COST BENEFIT ANALYSIS

• CBA could be fully quantitative or fully qualitative or it may be hybrid of both qualitative and quantitative judgements.

• The CBA becomes complex when costs and benefits are intangible or notional and long term for instance an organisation deciding on the environmental and social costs of a special project which would yield fantastic profits to the organisation &equally fantastic tax revenues to the govt.would have to work at a complex CBA.

Cost benefit analysis(contd)

Costs and Benefits in certain cases may not be even known.The

quantification of unknown costs and benefits is impossible.It is like

taking an infinite risk or shooting in the dark.

Socially relevant projects involve a lot of public Intervention

However the public at large may not be very professional in

converting their perceptionsinto quantitative expressions.It is the analyst who should translate

the public qualitative remarks into quantitative measures and carry

out the cost benefit analysis

Indices,scales and many statistical techniques are employed for such a

translation.CBA also demands weightages to be attached to the absolute figure costs and benefits

so gathered based on the changing significance of the figures in

different circumstances,regions and organisations.

Indicative Cost Benefit Analysis

• It may be useful for highly subjective decisions or judgements.Two or three decisions together may decide the overall impact of the process alongwith their relative costs and benefits.The indicative or Relative significance of various variables deciding the ultimate outcome of the decision making process can be used for approximate CBA.

Incremental Cost Benefit Analysis

• Ongoing business process requires a quick incremental CBA for quick conclusions,be the analysis accurate or approximate.Extra days credit offered to customers may increase sales and gross profit.The incremental amount of gross profit will have to compared with incremental or extra cost of credit that will be incurred by the enterprise.

• As long incremental profit exceeds incremental cost on a sustainable basis the decision to offer extra credit will prove to be correct.Sustainable NET Increment Benefit is often a strategic decision

• CBA in totality or CBA with strategic perspective is of vital significance.A multi product or multilocational enterprise always make use of CBA in totality.

• Ultimately the accuracy of CBA depends on how much deeper & quick you visualise the intangible,intrinsic and long term cost benefits of an organisation.Strategic alliances between two partners,buyback relationship with captive buyers and vendors multiple relationship with key dealers ,memorandum of understanding with govt.depts etc.require CBA in Totality.

Strategic Cost Analysis

1)Define the firms value chain and assign costs and assets to value activities.

• 2)Investigate cost drivers regulating each activity.

• 3)Examine possibilities to build sustainable Competitive advantage.

• (i)either through controlling cost drivers(ii) or by reconfiguring the value chain.

• Activities should be isolated and seperated if a)they represent a significant percentage of operating costs or b)the cost behaviour of the activities is different or the cost drivers.c)they are performed by competitors in a different way.d)they have a high potential of being able to create differentiation.

How to perform Cost Benefit Analysis?

• (1)SelectEvaluationCriterion(economic,business,schedule,technical)(2)Weigh the financial and non-financial benefits of each alternative(3)Choose the Appropriate Analysis period For benefit and costs

• (4)Conduct practical comparative & Technical Analysis(5)Define the cost of ownership

• 2)Diagnose cost drivers- economies of scale,learning,pattern of capacity utilisation,linkages within the value chain linkages with suppliers,linkages with customers,linkages with channels,interrelationship with other businessunits,levels of vertical integration ,timing,discretionary policies,location and institutional factors.

• 3)Develop Sustainable competitive advantage either by controlling those

• Drivers better than competitors or by reconfiguring the value chain.