The analyst or business sums the benefits of action or situation and then subtracts the associated costs with performing the action. Some analysts or consultants also create models in order to assign a dollar value on the intangible items includes the costs and benefits associated with living in a particular area. The cost-benefit analysis also called as benefit costs analysis that is a systematic method for estimating the weaknesses and strengths of alternatives used in order to determine the option that provides the appropriate approach to achieve benefits while preserving savings. It is primarily used to compare potential or completed course of actions, or to predict the value against the cost of a policy, project, or decision. Basically, it is used in policy or business decision, and project investments and commercial transactions. Costs and benefits within CBA are considered as in terms of monetary and are adjusted for the time value of money. The entire flows of costs and benefits across time are defined on a common basis in the context of their NPV (Net Present Value). There are other techniques included in CBA such as Social Return on Investment (SROI) analysis, fiscal impact analysis, economic impact analysis, risk-benefit analysis, cost-utility analysis.
Calculation of Cost-Benefit Analysis
Cost-Benefit Analysis helps the business to analyse decisions by considering total costs and total b benefits of business. The standard formula of computing cost-benefit analysis is Benefit/Cost. The formula shows the sum of all the benefits divided by the sum of all the costs incurred by business during a time of action or decision. In addition, cost-benefit analysis often focuses on direct, indirect and opportunity costs.
Process of Cost-Benefit Analysis
- CBA must begin with compiling a comprehensive list of the entire costs and benefits associated with the decision or project. The costs included within a CBA might include the following:
- Direct costs would be direct labour included in manufacturing, manufacturing expenses, raw materials, and inventory.
- Indirect costs must include electricity, overhead costs from utilities, rent, and management.
- Opportunity costs include investments, or building a plant versus buying one.
- Intangible costs include impacts of customer while pursuing a new business strategy, employee impact, product delivery delays, and construction of a manufacturing plant.
Following factors might be included in benefits:
- From the new product and increased production, sales and revenue will be increased.
- Market share or competitive advantage considered as a result of the decision.
- Intangible benefits such as enhanced safety and morale of employee and customer satisfaction because of the faster delivery or improved product offerings.