers' budgets are combined.

Question 19

A learning rate of 90% means that for every doubling of output, the time required by the activity falls by 10%.

Question 20

Unplanned costs incurred when steps are taken to speed up the project's completion are __________.

Question 21

Which worker's wages would constitute a direct cost for a construction project?

A) the project's cost accountant
B) the brick mason
C) the architect's assistant
D) the foreman's

Question 22

The charge that is most likely a fixed cost is for:

A) materials.
B) equipment rental.
C) direct labor.
D) utilities.

Question 23

Which of these is typically a recurring cost?

A) preliminary market analysis
B) personnel training
C) outplacement services
D) logistics

Question 24

A normal cost is incurred when:

A) overtime is used more than originally planned.
B) shipments are expedited.
C) additional temporary workers are brought on site.
D) the aggressive baseline plan is adhered to.

Question 25

Effective comparative estimates rely most heavily on:

A) an accurate inflation factor.
B) the correct number of years elapsed between the old project and the current one.
C) true comparability between the current project and previous project work.
D) the correct number of employees on the new project compared with the previous one.

Question 26

Which of these is typically a nonrecurring cost?

A) site study
B) labor
C) material
D) sales

Question 27

Estimates based on the assumption that historical data can be used as a frame of reference for current estimates are:

A) comparative estimates.
B) ballpark estimates.
C) definitive estimates.
D) feasibility estimates.

Question 28

You are probably looking at a bill for a variable cost when you are paying for:

A) leased capital equipment.
B) salaries.
C) materials.
D) health insurance.

Question 29

Unplanned costs incurred when steps are taken to speed up project's completion are called:

A) expedited costs.
B) accelerated costs.
C) pass-through costs.
D) normal costs.

Question 30

The order of magnitude cost estimate is used when:

A) ballpark estimates are not considered accurate enough.
B) historical data are readily available.
C) information or time is scarce.
D) parametric estimation has already been performed.

Question 31

Which of these indirect costs is typically classified as a selling or administrative cost?

A) secretarial support
B) utilities
C) insurance
D) depreciation

Question 32

When asked to provide an estimate of an irrigation system, Pete looked from one end of the field to the other, licked a finger and held it in the air, squinted into the sun and said $25,000, give or take 30%. The technique employed for cost estimation is:

A) parametric.
B) comparative.
C) definitive.
D) ballpark.

Question 33

Which of these indirect costs is typically classified as an overhead cost?

A) advertising
B) shipping
C) sales commissions
D) taxes

Question 34

Three workers complete a full 8-hour day finishing concrete for a terrace. All three workers are paid $12 an hour and the job bills to the customer for $450. What are the total direct labor costs?

A) $450
B) $12
C) $288
D) $96

Question 35

Cost estimates that are based as a guideline on real numbers, or figures derived after the completion of preliminary design work, are:

A) definitive estimates.
B) order of magnitude estimates.
C) parametric estimates.
D) feasibility estimates.

Question 36

Workers paid $15.00 per hour with an overhead charge of 1.45 and a personal time allowance of 1.15, have what total direct labor cost for an 8-hour work day?

A) $151.30
B) $174.00
C) $200.10
D) $236.80

Question 37

When their baby was ready to head off to college, the beleaguered parents pulled out the college folder from their file cabinet and added up the cost of putting their first child through college from 1995-2000. The mother whimpered as she factored in the rising cost of tuition, fees, books, and inflation by multiplying the total by 2.5. The father felt a searing pain go through his chest as he saw the total, knowing full well that their cost estimation approach, called:

A) an order of magnitude estimate, was highly accurate.
B) parametric estimation, was highly accurate.
C) feasibility estimation, was highly accurate.
D) definitive estimation, was highly accurate.

Question 38

A key for developing project cost estimates is to:

A) cost the project while considering the total package.
B) cost the project on a work package and task basis.
C) cost the project on a major module basis.
D) cost the project and add 33% for contingency.

Question 39

Which of the following is a direct cost?

A) labor
B) rent
C) depreciation on equipment
D) health benefits

Question 40

A systems analyst is paid at the rate of $50/hour and will be needed for 40 hours. Her employer uses an overhead multiplier of 60% and does not factor in personal time. Her total direct labor cost that should be billed at:

A) $2,000.
B) $3,200.
C) $1,250.
D) $4,500.

Question 41

The 1974 model Eldorado is a three-ton behemoth with a 500-cubic-inch engine that is long on style but short on gas mileage. During its five-year development process no one could possibly have anticipated that gas prices would go through the roof in 1973, making it far more expensive to operate and subsequently less attractive to a gas-price-conscious public. Design engineers scrambled to change the car in the last few months leading up to its debut, adding a slimmed down version with a smaller engine. All of the design overtime meant that the project budget took a big hit though, thanks to:

A) the initial low estimate.
B) the unexpected technical difficulties.
C) this external factor.
D) the lack of definition.

