After reading essay article you will learn about the cost of a project and its types.
Each activity of project consumers some resources and cost associated with it. In most of the cases, cost of an activity depends upon the duration of activity somehow. Thus, the cost of the project which is the aggregate of the activity costs, also depends upon the project duration time. An optimum project schedule implies lowest possible cost and the associated optimum time for the projects.
The total cost of any profit comprises two costs:
1. Direct cost.
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2. Indirect cost.
1. Direct Cost:
This cost is directly dependent upon the amount of resources in the execution of individual activities (e.g.) manpower loading materials consumed etc. The direct cost increases, if the activity duration is to be reduced. Following fig shows the relationship between direct cost and duration of time. Activity time can be varied by varying the cost.
Point N, on Fig. is referred as the ‘Normal point’ corresponds to the normal activity time. If duration is further increased beyond normal point, the decrease in the cost is insignificant. On the other hand, if activity is compressed, the direct cost goes on increasing.
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But beyond point C, further increase in cost has no significant change in activity duration, point C is referred as the crash point. Thus crash time is the minimum activity duration to which an activity can be compressed by increasing the resources and hence by increasing the direct cost.
For calculation purpose the direct cost activity duration time curve can be considered as a straight line. The slope of line gives the increase in direct cost per unit time for expanding the activity. This is called cost slope.
Mathematically,
Cost slope = Crash cost – Normal cost/formal time – Crash time
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= CC – CN/TN – TC = ΔC/ΔT
2. Indirect Cost:
This cost is associated with overhead expenses such as managerial services, indirect supplies, general administration etc. The expenditure on those items which are shared by more than one activity and cannot be allocated directly to individual activity is referred as indirect cost. The indirect cost is computed on per day, per week or per month base. The indirect cost decreases if the activity duration is to be reduced. Indirect costs can be further sub-divided into two parts.
(a) Fixed Indirect cost:
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Which is due to the general and administrative expenses such as license fee, insurance cost, taxes etc. It does not depend upon the progress of the project.
(b) Variable Indirect cost:
Which depends upon the time consumed by project and consists of overhead expenditure such as, supervision, interest on capital, depreciation etc. Indirect cost varies directly with the time. The sum of the direct & indirect cost gives the total project cost.
As the direct cost decreases with time and indirect cost increases with time, the total project cost curve will have a point where the total cost will be minimum. This minimum cost is said as the optimum cost and time corresponds to optimum cost is referred as optimum duration time.