Overview of Project Cost Management
According to an accounting textbook, cost is defined as a resource sacrificed or foregone to achieve a specific objective. It is something given up in exchange. It is necessary for project managers to understand project cost management since project costs money and consumes resources.
There are reasons for project cost overrun and these are as follows: * Not emphasizing the importance of realistic project cost estimates from the outset. IT project cost estimates are low to start with or based on unclear project requirements. * Many IT professionals think that preparing cost estimates is a job for accountants when in fact, it is a very demanding and important skill that project managers need
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It must be done to determine the net present value (NPV).
Internal rate of return (IRR) is the discount rate that makes NPV equal to zero. It is also called the time-adjusted rate of return.
Tangible costs or benefits are those costs or benefits that can be easily measured in pesos. While the intangible costs or benefits are the costs or benefits that are difficult to measure in monetary terms.
Direct costs are costs directly related to producing the products and services of a project. On the other hand, indirect costs are costs not directly related to a project’s products or services, but are indirectly related to performing the project.
Sunk cost is the money that has been spent in the past or considered gone.
The learning curve theory states that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced. It should be used to estimate costs on projects involving the production of large quantities of items. It also applies to the amount of time it takes to complete some tasks.
Reserves are the currencies included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict. Contingency reserves are the amounts needed above the estimate which are for future situations that may be partially planned for and are included in the project
(TCO B) Good project cost estimations are critical to a successful project. With that in mind, compare and contrast parametric and reserve analysis as cost estimation techniques. Please provide an example of each.
The budget for this project began at $280,000; each task was contracted out with an estimated cost during that period. Specific pieces for each resource fluctuated according to certain elements, such as flexibility, reputation, and skill. Usually resources with more skill had higher starting bids. This affects the overall estimated budget, bidding too high on a resource can exceed that period’s estimated budget. For example, this continuously happened with our Project Manager, Brian Michelson, whom scored exceptionally high in reputation, ethics, flexibility, and interpersonal skills, but his rate per hour may have been too high for this project. Now seeing how this and some additional high priced resources can cause cost control issues, we should have bid lower or chose a less
Cost can be described as one of the most important issues of a project success. A cost overrun is the amount by which the actual cost exceeds the budgeted, estimated, original, or target cost. Society sees cost overruns as the norm. They are a built-in part of
Time-phased project work is the basis for project cost control. Work package duration is used to develop the project network. Further, the time-phased budgets for work packages are timetabled to establish fiscal measures for each phase throughout the project. The time-phased budgets are to emulate the real cash needs of the budget, which will be used for project cost control. This information is useful to estimate cash outflows. The project manager's attention is on when the costs are to occur, when the budgeted cost is earned, and when the actual cost materializes. This information is made up to measure project schedule and cost variances (Gray & Larson, 2005). The following are typical types of costs found in a project:
Cost estimating is the process used to quantify the cost of services, materials and resources required to deliver a project.
▪ Inaccurate cost estimates during initial stages may cause project to fail due to lack of resources
Job Costing is an essential learning concept within cost accounting that is often overlooked in day-to-day operations by a large amount of professionals. For any business that plans on generating a profit from a specific project it must know how to effectively determine job costs. Job costing is comprised of the following three activities that relate to a specific job: materials, labor, and overhead. The materials sector of job costing has to do with gathering the costs of necessary elements and assigning costs to a direct product or project once it is used. Labor involved with job costing includes the time that an employee will dedicate to a project, then based on the amount of labor required an employee will be assigned to a job that
A) Explicit costs are expenses/payments that are actually made and frequently recorded. They mirror payment for a business transaction such as salaries, rent, and utilities.(OpenStax Economics, 2016). Implicit costs being intangible are not frequently recorded. This sort of cost mirrors a potential opportunity, advantages, or points of interest that may have happened in a given circumstance. (OpenStax Economics, 2016)
Costs means the overall estimated cost for a particular program alternative over the time period corresponding to the life of the program, including direct and indirect initial costs plus any periodic or continuing costs of operation and maintenance.
Cost estimating is the initial and most important part of the project. Cost estimate should be accurate, transparent and reliable because the resources are limited in any project especially
In the event there was poor estimating techniques used will cause risk management into the process to have to overcome unknowns. Some techniques to improve the poor estimating techniques is developing the process. According to Kerzner (2013), functional managers typically allocate the possibility additional required time or cost for cushion. The inflation of the allocated time or cost will time to ratify challenges. But in order to prevent poor estimating time in the future our organization can talk to additional industry leaders whom have undertaken a certain type of project. Talking to other industry leaders will allow direct feedback and possibilities to plan for to reduce poor estimating in future projects. In addition to other’s industrial leaders is to use dummy variables for project estimating techniques. By using dummy variables will provide ample lagged variables to essentially collect all required data (Pfeffer and Davis-Blake, 1986). For example using the variance analysis figures could allow some additional cost for materials.
Direct Costs: costs that can be easily and conveniently traced to the particular cost object under consideration. To be traced to a cost object, such as a product, the cost must be caused by the cost object.
Costing is essential for every organization, as every manufacturing and other department has to be assigned accurate budget for proper operation (Hansen, Mowen and Guan, 2006). The costing system provides information that is useful to managers for minimizing wastage and allocating resources to different departments.
Cost accounting can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). The data collected is then reviewed to reach a selling price or identify where investments are possible. The principal aim of cost accounting is advising the top administration or the top management on the most suitable method of action based on the cost capability and efficiency. Cost accounting offers the comprehensive cost information that assist the business regulate the present business operations and also enabling in future business plan. Since managers are supposed to make resolutions for their own firms, there is no need for the data
This is often the most important factor of project. Well, financing of a project starts from concept phase and cash flow with allocation is done in planning phase, but the execution phase requires maximum efforts in terms of resources and cost. Approximately 63% of all information systems projects encounter substantial budget overrun, with overrun values "typically between 40 and 200 percent"2. Changing market conditions, Scope of project, and unbalanced budget allocation can result in major cost overrun, normally an overrun project is bound to cost more in terms of static inventory and resource idleness. Erroneous estimates for cost and schedule indicates Lack of prioritisation and understanding.