Question 42

What learning rate is being demonstrated if the first unit takes 15 hours and the third unit takes 14 hours to complete?

A) greater than or equal to 97 percent
B) less than 97 percent but greater than or equal to 95 percent
C) less than 95 percent but greater than or equal to 93 percent
D) less than 93 percent

Question 43

It began as a simple macro that would extract grades and post them on a web site, but once the web programmer began the work, he became obsessed with various charting features, grade summaries, and reports that could be added to make this the grandest web site in the tri-county area. As 2 hours of programming work grew to 20 and then 80, he knew that the client wouldn't be happy with the cost overrun. The only comment he mumbled as he finished his work was:

A) "I had some technical difficulties, sorry."
B) "There were some specification changes, sorry."
C) "This project lacked definition from the outset, sorry."
D) "I thought I'd never get the wizard's hat! Oh, by the way, your grades work."

Question 44

Activity-based costing and bottom-up budgeting share the step of:

A) identifying cost drivers associated with each activity.
B) identifying activities that consumer resources and assigning costs to them.
C) assigning costs to projects by multiplying the cost driver rate times the volume of units.
D) tending to overestimate project costs due to the lack of involvement by top management.

Question 45

Once most of the design work is complete, at a point when the scope and capabilities of the project are quite well understood, a __________ may be developed.

A) definitive estimate
B) comparative estimate
C) a parametric estimate
D) a non-parametric estimate

Question 46

A budget that is created by starting with the work breakdown structure, determining costs for each work package, and then adding these costs together is:

A) zero-based budgeting.
B) top-down budgeting.
C) bottom-up budgeting.
D) activity-based budgeting.

Question 47

If it takes 50 hours to complete the first unit and the company knows from experience that the learning rate should be 0.85, how fast can they be expected to finish all ten units?

A) 29 hours
B) 500 hours
C) 234 hours
D) 356 hours

Question 48

An advantage of top-down budgeting is:

A) that top management estimates of project costs are often quite accurate, at least in aggregate.
B) an elimination of the friction between top and lower levels in the competition for budget money.
C) that projects are no longer a zero-sum game among lower level managers.
D) top management budgets, by definition, cannot experience overruns.

Question 49

The project plan is supported by the work breakdown structure,:

A) the budget, and the schedule.
B) the budget, and the work packages.
C) the work packages, and the schedule.
D) the schedule, and the contingency plan.

Question 50

A plan that identifies the allocated resources, the project's goals, and the schedule that allows an organization to achieve those goals is:

A) the work breakdown structure.
B) the risk management plan.
C) the statement of work.
D) the project budget.

Question 51

There was no way that the study tour to Italy could cost only $1500 for 14 days and 13 nights and include all transportation, meals and hotels, but the smarmy professor knew that students would balk at a higher advertised price. Once they were thousands of miles away from home in a country where none of them spoke the language it would be easier to tell them about unanticipated charges and approach the more realistic price of $3500 per person. This type of:

A) specification change is a common reason for a cost overrun.
B) lack of definition is a common reason for a cost overrun.
C) low initial estimate is a common reason for a cost overrun.
D) unexpected technical difficulty is a common reason for a cost overrun.

Question 52

An activity with a learning rate of 0.9 takes 20 hours for the first iteration. How long will it take to complete this task for the 10^th time?

A) 0.9 hours
B) 10 hours
C) 14 hours
D) 17 hours

Question 53

Whether it is the Boeing V-22 Osprey or a simple storm door installation for a do-it-yourselfer, nothing is ever completed as quickly or as cheaply as initial estimates due to:

A) lack of definition.
B) low initial estimates.
C) specification changes.
D) unexpected technical difficulties.

Question 54

Which of these estimates should be the most accurate?

A) parametric
B) definitive
C) comparative
D) order of magnitude

Question 55

It took 80 hours of analysis to complete the first phase, but the second phase was done in 74 hours. If this learning rate continues, then the 8^th analysis should take a mere:

A) 63 hours and 20 minutes, give or take.
B) 68 hours and 30 minutes, give or take.
C) 57 hours and 15 minutes, give or take.
D) 52 hours and 45 minutes, give or take.

Question 56

When properly performed, bottom-up budgeting has the disadvantage of:

A) a lack of detail needed in project plans.
B) a lack of coordination among project managers and functional department heads.
C) being a hindrance to top managers when prioritizing projects that are competing for the same scarce resources.
D) a reduction of top management's control of the budget process to one of oversight.

Question 57

A budgeting method that assigns costs first to activities and then to projects based on each project's use of resources is:

A) activity-based budgeting.
B) zero-based budgeting.
C) top-down budgeting.
D) bottom-up budgeting.

Question 58

Which statement about the use of learning curves is best?

A) Learning curve effects stay constant across projects.
B) A job that is substantially re-engineered will have no disruption of its learning curve.
C) It may be more likely to see learning curve effects in construction than in research and development.
D) Every worker performing an identical task will exhibit the same learning effect.

