Chapter 4: Budgeting the Project

True/False

1. The project’s budget is merely the sum of its resource costs.

Response: See section 4.1

Level: medium

2. A budget is a plan for allocating resources to project activities.

Response: See section 4.1

Level: easy

3. Overhead and indirect charges should not be assigned to a project.

Response: See section 4.1

Level: medium

4. Most organizations use top-down budgeting.

Response: See section 4.1

Level: medium

5. Because project budgeting is for a special case and the organization’s budgeting process is for routine work, the project manager need not be familiar with the organization’s accounting system.

Response: See section 4.1

Level: medium

6. Budget cuts are usually disastrous to an exponential life-cycle project.

Response: See section 4.2

Level: medium

7. Activity budgets show expenses by task and expected time period of the expenditure.

Response: See section 4.2

Level: medium

8. There is no way other than guessing to estimate the impact of learning on a project’s task.

Response: See section 4.2

Level: easy

10. By very careful planning, a project manager can do away with cost uncertainty.

Response: See section 4.4

Level: medium

11. Expected value is a tool for risk analysis.

Response: See section 4.5

Level: medium

12. Traditional organizational budgets are task-oriented, rather than activity-oriented.

Response: See section 4.2

Level: medium

13. Learning curve theory states that performance of labor per unit will improve by a percentage each time production increases by the same percentage.

Response: See section 4.3

Level: medium

14. Learning curve theory states that performance of labor per unit will improve by a fixed percentage each time production doubles.

Response: See section 4.3

Level: medium

15. Individual elements of project budgets are generally more accurate in bottom-up budgeting.

Response: See section 4.1

Level: medium

16. The project budget acts as a project control.

Response: See section 4.1

Level: medium

17. A budget is a plan for allocating resources.

Response: See section 4.1

Level: medium

18. Budgeting a project is often more difficult than budgeting routine activities.

Response: See section 4.1

Level: medium

19. The project manager recognizes an expense when an invoice is actually paid.

Response: See section 4.1

Level: medium

20. A key advantage of top-down budgeting is that the overall budget costs can be estimated quite accurately.

Response: See section 4.1

Level: medium

21. With top-down budgeting, overlooking a small but important task can often cause a serious budgetary problem.

Response: See section 4.1

Level: medium

22. Organizational tradition has little or no impact on the firm’s project budgeting.

Response: See section 4.1

Level: medium

23. Bottom-up budgets are usually more accurate in the detailed tasks.

Response: See section 4.1

Level: medium

24. For projects with S-shaped life cycles, top-down budgeting is most likely unacceptable.

Response: See section 4.2

Level: medium

25. Mechanical tasks typically have higher learning rates than more mental tasks.

Response: See section 4.3

Level: medium

28. Organizations can use both top-down and bottom-up budgeting.

Response: See section 4.1

Level: medium

29. Learning curves can be used to help improve cost estimates.

Response: See section 4.3

Level: easy

30. Top-down budgeting typically results in better acceptance of the budget.

Response: See section 4.1

Level: medium

31. Contingency planning is generally begun at that point in time when an organization finds itself in serious financial trouble.

Response: See section 4.4

Level: easy

32. Project budget is nothing more than the project plan, based on the WBS, expressed in monetary terms.

Response: See section 4.1

Level: easy

33. As a project unfolds, the cost uncertainty increases as the project moves towards completion.

Response: See section 4.4

Level: easy

34. The best approach to handling change in projects is to accept the negative change and take a loss on the project.

Response: See section 4.4

Level: medium

35. A disaster is an event that may have an extraordinarily high cost if it occurs, but has a very low probability of occurring.

