PMP EXAM ANSWERS – PROJECT COST MANAGEMENT

1. A cost management plan contains a description of:

Correct Answer: (D) The WBS level at which earned value will be calculated.

Explanation: The exam will ask you what the tools of project management contain in order to
test whether you really understand them. The cost management plan identifies the WBS level at
which earned value will be calculated.

2. If the success of your new project requires several of your people to work in a foreign country of
six months. The team informs you that in this country a payment is required to obtain visas. What
will you do?
Correct Answer: (B) Include the payment in the project budget.

Explanation: This type of payment usually occurs. It will be included in your project budget.

3. The BEST description of costs that change with the amount of productions is:
Correct Answer: (D) Variable costs

Explanation: Fixed costs do not vary with the amount produced. Direct costs could be either
fixed or variable and thus would not be the best answer. Sunk costs are already spent. Variable
costs change with the amount produced.

4. While reviewing project performance, if the project manager determines that the schedule
variance is -500. What is the BEST thing to do?
Correct Answer: (C) Determine the cost variance.

Explanation: The problem has to be evaluated first. The project managers knows the schedule
variance, but not the cost variance. Therefore, determining the cost variance first, possibly
followed by looking for activities that can be done in parallel.

5. Calculating estimate to complete (ETC) is done in:

Correct Answer: (C) Project monitoring and controlling.

Explanation: Calculating estimate to complete is doe in project monitoring and controlling.

6. The approximate resource costs necessary for completing project activities are compiled during
which project management process?
Correct Answer: (D) Estimate Costs

Explanation: Funding limit reconciliation and cost aggregation occur in the Determine Budget
process. Forecasting occurs as part of the Control Costs. Resource costs for completing project
activities are determined in Estimate Costs.
7. A cost performance index (CPI) of 0.89 means:
Correct Answer: (C) The project is getting 89 cents out of every dollar invested.

Explanation: The CPI is less than one, so the situation is bad. The project is only getting 89
cents out of every dollar invested.

8. Which of the following is an advantage of bottom-up estimating?

Correct Answer: (D) They are more accurate.

Explanation: Bottom-up estimates require that the project be defined and well understood before
estimating, but this is a disadvantage, as compared to analogous estimating. Analogous estimates
are less costly to develop and overall project costs will be capped for a project analogous
estimate. Bottom-up estimates are based on detailed analysis of the project; therefore they are
more, not less, costly to develop. An advantage of bottom-up estimating is that bottom-up
estimating are more accurate than analogous estimates.

9. A rough order of magnitude estimate is made during which project management process group?
Correct Answer: (C) Initiating

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

10. While completing a project, if a project manager realizes he needs to decrease project costs. After
researching his options, he comes up with the following options. Which choice would
DECREASE project costs?
Correct Answer: (B) Remove a test from the project management plan.

Explanation: Changing to a component with lower life cycle cost will not decrease project costs,
just costs over the lifecycle of the project. It will not solve the problem. Using a more
experienced resource will almost always lead to higher costs, and making activities occur
concurrently could affect costs later, due to the increased risk. Although it may not be the first
choice to think of, deleting a test would decrease costs, so it is the best answer offered. It may
also decrease quality, but that is not the question.

11. If the project manager is working on a high-profile where completing the project within budget is
critical. The project manager is new, but well-trained and is excited to see that the project is
spending less than budgeted. As a result, the project manager was planning to take a holiday
when a more senior project manager warned him that he has some important work to do on the
project. Why would the senior manager give such a warning on this project?
Correct Answer: (C) Under budget could mean work that was scheduled to be done has not
been completed. The project manager would look at how the cost performance compares to the
schedule performance.
 Explanation: Since a project control system is developed during planning, that cannot be best.
There is nothing in the situation described, or in standard project management practice, that
would say taking a holiday would be a problem with contracts. Team meetings are scheduled as
needed by the project and frequency is determined during project planning. The project manager
will understand reasons a project can be under budget so he can determine when to take action
and what action to take.

12. Which estimating method tends to be MOST costly for developing a project cost estimate?
Correct Answer: (D) Bottom-up

Explanation: Because you need project details to estimate this way, the effort expended will be
greater with bottom-up estimating.

13. Analogous estimating:

Correct Answer: (B) Uses top-down estimating techniques.

Explanation: Analogous estimating is used most frequently during project planning, not project
executing. Parametric estimating involves calculations based on historical records. Analogous
estimating uses top-down estimating techniques.

14. Which part of the cost budget does the project manager NOT have control over?
Correct Answer: (C) Management reserves

Explanation: Management reserves are set aside to cover unforeseen risks to the project.
Management approval is required to use these funds.

15. An estimate that is -25/+75 percent of actual is considered a:

Correct Answer: (B) Rough order of magnitude estimate.

