BUSN8005 Project Accounting And Financial Management : Essay Fountain

Question:

Explain briefly the following:

Tangible costs and Intangible costs

Fixed costs, direct costs and indirect costs

Cost baseline

Cost variances

Management reserve and contingency reserve

Area 1

Identify two sources of project funding and assess their advantages and disadvantages.

Area 2

Risk is unavoidable in any project. However, there are techniques in risk management that allow risk to be transferred from one party to another. Briefly explain these techniques.

Area 3

What is involved in project cost control?

Why do you believe organizations have problems in controlling costs and what do you think are possible solutions?

 

Answer:

Tangible and Intangible Costs

A tangible cost is mainly described as a cost that is quantifiable that is related with an identified asset or source. Tangible costs are therefore used to represent the expenses that might arise as a result of purchasing the materials or renting an equipment for a project.

The intangible cost on the other hand can be described as an unquantifiable cost that is related to an identifiable sources (Cañibano, 2018). The intangible costs in a project therefore represents a number of expenses related the goodwill of the customers, employee morale drop and loss of the brand value of the compnay. An intangible cost is therefore quite difficult to quantify unlike the tangible cost.

Fixed Costs, Direct Costs and Indirect Costs 

An expense that does not changes with the change in the goods or services offered is termed as fixed cost. The direct cost on the other hand can be described as a price that is attributed by the development and production of specific goods. One example of direct cost include direct labor, materials and commissions. The indirect cost on the other hand is derived from the overhead charges of the subsidiary work. These costs are no directly accountable to a cost object. Indirect cost therefore can either be fixed or variable.

Cost Baseline 

Cost baseline is a part of project baseline that is used for handling or estimating the amount of money that a particular project is predicted to cost (Kerzner & Kerzner, 2017). Cost baseline is therefore an approved budget indicated in a time distribution format. The estimation, monitoring and control of the cost is a project is implemented with cost baseline. Cost baseline is further described as an approved time phased plan that act as a point of comparison between the actual project works that are needed to be completed and the project progress.

 

Cost Variances 

Cost variance is a technique of showing the project’s financial performance and is indicated in form of mathematical calculation (Haz?r, 2015). A cost variance is therefore indicated as the difference between the cost that is actually incurred in the project and the planned cost that should be incurred in the project.

Management Reserve and Contingency Reserve 

Contingency reserve is not a part of the project budget and mainly includes additional time and labor to complete a project (Lock, 2017). The management reserve on the other hand can be described as the budget allocated that is withheld mainly for controlling and management purposes and not for carrying out some specific task.

Area 2

Two important sources of project funding include commercial loan and bridge finance. Commercial loans can be described as the funds that are mainly lent by the commercial banks and the other financial institution and are considered to be the main source of debt financing.

The bridge financing on the other hand is a short time financing arrangement associated with a project. This type of financing is mainly used in a project until any long time arrangement of project financing is made.

Area 3 

Risk is an uncertain event that is unavoidable in a project. Therefore, it is important for a project team to manage the major risks and issues associated with a project. One of the major process of risk management is transfer the risk to a third party, who is willing to take up the risk.

Risk transfer is a risk management strategy that involves a contractual shifting of a major risk from one party to another. One of the widely used method of risk transfer is purchasing an insurance policy of the risk that has been identified or specified (Hunter, Fitzgerald & Barlow, 2014). The contractual risk transfer is another technique of transferring a risk from one party to another party in form of a written contract.

Thus, the two most significant methods of risk transfer is the insurance method and the contractual risk management method. Purchasing an insurance policy is considered to be one of the most widely used techniques of risk transfer in project management. Transfer of the risk is one of the most significant process of risk mitigation in project management

Area 4 

Cost control is considered to be one of the key performance indicators that are used in management and implementation of a project. The cost control technique therefore involves controlling of the budget, schedule, baseline and the earned value of a project. Cost control is necessary for identifying and reducing the business expenses to increase the business profits of the undertaken project (Harrison & Lock, 2017). There are a number of cost control techniques that can be applied to project management. The efficient cost control measures of the project include planning the project budget, keeping a track of the budget of a project, effective management of time, effective change control in the project and use of earned value method in calculation and management of the cost of the project.

Organizations might have a problem in controlling the costs associated with the project. A number of challenges are faced by the project team in controlling the cost of a project. Lack of knowledge about controlling the cost of a project results in incorrect cost estimation. Apart from that, the use of obsolete methods and concepts of cost control can result in increase of problems in managing the project’s cost. However, the cost controlling issues in a project are needed to be addressed.

A number of solutions can be proposed for controlling the project cost. One of the integral solution that is proposed for managing the project cost include development of a project plan. The project cost estimation, on basis of the works that are needed to be completed is another proposed solution for controlling the cost of a project (Acebes et al. 2014). The cost control process is mainly concerned with the process of planning and controlling the budget of a project or a business. Therefore, accurate project planning can significantly help in managing and controlling the issues related to cost control in project management.

 

References 

Acebes, F., Pajares, J., Galán, J. M., & López-Paredes, A. (2014). A new approach for project control under uncertainty. Going back to the basics. International Journal of Project Management, 32(3), 423-434.

Cañibano, L. (2018). Accounting and intangibles. Revista de Contabilidad-Spanish Accounting Review, 21(1), 1-6.

Harrison, F., & Lock, D. (2017). Advanced project management: a structured approach. Routledge.

Haz?r, Ö. (2015). A review of analytical models, approaches and decision support tools in project monitoring and control. International Journal of Project Management, 33(4), 808-815.

Hunter, H., Fitzgerald, R., & Barlow, D. (2014). Improved cost monitoring and control through the Earned Value Management System. Acta Astronautica, 93, 497-500.

Kerzner, H., & Kerzner, H. R. (2017). Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.

Lock, D. (2017). The essentials of project management. Routledge.

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