How To Understand Cost Analysis

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Cost analysis has been baptized by many names like economic evaluation, cost allocation, efficiency assessment, cost-benefit analysis or cost-effectiveness analysis by various economics textbook authors. Many consider this a divisive set of processes in evaluating a particular program because they cover a vast range of methods but are often interchanged carelessly.

Its fundamental nature is that it is often a part of a respectable proposal on budget and accounting norms. These allow supervisors to establish the real outlay for supplying a particular service. Many cost analytic methods have often been employed by governments and large corporations to provide reasonable savings without sacrificing quality or attaching a high price tag. However, there are many tepid warnings regarding its complexity and it requires skilled economists to manipulate data and should never be taken lightly.

Whatever your take may be on this controversy, there are actually different methods for cost analysis in any form of project evaluation:

  1. Cost allocation. This is the simplest concept, which means the setting up of budget and accounting systems by program managers to determine the cost of service availed. Data must be recorded correctly with variables considered in form of surveys.
  2. Cost-effectiveness analysis. An intelligent comparative assumption is that for each outcome, there are several choices to choose from. It allows the evaluator to choose which method has a reasonable overlay. Comparisons are based on common scales for measuring outcomes and address which unit cost is greater for each approach, and the easiest to attain and provide more data. 
  3. Cost-benefit analysis. Utilizes benefit-to-cost ratios and the net rates of return. Simply put, if the contributions and results of the proposed alternative are reduced to a common (monetary) unit, it could be totaled and compared. Most likely, if the recipients are willing to pay for the service it's considered as a benefit; if not, it's a cost.   

One needs to be realistic as to the limits of this type of assessment. Cost analyses can supply estimates for an endeavor's probable outlay and forecasted benefits even before they can be executed. It could also provide alternative options for the most cost effective intervention. It could also forecast unexpected expenditures that might come up during the realization of the said project. Alternatively, it will not provide data regarding the net effect of the preferred outcomes. Also, it does not tell you if the most reasonably priced alternative is the best option.

Cost analysis methods are implemented by project managers because of their advantages. They promote monetary liability. They assure that data can be provided by the project overseers if they encounter queries from their financiers. They also set priorities especially when the resources are limited. This type of analytic method can be a powerful tool for pooling funds from financiers like philanthropists or legislators. The problem is that this type of analytic method requires technically skilled personnel. There is no standard where qualitative goals can be compared. It is also not validated, as there is no follow-up if such long-term outcomes have been attained.


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