MIS573-Chapter7

Question 1

A budgetary estimate is the most accurate of the three types of estimates.

Answer 1

False (A definitive estimate provides an accurate estimate of project costs. It provides details for purchases and estimates actual costs.)

Question 2

A negative schedule variance means that it took less time than planned to perform the work.

Answer 2

False (A negative schedule variance means that it took longer than planned to perform the work, and a positive schedule variance means that the work took less time than planned to perform.)

Question 3

A schedule performance index of one means that the project is on schedule.

Answer 3

True (The schedule performance index (SPI) is the ratio of earned value to planned value; it can be used to estimate the projected time to complete the project. A schedule performance index of one means the project is on schedule.)

Question 4

Analogous estimates are called activity-based costing.

Answer 4

False (Analogous estimates are also called top-down estimates. Such estimates use the actual cost of a previous, similar project as the basis for estimating the cost of the current project.)

Question 5

Analogous estimates are the most accurate technique to estimate costs.

Answer 5

False (Analogous estimates requires a good deal of expert judgment and is generally less costly than other techniques. However, it is also less accurate.)

Question 6

Budgetary estimates are made even before a project is officially started.

Answer 6

True (Many organizations develop budgets at least two years into the future. Budgetary estimates are made one to two years prior to project completion.)

Question 7

Contingency reserves are also known as unknown unknowns.

Answer 7

False (Contingency reserves allow for future situations that may be partially planned for. They are sometimes called known unknowns.)

Question 8

Definitive estimates are made one year or less prior to project completion.

Answer 8

True (Definitive estimates are made one year or less prior to project completion. They provide an accurate estimate of project costs.)

Question 9

Determining the budget involves allocating the project cost estimate to individual work items over time.

Answer 9

True (Determining the budget involves allocating the project cost estimate to individual material resources or work items over time. These material resources or work items are based on the activities in the work breakdown structure for the project.)

Question 10

Estimates should become more accurate as time progresses.

Answer 10

True (Estimates are usually done at various stages of a project and should become more accurate as time progresses.)

Question 11

Good Earth, a company manufacturing packaged food products, sets up its stores in Baltonia. However, a year later, the company closes the store down due to high operating costs. In such a scenario, the money spent in paying for the rent of the store in Baltonia would be an example of which costs?

Answer 11

sunk (Sunk cost is money that has been spent in the past. When deciding what projects to invest in or continue, one should not include sunk costs.)

Question 12

How are profits best defined?

Answer 12

revenues minus expenditures (Profits are revenues minus expenditures. To increase profits, a company can increase revenues, decrease expenses, or try to do both.)

Question 13

If an important supplier goes out of business, management reserves can be set aside to cover the resulting costs.

Answer 13

True (Management reserves allow for future situations that are unpredictable. For example, if a project manager gets sick for two weeks or an important supplier goes out of business, management reserves could be set aside to cover the resulting costs.)

Question 14

If cost variance is a positive number, it means that performing the work costs more than planned.

Answer 14

False (Cost variance (CV) is the earned value minus the actual cost. If cost variance is a negative number, it means that performing the work costs more than planned. If cost variance is a positive number, performing the work costs less than planned.)

Question 15

If the cost performance index (CPI) is less than 100 percent, the project is under budget.

Answer 15

False (If the CPI is less than one or less than 100 percent, the project is over budget. On the other hand, if the CPI is greater than one or more than 100 percent, the project is under budget.)

Question 16

In a bottom-up estimate, the size of the individual work items is one of the factors that drives the accuracy of the estimates.

Answer 16

True (The size of the individual work items and the experience of the estimators drive the accuracy of the estimates. Using smaller work items increases the accuracy of the cost estimate because the people assigned to do the work develop the cost estimate instead of someone unfamiliar with the work.)

Question 17

In an earned value chart, when the actual cost line is right on or above the earned value line, it indicates that costs are less than planned.

Answer 17

False (Viewing earned value information in chart form helps in visualizing how a project is performing. If the actual cost line is always on or above the earned value line, it indicates that costs are equal to or more than planned.)

Question 18

Intangible costs can be easily measured in monetary terms.

Answer 18

False (Intangible costs or benefits are difficult to measure in monetary terms. Conversely, tangible costs or benefits can easily be measured in dollars.)

Question 19

It is important for project managers to focus on indirect costs because they can be easily controlled.

Answer 19

False (Direct costs can be directly related to creating the products and services of the project. Project managers should focus on direct costs because they can be controlled.)

Question 20

It is important for project managers to understand that every cost estimate is unique.

Answer 20

True (Every cost estimate is unique, just as every project is unique.)

Question 21

IT project managers must be able to present and discuss project information both in financial and technical terms.

Answer 21

True (Most members of a company’s executive board have a better understanding of financial terms than IT terms, and are more interested in finance. Therefore, IT project managers need to be able to present and discuss project information both in financial terms and technical terms.)

