OROMIA STATE UNIVERSITY

Project Management-Program

Course Title: Project Cost Management

Course Code: MAPMS 631

Credit Hours: 3
Instructor: Dr. Abdela Y. (Assistant Professor)
 CHAPTER FIVE:
OVERVIEW OF PROJECT COST MANAGEMENT
5.1 Project Management
Project management can be defined as the
discipline of applying specific processes and
principles to initiate, plan, execute and manage
the way that new initiatives or changes are
implemented within an organization.
Cost is a resource sacrificed or foregone to
achieve a specific objective or something given up
in exchange

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5.2 Project Cost Management
• Project cost management is the process of
estimating, budgeting and controlling costs
throughout the project life cycle, with the objective
of keeping expenditures within the approved budget.
• For a project to be called successful, it’s necessary
that
– it delivers on the requirements and scope
– its execution quality is of a high standard
– it’s completed within schedule and
– it’s completed within budget.
Hence, project cost management is one of the key pillars of
project management
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5.3 Project Cost Management Processes
• While cost management is viewed as a continuous
process, it helps to split the function into four steps:
resource planning, estimation, budgeting and control.
• Resource planning: determining what resources and
quantities of them should be used
• Cost estimating: developing an estimate of the costs and
resources needed to complete a project
• Cost budgeting: allocating the overall cost estimate to
individual work items to establish a baseline for
measuring performance
• Cost control: controlling changes to the project budget

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5.4 Basic Principles of Cost Management
• Tangible costs or benefits are those costs or benefits
that an organization can easily measure in dollars.
• Intangible costs or benefits are costs or benefits that
are difficult to measure in monetary terms.
• Direct costs are costs that can be directly related to
producing the products and services of the project.
• Indirect costs are costs that are not directly related to
the products or services of the project, but are
indirectly related to performing the project.
• Sunk cost is money that has been spent in the past;
when deciding what projects to invest in or continue,
you should not include sunk costs.
Basic Principles of Cost Management...
• Learning curve theory states that when many items are
produced repetitively, the unit cost of those items
decreases in a regular pattern as more units are produced.
• Reserves are dollars included in a cost estimate to mitigate
cost risk by allowing for future situations that are difficult
to predict.
– Contingency reserves allow for future situations that
may be partially planned for (sometimes called known
unknowns) and are included in the project cost
baseline.
– Management reserves allow for future situations that
are unpredictable (sometimes called unknown
unknowns).
 5.5 Types of Project Cost
• There are different kinds of costs that make up
the whole cost of a project. The 5 costs they
cover are:
 Direct cost
 Indirect cost
 Fixed cost
 Variable cost
 Sunk cost

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COST CLASSIFICATION AND FLOW

