# PMP Ch 6 – Cost Management Questions (Rita Ch 7)

1. One common way to compute estimate at completion (EAC)
is to take the budget at completion (BAC) and:

A. Divide by SPI
B. Multiply by SPI
C. Multiply by CPI
D. Divide by CPI

This question is asking for the formula for EAC, which is BAC/CPI. Notice how you will have to remember the formula to get the answer correct.

2. Estimate at completion (EAC) is a periodic evaluation of:

A. The cost of work completed
B. The value of work performed
C. The anticipated total cost at project completion
D. What it will cost to finish the job

When you look at earned value, many of the terms have similar definitions. This could get you into trouble. Since the EAC means the estimate at completion, choice C is the best answer. Choice D is the definition of ETC, estimate to complete.

3. If earned value (EV) = 350, actual cost (AC) = 400, planned value (PV) = 325, what is cost variance (CV)?

A. 350
B. -75
C. 400
D. -50

CV = EV – AC

4. The customer responsible for overseeing your project asks you to provide a written cost estimate that is 30 percent higher than your estimate of the project’s cost. He explains that the budgeting process requires managers to estimate pessimistically to ensure enough money is allocated for projects. What is the BEST way to handle this?

A. Add the 30 percent as a lump sum contingency fund to handle project risks
B. Add the 30 percent to your cost estimate by spreading it evenly across all project activities
C. Create one cost baseline for budget allocation and a second one for the actual project management plan
D. Ask for information on risks that would cause your estimate to be too low

Presenting anything besides your original estimate (allocating more to the budget) is inaccurate and calls into question your competence and integrity as a project manager. The customer should list potential changes and risks to your estimate. If the costs and risks are justified, you can increase the budget.

5. Analogous estimating:

A. Uses bottom-up estimating techniques
B. Is used most frequently during the executing processes of the project
C. Uses top-down estimating techniques
D. Uses actual detailed historical costs

Analogous estimating is used most frequently during the planning processes, not the executing processes (choice B). You do not need to use historical costs (choice D) for an analogous estimate. Therefore, choice C is the correct answer.

6. All of the following are outputs of the Estimate Costs process EXCEPT:

A. An understanding of the cost risk in the work that has been estimated
B. The prevention of inappropriate changes from being induded in the cost baseline
C. An indication of the range of possible costs for the project
D. Documentation of any assumptions made during the Estimate Costs process

This question is asking, “When you finish estimating costs, what do you have?” Many people who do not realize that estimates should be in a range pick choice C. Choice B is more correctly part of the cost management plan and the change control system.

7. The main focus of life cycle costing is to:

A. Estimate installation costs
B. Estimate the cost of operations and maintenance
C. Consider installation costs when planning the project costs
D. Consider operations and maintenance costs in making project decisions

Life cycle costing looks at operations and maintenance costs and balances them with the project costs to try to reduce the cost across the entire life of the project.

8. Cost performance measurement is BEST done through which of the following?

A. Asking for a percent complete from each team member and reporting that in the monthly progress report
B. Calculating earned value and using the indexes and other calculations to report past performance and forecast future performance
C. Using the 50/50 rule and making sure the life cyde cost is less than the project cost
D. Focusing on the amount expended last month and what will be expended the following month

Asking percent complete (choice A) is not a best practice since it is usually a guess.
Often the easiest work is done first on a project, throwing off any percentage calculations of work remaining. It may be a good thing to use the 50/50 rule, as in choice C. However, the 50/50 rule is not necessarily induded in the progress report, and the second part of the sentence is incorrect. The life cyde cost cannot be lower than the project cost, as the life cyde cost indudes the project cost.
Choice D is often done by inexperienced project managers who know of nothing else. Not only does it provide little information, but also it cannot be used to predict the future. Choice B is the best answer since it looks at the past and uses this information to estimate future costs.

9. A cost performance index (CPI) of 0.89 means:

A. At this time, we expect the total project to cost 89 percent more than planned
B. When the project is completed we will have spent 89 percent more than planned
C. The project is only progressing at 89 percent of the rate planned
D. The project is only getting 89 cents out of every dollar invested

The CPI is less than one, so the situation is bad. Choice D is the best answer.

10. A schedule performance index (SPI) of 0.76 means:

A. You are over budget
B. You are ahead of schedule
C. You are only progressing at 76 percent of the rate originally planned
D. You are only progressing at 24 percent of the rate originally planned

Earned value questions ask for a calculation or an interpretation of the results. See the tricks under this topic in this book.

