Financial Management for Project Managers Performance Measurement in Accounting 3 — Questions and Answers
Question 1: Which accounting concept allocates indirect costs to projects based on a predetermined rate applied to a cost driver such as direct labor hours?
- Overhead absorption rate (Correct answer)
- Activity-based costing
- Direct cost allocation
- Standard costing
Correct answer: Overhead absorption rate
The overhead absorption rate spreads indirect costs across projects using a cost driver like direct labor hours.
Question 2: A project manager reviews a variance report showing an unfavorable efficiency variance. What does this most likely indicate?
- More resources were used than planned to produce the actual output (Correct answer)
- Resources cost more per unit than budgeted
- The project produced less output than planned
- Overhead costs exceeded the budget
Correct answer: More resources were used than planned to produce the actual output
An unfavorable efficiency variance means actual input quantity exceeded the standard quantity for the actual output produced.
Question 3: In project financial reporting, what is a 'management reserve'?
- Budget set aside for unknown unknowns outside the performance measurement baseline (Correct answer)
- Funds allocated for identified risks within the project scope
- The difference between EAC and BAC
- Profit margin built into the contract price
Correct answer: Budget set aside for unknown unknowns outside the performance measurement baseline
Management reserve is held outside the PMB for unknown-unknown risks and requires management approval to access.
Question 4: A project uses a 50/50 rule for measuring earned value. A task is started but not completed in the reporting period. What EV is credited?
- 50% of the task budget (Correct answer)
- 0% until fully complete
- 100% of the task budget
- Actual percentage physically complete
Correct answer: 50% of the task budget
The 50/50 rule credits 50% of the task budget when work begins and the remaining 50% upon completion.
Question 5: What financial metric best measures a project's return relative to its cost for investment decision-making?
- Return on Investment (ROI) (Correct answer)
- Net Present Value (NPV)
- Internal Rate of Return (IRR)
- Payback Period
Correct answer: Return on Investment (ROI)
ROI expresses net benefit as a percentage of cost, making it the most direct measure of return relative to investment.
Question 6: A project's Estimate to Complete (ETC) is calculated as EAC - AC. What assumption underlies this approach?
- Past cost performance is irrelevant and remaining work will be re-estimated from scratch (Correct answer)
- Future work will be performed at the same CPI as historical performance
- The project will be completed exactly at BAC
- Sunk costs are recoverable
Correct answer: Past cost performance is irrelevant and remaining work will be re-estimated from scratch
ETC = EAC - AC represents a bottom-up re-estimate that ignores past CPI and forecasts remaining costs independently.
Question 7: Which earned value reporting term describes the dollar difference between what was planned to be spent and what was actually spent by a given date?
- Cost Variance (CV) (Correct answer)
- Schedule Variance (SV)
- Variance at Completion (VAC)
- Budget Variance
Correct answer: Cost Variance (CV)
Cost Variance (CV) = EV - AC, capturing the difference between budgeted cost of work performed and actual cost.
Financial Management for Project Managers Performance Measurement in Accounting 3
Which accounting concept allocates indirect costs to projects based on a predetermined rate applied to a cost driver such as direct labor hours?