Situation — All of the project managers were very cordial during your instruction about the nature of projects, scope, and WBS, and how DIT project managers can use a good scope statement and a well-structured WBS to preclude scope creep and gold plating in addition to supporting cost estimates and managing a project to budget. Although they were cordial, they also seemed less than convinced all this management minutia was worth the time better spent on the technical aspects of the project. You know, however, you are only scratching the surface, and need to get them to understand the connection between technical details and the attention they must give to controlling project costs. The next step you have to take is to ensure they understand project cost management planning and processes.
Assignment – During the planning process the project manager and team members must identify how much investment will go into covering the cost of services, materials, and other resources needed for the project. For this post, discuss the five major cost types associated for all projects: Fixed, Variable, Direct, Indirect, and Sunk. Connect examples of the current project to all five cost categories.
Week 2 Discussion: Cost Control in Project
During the planning process of the organization, one should always be ready with well-prepared structures where all the information related to the project investment is written on it. If all the information related to it is mentioned in it then it will be helpful to understand what the new things should be mainly focused on. While investing in the project the various information should be there and the knowledge related to the cost type should be known. In the project making the various types of costs that take place within the organization and the five major cost types associated with all projects are stated below-
Fixed cost– Fixed cost is those cost which does not change with the sales or the production of the organization. The amount here is fixed this is because they are not directly associated with manufacturing a product or delivering a service. Here the production of the goods or the sales of the goods did not affect the cost. This fixed cost depends on the time rather than the product quantity. The cost here rises with the changes in time. An example of a fixed cost is the salary, lease cost, or rental cost. Here while starting the project the amount of the place rented will be same on the per month where the product takes place or not it does not affect the rent or the employee’s salaries. The changes that take place or rent increases take place with the passing of some years or time.
Variable cost– Variable costs are the cost where the changes take place with the change in the values. Here the quality increases and decreases wage the cost price of the project. Variable costs are the sum of marginal costs over all units produced (Moreira, Cabaleiro & Reichstein, 2019, p.775). They can also be considered normal costs. Examples of the variola costs are the price of the raw material, labor, and delivery charges. With more raw materials, the price will increase, and with less quality of the raw materials, the prices will also decrease. Likewise, if more product is to be developed then the delivery charges will increase, and with fewer deliveries of the product, the delivery charges will; decreases as well. So here the cost depends on the amount of the products which need to be sold. If a large quantity of the product is made more investment is required and if less material is to be made then less cost will take place.
Direct cost– Direct costs are costs that are directly accountable to a cost object. A direct cost is a price that can be directly tied to the production of specific goods or services. The direct cost of the product here refers to the direct cost associated with the product. In the direct cost, the expenses that were taken place by the company can easily connect with the specific product or object. Direct costs are those cost that is directly related to the product. Examples of direct costs are Labor wages, raw material costs, and rent of the factory. The labor and the ways are directly related If the wages are not provided to the laborers, then the laborers will not want to work on the project had the work will automatically be stopped as well. These factors are directly related to the product or the project so they can be considered the direct cost of the project.
Indirect cost- Indirect costs are costs that are not directly accountable to a cost object. The indirect cost can be either fixed or it can be variable as well. This indirect cost can be frequently referred to as overhead expenses (Akerman, 2018, p.160). This cost is not directly linked with the product making but without them, product completion also cannot take place. For example, the electric bill is the indirect cost as though the raw material is there but if the supply of the electricity is, not there in the organization then the machine will not start and the product-making process will not be able to start as well. So, it indirectly affects the organization as well.
Sunk cost– A sunk cost refers to money that has already been spent and cannot be recovered. In economic decision-making, sunk costs are treated as bygone and are not taken into consideration when deciding whether to continue an investment project. Sunk costs are those costs that have already been incurred but cannot be recovered as well. It can be termed as the expenses as well. This cost is avoided if the actions are taken This cost is that cost where the investment is done and the recovery option is not there. An example of the sunk cost is when the company wants to expand the warehouse and for that, the architectural design is to be done and the product is purchased some fees are already been paid and the work is started but in between the economic slowdown takes place and now the company is unsure that whether they should start the making of the work and to hold the work. Here a certain amount is invested so the decision is to be taken whether to continue or stop. This is the sunk cost where the same amount is spent and the recovery chance of it is not possible now.
Akerman, A. (2018). A theory on the role of wholesalers in international trade based on economies of scope. Canadian Journal of Economics/Revue canadienne d’économique, 51(1), 156-185.
Moreira, S., Cabaleiro, G., & Reichstein, T. (2019). Licensing decision: a rent dissipation lens applied to product market competition, openness to external knowledge, and exogenous sunk costs. Industrial and Corporate Change, 28(4), 773-792.