11. Which of the following is NOT needed in order to come up with a project estimate?

A. A WBS
B. A network diagram
C. Risks
D. A change control system

A change control system is not required to obtain estimates, but without the other three choices, you cannot develop the estimates. You need the WBS to define the activities, the network diagram to see the dependencies, and the risks to determine contingencies.
NOTE: These are high-level risks, not the detailed risks we identify later in the planning process group.

12. Which of the following is an example of a parametric estimate?

A. Dollars per module
B. Learning bend
C. Bottom-up
D. CPM

Parametric estimates use a mathematical model to predict project cost or time.

13. A rough order of magnitude estimate is made during which project management process group?

A. Planning
B. Closing
C. Executing
D. Initiating

This estimate has a wide range. It is done during project initiating, when very little is known about the project.

14. A cost baseline is an output of which cost management process?

A. Estimate Activity Resources
B. Estimate Costs
C. Determine Budget
D. Control Costs

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

15. During which project management process group are budget forecasts created?

A. Monitoring and controlling
B. Planning
C. Initiating
D. Executing

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

16. Which type of cost is team training?

A. Direct
B. NPV
C. Indirect
D. Fixed

You are training the team on skills required for the project. The cost is directly related to the project and thus a direct cost.

17. Project setup costs are an example of:

A. Variable costs
B. Fixed costs
D. Opportunity costs

Setup costs do not change as production on the project changes. Therefore, they are fixed costs.

18. Value analysis is performed to get:

A. More value from the cost analysis
B. Management to buy into the project
C. The team to buy into the project
D. A less costly way of doing the same work

Notice that you need to know the definition of value analysis to answer this question.
Also notice that the other choices could be considered correct by someone who does not know the definition.

19. Who has the cost risk in a fixed price (FP) contract?

A. The team
C. The seller
D. Management

If the costs are more than expected under a fixed price contract, the seller must pay those costs. As explained in the Procurement Management chapter, “cost risk” refers to the person who will have to pay for the added cost if costs escalate. Because the price is fixed, the seller will have to pay any increased costs out of their profit. Naturally, this does not include increased PRICE due to change orders. A fixed price contract and the PRICE could be changed with change orders.

20. Which of the following represents the estimated value of the work actually accomplished?

A. Earned value (EV)
B. Planned value (PV)
C. Actual cost (AC)
D. Cost variance (CV)

It can be confusing to differentiate earned value terms from each other. The definition presented here is for EV or earned value, so choice A is the best choice.

21. Which of the following are ALL items included in the cost management plan?

A. The level of accuracy needed for estimates, rules for measuring cost performance, specifications for how duration estimates should be stated
B. Specifications for how estimates should be stated, rules for measuring cost performance, the level of accuracy needed for estimates
C. Rules for measuring team performance, the level of accuracy needed for estimates, specifications for how estimates should be stated
D. Specifications for how estimates should be stated, the level of risk needed for estimates, rules for measuring cost performance

Every item in choice B accurately describes apart of the cost management plan.
Notice how one word in each of the other options makes the entire choice incorrect. Choice A refers to duration estimates, which are created during the time management process, choice C includes measuring team performance, apart of human resource management, and choice D includes risk.

22. Your project has a medium amount of risk and is not very well defined. The sponsor hands you a project charter and asks you to confirm that the project can be completed within the project cost budget. What is the BEST method to handle this?

A. Build the estimate in the form of a range of possible results
B. Ask the team members to help estimate the cost based on the project charter
C. Based on the information you have, calculate a parametric estimate
D. Provide an analogous estimate based on past history.

Accuracy is always important, but since the project charter has just been received, the project has not yet been planned. Therefore, although some of the choices are not blatantly wrong, it is best to estimate in a range.

23. The cost contingency reserve should be:

A. Hidden to prevent management from disallowing the reserve
B. Added to each activity to provide the customer with a shorter critical path
C. Maintained by management to cover cost overruns
D. Added to the base costs of the project to account for risks

Choice A is an inappropriate action. Choice B is an incorrect statement. Choice C describes management reserves. During the risk management process, you determine appropriate cost contingency reserves for risk events. The sum of these reserves should be added to the total project estimate to cover the cost of risk events happening.

