'Cost Analysis\r'

'T open of content Introduction: Financing ends and enthronisation endings be considered to be devil of the most zippy conclusions that corporations go for to carry off. live epitome is one of the itemors that should be taken into experimental condition while evaluating financial and enthronisation conclusivenesss. This motif reviews the concept of embody epitome, how it is apply in decision qualification, and how firms usu tot totallyyy involve woo compend in evaluating divergent projects.\r\nFurther much than, the paper discusses whatsoever of the chief(prenominal) concepts that ar derived from embody depth psychology much(prenominal) as address allotment, greet-effectiveness digest, and exist- gain analytic thinking. In addition, some of the advantages and disadvantages of constitute synopsis will be discussed. More everywhere, the concept of intangible asset pecuniary value digest will be introduced. Then, the leave alones and finding s of the research paper will be illustrated. Finally, few recommendations that atomic number 18 found on the effects and findings will be made. Literature criticism:\r\nDue to its high importance in the decision making process, salute compendium has been discussed in some(prenominal) appropriates by several(prenominal) causations who illustrated product lineive aspects of toll summary. In his book â€Å" be-benefit abbreviation,” E. J. Mishan discussed in depth the concept of exist-benefit digest, which is a form of cost analysis. Professor Mishan foc employ on some of the key concepts that be related to cost-benefit analysis. The occasion started his book with few examples of cost analysis in order to illustrate to the reader the meaning of cost-benefit analysis. Then, Mr.\r\nMishan illustrated the stinting aspect of cost-benefit analysis and showed how opportunity cost could be related to cost-benefit analysis. Furtherto a greater extent, Mr. Mishan tr ied to show how cost-benefit analysis is trammel and stop be used partially in the decision making process. A nonable divide of Mr. Mishan’s book is accreditedty equivalence. In this section, the author developed an assumption that â€Å"enables us formally to association a number of alternative uncertain benefits without first-class honours degree reducing each to a certainty equivalent. In his member â€Å"Ways to Deliver More for Less,” nettle E.\r\nRoberts, Senior Vice President and Chief learning Officer of Boscov’s Department Stores, discussed how cost analysis gage be used to subdue IT spending. Mr. Roberts discussed how the IT budgeting has changed over period. The author suggested dashs to enable Information Technology, which is a cost center rather than a simoleons center, to â€Å"deliver more than what is pass judgment and at a lower cost than what was budgeted. ” Then, Mr. Roberts suggested that a revision for disagreeent co st, such as variable cost, fixed costs, and paysheet costs, should be made.\r\nThe author concluded his research by emphasizing on the fact that â€Å"every vaulting horse invested on a cost item moldiness deliver as much value to the air as its highest-margin product or service. ” Cost depth psychology: Definition consort to The U. S. Office of Surface mine Reclamation and Enforcement, cost analysis screw be defined as â€Å"the process of obtaining cost breakdowns, confirmatory cost data, evaluating specific elements of costs and examining data to gear up necessity, reasonableness, and appropriateness of the costs. Both financing and investment decisions be highly requireed by cost analysis as corporations usually pay a commodious deal of direction to the different types of costs that atomic number 18 involved in the different projects that will be taken into consideration either to overturn coin or to invest surplus funds that a corporation has. virtuallyti mes cost analysis is perceive as a light beam that is used completely to reduce costs. In contrast to this point of view, cost analysis is believed to be a marionette that helps counseling to choose the dress hat possible solution or project among many different alternatives.\r\nIn their article â€Å"â€Å" using Cost Analysis In Evaluation,” billion Se swell up and bloody shame Marczak believe that cost analysis rules and uses be â€Å" entangled, require very advanced technical skills and train in methodology and in principles of economics, and should not be taken lightly. ” third Types of Cost Analysis: Three of the main concepts that ar derived from cost analysis argon cost allocation, cost-effectiveness analysis, and cost-benefit analysis. These three methods ar usually used simultaneously in order for corporations to evaluate different decisions or projects.