PMP Terminologies related to Cost

A Cost is an amount an organization pays for a product or service. This is often referred to as the unit cost and payment for each unit of an item purchased. In general, a cost is an accounting term that refers to all expenses an individual or organization incurred. The Cost of something has two main parts: one part, which is the good itself named in terms of its tangible form, and another part which is the money used to purchase it. Thus effective today, you must deal with both PMP Terminologies related to Cost.

Cost management plan

The cost management plan is a document that provides information and guidance to the project manager on how to manage costs. It should include a high-level description of the project's financials, including budgets and forecasts, and details on how costs are estimated and managed.

The cost management plan should also contain information about how the team will assess when it has reached its target completion date and how it will use this information to determine whether or not to continue with the project.

In addition, some projects may have other costs, such as marketing expenses or product development efforts. These can be included in the cost management plan if they fit into the scope of work for the project.

Cost Baseline

The cost baseline is the amount of money needed to make the product.

The cost baseline helps you determine how much your product will cost to produce. It also tells you how much money you need to get started.

For example, if your product costs $20 to make, and it takes $5 of materials and supplies to make each item, your total manufacturing costs would be $15. Therefore, that number should be used when pricing your items.

Earned Value

The earned value is a financial measure of the resources and incurred costs required to complete a project.

Earned value is calculated by taking into account two factors: the Cost of goods sold, which represents the Cost of the goods shipped to customers, and actual cash expenditures, which means how much was spent on goods and services.

Earned value is a valuable tool for monitoring progress in projects. It indicates whether a project is completed on time, within budget, and of high quality.

Earned value can be used for quality control as well as scheduling purposes. The earned value should always be compared with the planned value because the earned value can be adjusted upward or downward to reflect actual performance against plan or budgeted values.

Planned Value

Planned value is the amount of money you expect to receive from your project after you have invested all the money.

When you plan a project, you should consider the Cost of each phase and how long it will take to complete it. And then, you should calculate the total expected Cost and revenue of the entire project.

The planned value is an integral part of your budgeting process because it shows your available money for other projects or investments.

Actual Cost (AC) 

Actual Cost is the total expenses incurred by the entity, which can be directly and indirectly associated with the work done. For example, it includes all overheads, salaries, wages, transportation costs, etc. Actual Cost is a popular method because it can be easily converted into a percentage of turnover or profit, widely used in business management.

Estimate at Completion (EAC)

The EAC measures the extent to which a project has been completed. In other words, it measures how close a project is to being finished.

The EAC is calculated by taking all completed tasks and the sum of all remaining tasks in the proposed timeline. The sum of all remaining charges is calculated by subtracting the total hours spent on each task from the total number of hours spent on each task. The sum of all completed tasks is calculated by subtracting the total hours spent on each task from the total number of hours spent on that particular task.

The EAC can be damaging if more tasks remain than were initially planned to be completed. This can happen if unforeseen delays or problems require additional time to fix or resolve.

Cost performance index (CPI)

The cost performance index (CPI) is a financial measure used to determine the quality of a project. The CPI is calculated by dividing the total project cost by the total number of benefits derived. The CPI can be used as the basis for evaluating the performance of a project and subsequent decision-making.

The CPI provides managers with information about how much money they have spent on a project and what value it has gained. This enables them to make decisions about whether to continue with that particular project or not.

Schedule performance index (SPI)

SPI is a performance index that measures the efficiency of a system, either in terms of resource utilization or quality. It is calculated by dividing the total time required to complete a task by the time spent on it.

Schedule Performance Index (SPI) is a tool that helps managers to assess their project's performance, identifying areas for improvement and opportunities for increased productivity. The SPI is calculated from actual times rather than estimates or idealized tasks.

The SPI formula is: SPI = Actual Time / Estimated Time

SPI can measure how fast an organization can complete a task or how well it fulfills its goals. If an organization's SPI is below 1, it performs better than average; if it's above 2, it's acting worse than average.

As a final thought, you should understand that there are several ways to calculate the project cost; for example, if you are using Earned Value Management (EVM), then you will add the Estimate at Completion for the Work Packages. Learning the lingo may help you better interface with your team and project manager.