24. The seller tells you that your activities have resulted in an increase in their costs. You should:

A. Recommend a change to the project costs
B. Have a meeting with management to find out what to do
C. Ask the seller for supporting information
D. Deny any wrongdoing

This is a professional and social responsibility/procurement/cost question. The situation described involves a claim. The best thing to do would be to get supporting information to find out what happened and take corrective action for the future. After choice C and negotiation, choice A would most likely occur. Choice D is unethical. Choice B is a meeting with YOUR management and should not occur until you have all the information.

25. Your cost forecast shows that you will have a cost overrun at the end of the project. Which of the following should you do?

A. Eliminate risks in estimates and reestimate
B. Meet with the sponsor to find out what work can be done sooner
C. Cut quality
D. Decrease scope

Look for the choice that would have the least negative impact in this situation. You would not need to meet with the sponsor to do choice B. Choices C and D always have negative effects. The choice with the least negative impact is Choice A.

26. A new store development project requires the purchase of various equipment, machinery, and furniture. The department responsible for the development recently centralized its external purchasing process and standardized its new order system. In which document can these new procedures be found?

A. Project scope statement
B. WBS
C. Staffing management plan
D. Organizational policies

Procedures for the rental and purchase of supplies and equipment are found in the organizational policies, part of organizational process assets.

27. Early in the life of your project, you are having a discussion with the sponsor about what estimating techniques should be used. You want a form of expert judgment, but the sponsor argues for analogous estimating. It would be BEST to:

A. Agree to analogous estimating, as it is a form of expert judgment
B. Suggest life cyde costing as a compromise
C. Determine why the sponsor wants such an accurate estimate
D. Try to convince the sponsor to allow expert judgment because it is typically more accurate

This is a tricky question. In order to pick the best answer, you need to realize that analogous estimating is a form of expert judgment. Notice choice C, “determnine why;” sounds like a good idea, but look at the rest of the senten ce. Analogous estimates are not accurate. Reading every word of this choice helps eliminate it.

28. You have just completed the initiating processes of a small project and are moving into the planning processes when a project stakeholder asks you for the projects budget and cost baseline. What should you tell her?

A. The project budget can be found in the project’s charter, which has just been completed
B. The project budget and baseline will not be finalized and accepted until the planning processes are completed
C. The project management plan will not contain the project’s budget and baseline; this is a small project
D. It is impossible to complete an estimate before the project management plan is created

The overall project budget (choice A) may be included in the project charter but not the detailed costs. Even small projects (choice C) should have a budget and schedule. It is not impossible to create a project budget before the project management plan is created (choice D). It is just not wise, as the budget will not be accurate.

29. The project manager is allocating overall cost estimates to individual activities to establish a baseline for measuring project performance. What process is this?

A. Cost Management
B. Estimate Costs
C. Determine Budget
D. Control Costs

Choice A is too general. The estimates are already created in this example, so the answer is not choice B. The answer is not D, Control Costs, because the baseline has not yet been created. The correct answer is choice C.

30. Monitoring cost expended to date in order to detect variances from the plan occurs during:

A. The creation of the cost change management plan
B. Recommending corrective actions
C. Updating the cost baseline
D. Product performance reviews

Recommending corrective actions (choice B) and possible updates to the cost baseline(choice C) result from the activity described; they are not concurrent with it. Monitoring costs are part of change control, but not part of creating the change control system (choice A).

31. A cost management plan contains a description of:

A. The project costs
B. How resources are allocated
C. The budgets and how they were calculated
D. The WBS level at which earned value will be calculated

The exam will ask you what the tools of project management cantain in order to test whether you really understand them. This question is almost impossible to guess correctly.

32. A manufacturing project has a schedule performance index (SPI) of 0.89 and a cost performance index (CPI) of 0.91. Generally, what is the BEST explanation for why this occurred?

A. The scope was changed
B. A supplier went out of business and a new one needed to be found
C. Additional equipment needed to be purchased
D. A critical path activity took longer and needed more labor hours to complete

To answer this question, you must look for a choice that would take longer and cost more. If you picked choice A, reread it. It says scope was changed, not necessarily added to. If the change was to reduce the scope, it might also have reduced cost. Though it would take time to handle the event described in choice B, the impacted activity might not be on the critical path and thus might not affect time. Choice C would definitely add cost, but not necessarily time. Only choice D would negatively affect both time and cast.

33. Although the stakeholders thought there was enough money in the budget, halfway through the project the cost performance index (CPI) is 0.7. To determine the root cause, several stakeholders audit the project and discover the project cost budget was estimated analogously. Although the activity estimates add up to the project estimate, the stakeholders think something was missing in how the estimate was campleted. Which of the following describes what was missing?

A. Estimated costs should be used to measure CPI
B. SPI should be used, not CPI
C. Bottom-up estimating should have been used
D. Past history was not taken into account

Actual costs are used to measure CPI, and there is no reason to use SPI in this situation, so choices A and B are not correct. Using past history (choice D) is another way of saying “analogous,” The best way to estimate is bottom-up (choice C). Such estimating would have improved the overall quality of the estimate.

34. Earned value analysis is an example of:

A. Performance reporting
B. Planning control
C. Ishikawa diagrams
D. Integrating the project components into a whole

Earned value analysis is a great reporting tool. With it, you can show where you stand on budget and schedule as well as provide forecasts for the rest of the project.

35. You are about to take over a project from another project manager and find out the following information about the project. Activity Z has an early start (ES) of day 15 and a late start (LS) of day 20. Activity Z is a difficult activity. The cost performance index (CPI) is 1.1. The schedule performance index (SPI) is 0.8. There are 11 stakeholders on the project. Based on this information, which of the following would you be the MOST concerned about?

A. Schedule
B. Float
C. Cost
D. The number of available resources

This is one of those questions that combines topics from various knowledge areas. Did you fall into the trap of calculating the float for Z? The amount of float for one activity and the number of stakeholders does not tell you anything in this case, so choices Band D cannot be the best answers. The CPI is greater than one and the SPI is less than one. Therefore, the thing to be most worried about would be schedule.

36. The difference between the cost baseline and the cost budget can be BEST described as:

A. The management reserve
B. The contingency reserve
C. The project cost estimate
D. The cost account

Cost accounts are included in the project cost estimate, and the contingency reserve is added to that to come up with the cost baseline. Thereafter the management reserve is added to come up with the cost budget. Therefore, only choice A is correct.

37. You provide a project cost estimate for the project to the project sponsor. He is unhappy with the estimate, because he thinks the price should be lower. He asks you to cut 15 percent off the project estimate. What should you do?

A. Start the project and constantly look for cost savings
B. Tell all the team members to cut 15 percent from their estimates
C. Inform the sponsor of the activities to be cut

This question is full of choices that are not correct project management actions. If you picked the wrong answer, look again at the choices and try to determine what you are missing. Whatever it is, it will show up more than once on the real exam!
To answer the question, you must first realize that it is never appropriate for a project manager to just cut estimates across the board (choice B). The project manager should have created an estimate with realistic work package estimates that do not include padding. Then, if costs must be decreased, the project manager can look to cut quality, decrease risk, cut scape, or use cheaper resources (and at the same time closely monitor the impact of changes on the project schedule).
One of the worst things a project manager can do is to start a project while knowing that the time or cost for the project is unrealistic. Therefore, choice A cannot be best. Notice that choice D suggests adding resources. That would cost more. Choice C involves evaluating, looking for alternatives, and then going to the sponsor to tell him the impact of the cost cutting.

38. Cost risk means:

A. There are risks that will cost the project money
B. The project is too risky from a cost aspect
C. There is a risk that project costs could go higher than planned
D. There is a risk that the cost of the project will be lower than planned

Choice A is a correct statement but it is not the definition of cost risk. Choice B refers to the overall cost risk on the project, and assumes that the risk is too great to do the project. The opposite of choice D is correct.

39. A project manager needs to analyze the project costs to find ways to decrease costs. It would be BEST if the project manager looks at:

A. Variable costs and fixed costs
B. Fixed costs and indirect costs
C. Direct costs and variable costs
D. Indirect costs and direct costs

Choice C describes costs that are directly attributable to the project or that vary with the amount of work accomplished.

40. You are the project manager for a railroad construction project. Your Sponsor has asked you for a forecast for the cost of project completion. The project has a total budget of \$80,000 abd CPI of .95 . The project has spent \$25,000 of its budget so far. How much more money do you plan to spend on the project?

A. \$59,210
B. \$80,000
C \$84,210
D \$109,210

Answer: Really asking for ETC. ETC = EAC – AC. We have AC. Can we get EAC? EAC = BAC/CPI. Now we have everything we need.

ETC = EAC – AC = BAC/CPI -AC = \$ 80,000/0.95 – \$25,000 = \$59,210 (A)

41. You are managing a project with a total budget of \$450,000. According to the schedule, your team should have completed 45% of the work by now. But at the latest status meeting, the team only reported that 40% of the work has actually been completed. The team has spent \$165,000 so far on the project. How would you best describe this project?