\r\nSome of these methods might seem impartial and easy to use; however, they should never be unattended or taken slightly as they bottomland be of large(p) benefit in ascertain the right decisions. Cost Allocation: Cost allocation is the simplest among the three concepts that were mentioned earlier. Sewell and Marczak stated that cost allocation refers to â€Å" tantrum up budgeting and accounting systems in a way that allows program managers to stop a unit cost or cost per unit of service. Furthermore, Sewell and Marczak illustrated that in many corporations, cost allocation is used to provide â€Å"some of the basic information needed to conduct more ambitious cost analyses such as cost-benefit analysis or cost-effectiveness analysis. ” Therefore, it provoke be concluded that cost allocation is a prerequisite to both cost-benefit analysis and cost-effectiveness analysis. Example: The pastime table shows the monthly cost allocation for 3 different projects It is important to bank note that firms usually allocate their costs based on previous experience and estimation.\r\nHowever, firms should expect costs to change, which ordure be due to financial crises, inflation, or different factors, and try to adapt their cost allocation systems in such a way that it will cope the new changes. Based on the costing method that the company uses, such as activity-based costing, a more detailed cost allocation system can be structured in order to determine the unit cost as skillfully as possible Once costs have been identify and allocated, more advanced cost analysis methods, such as cost-effectiveness analysis and cost-benefit analysis, are used.\r\nCost-effectiveness Analysis: harmonize to Sewell and Marczak, the concept of cost-effectiveness analysis holds that â€Å"a certain benefit or outcome is desired, and that there are several alternative ways to achieve it. ” However, cost-effectiveness analysis should not be used separately during the process of evaluating projects or decisions as it will favor the cheapest option. Instea d, cost-effectiveness analysis should be used along with cost allocation and cost-benefit analysis in order to provide more specific and more informative outcomes.\r\nIt is important to mention that cost-effectiveness is a comparative tool that compares the cost of separate projects and favors the least expensive one. If we except used cost-effectiveness to decide which machine to buy, machine 1 will be upgrade by cost-effectiveness since it will generate products cheaper than machine 2. However, this is not necessarily the correct decision since cost-effectiveness analysis fails to take into consideration certain criteria such as the time each machine requires to generate the product and the note of the generated products.\r\nCost-benefit Analysis: According to smbtn. com, cost-benefit analysis can be best described as â€Å"An analysis tool that measures the results or benefits of a decision compared with the unavoidable costs. ” Cost-benefit analysis is perceived as a brawny tool that perplexity usually use whenever a â€Å"buy-or-build” decision needs to be taken. Buy-or-build decisions are usually taken when a firm faces a situation where it has two options: (1) To buy or outsource a certain part of its business (2) To internally manufacture or perform a certain part of its business.\r\nCost-benefit analysis can assist in taking buy-or-build decisions as it will illustrate the benefits and costs that are expected if buy decision or build decision is taken. Cost-benefit analysis consists of several tools, such as benefit-to-costs ratio, that are used to analyze and compare benefits and costs that are involved in a certain project. According to Sewell and Marczak, benefit-to-costs ratio is â€Å"the total monetary cost of the benefits or outcomes divided by the total monetary costs of obtaining them. Despite the fact the cost-benefit seems to be the most powerful tool to analyze costs and taking cost related decisions, it should be us ed along with other tools such as cost-effectiveness analysis and cost allocation. Using cost-benefit analysis separately from other tools can result in misleading decisions that can cost attention dearly. If the benefits-to-costs ratio is greater than 1, then the project should be analyzed further, compared to other projects and taken into consideration as a potential project that the firm can invest in or use to raise funds.\r\nAdvantages of Cost Analysis: Cost analysis can be of great help for management as it can be used as a tool in the decision making process. Some of the most important advantages of cost analysis are: Cost analysis can clarify all costs that are involved in a certain project. Cost analysis will buy the farm attention to costs that may not be obvious at first. Consequently, allowing managers to take more precise financing or investment decisions. Cost analysis can help management prioritize tasks and processes when budgets are limited.\r\nIt is believed that managers can distribute budgets more effectively when all costs are identified; therefore, it will be possible to get the most out of easy resources. Disadvantages of cost analysis: On the other hand, cost analysis is not incessantly sufficient by its own for management to make decisions. Some of the facts that cost analysis cannot provide information about are: _As Sewell and Marczak mentioned, cost analysis cannot always tell â€Å"whether the least expensive alternative is always the best alternative. _” Cost analysis by its own is not always enough to determine the best alternative.