Cost Management: PMP Exam Study (PMBOK 6)

All projects need money, there is no doubt in here. If this is the case we should discuss more the money that it takes for projects to fulfill themselves. Therefore there's no wonder that cost management is an important aspect of the PMP Exam. To manage costs we need to understand that how we conduct the processes of projects around that money, how we're going to apply for our job. Controlling and using the funds of your organization for a project is a part of being a project manager. Therefore, cost management is of great importance both in terms of project Management and when preparing for project management exams such as pmp, capm, prince2.
Senior management always wants to track the project. Especially in terms of cost. In the scope of cost management earned value analysis is one of the tools that are used to evaluate if your projects on track needless to say budgets and cost controls are key responsibilities for your role as project manager or scrum master. Considering that many projects fail due to exceeding costs, the sensitivity of senior management is very understandable and it should also be the project manager's sensitivity. Additionally, projects that fail due to cost considerations, usually fail in a destructive way. Therefore costs of the project should be managed closely.

Some management only wants to see project progress communicated in terms of one simple thing. Another key principle for cost management is cost value engineering. Cost value engineering refers to getting more out of a project without sacrificing scope. As a project manager, all the thing we have to do is estimating, budgeting and controlling costs. Therefore it's the project manager's responsibility to assure that project will be completed within the approved budget.

Project cost management is all activities, ensure that a project remains within budget limits. It is the project management knowledge area, which includes processes for identifying cost management procedures, estimating project costs, determining project budget, and controlling costs.

To estimate costs these methods are commonly used;
  • Analogous estimating
  • Bottom-up estimating
  • Three point estimating
  • Parametric estimating

In PMBOK 7 there is not a specific performance domain for cost. Assumptions are made and budget is created as a part of planning performance domain and it is controlled as a part of measurement performance domain. All other performance domains have cost aspects to a certain level.

In the project cost management knowledge area, the cost baseline, which is one of the three important project baselines, is developed. Three of the four processes covered by this project management knowledge area are also in the planning process group, while the cost control process is in the monitoring and control process group.

Processes in Project Cost Management Knowledge Area

Plan Cost Management
Estimate Costs
Determine Budget
Control Costs

Types of Costs in PMP Exam

What is the cost? What different types of costs are there? There are a few different ways that we can classify costs and they all have their advantages and disadvantages. If we classify costs by behavior, you may think what does that mean to costs have behavior. They act in certain ways in relation to other activities. Let's classify the two types of costs here as fixed costs and variable costs. if we can determine how costs act so that we can make projections based on different levels of production. Therefore we have fixed costs. Fixed costs mean that as the production level rises the cost remains fixed. The other type is variable costs and variable costs are going to go up with each new unit of production.

Another method of classification of costs is by function. Simply asking the question of "What does that cost do? Why are we incurring this cost?" so we can have direct costs and indirect costs classified by function. Direct costs are going to be a cost that is traceable to a cost object. Therefore, if we're in a production cycle, the direct cost would be things like direct materials and direct labor. these are things that we can trace to a particular unit of inventory that we are producing.

Indirect costs are things that we can't trace and are not traceable to a cost object. Examples of that are going to be maintenance costs for multiple departments. we can't really have these indirect costs allocated specifically to a cost object.