A. The project is ahead of schedule and within its budget.

B. The project is behind schedule and within its budget.

C. The project is ahead of schedule and over its budget.

D. The project is behind schedule and over its budget.

Answer: Let’s look at the schedule. Should be 45% complete, we are 40% complete. SPI = EV/PV = 40% / 45% = 0.89 < 1. We are behind schedule. Now to budget. CPI = EV/AC = (40% x \$450,000) / \$165,000 = 1.09. We are within budget.
42. You are managing a construction project that is currently being initiated. You met with the sponsors and several important stakeholders, and have started to work on the preliminary scope statement. You’ve documented several key assumptions that have been made, and identified project constraints and initial risks. Before you can finish the preliminary scope statement, you must make a rough order of magnitude estimate of both time and cost so that the sponsor can allocate the final budget.

What is the range of a rough order of magnitude (ROM) estimate?

A. -10% to +10%

B. -50% to +50%

C. -50% to +100%

D. -100% to +200%

Answer: Just answer the question. A ROM estimate is defined as -50% to +100%. The rest is unnecessary information.
43. You are managing a construction project to install new door frames in an office building. You planned on spending \$12,500 on the project, but your costs are higher than expected, and now you’re afraid that your project is spending too much money. What number tells you the difference between the amount of money you planned on spending and what you’ve actually spent so far on the project?

A. AC

B. SV

C. CV

D. VAC

Answer: The question is asking for the difference between planned and actual spending. This is Cost Variance, so CV.
44. You are managing a project with an EV of \$15,000, PV of \$12,000, and AC of \$11,000. How would you BEST describe this project?

A. The project is ahead of schedule and within its budget.

B. The project is behind schedule and within its budget.

C. The project is ahead of schedule and over its budget.

D. The project is behind schedule and over is budget.

Answer: SPI = EV/PV = 15000/12000 = 1.25 > 1 so we’re ahead of schedule. CPI = EV/AC = 15000/11000 = 1.36 > 1 (\$1.36 in value for every dollar spend) so we’re within our budget. (A)
45. You are managing a project with AC = \$25,100 , ETC = \$45,600 , VAC = -\$2,600, BAC = \$90,000, and EAC = \$92,100. Your sponsor asks you to forecast how much money you expect to spend on the remainder of the project. Which is the BEST estimate to use for this forecast?

A. \$45,600

B. \$87,400

C. \$90,000

D. \$92,100

Answer: The question is asking how much MORE money will be spent to complete the project. This is the Estimate to Completion, or ETC, which is given to you. \$45,600 (A)
46. You are managing a project with a schedule performance index (SPI) of 1.07 and a cost performance index (CPI) of .94. How would you BEST describe this project?

A. The project is ahead of scheule and within its budget.

B. The project is behind schedule and within its budget.

C. The project is ahead of schedule and over its budget.

D. The project is behind schedule and over its budget.

Answer: SPI is greater than 1, you are ahead of schedule. CPI is less than 1, you are over budget. (C)
47. You are the project manager for a railroad construction project. Your sponsor has asked you for a forecast for the cost of project completion. Which of the following is the BEST metric to use for forecasting?

A. EV and AC

B. SV and CV

C. ETC and VAC

D. SPI and CPI

Answer: EV, AC, SV, CV, SPI, AND CPI are all measures of PAST performance. ETC and VAC predict future values. Forecasting is future. (C)
48. You have been asked to select between three projects. Project A has a net present value of \$54,750 and will take six months to complete. Project B has a net present value of \$85,100 and will take two years to complete. Project C has a net present value or \$15,000 and a benefit-cost ratio of 5:2. Which project should you choose?

A. Project A

B. Project B

C. Project C

D. There is not enough information to decide.

Answer: The important information in this question are the NPV values. The given times and BCR are unnecessary information. Choose the greatest NPV. (B)
49. You’ve been hired by a large consulting firm to evaluate a software project for them. You have access to the CPI and EV for the project, but not the AC. The CPI is .92 and the EV is \$172,500. How much money has actually been spent for the project?

A. \$158,700

B. \$172,500

C. \$187,500

D. There is not enough information to calculate the actual cost.

Answer: From the equations, we have CPI = EV/AC. Solving for AC, gives us AC = EV/CPI = 172,500/0.92 = \$187,500 (C)