CCT Cost Estimation & Budgeting 4 — Questions and Answers
Question 1: What is the purpose of an independent cost estimate (ICE)?
- To validate the reasonableness of contractor bids or internal estimates (Correct answer)
- To replace the project manager's cost baseline
- To satisfy regulatory reporting requirements
- To identify scope gaps in the work breakdown structure
Correct answer: To validate the reasonableness of contractor bids or internal estimates
An ICE is prepared by a party not involved in the original estimate to provide an objective check on cost reasonableness.
Question 2: Which method of cost allocation distributes overhead to cost centers based on machine hours or direct labor hours?
- Traditional absorption costing (Correct answer)
- Activity-based costing
- Direct costing
- Standard costing
Correct answer: Traditional absorption costing
Traditional absorption costing allocates overhead using a single volume-based driver such as machine hours or direct labor hours.
Question 3: A project's cumulative planned value (PV) curve plotted over time is commonly called what?
- S-curve (Correct answer)
- Gantt chart
- Cost histogram
- Cash flow diagram
Correct answer: S-curve
The S-curve represents cumulative planned value over time and gets its name from the characteristic S-shape of most project spending profiles.
Question 4: What is the definition of 'allowance' in cost estimating?
- A cost added to an estimate for known but undefined scope elements (Correct answer)
- A reserve held for unknown project risks
- A percentage applied to cover profit and overhead
- A credit given for value engineering savings
Correct answer: A cost added to an estimate for known but undefined scope elements
An allowance is a provision in the estimate for known scope elements that cannot yet be fully defined or quantified.
Question 5: In the context of cost estimating, what does 'scope creep' primarily cause?
- Cost overruns due to uncontrolled additions to project scope (Correct answer)
- Schedule delays from poor resource allocation
- Estimate inaccuracy from using wrong cost indices
- Budget reductions from value engineering
Correct answer: Cost overruns due to uncontrolled additions to project scope
Scope creep refers to the gradual, unauthorized expansion of project scope that drives cost overruns when not formally controlled.
Question 6: Which estimating classification system is used by AACE International to categorize estimates by maturity of project definition?
- Class 1 through Class 5 (Correct answer)
- Type A through Type E
- Level 1 through Level 4
- Phase 1 through Phase 6
Correct answer: Class 1 through Class 5
AACE International's Recommended Practice 18R-97 defines five estimate classes (Class 1-5) based on the degree of project definition.
Question 7: What is the primary advantage of using activity-based costing (ABC) over traditional cost allocation methods?
- It provides more accurate cost data by tracing overhead to activities that consume resources (Correct answer)
- It reduces the total amount of overhead allocated to products
- It simplifies the accounting process by using fewer cost pools
- It eliminates the need for indirect cost allocation entirely
Correct answer: It provides more accurate cost data by tracing overhead to activities that consume resources
ABC identifies the activities that drive costs and assigns overhead based on each product's actual consumption of those activities, yielding more accurate cost data.
CCT Cost Estimation & Budgeting 4
What is the purpose of an independent cost estimate (ICE)?