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One of the most important steps in cost variance analysis is setting up the planned cost in the simulation model. The planned cost is the budgeted or estimated cost of a project or activity, based on the scope, schedule, and resources. It is also known as the baseline cost or the target cost. The planned cost serves as a reference point for comparing the actual cost and identifying the cost variance. In this section, we will discuss how to set up the planned cost in the simulation model, and what factors to consider when doing so. We will also provide some examples of how to use the simulation model to generate different scenarios of the planned cost.
To set up the planned cost in the simulation model, we need to follow these steps:
1. Define the scope of the project or activity. This includes the objectives, deliverables, requirements, assumptions, and constraints. The scope defines what is included and excluded in the project or activity, and how it will be measured and controlled.
2. Break down the scope into smaller and manageable units, called work packages or tasks. This is known as the work breakdown structure (WBS). The WBS helps to organize and allocate the work, and to estimate the cost and duration of each work package or task.
3. Assign resources to each work package or task. Resources are the people, materials, equipment, and facilities that are needed to perform the work. Resources have different costs and availability, which affect the planned cost and the schedule of the project or activity.
4. Estimate the cost of each work package or task, based on the resources, duration, and complexity. This is known as the bottom-up cost estimation. The cost of each work package or task can be calculated by multiplying the resource cost by the resource quantity by the resource duration. The cost of each work package or task can also be estimated by using historical data, expert judgment, or parametric models.
5. Aggregate the cost of each work package or task to get the total planned cost of the project or activity. This is known as the top-down cost estimation. The total planned cost can be adjusted by adding contingencies, reserves, or allowances, to account for uncertainties, risks, or changes.
6. Enter the planned cost data into the simulation model. The simulation model is a mathematical representation of the project or activity, that can be used to analyze the behavior and performance of the system under different conditions. The simulation model can be built using software tools, such as Excel, @RISK, Crystal Ball, or Simul8.
The simulation model allows us to generate different scenarios of the planned cost, by changing the input variables, such as the resource cost, resource availability, resource duration, work package or task complexity, contingencies, reserves, or allowances. The simulation model can also incorporate probability distributions, such as normal, uniform, triangular, or beta, to reflect the uncertainty and variability of the input variables. The simulation model can then output the results of the scenarios, such as the mean, median, mode, standard deviation, range, confidence intervals, or histograms, of the planned cost. These results can help us to understand the sensitivity, risk, and opportunity of the planned cost, and to make informed decisions.
For example, suppose we are planning a software development project, with the following scope, WBS, resources, and cost estimates:
- Scope: Develop a web-based application for online shopping, with the following features: user registration, product catalog, shopping cart, payment, order confirmation, and customer service.
- WBS:
- 1. Project management
- 1.1. Initiation
- 1.2. Planning
- 1.3. Execution
- 1.4. Monitoring and control
- 1.5. Closure
- 2. Software development
- 2.1. Requirements analysis
- 2.2. Design
- 2.3. Coding
- 2.4. Testing
- 2.5. Deployment
- 3. Quality assurance
- 3.1. Review
- 3.2. Audit
- 3.3. Testing
- 4. User training
- 4.1. Preparation
- 4.2. Delivery
- 4.3. Evaluation
- Resources:
- Project manager: $100 per hour, available 8 hours per day, 5 days per week
- Software developer: $80 per hour, available 8 hours per day, 5 days per week
- quality assurance engineer: $60 per hour, available 8 hours per day, 5 days per week
- User trainer: $50 per hour, available 8 hours per day, 5 days per week
- Cost estimates:
| WBS | Work package or task | Resource | Resource quantity | Resource duration | Resource cost | Work package or task cost |
| 1.1 | Initiation | Project manager | 1 | 8 hours | $100 | $800 |
| 1.2 | Planning | Project manager | 1 | 40 hours | $100 | $4,000 |
| 1.3 | Execution | Project manager | 1 | 160 hours | $100 | $16,000 |
| 1.4 | Monitoring and control | Project manager | 1 | 80 hours | $100 | $8,000 |
| 1.5 | Closure | Project manager | 1 | 8 hours | $100 | $800 |
| 2.1 | Requirements analysis | Software developer | 2 | 40 hours | $80 | $6,400 |
| 2.2 | Design | Software developer | 2 | 80 hours | $80 | $12,800 |
| 2.3 | Coding | Software developer | 4 | 160 hours | $80 | $51,200 |
| 2.4 | Testing | Software developer | 2 | 40 hours | $80 | $6,400 |
| 2.5 | Deployment | Software developer | 2 | 8 hours | $80 | $1,280 |
| 3.1 | review | Quality assurance engineer | 1 | 40 hours | $60 | $2,400 |
| 3.2 | audit | Quality assurance engineer | 1 | 16 hours | $60 | $960 |
| 3.3 | testing | Quality assurance engineer | 2 | 80 hours | $60 | $9,600 |
| 4.1 | Preparation | User trainer | 1 | 40 hours | $50 | $2,000 |
| 4.2 | Delivery | User trainer | 2 | 40 hours | $50 | $4,000 |
| 4.3 | Evaluation | User trainer | 1 | 8 hours | $50 | $400 |
- Total planned cost: $126,240
We can enter this data into the simulation model, and generate different scenarios of the planned cost, by changing the input variables. For example, we can change the resource cost by adding a 10% increase or decrease, to reflect the market fluctuations. We can also change the resource duration by adding a triangular distribution, with a minimum of 80%, a most likely of 100%, and a maximum of 120%, to reflect the uncertainty and variability of the work. We can also add a 10% contingency to the total planned cost, to account for unforeseen events or changes.
The simulation model can then output the results of the scenarios, such as the mean, median, mode, standard deviation, range, confidence intervals, or histograms, of the planned cost. For example, the simulation model can output the following results:
- Mean planned cost: $138,864
- Median planned cost: $138,816
- Mode planned cost: $138,816
- Standard deviation of planned cost: $4,608
- Range of planned cost: $115,200 - $149,760
- 95% confidence interval of planned cost: $130,176 - $147,552
- Histogram of planned cost:
![Histogram of planned cost](https://i.imgur.com/0pQ7Zjy.
Past success is no guarantee of future success, so I have learned to be an entrepreneur. I began to produce and direct my own projects.