Response: See section 4.5

Level: medium

37. The PMI does not devote much coverage to risk management in the PMBOK

Response: See section 4.5

Level: medium

Multiple Choice

41. The budgeting approach based on the collective judgments of top and middle managers is called:

a) top-down budgeting

b) bottom-up budgeting

c) activity budgeting

d) program budgeting

e) life cycle budgeting

Response: See section 4.1

Level: medium

44. Which of the following statements is not true about a firm and its project accounting?

a) each firm has its own rules with regard to the allocation of overhead

b) most firms must comply with the Sarbanes-Oxley Act

c) the project manager must rely on the accounting department to make special

allowances for his/her project

d) most firms have their own accounting idiosyncrasies

e) unexpected charges may suddenly appear when the PM least expects it

Response: See section 4.1

Level: medium

45. The name given to the budget process that aggregates income and expenditures across projects is:

a) activity-oriented budget

b) top-down budget

c) bottom-up budget

d) program-oriented budget

e) activity-based costing

Response: See section 4.2

Level: medium

46. The first unit requires 10 hours to complete. If the industry uses an 80 percent learning rate, how long should the third unit take?

a) 10 hours

b) 9 hours

c) 8 hours

d) 7.02 hours

e) 6.40 hours

Response: See section 4.3

Level: medium

47. The first unit required 6 hours. If the industry uses a 90 percent learning rate, how long should the fourth unit take?

a) 6 hours

b) 4.86 hours

c) 3.75 hours

d) 3.34 hours

e) 2.67 hours

Response: See section 4.3

Level: medium

48. William, a project manager, needs to prepare the budget for a new software development project. To do so, he takes inputs from other managers who have worked on similar projects in the past. After estimating the overall project cost, he gives the estimates to his team members so that they can split up the cost of each individual task involved in producing the required deliverable. In this scenario, William is using _____.

a) top-down budgeting

b) bottom-up budgeting

c) agile project budgeting

d) dynamic matrix budgeting

e) lateral budgeting

Response: See section 4.1

Level: difficult

49. Susan, a project manager, uses a work breakdown structure to list the elemental tasks of a project. She then asks the team members responsible for each of these tasks to give her an estimate of the cost required to accomplish each task. Next, she adds indirect costs such as administrative costs and a reserve for contingencies to the total task cost and files her budget with the accounting department. In this scenario, Susan is using _____.

a) top-down budgeting

b) bottom-up budgeting

c) agile project budgeting

d) dynamic matrix budgeting

e) lateral budgeting

Response: See section 4.1

Level: difficult

50. Sean, a project manager, has to prepare the budget for a new project. He estimates the overall project cost by estimating the costs of the major tasks. He then gives these estimates to Raphael, an engineer who works under Sean, to split up the costs for each of the activities involved in accomplishing the major tasks. In this scenario, Sean is using _____.

a) top-down budgeting

b) bottom-up budgeting

c) agile project budgeting

d) dynamic matrix budgeting

e) lateral budgeting

Response: See section 4.1

Level: difficult

51. Rachel, a project manager, has undertaken a project to build a wall around a compound. She estimates that the cost of materials will be $520 and labor costs will be $10 for 20 hours. If the overheads for this project are 50 percent of the labor and material costs, the total cost will be:

a) $1080.

b) $1,560.

c) $880.

d) $780.

e) $960.

Response: See section 4.2

Level: difficult

52. Stefan, a project manager in a publishing company, has undertaken a project to translate a book in French into English and to sell a million copies. He estimates that the cost of the materials will be $6000 and the project will require 30 hours of labor at $50 per hour. If the overheads for the project are estimated at a rate of 50 percent of the labor costs, the total cost of the project will be:

a) $1080.

b) $1,500.

c) $4,500.

d) $7,800.

e) $8,250.

