COST ANALYSIS

Arda ÇELİK

DEÜ Endüstri Mühendisliği

2009503090

ABSTRACTCost analysis can play strategic roles in organizationsand plans. As industrial engineers, we have to makethese analyses adaptable, efficient and effective for ourlabor units; therefore, cost strategies according to costanalysis may be guide for us.

Cost analysis is acontinuous process. It can provide estimates of what aprogram’s costs and benefits are likely to be, before itis implemented. A careful cost analysis may improveunderstanding of program operation, and tell whatlevels of intervention are the most cost effective

Cost

In accounting, costs are the monetary value ofexpenditures for suppliers, services, labour, products,equipment and other items purchased for use by abusiness or other accounting entity.

In engineeringeconomics there are many types of costs, each isclassified differently according to the immediate needsof management. For example; engineers may want cost data to prepare external reports, to prepare planningbudgets, or to make decisions.

Manufacturing Costs

In converting raw materials into finished goods, amanufacturer incurs various costs of operating afactory. Most manufacturing companies dividemanufacturing costs into three broad categories; directmaterials, direct labor, manufacturing overhead.

Non-manufacturing Costs

There are two additional costs in supporting anymanufacturing operations. They are marketing orselling costs and administrative costs. Marketing orselling costs include all costs necessary to securecustomer orders and get the finished product or serviceinto the hands of customer.

Cost breakdown of thesetypes provide data for control over selling andadministrative functions in the same way thatmanufacturing cost breakdowns provide data forcontrol over manufacturing functions

Periodic Costs

They are those costs that are charged to expenses in theperiod in which they are incurred. The underlyingassumption is that the associated benefits are receivedin the same period as the cost is incurred. Some specificexamples are all general and administrative expenses,selling expenses.

Therefore, advertising, salescommissions, public relations and other nonmanufacturingcosts discussed earlier would beperiodic costs.

Product Costs

Some costs are better matched against products thanthey are against periods. Costs of this type –calledproduct costs- consist of the costs involved in thepurchase or manufacturing of goods. Product costs arenot viewed as expenses; they are the cost of creatinginventory

COST ANALYSIS

There are different definitions of cost analysis. The firstone is that the process of analyzing and estimatingresources required to support past, present, and futureforces, unit systems and equipment

The second definition of cost analysis is that theemphasis is an assessing the costs incurred by the salesorganization to generate the achieved levels of sales.

The other definition, the general approach is tocompare the costs incurred with planned costs asdefined by selling budgets.

Cost Analysis Process

Cost analysis should become increasingly detailed andaccurate as the development process moves forward. Inthe early phases estimates based on square foot costs,modified by costs associated with special siteconditions, will be sufficient.

Functions of cost analysis process;

Develop and apply internal cost estimates.

Know when to use “should cost” analysis.

Understand profit as a reward for risk concept.

Identify sources of cost data.

Cost Analysis Products

According to the definitions of cost analysis, there aremany cost analysis products which are used bycompanies. These are; economic analysis (EA),analysis of alternatives (AOA), program office estimate(POE), component cost analysis (CCA), cost analysisbrief (CAB) and the last one is army cost position(ACP).These products effect the cost analysis process.

What Cost Analysis Can Tell Us?

Cost analysis can provide estimates of what aprogram’s costs and benefits are likely to be, before itis implemented. “Ex-ante” or “before the fact” costanalysis may have to be based on very rough estimatesof cost and expected benefits.Cost analysis may improve understanding of programoperation, and tell what levels of intervention are mostcost-effective.Cost analysis may reveal unexpected costs.

What Cost Analysis Cannot Tell Us?

Whether or not the program is having a significant neteffect on the desired outcomes. Cost analysis may beconsidered an extension of an impact or outcomeevaluation, but it cannot take the place of one.

Whether the least expensive alternative is always thebest alternative. Often political or social values otherthan cost need to determine program and policychoices. When there are competing values or goalsinvolved, cost analysis is often just one factor to beconsidered, and we need to have some other way ofdeciding which factors should take priority.

Main Types of Cost Analysis

Cost-of-illness analysis is a determination of theeconomic impact of an illness or condition e.g., ofsmoking, including associated treatment costs.

Cost-minimization analysis is a determination of theleast costly among alternative interventions that areassumed to produce equivalent outcomes. When thetotal cost of an alternative is a function of increasingand decreasing cost components, most likely a valueexists for the common variable that will result in aminimum cost for the alternative.

Cost-effectiveness analysis (CEA) is a comparison ofcosts in monetary units with outcomes in quantitativenon-monetary units e.g., reduced mortality andmorbidity. Cost-effectiveness analysis had its origin inthe economic evaluation of complex defense and spacesystem. The basic concepts inherent in costeffectivenessanalysis are now being applied to a broadrange of problems in both the defense and the civilsectors of public activities.

Cost-utility analysis (CUA) is a form of costeffectivenessanalysis that compares costs in monetaryunits with outcomes in terms of their utility, usually tothe patient, measured.

Cost-consequence analysis is a form of costeffectivenessanalysis that presents costs and outcomesin discrete categories, without aggregating or weightingthem.

Cost-benefit analysis (CBA) compares costs andbenefits, both of which are quantified in commonmonetary units.

Advantages of Using Cost Analysis

Too often, program managers cannot easily determinethe cost of providing particular services or achievingcertain outcomes, because they are not systematicallycollecting the necessary data. At the least programsshould be able to tell funders that during a given timeperiod (Jacobs, 1998). At this point, cost analysispromotes fiscal accountability in programs.

Cost analysis helps set priorities when resources arelimited. Program managers can use cost information indesigning programs. Using cost analysis can beextremely powerful and persuasive to legislators, policymakers, and other funders. May help convince them toinvest in particular kinds of programs. Some argue thatthis advantage of cost-benefit analysis may hold trueeven when it is not possible to assign monetary valuesto all program costs and outcomes; if the effect isstrong enough, even a relatively incomplete costbenefitanalysis may be persuasive (Barnett, 1993).

Disadvantages of Using Cost Analysis

Cost analysis requires a great deal of technical skill andknowledge.Critics feel that many cost analysis are overlysimplistic, and suffer from serious conceptual andmethodological inadequacies. There is a danger that anoverly-simplistic cost-benefit analysis may set up anintervention to fail, by promoting expectations that areunrealistically high, and cannot really be achieved. Thismay result in political backlash which actually hurtsfuture funding prospects instead of helping

There are no standard ways to assign dollar values tosome qualitative goals, especially in social programs.For example, how do we value things like time, humanlives saved or quality of life?Market costs (what people actually pay for something)do not always reflect “real” social costs. Sometimesone person’s cost can be the other’s benefits.Sometimes there are multiple competing goals, so weneed to weight them or prioritize them in some way