Financial Management for Project Managers Performance Measurement in Accounting 4 — Questions and Answers
Question 1: A project manager is evaluating two mutually exclusive projects. Project A has an NPV of $80,000 and Project B has an NPV of $120,000. Which should be selected if budget allows only one?
- Project B, because it has the higher NPV (Correct answer)
- Project A, because it likely has lower risk
- Whichever has the shorter payback period
- Whichever has the higher IRR
Correct answer: Project B, because it has the higher NPV
When choosing between mutually exclusive projects, the one with the higher NPV creates the most organizational value.
Question 2: In cost accounting, what distinguishes a 'sunk cost' from other project costs?
- It has already been incurred and cannot be recovered regardless of future decisions (Correct answer)
- It is a future cost that can be avoided by stopping the project
- It represents overhead allocated but not yet spent
- It is a contingency cost reserved for known risks
Correct answer: It has already been incurred and cannot be recovered regardless of future decisions
Sunk costs are past expenditures that are irrelevant to future decision-making because they cannot be recovered.
Question 3: A project's SPI is 0.85 and CPI is 0.90. Which corrective action addresses BOTH underperformance indicators simultaneously?
- Crash the schedule using overtime while identifying cost reduction opportunities (Correct answer)
- Add more resources to improve only the schedule
- Reduce scope to lower costs without addressing schedule
- Extend the deadline to allow natural recovery
Correct answer: Crash the schedule using overtime while identifying cost reduction opportunities
Crashing with simultaneous cost controls can improve both schedule (SPI) and cost (CPI) performance concurrently.
Question 4: Which depreciation method allocates cost evenly over an asset's useful life and is simplest to apply for project accounting?
- Straight-line depreciation (Correct answer)
- Double declining balance
- Units of production
- Sum-of-years-digits
Correct answer: Straight-line depreciation
Straight-line depreciation divides cost minus salvage value equally across all years of useful life.
Question 5: A control account in Earned Value Management is best described as:
- A management control point where scope, schedule, and budget are integrated and performance is measured (Correct answer)
- A bank account used to hold project funds
- A ledger entry for tracking actual project expenditures
- A variance threshold that triggers management escalation
Correct answer: A management control point where scope, schedule, and budget are integrated and performance is measured
Control accounts are management control points in the WBS where EVM integrates scope, schedule, and cost for measurement.
Question 6: A project manager is told TCPI based on EAC is 1.12. What does this tell the project team?
- The team must spend future dollars 12% more efficiently than historically achieved (Correct answer)
- The project is 12% over budget
- Future work can be done at 88% of the planned rate
- The project schedule needs to be compressed by 12%
Correct answer: The team must spend future dollars 12% more efficiently than historically achieved
TCPI > 1.0 means remaining work must be completed more efficiently than past performance to meet the revised forecast.
Question 7: An activity-based costing (ABC) system differs from traditional cost accounting primarily because it:
- Assigns overhead costs based on the activities that actually consume resources (Correct answer)
- Uses a single plant-wide rate to allocate all indirect costs
- Only tracks direct material and direct labor costs
- Ignores fixed overhead in product costing
Correct answer: Assigns overhead costs based on the activities that actually consume resources
ABC traces overhead to activities and then to cost objects, providing more accurate cost information than a single overhead rate.
Financial Management for Project Managers Performance Measurement in Accounting 4
A project manager is evaluating two mutually exclusive projects.
Project A has an NPV of $80,000 and Project B has an NPV of $120,000.
Which should be selected if budget allows only one?