Product Management: Cost Estimation Flashcards
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A startup PM must choose between two features. Feature A costs $50K with a 60% chance of $200K return. Feature B costs $30K with an 80% chance of $100K return. Which has a higher Expected Monetary Value (EMV)?
Answer: Feature A ($70K EMV)
EMV = (probability × return) − cost; Feature A: (0.6 × $200K) − $50K = $70K; Feature B: (0.8 × $100K) − $30K = $50K.
In software product development, which factor most commonly causes cost estimates to grow over time?
Answer: Scope creep adding unplanned features and requirements
Scope creep — the gradual addition of unplanned features — is the most common driver of cost growth in software product development.
What is the primary purpose of a Work Breakdown Structure (WBS) in cost estimation?
Answer: To decompose project deliverables into manageable components for more accurate costing
A WBS decomposes deliverables into smaller, more manageable work packages, enabling more accurate and detailed cost estimates for each component.
A PM is using Agile and wants to estimate the cost of a sprint. The team's velocity is 40 story points per sprint, and each story point costs $500. What is the estimated sprint cost?
Answer: $20,000
Sprint cost = velocity × cost per point = 40 × $500 = $20,000.
Which statement best describes the difference between direct costs and indirect costs in product development?
Answer: Direct costs are traced specifically to a product; indirect costs are shared overhead allocated across products
Direct costs (e.g., developer salaries for a specific feature) are directly attributable to a product, while indirect costs (e.g., office rent) are shared overhead.
A product manager discovers the actual cost to develop a feature was $80K, but the approved budget was $60K. What is the cost variance (CV)?
Answer: -$20K (over budget)
CV = EV − AC; if earned value equals planned value of $60K and actual cost is $80K, CV = $60K − $80K = −$20K, indicating an overrun.
When should a ROM (Rough Order of Magnitude) estimate typically be used?
Answer: In the early project initiation phase when details are unknown
ROM estimates (with −25% to +75% accuracy) are used in early project phases when little detail is known, to help with initial go/no-go decisions.