Prepared by Scott M. Shafer, Updated by William E. Matthews and Thomas G. Roberts, William Patterson University Copyright 2007 John Wiley & Sons, Inc.4-1 Mantel, Meredith, Shafer, and Sutton John Wiley and Sons, Inc.

 Budgets are plans for allocating organizational resources to project activities. forecasting required resources, quantities needed, when needed, and costs  Budgets help tie project to overall organizational objectives.  Budgets can be used as tool by upper management to monitor and guide projects. Copyright 2007 John Wiley & Sons, Inc.4-2

 Based on collective judgments and experiences of top and middle managers.  Overall project cost estimated by estimating costs of major tasks  Advantages accuracy of estimating overall budget errors in funding small tasks need not be individually identified Copyright 2007 John Wiley & Sons, Inc.4-3

 WBS or action plan identifies elemental tasks  Those responsible for executing these tasks estimate resource requirements  Advantage more accurate in the detailed tasks  Disadvantage risk of overlooking tasks Copyright 2007 John Wiley & Sons, Inc.4-4

 Determine resource requirements and then costs for each task fixed costs (e.g., materials) labor time labor rate equipment time equipment rate overhead GS&A (General, Sales, and administrative) Copyright 2007John Wiley & Sons, Inc.4-5

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 Activity oriented budgets are based on historical data accumulated through an activity-based accounting system. expenses assigned to basic budget lines  With program budgets, each project has its own budget. expenses by task and time period are shown Copyright 2007John Wiley & Sons, Inc.4-7

Copyright 2007John Wiley & Sons, Inc.4-8 where T n = the time required to complete the n th unit T 1 = the time required to complete the first unit r = log(learning rate)/log(2) Learning exhibited by humans when they repeat a task (each time the output doubles, the worker hours per unit decrease by a fixed percentage of their previous value)

 The tracking signal number reveals if there is a systematic bias in cost or other estimate and whether the bias is positive or negative Copyright 2007 John Wiley & Sons, Inc.4-9

 Changes in Resource Prices increase all estimates by same percentage estimate rate of price change individually for inputs that have significant impact on costs  Waste and Spoilage  Team Member Turnover  Using “Mythical Man-Months”  Organization Climate Copyright 2007John Wiley & Sons, Inc.4-10

Copyright 2007John Wiley & Sons, Inc.4-11

 Errors made by cost estimator as to how to achieve tasks.  New knowledge about the nature of the performance goal or setting.  A mandate … A new law or standard, etc Copyright 2007 John Wiley & Sons, Inc.4-12

 Planning  Identification  Qualitative Analysis  Quantitative Analysis  Response Planning  Monitoring and Control Copyright 2007 John Wiley & Sons, Inc.4-13

 List ways project might fail  Evaluate severity (S) of each failure  Estimate likelihood (L) of each failure occurring  Estimate ability to detect each failure (D)  Calculate Risk Priority Number (RPN)  Sort potential failures by their RPNs Copyright 2007 John Wiley & Sons, Inc.4-14

 Game Theory  Expected Value  Simulation Copyright 2007 John Wiley & Sons, Inc.4-15 All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information herein.