Question 59

Input is received from an organization's management to create a project budget in:

A) zero-based budgeting.
B) top-down budgeting.
C) bottom-up budgeting.
D) activity-based budgeting.

Question 60

Poor initial scope development and work breakdown structure often creates cost overruns that are attributable to:

A) lack of definition.
B) deliberate low initial estimates.
C) unexpected technical difficulties.
D) external factors.

Question 61

An early warning signal for the potential of an overdrawn budget is created when:

A) activity-based costing cannot identify drivers.
B) a bottom-up budget never makes it up the chain of command.
C) contingency funds are applied for.
D) a top-down process moves too quickly down to the functional managers.

Question 62

The new dock would require 24 piers to support it and it was known that each time a pier is sunk into the harbor it would take 300 man hours of labor at $25 per hour. An activity-based costing of the entire pier system results in a total cost of how much?

A) $600
B) $7,500
C) $300,000
D) $180,000

Question 63

A contingency rate of 10% on a building project budgeted at $20 million means:

A) the project organization is hoping to bring the project in for around $22 million.
B) the project organization is hoping to bring the project in for around $2 million.
C) the project organization is hoping to bring the project in for around $18 million.
D) the project organization is hoping to bring the project in for around $200 million.

Question 64

A disadvantage of contingency funds is:

A) a recognition that the future contains both knowns and unknowns and the problems that might arise will impact the budget.
B) it is difficult to ascertain across what project activities contingency funds should be applied.
C) that application to the contingency fund gives an early warning signal of a potential overdrawn budget.
D) that provision is made in the company plans for an increase in project cost.

Question 65

Which of the following is NOT contained in a typical time-phased budget?

A) total expenses for each activity
B) total expenses for each time unit
C) cumulative expenses for each time unit
D) cumulative time for each expense

Question 66

What is the total project budget in this time-phased budget?

A) cannot be determined from the information given
B) $61,000
C) $35,000
D) $71,500

Question 67

Contingency money is:

A) the money that must be received before any project work can begin.
B) money that is spent first to lock-in all contract guarantees.
C) not usually a part of the activity-based costing process.
D) valued at a higher rate than non-contingency money when determining project costs.

Question 68

What is the total project budget for design in this time-phased budget?

A) $152,000
B) $106,000
C) $57,000
D) $34,000

Question 69

"If anything can go wrong it often will" is an articulation of:

A) Taylor's Theorem.
B) Pinto's Postulate.
C) Murphy's Law.
D) the Pareto Principle

Question 70

It was fortunate that the project budget included contingency funding; the top manager had not foreseen that the project would need the services of their elite slide rule squad in more than one area at the same time. Design couldn't complete their work without their services, nor could marketing, or production. Contingency funds came in handy to meet the unanticipated:

A) change in project scope.
B) abnormal project conditions.
C) consequences of Murphy's Law.
D) interaction costs.

Question 71

After years of tinkering and reverse engineering initiatives, Kimray had finally unlocked the secrets of the Beta tape format. A quick trip to the rental store was an epiphany for company leadership when they realized that only a handful of Beta tapes were available; the rest of the world had adopted the VHS format seemingly overnight. Now they would have to buy a few of those newfangled VHS machines to see how they ticked. The contingency funds that management had set aside would be put to good use on this:

A) change in project scope.
B) abnormal condition.
C) unanticipated interaction cost.
D) latest evidence of Murphy's Law.

Question 72

What is the cumulative project budget for September in this time-phased budget?

A) $210,000
B) $152,000
C) $137,800
D) $80,000

Question 73

An allocation of extra funds to cover uncertainties and improve chances that the project can be completed within the timeframe originally specified is a(n):

A) setback.
B) budget contingency.
C) reallocation budget.
D) reserve line budget.

Question 74

What is the cumulative cost in February in this time-phased budget?

A) $25,000
B) $17,000
C) $14,000
D) $0

Question 75

What is the total project budget in this time-phased budget?

A) $210,000
B) $193,000
C) $184,500
D) $178,300

Question 76

What is the project budget for November in this time-phased budget?

A) $21,000
B) $15,000
C) $18,000
D) $33,000

Question 77

Project cost estimates usually anticipate that resources will be available, that the weather will not be extreme, and that funding will materialize, creating what are called:

A) hyperactivity.
B) standard operating procedures.
C) standard duress.
D) normal conditions.

Question 78

A budget containing disaggregated figures across the schedule when work is planned is a:

A) time-phased budget.
B) chronic budget.
C) temporal budget.
D) calendar budget.

Question 79

What is the total amount budgeted for design costs in this time-phased budget?

A) $3,000
B) $6,000
C) $10,000
D) $17,000

Question 80

What is the total amount budgeted for March in this time-phased budget?

A) $6,000
B) $35,000
C) $41,000
D) $66,000