Explanation: The rough order of magnitude estimate has a range of -25/+75 percent of actual
and is done during the initiating process group.

16. If you have just completed the initiating processes of a small project and are moving into project
planning when a project stakeholder asks you for the project's budget and cost baseline. What
would you tell her?
Correct Answer: (D) The project budget and baseline will not be finalized and accepted until the
planning processes are completed.

Explanation: The overall project budget may be included in the project charter but not the
detailed cost. Even small projects will have a budget and schedule. It is not difficult to develop a
project budget before the project management plan is developed. However, it is not wise to do so,
as the budget will not be accurate. The project budget and baseline are not finalized and accepted
until the planning processes are completed.
17. If 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 completed. Which of the following describes what was missing?
Correct Answer: (A) Bottom-up estimating is to be used.

Explanation: Actual costs are used to measure CPI, and there is no reason to use SPI in this
situation. Using past history is another way of saying "analogous". The best way to estimate is
bottom-up. Such estimating would have improved the overall quality of the estimate.

18. What is the difference between expected monetary value and net present value?
Correct Answer: (A) Expected monetary value is the probability times impact of an opportunity,
and net present value is the benefits less costs over many time periods.

Explanation: This is one of those questions where you either know it or you get lost in the
question. Expected monetary value is used in risk management, but it is not the estimated value
of risk response plans. Expected monetary value is the probability times impact of an
opportunity, and net present value is the benefits less costs over many time periods.

19. If you are assigned as the project manager on a new project and the organization uses a strong
matrix structure. Computers needed to complete the project are an example of:
Correct Answer: (D) Fixed cost.

Explanation: A fixed cost is a non-recurring cost that will not change as the project progresses.
Note the additional information unrelated to the question. It was added as distracter.

20. If 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?
Correct Answer: (B) Ask for information on risks that would cause your estimate to be too low.

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

21. If a project manager is finalizing a project that has had repeated problems with cost performance.
He is concerned about what management will say. Which of the following types of information
would be BEST for the project manager to use to evaluate performance?
Correct Answer: (B) The cost performance index (CPI).
 Explanation: Ask yourself which choice helps evaluate cost performance. The project budget
deals with cost, but not performance, as there is nothing to compare against the budget listed
here. There is no comparison of actual to budget. The only choice that addresses cost and
performance is the cost performance index.

22. If 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 this?
Correct Answer: (B) A critical path activity took longer and needed more labor hours to
complete.

Explanation: To answer this question, you will look for a choice that would take longer and cost
more. Notice one of the choices says scope was changed, but it was 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 issue of the need to find a new supplier, the impacted activity might not be on the
critical path and thus might not affect time. Purchasing additional equipment definitely adds cost,
but not necessarily time. A critical path activity taking longer and requiring more labor to
complete would negatively affect both time and cost.

23. If your boss has asked you for a cost baseline for the project, but it is early in the project
management process and there is very little project information. In this circumstance, what is the
BEST way to estimate this project?
Correct Answer: (C) Provide a rough order of magnitude estimate.

Explanation: Historical information is not enough to base an estimate on. Team estimates or
estimating using the schedule model are not possible because you are still in project initiating.
You have not yet identified activities, nor do you have a schedule model. It is best to provide a
rough order of magnitude estimate based on your current understanding of this project.

24. Project setup costs are an example of:

Correct Answer: (D) Fixed Costs.

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

25. If a project manager has completed a detailed WBS and cost estimates for each work package. To
develop a cost baseline from this data, the project manager will:
Correct Answer: (D) Add the work package and risk contingency reserve estimates.

Explanation: Analogous estimating and gaining expert opinions of project cost would have been
completed before the finalization of the cost baseline. A cost baseline does not include a
management reserves. However, it shall include a contingency reserve for risks. The project
manager shall total the work package estimates and risk contingency reserve estimates to develop
the cost baseline.
26. A schedule performance index (SPI) of 0.76 means:
Correct Answer: (C) You are progressing at 76 percent of the rate originally planned.

Explanation: Earned value questions ask for calculation or an interpretation of the results. In this
case, the project is progressing at 76 percent of the rate planned.

27. Monitoring cost expended to date in order to detect variances from the plan occurs during:
Correct Answer: (A) Project performance reviews.

Explanation: Recommending corrective actions and possible updates to the cost baseline result
from project performance reviews, they are not concurrent with them. Monitoring costs is part of
change control but not part of developing the change control system. The correct choice is project
performance reviews.

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

Correct Answer: (A) Determine Budget.

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

29. If your cost forecast shows that you will have a cost overrun at the end of the project. Which of
the following would you do?
Correct Answer: (C) Eliminate risks in estimates and re-estimate.

