GMS 450 Lecture Notes - Lecture 6: Cost Accounting, Work Breakdown Structure, Direct Labor Cost
15 Jun 2018
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Susan Liang
Lecture 6
1
GMS450
Chapter 6: Project Budgeting
Project Cost Management Process
• In cost management process, costs are estimated using resource planning. (first step in order to find the cost of the budget)
• The estimated costs are budgeted by an organization, and the project manager controls the budget.
• A project manager has to control schedule, performance, scope, value, and resources in order to control the costs.
4 Steps to Project Cost
Step 1) Resource Planning
• The planning of the resources used to execute the project
• To accomplish resource planning:
- List the required resource
- Quantify the required resource
- Construct a resource schedule, and
- Level the resources
List Resources
• List all required resources based on WBS. Each task listed in WBS demands particular skills or knowledge. Based on this
information, resources can be identified and listed.
• Labor: Identify all the roles involved in undertaking the project, including all full-time, part-time and contracting roles.
• Equipment: Identify all of the equipment involved in undertaking the project; may include personal computers,
photocopiers, mobile phones, telecommunications equipment, etc.
• Materials: Identify all non-consumable materials to complete project activities such as office materials and materials
required for construction including lumber, steel and concrete.
Quantify Resources
• All identified resources are subject to some specification:
• Labor: List skills and experiences required by all roles and quantify how many of such resources are needed.
• Equipment: List the specification of all equipment, the total quantity needed, and dates of requirement. (include start and
finish time for the use of equipment)
• Materials: List the specification of all required materials and the total quantity.
Resource Leveling
• When the project is large and contains many resource over-allocations, resource leveling must be accomplished:
- A technique in which start and finish dates are adjusted based on resource constraints with the goal of balancing
demand for resources with the available supply.
- Purpose is to create a smoother distribution of resource usage.
• Resource leveling aims to minimize the period-by-period variations in resource loading by shifting tasks within their slack
allowances.
• Leveling is done by delaying or splitting tasks until the resources assigned to them are no longer over-allocated.
(some resources are really expensive to have for activities – if this happens, you need to rent more of those expensive resources so
you have to think about maybe postponing the project in order to finish one part of the activity to level out the usage of the
resources)
Step 2) Project Costs (Cost Estimating)
• Cost is a resource expended to achieve a specific objective; in our case, a project.
• Cost management in projects (i.e., budgeting) is the process by which companies control and plan the costs of
implementing projects.
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Susan Liang
Lecture 6
2
• Before a project is started, the anticipated costs should be identified. (plan resources in advance)
• Profits are the revenues of an organization minus the costs borne by the organization, including project costs. (end of the
day, PM only cares about profit)
• In order for an organization to increase its profits, its project costs have to decrease, its revenues increase, or both.
• Therefore, it is important to identify different project costs.
- Direct costs: Direct material and labor costs used solely for a project
- Indirect costs: Any material and labor costs that are not used in a single project
- Fixed costs: Reai ostat egadless of hages i the leel of pojet atiities et, isuae, popet taes, …
- Variable costs: Vary in direct proportion to changes in the level of project activities (mainly Direct material and direct
labor cost)
- Overhead costs: Primarily those indirect costs associated with project implementation (laboratories, health insurance,
paid leae tie, …
- General and administrative costs: Costs primarily associated with general management and administration of the
project
Cost Estimation
(midterm: 5 math exam questions will come from cost estimation)
• Estimating is the process of determining the cost of a project.
• In order to have an accurate project cost estimate:
- Have an accurate estimate on the number of people needed
- Have an accurate estimate of time to complete the tasks
• Project estimates are derived by totaling the estimates for individual project elements.
Work Element Costing
• Determine resource requirements and then costs for each task
- Fixed costs
- Labor time and labor rate
- Equipment time and equipment rate
- Overhead, general, sales, and administrative (all these 3 bullets are also part of assignment 3)
Example: A certain task is expected to require
- 16 hours of labor at $10 per hour (labour)
- Required materials cost $235 (material)
- The organization charges overhead for the use of utilities, indirect labor, and so forth at a rate of 50 percent of direct
labor. (expect 50% of the labour cost is overhead)
- The total task cost will be $235 + (16hr x $10hr) x 1.5] = $475
- 1.5 comes from 50% of direct labour
Step 3) Project Budgeting
• A budget must be developed in order to obtain the resources needed to accomplish the pojet’s ojeties
• A budget is a plan for allocating organizational resources to the project activities
• A budget acts as a tool for upper management to monitor and guide the project
• Reall that pojet plaig poess as aout diidig pla’s elements to smallest possible pieces that could be
sequenced, assigned, scheduled, and budgeted.
• The project budget is the project plan, based on the WBS, expressed in monetary terms and it becomes a part of the project
charter.
Budgeting
• Budgeting is forecasting what resources the project will require, what quantities of each will be needed, when they will be
needed, and how much they will cost.
• Most businesses employ experienced estimators who can forecast resource usage very well.
- A bricklayer can usually estimate the number of bricks required to construct a brick wall of given dimensions.
- A painter can estimate the number of hours needed to paint a wall of given dimensions
• Budgeting a project is more difficult than budgeting more routine activities
find more resources at oneclass.com
find more resources at oneclass.com