Question 22

One of the reasons why project cost estimates are inaccurate is because human beings are biased toward underestimation.

Answer 22

True (One of the reasons why project cost estimates are very inaccurate is because human beings are biased toward underestimation. It is thus important for project managers and top management to review estimates and ask important questions to make sure the estimates are not biased.)

Question 23

Overrun is the additional percentage amount by which estimates exceed actual costs.

Answer 23

False (Overrun is the additional percentage or dollar amount by which actual costs exceed estimates.)

Question 24

Project managers must conduct cash flow analysis to determine net present value.

Answer 24

True (Cash flow analysis is a method of determining the estimated annual costs and benefits for a project and the resulting annual cash flow. Project managers must conduct cash flow analysis to determine net present value.)

Question 25

Soles is a footwear company which has recently set up its store in Ambrosia. To manufacture its products, Soles incurs a range of different costs. Which would be an example of an indirect cost?

Answer 25

Electricity used to run its factories (Indirect costs are not directly related to the products or services of the project, but are indirectly related to performing the project. For example, indirect costs would include the cost of electricity, paper towels, and other necessities in a large building that houses 1,000 employees who work on many projects.)

Question 26

Spreadsheets are a common tool for cost estimating, cost budgeting, and cost control.

Answer 26

True (Most organizations use software to assist in various activities related to project cost management. Spreadsheets are a common tool for cost estimating, cost budgeting, and cost control.)

Question 27

The formulas for variances and indexes start with EV, the earned value.

Answer 27

True (The formulas for variances and indexes start with EV, the earned value. Variances are calculated by subtracting the actual cost or planned value from EV, and indexes are calculated by dividing EV by the actual cost or planned value.)

Question 28

The main goal of which process is to produce a cost baseline for measuring project performance and project funding requirements?

Answer 28

cost budgeting (The main goal of the cost budgeting process is to produce a cost baseline for measuring project performance and to determine project funding requirements. Determining the budget involves allocating the project cost estimate to individual material resources or work items over time.)

Question 29

The primary output of the planning cost management process is a change request.

Answer 29

False (The main output of the planning cost management process process is a cost management plan. Planning cost management involves determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost.)

Question 30

What is a rough order of magnitude estimate also referred to as?

Answer 30

ballpark (A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. A ROM estimate can also be referred to as a ballpark estimate, a guesstimate, a swag, or a broad gauge.)

Question 31

What is the purpose of a cost performance index (CPI)?

Answer 31

estimate the projected cost of completing the project (The cost performance index (CPI) is the ratio of earned value to actual cost; it can be used to estimate the projected cost of completing the project.)

Question 32

What term is used for analogous estimates?

Answer 32

top-down (Analogous estimates use the actual cost of a previous, similar project as the basis for estimating the cost of the current project. They are also called top-down estimates.)

Question 33

What type of estimate is a cost estimation tool used to allocate money into an organization’s budget?

Answer 33

budgetary (budgetary estimate is used to allocate money into an organization’s budget. Budgetary estimates are made one to two years prior to project completion.)

Question 34

What type of estimate is used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs?

Answer 34

definitive (A definitive estimate provides an accurate estimate of project costs. Definitive estimates are used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs.)

Question 35

What type of management includes the processes required to ensure that a project team completes a project within an approved budget?

Answer 35

project cost management (Project cost management includes the processes required to ensure that a project team completes a project within an approved budget. Project managers must make sure their projects are well defined, have accurate time and cost estimates, and have a realistic budget that they were involved in approving.)

Question 36

When deciding what projects to invest in or continue, one should include sunk costs.

Answer 36

False (Sunk cost is money that has been spent in the past. When deciding what projects to invest in or continue, one should not include sunk costs.)

Question 37

Which costs are difficult to measure in monetary terms?

Answer 37

Intangible costs (Intangible costs or benefits are difficult to measure in monetary terms.)

Question 38

Which is an input of the process of controlling costs?

Answer 38

work performance data (The project management plan, project funding requirements, work performance data, and organizational process assets are inputs for controlling costs.)

Question 39

Which is an output of the process of controlling costs?

Answer 39

cost forecasts (Outputs of the process of controlling costs are work performance information, cost forecasts, change requests, project management plan updates, project documents updates, and organizational process asset updates.)

Question 40

Which is true of earned value?

Answer 40

It is an estimate of the value of the physical work actually completed. (The earned value (EV) is an estimate of the value of the physical work actually completed. EV is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date.)

Question 41

Which is true of the schedule performance index (SPI)?

Answer 41

It can be used to estimate the projected time to complete the project. (The schedule performance index (SPI) is the ratio of earned value to planned value; it can be used to estimate the projected time to complete the project.)

Question 42

Which process involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance?

Answer 42

determining the budget (Determining the budget involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.)

Question 43

Which process involves developing an approximation of the costs of resources needed to complete a project?