Explanation: Look for the choice that would have the least negative impact on this situation.
You would not need to meet with the sponsor to determine which work can be done sooner.
Cutting quality and decreasing scope always have negative effects. The choice with the least
negative impact is to eliminate risks in estimates and re-estimate.

30. If the project manager is allocating overall cost estimates to individual activities to establish a
baseline for measuring project performance. What process is this?
Correct Answer: (B) Determine Budget.

Explanation: Cost Management is too general. The estimates are already developed in this
situation, so the answer is not Estimate Costs. The answer is not Control Costs, because the
baseline has not yet been developed. The work described is the Determine Budget process.

31. Which of the following is NOT needed in order to come up with a project estimate?
Correct Answer: (B) Change requests.

Explanation: 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 project planning. Change requests are not required to obtain
estimates, although they could cause existing estimates to be adjusted. Without the other three
choices, you cannot develop the estimates.
32. In which parts of the cost management process is earned value (EV) used?
Correct Answer: (C) Forecasting and project performance reviews.

Explanation: Developing the cost baseline and the cost control system, reserve analysis, and
cost aggregation occur during project planning. Earned value is not used for reserve analysis or
cost aggregation. It is used in forecasting and project performance reviews.

33. If a trend report was given to the project manager, who reacted to the report by investigating
what activity or activities had not been done, but would have been done, to date. What did the
report show?
Correct Answer: (C) Actual cost was below planned and schedule progress as less than planned.

Explanation: You should ask yourself which of the choices could be interpreted to mean work
was not done. A schedule performance index (SPI) of less than 1 could mean work was not done,
but there could be other reasons. When you combine cost and schedule you can clearly see the
reason the project has progressed more slowly than planned is probably due to work not getting
done.

34. After analyzing the status of your project, you determine the earned value (EV) is lower than the
planned value (PV). What will you expect as an outcome if this trend continues?
Correct Answer: (B) The project will finish behind schedule.

Explanation: If earned value is lower than planned value, it indicates less work is occurring
than was scheduled, resulting in schedule slippage.

35. The difference between the cost baseline and the cost budget can be BEST described as:
Correct Answer: (C) The management reserves.

Explanation: Cost accounts are included in the project cost estimate, and the contingency
reserves are added to that to come up with the cost baseline. Thereafter, the management reserves
are added to come up with the cost budget. The management reserves make up the difference
between the cost baseline and the cost budget.

36. What is MOST LIKLEY to happen to contingency reserves allocated to a project if they are not
needed?
Correct Answer: (B) They are deleted from the project budget

Explanation: When it is evident that a risk for which contingency reserves were set aside will
not occur, those funds may be deleted from the project budget and made available to other
projects in the organization.
37. During project planning, if one of the electrical engineers informs the project manager that the
lifecycle cost of the new heating and air conditioning system is higher than the lifecycle cost of
another heating and air conditioning system. What would the project manager do?
Correct Answer: (B) Select the product with the lower lifecycle cost.

Explanation: Generally, the lower lifecycle cost will be selected.

38. If you are tracking your project using earned value management (EVM) and find you are behind
schedule but under budget. Your variances show schedule variance (SV) = -$50 million, cost
variance (CV) = $100 million, and your actual costs are $500 million. What are the CPI, PV and
SPI?
Correct Answer: (D) 1.20, $650 million, 0.92

Explanation: First find EV=CV+AC=$600 million. Calculate CPI=EV/AC= $600 million/$500

million= 1.20. Next, to find PV, you would use the formula PV=EV-SV=$650 million. Now you
can compute SPI=EV/PV= $600 million/$650 million =0.923.

39. During project executing, in case the forecasted remaining hours exceed planned remaining
hours. Consequently, the project will take on a negative variance. Which calculation is the project
manager likely to use as a measurement tool to validate this information?
Correct Answer: (A) EV-PV

Explanation: Earned Value (EV) minus planned value (PV) equals schedule variance (SV).

40. Early in the cycle of the project, a discussion with the sponsor about what estimating techniques
to be used. If you want a form of expert judgment and the sponsor argues for analogous
estimating. t would be BEST to:
Correct Answer: (B) Agree to analogous estimating as it is a form of expert judgment.

Explanation: This is a tricky question. Determining why the sponsor wants such an accurate
estimate sounds like a good idea at first. However, analogous estimates are less accurate than
other forms of estimating, as they are prepared with a limited amount of detailed information.
Reading every word of this choice helps eliminate it. In order to pick up the best answer, you
need to realize that analogous estimating is a form of expert judgment.

41. If you provide a project cost estimate for the project to the project sponsor and he is unhappy
with the estimate because he thinks the price has to be lower. He asks you to cut 15 percent off
the project estimate. What would you do?
Correct Answer: (A) Inform the sponsor of the activities to be cut.

