PMP examination preparation - Types of Cost

PMP Examination Preparation - Types of Cost
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Sabyasachi

Published on November 20, 2012


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This film cost $31 million. With that kind of money I could have invaded some country - Clint Eastwood

It is important to understand the types of costs and the difference between the types of costs while creating estimates in your projects.

Types of Cost

  • Fixed Costs: These costs stay the same and do not change throughout the project life cycle. Examples of fixed costs include setup costs, rental costs etc.
  • Variable Costs: Variable costs are costs that change with the amount of work. Examples of variable costs are hourly labor, the cost of material, the cost of supply, fuel for bulldozer etc.
  • Direct Costs: Direct costs are expenses that are billed directly to the project. Examples of direct costs are team travel expenses, team wages, the cost of material used in a project, costs incurred for recognition and awards materials used to construct a building.
  • Indirect Costs: Indirect costs are costs that are shared and allocated among several or all projects. Examples include fringe benefits and taxes. Another example of indirect costs could be the salary of an architect or a project manager who is partially allocated across many projects. Their team members' salaries would be direct costs since each of them is directly working on a particular project and their salary is direct costs to the project. But since the project manager is allocated to several projects, the costs incurred on his salary are indirect costs to the project.
  • Sunk Costs: Sunk costs are costs that have been incurred on a project but have not produced value towards the project objectives. Sunk costs are like spilled milk.If they are unrecoverable, they are to be treated as if they are irrelevant. For instance, let's assume that you hire a freelance developer to develop your website in Java technologies. However, after working on the job for some time, the developer quits the job for a personal reason. When you hire another developer for the job, he convinces you that he could do a better job in .NET technologies and you too make up your mind to develop your website in .NET technologies.  In such a case the costs that you have incurred on the freelance java developer could be treated as sunk costs.

Sample Question and answers
1) John works as a Project Manager with ABD consultants Pvt. Ltd. He felt a need to arrange skill upgradation training for his team members. What type of Cost will he incur on the project due to these training?
A.Direct
B.NPV
C.Indirect
D.Fixed

Answer: A: John wants to arrange training for the team since he wants them to upgrade their skillsets.This a cost which is directly related to the project. Therefore, these costs are direct costs.

2) Room rent costs are an example of
A.Variable Costs
B.Fixed Costs
C.Overhead Costs
D.Opportunity Costs

Answer: B: Costs incurred on room rents are Fixed Costs.

3) Bob needs to analyze the project costs to find ways to decrease costs. It would be best if he looks at 

A.Variable Cost and Fixed Cost
B.Fixed Costs and Indirect Costs
C.Direct Costs and Variable Costs
D.Indirect Cost and Direct Costs

Ans: C: Direct costs and variable costs are costs that are directly attributable to the project or those that vary with the amount of work accomplished. Therefore Bob could analyze these costs to find ways in decreasing them.

Preparing for PMP®? Take this test to know where you stand!

Conclusion
While creating estimates on a project, project managers should understand the types of costs incurred. The PMP®certification has quite a few questions on the topic. Therefore PMP® aspirants should understand the types of costs and the basic difference between them.

 

PMP is a registered trademark of the Project Management Institute, Inc. 

 

About the Author

Sabyasachi has over a decade’s experience in leading IT and non IT projects in the Healthcare, Oil and Energy, eCommerce, Public Sector Undertaking , and Services industry . He is a PMI certified Project Management Professional , PMP, and a volunteer in the Project management community with a focus on best practice and mentoring other project management professionals . His writings are regularly published in several blogs , forums and online project management communities .


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