2. What is Cost Benefit Analysis ?
How Cost Benefit Analysis is important for any
organization?
Example of Cost Benefit Analysis
Cost Benefit Analysis Quantitative and Qualitative
Aspects
3. WHAT IS COST BENEFIT ANALYSIS ?
A cost benefit analysis is also known as a benefit
cost analysis.
It is an important process for organizations through
which they analyze their systems or projects so that
they can get maximum benefits out of it.
It can be explained as a method to estimate all
costs involved in the business and possible profits
to be derived from a business project.
Cost Benefit Analysis (CBA) is one of the main
ways used by people to take decisions in
organizations.
4. WHY COST BENEFIT ANALYSIS IS IMPORTANT
FOR AN ORGANIZATION?
Before building a new plant or taking on a new project,
managers conduct a cost-benefit analysis to evaluate all
the potential costs and benefits that a company might
generate from the project.
The outcome of the analysis will determine whether the
project is financially feasible in terms of profit or if the
company should pursue another project.
Cost Benefit Analysis is the foundation of the decision
making process across a wide variety of disciplines.
Example of decisions to which cost benefit analysis can
be applied are:
Whether to hire staff to design a new product.
5. PROCESS OF COST BENEFIT ANALYSIS
A project should be considered only if:
Benefits > Costs , or
Benefits/Costs ratio >1
A cost- benefit analysis (CBA) must begin with
compiling a complete and comprehensive list of all
the costs and benefits associated with the project or
decision.
In sales or profit
In operating costs.
In required investment
6. IDENTIFY COSTS- THE COST INVOLVED IN A
CBA MIGHT INCLUDE THE FOLLOWING:
Tangible and Intangible Costs:
Tangible cost are easy to measure and quantify,
and are usually related to an identifiable source
or asset, like employee salary, and purchasing
hardware or software.
Intangible Costs are difficult to identify and
measure, like cost of a system breakdown.
7. CONTINUE:
Fixed & Variable costs:-
Fixed Costs remain same even if the volume of
activities is increased.
Example: Cost of physical assets or rental
charges
Variable Costs vary in proportion to the volume
of activities of the system
Example: More buying of printer paper due to
increased use.
8. CONTINUE…
Direct & Indirect Costs
Direct Cost: are those which are directly
associated to an operation
Like cost of raw material for production
Indirect Costs- which are not directly associated
to an operation( also called as overhead) cost.
Like insurance cost or maintenance cost.
9. IDENTIFY ALL T EXPECTED BENIFITS
Once you have compiled a comprehensive list of all
the cost associated in the project/investment, you
need to identify and quantify all benefits anticipated
after the implementation of project/investment.
Firstly identify the ( the direct, indirect, fixed,
variable or tangible) monetary benefits such as
profits from products and services, the contribution
from investors.
Secondly identify( intangible) nonmonetary benefits
that are likely to arise. Theses include reliability,
increased durability, improved customer
satisfaction, etc.
11. EXAMPLE OF COST/BENEFIT ANALYSIS
“Good Life” is an upcoming hospital that has been in
operation for almost two years now. The manager looks
forward to expand its operations in the coming 3rd year.
The hospital management in a meeting decides to
examine that whether the decision is beneficial or
feasible for the hospital or not.
The management analyzes that in a one year the total
revenue collected is RS 200.000. However, if they hire 2
more physicians and few more hospital equipments it
will cost RS.100,000.The salary of physicians will be RS
70,000 and the cost of hiring and training will be RS
5,000.
Therefore, to calculate the CBA, we first get the total cost by
adding
12. EXAMPLE OF COST/BENEFIT ANALYSIS
In this case, it will be salaries + equipment + cost of
hiring and training
= 100,00 +70,000 +5000
=RS 175,000
Additionally, there is the cost of expanding consultation
rooms which stands at RS 100,000.
The identified benefits that will come after the
implementation of the plan will be RS 200,000.
Therefore ,using the benefits=cost ration, we get
175,000/200.000=0.875.
0.875- the value is positive and that the total benefits
are greater than the costs.
The CBA indicated that the decision to expand the
hospital's operation is feasible and beneficial to it.
13. COST BENEFIT ANALYSIS QUANTITATIVE AND
QUALITATIVE ASPECTS
As a manager, whenever you have to make business
decision which proves to be beneficial for the growth of
the company, you must take into account both the
qualitative and quantitative factors and then do the cost
benefits analysis.
Qualitative factors means looking at the intangibles. The
factors about a company that cannot be measured or
checked in numbers. Qualitative aspects or factors may
include reputations, brand strength, Customers review
and employee morale.
Quantifiable data is which can be measured such as
sales figure, profitability and return on investment, For
any company it is important to look at all financial
metrics and ratios to do the analysis.
Both qualitative and quantitative methods can be used
to make decisions.
14. WHEN TO INCLUDE QUANTITATIVE AND
QUALITATIVE FACTORS
In case large investment of funds is involved in any
decision, the key decision factors are more likely to
be quantitative, since the investing the business
has a great deal at stake in the decision.
However, if the investment of funds is minor, the
impact of qualitative factors could play a more
important role in the decision.
Note- From a branding point of view, qualitative
factors will be particularly important. Proper
branding essentially requires a high expenditure
levels to establish and maintain good quality, which
a purely quantitative analysis might not justify.