Explanation: This question is full of choices that are not correct project management actions. To
answer the question, you will first realize that it is never appropriate for a project manager to cut
estimates across the board. You should have developed a project estimate based on realistic work
package estimates that do not include padding. Then, if costs have to be decreased, you can look
to cut quality, decrease risk, cut scope, or use cheaper resources (and at the same time closely
 monitor the impact of changes on the project schedule). One of the main failure scenarios is when
a project manager starts a project knowing that the time or cost for the project is unrealistic. Did
you notice the choice of adding additional resources? Even though they have low hourly rates,
that would add cost. Evaluating, looking for alternatives, and then reporting the impact of the
cost cutting to the sponsor is the best action to take.

42. Which of the following defines things the project manager does regarding cost?
Correct Answer: (B) Never just accept constraints from management, periodically re-calculate
the estimate to complete, meet any agreed-upon estimates.

Explanation: The project manager should not just accept management constraints, and
estimating smaller components leads to more accurate estimates. Eliminating risks, decreasing
costs, and re-estimating do not occur until a change is approved. The estimate to complete will be
updated as the project progresses, and while using historical records is a good practice, it should
not be the only source of estimates. The only choice that is completely accurate is: "Never just
accept constraints from management, periodically re-calculate the estimate to complete, meet any
agreed-upon estimates".

43. All of the following are outputs of the Estimate Costs process EXCEPT:
Correct Answer: (A) The prevention of inappropriate changes being included in the cost
baseline.

Explanation: 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 that option.
Documentation of assumptions is referring to the basis of estimates, which are an output of
Estimate Costs. The prevention of inappropriate changes is more correctly part of the cost
management plan and the change control system.

44. Which of the following is a benefit of analogous estimating?

Correct Answer: (A) It is quick.

Explanation: Analogous estimating uses expert judgment and historical information to predict
the future. It is faster to use than bottom-up estimating. The other choices shown are advantages
of bottom-up estimating.

45. The main focus of lifecycle costing is to:

Correct Answer: (C) Consider installation costs when planning the project costs.

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

46. If a project manager is working with management to develop the project estimate. During the
initiating process group, what level of accuracy would the estimate have?
Correct Answer: (A) -25 percent to +75 percent
 Explanation: The only estimate that is usually made in the initiating process group is the rough
order of magnitude estimate. This estimate is accurate to -25 percent to +75 percent.

47. If a customer starts to have cash flow problems because other projects are being completed early
and he notifies the project manager that there be will be limits on when funds will be available
for the project. The project CPI is currently 1.02, and the estimate to complete is US $927,000. If
the project manager performs funding limit reconciliation, there will also MOST likely be a
change to the:
Correct Answer: (C) Project schedule.

Explanation: Funding limit reconciliation most likely will affect the project schedule, since
work will need to be moved to when funds will be available.

48. If a project has a team member assigned to the project full time. What is the MOST likely effect
on the project if that resource completes her activity sooner than planned?
Correct Answer: (D) Wasted cost.

Explanation: A full-time team member who completes her work sooner than planned could be
forced to wait for the start of her next activity. Since she is fulltime, she would have to be paid
for time not working.

49. If there a six-month project with 300 work packages and a US $600,000 budget, but three months
into the project, 150 work packages are complete and US $300,000has been spent. Which of the
following is CORRECT?
Correct Answer: (A) There is not enough information.

Explanation: Half the project is done and half the cost has been expended. The answer is simple.
Or is it? In fact, you do not know what was planned, so you cannot answer this question based on
the information provided.

50. If the network expansion project you just took over is said to be doing pretty well. The previous
project manager only used variances to report the current project status. In the last report, you
find SV=US $50,000, CV= US $10,000, PV= US $500,000. You know the rate of spending and
schedule progress are important as well. Based on the details you have been given, what are the
SPI and CPI?
Correct Answer: (C) 1.10, 1.02

Explanation: First find EV=SV+PV= $550,000. Calculate SPI=EV/PV=550,000/500,000= 1.10.

To find the CPI, you need to first calculate AC. You use AC=EV-CV=$540,000. Now you can
compute CPI=EV/AC=550/540=1.02. In the other choices, the calculations are wrong, but match
if you make computational mistakes.

51. If a project is over budget to date. Which of the following is NOT a reason this could have
occurred?
Correct Answer: (A) Work was delayed.

Explanation: Completing more work than planned, an unexpected cost increase from a supplier,
and inefficient performance of work are all reasons a project could be over budget. If work was
planned but not done at the time it was scheduled to be completed, funds allocated for that cost
would remain unspent, making the project under budget until that work is completed and paid
for. It is possible that making up for the work not being done on time could result in the need to
crash the project or work overtime, in which case the project could later end up over budget for
the activity.