Answer 43

estimating costs (Estimating costs involves developing an approximation or estimate of the costs of the resources needed to complete a project. The main outputs of the cost estimating process are activity cost estimates, basis of estimates, and project documents updates.)

Question 44

Which process results in a cost baseline as a main output?

Answer 44

cost budgeting (Determining the budget involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. The main outputs of the cost budgeting process are a cost baseline, project funding requirements, and project documents updates.)

Question 45

Which reserves allow for future situations that are unpredictable?

Answer 45

Management reserves (Management reserves allow for future situations that are unpredictable. They are sometimes called unknown unknowns.)

Question 46

Which statement best defines cost variance?

Answer 46

earned value minus the actual cost (Cost variance (CV) is the earned value minus the actual cost. If cost variance is a negative number, it means that performing the work costs more than planned. If cost variance is a positive number, performing the work costs less than planned.)

Question 47

Which statement best defines schedule variance?

Answer 47

earned value minus the planned value (Schedule variance (SV) is the earned value minus the planned value. A negative schedule variance means that it took longer than planned to perform the work, and a positive schedule variance means that the work took less time than planned to perform.)

Question 48

Which statement is true of analogous estimates?

Answer 48

They are most reliable when previous projects are similar in fact with current projects. (Analogous estimates use the actual cost of a previous, similar project as the basis for estimating the cost of the current project. They are most reliable when the previous projects are similar in fact, not just in appearance.)

Question 49

Which statement is true of contingency reserves?

Answer 49

They allow for future situations that can be partially planned for. (Contingency reserves allow for future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baseline.)

Question 50

Which statement is true regarding indirect costs?

Answer 50

not directly related to the products or services of a project. (Indirect costs are not directly related to the products or services of the project, but are indirectly related to performing the project.)

Question 51

Which type of estimate uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project?

Answer 51

analogous estimates (Analogous estimates use the actual cost of a previous, similar project as the basis for estimating the cost of the current project. This technique requires a good deal of expert judgment and is generally less costly than other techniques, but it is also less accurate.)

Question 52

Which type of estimating uses project characteristics in a mathematical model to estimate project costs?

Answer 52

parametric (Parametric estimating uses project characteristics (parameters) in a mathematical model to estimate project costs.)

Question 53

Work performance information and cost forecasts are main outputs of which process?

Answer 53

cost control (Controlling costs involves controlling changes to the project budget. The main outputs of the cost control process are work performance information, cost forecasts, change requests, project management plan updates, project documents updates, and organizational process assets updates.)

Question 54

Which statement is true of a order of magnitude estimate?

Answer 54

It provides an estimate of what a project will cost. (A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. This type of estimate is done very early in a project or even before a project is officially started.)

Question 55

The project management plan and project funding requirements are inputs of the process of controlling costs.

Answer 55

True (The project management plan, project funding requirements, work performance data, and organizational process assets are inputs for controlling costs.)

Question 56

Newtech Inc. hires John for the position of a software programmer to work on their new project. Salary paid to John by Newtech Inc. would be an example of which type of costs?

Answer 56

direct (Direct costs can be directly related to creating the products and services of a project. For instance, direct costs include the salaries of people working full time on a project.)

Question 57

Which process helps develop an accurate projection of a project’s financial expenses and benefits?

Answer 57

life cycle costing (Life cycle costing helps develop an accurate projection of a project’s financial costs and benefits. It allows one to see a big-picture view of the cost of a project throughout its life cycle.)

Question 58

What does the process of controlling costs primarily involve?

Answer 58

managing changes to the project budget (Controlling costs involves controlling changes to the project budget. The main outputs of the cost control process are work performance information, cost forecasts, change requests, project management plan updates, project documents updates, and organizational process assets updates.)

Question 59

What is another term used for budget?

Answer 59

planned value (The planned value (PV), also called the budget, is the portion of the approved total cost estimate planned to be spent on an activity during a given period.)

Question 60

Supporting details for an estimate include the ground rules and assumptions used in creating the estimate.

Answer 60

True (In addition to creating cost estimates for the entire project and activity cost estimates, it is also important to provide supporting details for the estimates and updates to project documents. The supporting details include the ground rules and assumptions used in creating the estimate, a description of the project used as a basis for the estimate, and details on the cost estimation tools and techniques used to create the estimate.)

Question 61

Which type of estimate should be used if the cost estimate for a project is used a basis for contract awards and performance reporting?

Answer 61

definitive (If the cost estimate for a project is a basis for contract awards and performance reporting, it should be a definitive estimate and as accurate as possible.)

Question 62

Which is most likely to be a reason for inaccuracies in information technology cost estimates?

Answer 62

People lack estimating experience. (The people who develop software cost estimates often do not have much experience with cost estimation, especially for large projects. They also do not have enough accurate, reliable project data on which to base estimates.)

Question 63

Which method is used for determining the estimated annual costs and benefits for a project?

Answer 63

Cash flow analysis (Cash flow analysis is a method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow. Project managers must conduct cash flow analysis to determine net present value.)