Cost benefit analysis example
Any business undertaking has to undergo a cost-benefit analysis at some stage of its operation. This helps them determine how their inputs are used and whether they are still relevant in the market of tomorrow. This involves the identification of methods, prices and techniques that are productive while still preserving the relevancy of the services or products offered. The results of such an analysis are then used to determine what changes should be made in order to improve production and make the firm more competitive.
This form of costing has been around since the days of David Archer when he first put forth the discipline of cost-benefit analysis example. It has been refined and improved over the years and is now used in all kinds of industries from agriculture to information technology. The basic idea behind it is that production should be optimized to yield maximum returns while maintaining the quality of that output. It basically involves dividing the costs of a process into four categories: direct costs, indirect costs, fixed costs and variable costs.
For a company to perform a Cost benefit analysis example, the following data will need to be collected: data on the prices and quantities of raw materials being produced, projected USGBC payments, net proceeds from the sale of goods produced, and expected direct and indirect job creation and death claims over the course of the project. The price of inputs used in the production of the company's outputs will also need to be collected: usd per unit, usd per ton, usd per job, and net change in price measured over time. Potential change in prices due to competition from foreign firms will also need to be considered. Potential changes in the volume of the company's output will also need to be assessed: were increasing orders from customers resulting in increased demand for the company's product, will new markets emerge if the company locates itself in a desirable location, or is the company simply moving from one part of the world to another?
In order to perform a cost benefit analysis example, the first step is to identify which factors are important in the analysis. Data on the price and quantities of inputs needed should first be analyzed: what are their average values, how do they compare to the prices the company obtains from suppliers, what are the cost savings that result from purchasing these inputs at discounted rates? The discount rates used by different models may be the same, but there are variations in the inputs that are used in the calculation of these discount rates. Another important data element is the level of direct employment in the proposed operation. If the proposed operation will produce less number of direct workers than an equivalent operation using more indirect workers, then the discount rate used to calculate the CPOE will be lower.
Next, we will analyze the direct and indirect costs associated with the operation. The analysis here will allow us to calculate whether the company can save money using its existing resources in producing the same output using different inputs. The analysis will also allow us to determine whether the costs of producing the same output under the alternative set-ups is higher or lower than the costs it would incur in buying inputs from suppliers and labor from direct workers. The analysis should also contain the effect of changes in technology that may reduce the amount of time needed to deliver the same output. This will allow us to determine whether the cost of acquiring the new technology relative to the cost of producing it is worth the added production. Again, the analysis should include all the data elements that could affect the valuation of the investment.
The third step in the process is to determine whether the quantitative measures obtained by the previous step to provide enough information to value the investment properly. In other words, we must be able to measure the quantitative benefits of the investment correctly, so as not to value it too low or too high. We can achieve this by performing a profit and loss analysis, by looking at whether the monetary value of the investment justifies the costs of acquiring it, and by comparing it to the costs of producing similar outputs in economically comparable situations. We may use different methods of measuring the values we obtain from the previous step. The results of the profit and loss analysis can be used to value the cost of acquisition and production.
The fourth step in the process is to compare the quantitative results from the previous steps with the information obtained from existing processes and models. The results of the process are called the operating cost. This shows how much it costs to supply a business with the outputs it needs to satisfy customers and satisfy its own purposes. It also shows how much it is willing to invest for the purpose of maintaining the operation. The operating cost is a function of a number of factors such as the capital cost of establishing the enterprise, the rate of interest used to finance it, and the nature of the services it provides.
Another way of calculating the operating cost is to calculate the ratio of revenue to assets over a period of time. The purpose here is to calculate the operating, maintenance and capital budgeting costs over time. The last step in the process is to value the opportunity cost for the entrepreneur. It refers to the difference between what a firm has invested in the enterprise and what it would have spent if it had not existed. The purpose of this step is to highlight the areas where further input costs could be reduced and to determine the opportunity to improve the quality of the outputs and make the organization more profitable.
