Chapter 7 Project Cost Management MCQ

Project cost management involves processes such as cost estimation, budgeting, and cost control to ensure that the project stays within the approved budget. Managing costs effectively helps in resource allocation, risk mitigation, and financial forecasting. Scope and time management are critical to project success but do not directly control the financial aspects. Quality management ensures that the project meets standards but does not focus on budgeting.

Determining the budget assigns costs to individual tasks, activities, and work packages, creating a cost baseline to track financial performance. This process ensures that project costs are planned and distributed appropriately. Estimating costs provides an initial idea of expenses, while cost control focuses on monitoring and managing financial deviations. Budgeting is a crucial step before cost control can occur.

Cost budgeting is responsible for developing a cost baseline, which is a detailed plan of estimated expenses distributed over time. This baseline acts as a reference for cost performance measurement throughout the project. Cost estimating provides financial approximations, while cost controlling manages spending and deviations. Cost planning is a broader process that encompasses estimation, budgeting, and control.

Controlling costs ensures that the project stays within its approved budget by tracking expenses, updating cost forecasts, and managing changes to financial plans. This process involves earned value management (EVM), cost variance analysis, and performance index calculations. It does not involve creating financial policies or setting initial cost estimates. Proper cost control helps prevent budget overruns and keeps financial risks in check.

Controlling costs ensures that the project stays within its approved budget by tracking expenses, updating cost forecasts, and managing changes to financial plans. This process involves earned value management (EVM), cost variance analysis, and performance index calculations. It does not involve creating financial policies or setting initial cost estimates. Proper cost control helps prevent budget overruns and keeps financial risks in check.

Cost control produces work performance information, which reflects financial progress, and cost forecasts, which estimate future financial needs. These outputs help project managers adjust spending strategies and ensure financial stability. Cost estimating and budgeting occur earlier in the project, while cost control actively manages financial execution. Cost pricing is unrelated to cost control and pertains more to external product or service pricing strategies.

Life cycle costing considers all costs associated with a project over its entire lifespan, including initial investment, operational expenses, and maintenance. This approach provides a more comprehensive financial outlook compared to standard cost estimation methods. Critical path, fast tracking, and crashing focus on scheduling and time management, not financial projections. Life cycle costing is essential for evaluating long-term profitability and financial sustainability.

Profit is the financial gain remaining after subtracting all costs from revenue. It is the primary measure of a business’s financial success. If expenses exceed revenue, the business incurs a loss. Profitability ensures long-term sustainability and investment potential for any business or project.

Management reserves are allocated for unexpected risks or "unknown unknowns" that cannot be anticipated. These reserves act as a financial cushion for unpredictable circumstances. Contingency reserves, on the other hand, are for "known unknowns," or risks that have been identified. Cost baseline reserves are part of the planned budget and do not account for unexpected situations.

Indirect costs are not tied to a specific project deliverable but still contribute to overall project execution. Examples include administrative expenses, facility costs, and utilities. These costs cannot be directly traced to a specific work package but are essential for maintaining operations. In contrast, direct costs are directly associated with project activities, such as labor, materials, and equipment.