\r\nUsually, other criteria that cannot be determined by cost analysis, such as time, have an effect on the decision making process. Cost analysis is very complex and requires great deal of skills and expertise. Cost analysis requires not tho background in finance and accounting, but overly economic and decision making skills. It is common present tense for geological formations to outso urce cost analysis if it cannot be make effectively in-house. According to _Sewell and Marczak, â€Å"sometimes costs and monetary values are considered less important than other, more intangible values or program outcomes. ” intangible cost analysis: Despite the fact that corporations ofttimes use cost analysis in evaluating the different decisions that have to be made, intangible cost analysis is not always taken into consideration. In his book â€Å" impalpable prudence: Tools for Solving the Accounting and circumspection Crisis,” Ken Stanfield described intangible cost analysis as set of processes that â€Å"[allow] executives to identify, measure, and reduce costs that the organization has always been aware of, but has not been able to previously measure and control. Intangible cost analysis allows corporations to increase efficiency and productivity as well as decrease costs. According to Stanfield, in contrast to old cost analysis methods where tangible cost s were the most important selection criteria, modern cost analysis methods favors alternatives, decisions, or projects â€Å"with the lowest total hearty cost (tangible costs + intangible costs). ” Some of the intangible costs that should be taken into consideration are knowledge costs, time costs, and relationship management costs.\r\n many another(prenominal) organizations started to take intangible costs more in earnest and established departments that are dedicated to deal with such costs such as knowledge management department. Intangible cost analysis is more complex than tangible cost analysis due to the fact that it depends on estimation skills and past experience. Therefore, possessing intangible cost analysis skills can be considered as a competitive advantage as it will result in better cost management and lower incurred costs. Results and Findings:\r\nCost analysis is one of the most sophisticated concepts in business, and many economists wrote several books abo ut it. The following points illustrate the results and findings of the research paper: Cost analysis consists of multiple tools and techniques that are usually used simultaneously to reach the best decision possible. Cost analysis not only allows firms to find ways to reduce costs, but it also suggests methods that can be use to turn a cost center into profits center.\r\nIt is vital for decision makers to be aware that cost analysis consists of tools that can estimate costs, which might differ from costs that will be incurred in reality. Intangible cost analysis should not be taken slightly as it has a great affect on the business of any company, especially on the long run. Cost analysis fails to take into consideration some factors such as time and feature Cost analysis needs advanced skills and is considered to be a competitive advantage for firms that have employees specialised in it.\r\nRecommendations and Conclusion: Using multiple cost analysis tools, which is due to the fa ct that the use of only one or few tools will result in misleading decisions Pay great attention to intangible cost analysis as it can make the difference between success and failure. puzzle into consideration factors that cannot be quantified and analyzed such as time and quality.\r\nDue to the fact that cost analysis has become a vital part of the decision making process, firms have to ensure that they possess the required cost analysis skills or outsource to specialized cost analysis firms. In conclusion, it is vital to mark on the fact that cost analysis is average one tool that can be used in the decision making process. Financing decisions and investments decisions are so critical that many tools and selection criteria have to be used while analyzing and evaluating these decisions.\r\nNowadays, the world is face up a financial crisis that is affecting all companies; consequently, firms are starting to analyze costs to determine how best to protect themselves. Bibliography Mishan, E. J. Cost Benefit Analysis: An on the loose(p) Introduction, 1982. Ramji, Al-Noor, Linda Reino, Harry E. Roberts, eds. , Inside The Minds: Ways To Reduce It using up : Leading Executives On Managing Costs, Negotiating Pricing & Reducing general Technology Expenditures. United States of America: Aspatore, 2004. Sewell, Meg and Mary Marczak.\r\nUsing Cost Analysis In Evaluation. The University of genus Arizona; available from http://ag. arizona. edu/fcs/cyfernet/cyfar/Costben2. htm; internet; accessed 1 November 2008. Stanfield, Ken. Intangible Management: Tools for Solving the Accounting and Management Crisis. Academic express; 1st edition (July 1, 2002). The U. S. Office of Surface minelaying Reclamation and Enforcement: Federal Assistance Manual. Washington, D. C. , 1998; available from http://www. osmre. gov/fam/defin. htm; Internet; accessed 16 November 2008.\r\n'