Response: See section 4.2

Level: difficult

53. Victoria, an artisan who produces handcrafted furniture, has to carve six ornate chairs to go around a table. It takes her 10 hours to complete the first chair. She estimates that her learning rate is 80 percent. Given this information, Victoria should be able to make the second chair in _____.

a) 8 hours

b) 6.3 hours

c) 5.12 hours

d) 3 hours

e) 2.12 hours

Response: See section 4.3

Level: difficult

54. Pogmon Solutions, a computer manufacturer, is introducing a new product—a high-end gaming laptop. Its technicians take 21 hours to produce the first unit of the laptop, and the company follows a 78 percent learning curve. Given this information, the eighth unit of the laptop would approximately require _____.

a) 8 hours

b) 6 hours

c) 5 hours

d) 10 hours

e) 2 hours

Response: See section 4.3

Level: difficult

55. Devon, a project manager, is working on a software development project. He needs more coders to complete the project on time. As a result, he hires people and they are given on-the-job training by their coworkers. However, this significantly reduces the output of the team and leads to a delay in the project. The given scenario exemplifies:

a) integration management.

b) systems engineering.

c) the mythical man-month effect.

d) the boomerang effect.

e) the sleeper effect.

Response: See section 4.3

Level: difficult

56. Victor, a project manager, is constructing a budget for a project to construct a house. He estimates that the materials will cost $100,000 and the project will require 15 people working 6 hours a day to ensure timely completion. He estimates the cost of labor at $15 per hour. Additional costs, safety equipment, and overheads are marked at a rate of 50 percent of direct labor. In this scenario, the total cost of the project will be _____.

a) $120,000

b) $102,025

c) $100,090

d) $100,900

e) $110,510

Response: See section 4.2

Level: difficult

57. Samuel, a project manager, and Martha, his subordinate, are working on a project. In the budgeting phase, Samuel is responsible for estimating the costs for Level 1 tasks and Martha is responsible for estimating the costs for Level 2 tasks. While collating the data, Samuel finds that the total estimated cost for Level 1 tasks is much lower than the total estimated cost for Level 2 tasks. Which of the following is a reason for this discrepancy?

a) Subordinates tend to have more experience than higher management in allocating costs.

b) Project managers are naturally pessimistic and want to build in protection for everything that might possibly go wrong.

c) Subordinates are usually optimistic and never admit that details have been forgotten or that anything can or will go wrong.

d) Jobs always look easier, faster, and cheaper to the project manager than to the subordinates who have to do them.

e) Project managers and subordinates are often dishonest in their estimations.

Response: See section 4.2

Level: difficult

58. A task is expected to take 20 hours of labor at $25 per hour. The required material cost is $500 and the organization charges 30% of direct labor for overhead. The total task cost is:

a) $500

b) $1,150

c) $1,250

d) $1,300

e) $1,500

Response: See section 4.2

Level: medium

59. There is a 30 percent chance that a new product development project will result in sales of $500,000 and a 70 percent chance that the project will result in sales of $100,000. What is the expected value of this project?

a) $220,000

b) $240,000

c) $300,000

d) $320,000

e) $340,000

Response: See section 4.5

Level: medium

60. After major risk are identified which of the following data should NOT be obtained for analysis

a) probability of each risk occurring

b) Range or distribution of possible outcomes

c) probability of each outcome

d) the expected time of each outcome

e) the person responsible for each outcome

Response: See section 4.5

Level: medium

Short Answer

61. Define top-down and bottom-up budgeting.

Response: See section 4.1

Level: medium

62. Define the term learning rate.

Response: See section 4.3

Level: medium

63. Risk management includes what three areas?

64. Explain how you would use the shape of a project’s life cycle to resolve budget conflicts between a superior and subordinate.

Response: See section 4.2

Level: medium

65. Briefly contrast the three different perspectives cost can be viewed from.

Response: See section 4.1

Level: medium

66. Contrast between activity budgeting and program budgeting.

67. Briefly explain how learning curves can help improve the cost estimating process.

68. Explain how budget uncertainty changes as a project progresses.

Response: See section 4.4

Level: medium

69. How can you handle changes in the project budget?

Response: See section 4.4

Level: medium

70. Explain the concept of Brook’s “mythical man month.”

Response: See Section 4.3

Level: medium