Product Management Product Management: Cost Estimation 2 — Questions and Answers
Question 1: A PM uses a cost estimation technique that relies on statistical relationships between historical data and project variables. Which technique is this?
- Analogous estimating
- Parametric estimating (Correct answer)
- Bottom-up estimating
- Three-point estimating
Correct answer: Parametric estimating
Parametric estimating uses statistical relationships between historical data and project variables (e.g., cost per unit) to calculate estimates.
Question 2: What does the term 'cost baseline' refer to in product management?
- The minimum budget required to start a project
- The approved time-phased budget used to measure project performance (Correct answer)
- The fixed cost that cannot be changed once approved
- The average cost across similar past projects
Correct answer: The approved time-phased budget used to measure project performance
The cost baseline is the approved, time-phased budget against which project cost performance is measured and monitored.
Question 3: A product team is estimating a new feature with high uncertainty. They use optimistic (O), pessimistic (P), and most likely (M) estimates. Which formula gives the PERT expected value?
- (O + P + M) / 3
- (O + 4M + P) / 6 (Correct answer)
- (O + 2M + P) / 4
- (O + M + 2P) / 4
Correct answer: (O + 4M + P) / 6
The PERT formula weights the most likely estimate four times more than the optimistic and pessimistic estimates: (O + 4M + P) / 6.
Question 4: Sunk costs should generally be ignored when making future product investment decisions. Why?
- They are too difficult to calculate accurately
- They are already spent and cannot be recovered regardless of future decisions (Correct answer)
- They are included in opportunity cost calculations
- They only apply to hardware purchases, not software
Correct answer: They are already spent and cannot be recovered regardless of future decisions
Sunk costs are irrecoverable past expenditures that should not influence future decisions, which should be based on expected future costs and benefits.
Question 5: Which cost estimation approach involves estimating each individual work package and rolling them up to get the total project cost?
- Top-down estimating
- Analogous estimating
- Bottom-up estimating (Correct answer)
- ROM estimating
Correct answer: Bottom-up estimating
Bottom-up estimating breaks work into the smallest components, estimates each one individually, then aggregates them for the total estimate.
Question 6: A PM calculates a Cost Performance Index (CPI) of 0.85. What does this indicate?
- The project is 85% complete
- For every dollar spent, only 85 cents of value is being delivered (Correct answer)
- The project is 15% under budget
- The team is 15% more productive than planned
Correct answer: For every dollar spent, only 85 cents of value is being delivered
A CPI below 1.0 means the project is over budget — only $0.85 of earned value is produced for every $1.00 actually spent.
Question 7: What is 'reserve analysis' in the context of product cost estimation?
- Analyzing past cost overruns to improve future estimates
- Setting aside contingency funds for identified risks and management reserves for unknown risks (Correct answer)
- Reserving budget only for high-priority features
- Calculating the minimum viable cost to launch a product
Correct answer: Setting aside contingency funds for identified risks and management reserves for unknown risks
Reserve analysis involves adding contingency reserves for known risks and management reserves for unknown risks to protect the overall budget.
Product Management Product Management: Cost Estimation 2
A PM uses a cost estimation technique that relies on statistical relationships between historical data and project variables.
Which technique is this?