• There are various ways of classifying costs. Each

classification serves different purpose.
i. Classification According to Function: The grouping of
costs is according to the broad divisions of functions such
as production, administration, selling, R&D Costs etc.
ii. Classification on the basis of Traceability to the
Product:
1. Direct costs………. can be traced to the cost object in an
economically feasible way.
2. Indirect costs (Overhead costs)…………are associated
with the cost object, but cannot be traced to the cost
object in an economically feasible way.
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iii. Classification According to Variability & Behavior
• This classification is based on the degree of traceability
to the final product of the firm
– Variable Costs ………..vary in direct proportion to
volume, in total.
– Fixed Costs ………….stay the same amount in total
as volume fluctuates.
iv. Classification According to their treatment
a) Product costs…….. is any cost that is associated with
units of product for a particular purpose.
b) Period costs…….. are not associated with the
manufacture of products or not sufficiently
identifiable with specific production
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 Cont’d…
• Costs can also be classified as either product or
period costs.
 Product costs: are related to making or
acquiring the products or providing the services
that directly generate the revenues of an entity;
 Period costs: are related to other business
functions such as selling and administration.
• Product costs are also called inventoriable
costs and include the cost of direct material,
direct labor, and overhead.
 Cont’d…
• Any readily identifiable part of a product (such
as the clay in a vase) is a direct material.
• Direct material includes raw materials,
purchased components from contract
manufacturers, & manufactured subassemblies.
• Direct labor refers to the time spent by
individuals who work specifically on
manufacturing a product or performing a
service.
Cont’d…
 Direct Material Costs:- All manufactured
products are made from basic direct materials.
• Direct materials are the acquisition costs of
materials that can be conveniently and
economically traced to specific unit of product.
• Acquisition cost of direct materials includes
freight–in charges, sales taxes and customs
duties.
• Some examples of direct materials are iron ore
for steel, sheet steel for automobiles and sugar
for candy.
Cont’d…
 Direct Labor Costs:
• Compensation of all labor that can be identified
in an economically feasible way with a cost
object. Or it is the costs of labor to complete
production activities that can be conveniently
and economically traced to specific units of
product.
• Example: wages/labors of machine operators
and assembler
Cont’d…
 Manufacturing Overhead Costs: The third
elements of product cost include all
manufacturing costs that cannot be classified as
direct materials or direct labor costs.
• Manufacturing overhead costs are production
related costs that can’t be practically or
conveniently traced directly to an end product.
• This assortment of costs is also called factory
overhead, or indirect manufacturing costs.
 Cont’d…
• Common components of manufacturing
overhead costs are indirect material costs,
indirect labor costs and other manufacturing
overhead costs.
 Indirect material costs: are the costs of
materials that cannot be conveniently or
economically traced to a unit of product e.g.
cost of nails, lubricants and small tools.
Cont’d…
 Indirect labor costs: are labor costs for
production related activities that cannot be
conveniently or economically traced to a unit of
product.
• These are labor costs that are impossible or
impractical to trace to a specific product.
• Example: cost of labor for maintenance,
inspection, supervision, materials handling and
machine handling, wages of janitors and plant
guards.
Cont’d…
 Other indirect manufacturing costs:
• Example: power, supplies, property taxes,
property insurance and depreciation on plant
and equipment used in production.
Period (Non Manufacturing) Costs:
• Period costs are all items in the income statement
other than cost of goods sold.
• These costs are treated as expenses of the period
in which they are incurred.
• For manufacturing sector companies, period costs
include all non-manufacturing costs for example,
selling cost, administration cost and Research and
Development costs.
• For merchandising-sector companies, period costs
include all costs not related to the cost of goods
purchased for resale in the same form.
• For service sector companies, since there are no
inventorable costs, all their costs are period costs.
 Prime Cost and Conversion Costs:
• In manufacturing companies, the costs can
again be classified as Prime Cost and Conversion
costs.
 Prime costs: are all direct manufacturing costs
i.e. direct material costs and direct
manufacturing labor cost.
 Conversion Costs: are all manufacturing costs
other than direct material costs.
• Conversion costs are the costs incurred to
convert direct material into the final product,
namely, costs for direct labor and manufacturing
overhead.
V) Classification According to Controllability

1. Controllable costs
• Influenced by the action of a specified member of a
firm.
1. Uncontrollable cost
• Cannot be influenced by the action of any member of
undertaking or beyond control

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 5.6 Project Cost Management Overview
“The Project Cost Management includes the processes involved
in planning, estimating, budgeting, and controlling costs so that
the project can be completed within the approved budget”
Project Cost Management
The Overview of project cost Management include the
following fundamental phases.
1. Estimate Costs: The process of developing an
approximation of the monetary resources needed to
complete project activities.
2. Determine Budget: the process of aggregating the
estimated cost of individual activities to establish an
authorized cost base line
3. Control costs: The process of monitoring the status of the
project to update the project budget and managing changes
to the cost base line.
Project Cost Management...
• Project Cost Management is primarily concerned with
the cost of the resources needed to complete project
activities.
• Project Cost Management should also consider the
effect of project decisions on the subsequent recurring
cost of using, maintaining, and supporting the product,
service, or result of the project.
• For example, limiting the number of design reviews
can reduce the cost of the project but could increase
the resulting product’s operating costs.
1. Estimate costs
• Estimate Costs is the process of developing an
approximation of the monetary resources needed
to complete project activities.
• The key benefit of this process is that it
determines the amount of cost required to
complete project work.
 Estimate costs...
• Cost estimates are a prediction that is based on
the information known at a given point in time.
• Cost estimates include the identification and
consideration of costing alternatives to initiate
and complete the project.
• Cost tradeoffs and risks should be considered,
such as make versus buy, buy versus lease, and
the sharing of resources in order to achieve
optimal costs for the project.
• Cost estimates are generally expressed in units of
some currency (i.e., Birr, dollars, euros, yen, etc.)
 2. Determine Budget
• Budgeting is allocating costs to work packages to
establish a cost baseline to measure project
performance.
• Determine Budget is the process of aggregating
the estimated costs of individual activities or work
packages to establish an authorized cost baseline
• Remember Contingency items are for
unplanned but required changes it is not to cover
things such as:
– Price escalation
– Scope & Quality Changes
• A project budget includes all the funds authorized
to execute the project.
3. Control costs
• Control Costs is the process of monitoring the
status of the project to update the project costs
and managing changes to the cost baseline.
• The key benefit of this process is that it provides
the means to recognize variance from the plan in
order to take corrective action and minimize risk.
Overview of Project Cost Management
END OF THE CHAPTER!

END OF THE CLASS!

THANK YOU!!