Financial Management for Project Managers Cost Estimation and Budgeting 2 — Questions and Answers
Question 1: Management reserves in a project budget are intended for:
- Known risks identified in the risk register
- Unknown unknowns or unforeseen scope changes (Correct answer)
- Routine administrative project expenses
- Bonuses and incentives for the project team
Correct answer: Unknown unknowns or unforeseen scope changes
Management reserves cover unknown unknowns — unanticipated events not identified during planning — and are controlled by senior management, not the project manager.
Question 2: A project has a total budget of $500,000, a cost baseline of $450,000, and contingency reserves of $30,000. What is the management reserve?
- $20,000 (Correct answer)
- $30,000
- $50,000
- $80,000
Correct answer: $20,000
The management reserve equals total budget minus cost baseline minus contingency: $500,000 - $450,000 - $30,000 = $20,000.
Question 3: Analogous cost estimating is most appropriate when:
- Detailed project scope and WBS are fully defined
- Historical data from similar past projects is available and time is limited (Correct answer)
- The project involves entirely new and unique technology
- Precise parametric models have been developed
Correct answer: Historical data from similar past projects is available and time is limited
Analogous estimating leverages historical data from similar projects and is fast, making it ideal early in the project when detailed information is not yet available.
Question 4: Which document formally authorizes the project manager to apply organizational resources and establishes the cost budget?
- Project scope statement
- Cost management plan
- Project charter (Correct answer)
- Work breakdown structure
Correct answer: Project charter
The project charter is the formal authorization document that gives the project manager authority to use resources, including budget allocations.
Question 5: Life cycle costing in project financial management considers:
- Only the initial capital costs of the project
- Total costs including acquisition, operation, maintenance, and disposal (Correct answer)
- The cost of the project management team only
- Only recurring operational costs after project completion
Correct answer: Total costs including acquisition, operation, maintenance, and disposal
Life cycle costing evaluates the total cost of ownership across all phases — acquisition, operation, maintenance, and decommissioning — to support complete financial decisions.
Question 6: When should a project manager formally re-baseline the project cost baseline?
- Whenever actual costs exceed planned costs
- Only after an approved change request that significantly alters project scope (Correct answer)
- At the end of every reporting period
- When the contingency reserve falls below 10%
Correct answer: Only after an approved change request that significantly alters project scope
The cost baseline should only be re-baselined after an approved change request, as arbitrary changes undermine performance measurement integrity.
Financial Management for Project Managers Cost Estimation and Budgeting 2
Management reserves in a project budget are intended for: