Cost-Benefit Analysis and Its Types

Cost-Benefit Analysis:- The primary objective of cost-benefit analysis is to find out whether it is economically worthwhile to invest in the proposed project. If the return on investment is high, the project is considered economically worthwhile.

Cost-Benefit Analysis Steps-

  1. Identification of costs & benefits.
  2. Classification of costs & benefits.
  3. Selection of Evaluation Methods.
  4. Interpret Results of the analysis & take final action.

Classification of Costs & Benefits:-

Tangible or Intangible

Tangible means that which is definite& can, therefore, be determined in advance.

Tangible cost means that it is known & can be estimated quite accurately.

For Eg.

The cost of the salary of employees, equipment cost, material cost, operating cost, etc.

Intangible cost refers to something which we know, but the financial value of which cannot be accurately assessed.

For Eg.

The cost of the breakdown of an online banking system for one hour would cause the bank to lose the deposits & waste human resources.

Tangible Benefits

Tangible benefits are those savings that can be actually measured.

For Eg.

Decrease in production costs & increase in sales are tangible benefits.

Intangible benefits

Intangible benefits cannot be measured

For Eg.

Improvement in the company image due to computerization.


Fixed or Variable Costs & Benefits

Costs that are constant & do not change are fixed costs.

For Eg.

The purchase of equipment, rent to be paid, purchase of software are fixed costs.

Variable Costs are those that are incurred periodically &vary with the volume of work.

For Eg.

The cost of stationery &floppies would amount of variable cost.

Fixed Benefits also remain constant. By using a new system, if 20%of stall members are reduced, we can call it a fixed benefit.

Variable Benefits

Variable benefits are realized on a regular basis.

For Eg.

The library information system that saves two minutes in providing information about a particular book to the borrower. The amount of time saved varies with the information given to the borrowers.


Direct or Indirect Costs & Benefits

Direct costs are those which are directly associated with a system.

For Eg.

The purchase of Floppy for Rs200/- is a direct cost.

Indirect Cost is not directly associated with a specific activity in the system. They are often referred to as overhead expenses.

For Eg.

Cost of space to install a system, maintenance of computer center, light &air – conditioning are all indirect costs.

Direct benefits also can be specifically attributable to a given project.

For Eg.

A new system that can process 25%, more transactions per day is a direct benefit.

Indirect benefits are realized as a by-product of another system.

For Eg.

A system that tracks sales calls on customers provides an indirect marketing benefit by giving additional information about the competition.