For a business to sustain, it is essential to be skilful in analysing the cost or returns (profit) for any situation or a decision it makes. To understand this phenomenon in detail, Singaporean students learn business management or business development courses in Singapore top universities or some private universities.
Along with the wonderful skills and knowledge, students also get to complete some assignments which are provided in the course with a deadline.
Here they can get some idea to write about “cost analysis” or can also avail our online assignment help service.
What is Cost Analysis?
Cost analysis refers to the process of modelling costs in order to sustain strategic management, decision making and cost-reduction. The interpretation of costs involves the process to analyse the separate factors in the cost proposal like materials, equipment, labour which fabricate goods or services, suggested profit.
It is utilized for the purpose of cost evaluation in the situations of relatively lower competition or quite less offers in the marketplace.
A cost analysis is one of the most important tools for business planning. It refers to the degree of cost-output relationship i.e. it is involved with the determination of the cost of hiring all the input assets and how these could be re-arranged in a better way in order to enhance the output (productivity) of the organization.
Simply put, the cost analysis is concerned with the total production cost (money value of all the inputs like labor, law, material) which in turn assist to decide the ideal level of productivity while enhancing the overall efficiency.
Types of Cost Analysis
The concept of cost analysis is related to the breaking down of a cost summary into its components and reviewing and briefing of each factor. It involves the comparison of costs of production (inputs) and output to evaluate the profit and search for the conditions subject to improvement.
These are the common types of cost analysis: –
No. 1 – Estimates- It involves the development and validation to the forecast of the costs. It is a primary step for an organization’s business planning or making a strategy, program or project.
No. 2 – Life cycle cost analysis- It is concerned with the calculation of the anticipated total cost of ownership of an asset throughout its lifespan.
No. 3 – Cost-Benefit Analysis- This kind of analysis is focused on modelling and comparing the costs and benefits like the comparison of the product manufacturing and development cost against revenue. It generally uses the estimates like return on investment and payback period.
No. 4 – Efficiency- It alludes the measure of cost efficiency on the basis of the efficiency formula.
No. 5 – Cost Effectiveness- The cost-effectiveness involves the process of contrasting the costs of strategies with respect to the results since the results are not plainly financial. For instance, comparing the various ways to enhance your quality of life as claimed by the costa and non-financial results like happiness.
Why cost analysis is important?
Cost analysis is a part of financial analysis which supports the three major aspects of the business i.e. strategic planning, decision making and cost reduction. It somehow concerns the optimal utilization of business costs.
A cost analysis gives a chance to pass judgment on the effectiveness of activities. For instance, an organization can analyse the number of items delivered from a given degree of assets. It enables an organization to choose whether a venture is dispatching value and serves as a guide for execution upgrades. The outcomes of a cost critique report may help an organization in better using accessible assets. It additionally assists in as documentation that exhibits proof of responsibility. A cost investigation can trace the expenses and spending, which can enable an organization to decide whether funds are plundered or not.
Significance of cost analysis for decision making
Cost analysis is characterized as the portion of expenses to provide assessments of what a program’s expenses and advantages are probably going to be before it is implemented.
The managers require sufficient, deliberate and valuable cost information and reports to deal with a business undertaking and to accomplish its business goals. The valuable data produced by cost records and reports in cost interpretation help the executives in making decisions.
Cost analysis is indispensable for managerial decision making in different associations – profit-oriented and non-profit organizations. In profit-oriented organizations, cost and cost review reports are valuable in different administration dynamic zones: item costing and pricing, cost management, extraordinary (strategic) decisions, benefit arranging, capital investment decisions, standard-setting, item/client gainfulness, and so forth. In non-profit organizations, cost analysis gives a valuable contribution to cost-sharing decisions, cost management(containment), cost-recuperation estimating decisions, and so forth. In such associations, cost study is a piece of good program planning and accounting practices, which permit managers to decide the accurate cost of giving a given unit of service.
Role of cost analysis in the product success
The implementation of a new product entails a progression of exercises. The more creative the item is, the more complex is the procedure. It comprises of a few principle stages: idea generation, idea screening, idea advancement and testing, marketing strategies, business analysis, development of the product, test advertising and commercialization. Every one of them has an enormous uncertainty in the results.
Generally, the success of a product is measured in terms of their financial outcomes. Thus, the new product ideas can also be chosen on the basis of their proposed financial results. The organizations determine the upper limit of the budget and then considers only those new projects whose budget lies below that limit.
Therefore, it is essential for the organizations to evaluate the overall production costs, returns while considering all other expenses so as to determine the resulting profit as well as forecasting for the new products.
Cost analysis Tools and Techniques
Cost analysis must be a scaring exercise for most of the managers in various organizations. It is very common among the managers to work so hard that they burn the night oil for the cost estimation. In spite of all the hard work and terrific efforts, when the estimated cost gets above the budget, the managers receive criticism from all corners.
Although doing a proper cost examination is a very difficult task like climbing on Himalaya but an almost perfect destination can be conquered with the help of some cost analysis tools and techniques: –
- Expert Judgement
- Analogous Estimation
- Parametric Estimation
- Bottom-Up Estimation
- Three-Point Estimation
- Reserve Analysis
- Cost of Quality
- Management Software
- Vendor Analysis
- Group Decision Making Techniques
How to perform a cost analysis process
Cost analysis is a major part of economic analysis. Leading a cost analysis, as the name infers, focuses around the expenses of executing a program regardless of a definitive result. A cost analysis is a significant first step before you participate in quite a while of financial assessment to decide the viability or appropriateness of a potential venture.
These are some easy guidelines that one can follow to do project cost analysis efficiently-
No. 1 – Defining Your Purpose and Scope
- Find out why you need a cost analysis
- Recognize perspective for your cost analysis
- Differentiate the programs you offer
- Set the time period you want to evaluate
No. 2 – Categorizing Costs
- Examine the former cost analysis reports, if available
- Record all the direct costs of the program you’re evaluating
- Involve the indirect costs
- Organize costs in order to reflect the purpose of your analysis
No. 3 – Calculating Costs
- Assemble financial records and information
- Total direct costs for the program
- Assign indirect costs to the program you’re analysing
- Calculate depreciation of assets
- Factor in hidden costs (additional costs)
- Conclude on the basis of your findings
Benefits of Cost Analysis
There are various advantages of cost analysis in an organization-
- Promotes awareness of the cost structure
- Provide deeper knowledge about specific elements, like required labor and overhead
- Enables managers to procure additional knowledge of company costs
- Help in making informed decisions
- Provides the opportunity to prioritize objectives and resources which are the most suitable and beneficial for the organization
Problems faced during cost analysis process
Apart from the marvellous advantages, there are some disadvantages of cost analysis too-
- Requires specific business skills
- Need general knowledge of economics to push realistic expectations
- Some companies may not have skilled employees so they need to resort to outsourcing for completing cost analysis
- Cost analysis generally represents quantitative items which can result in a company to be in problem when it requires to consider qualitative or intangible factors
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The cost analysis in the economics of a business is indeed an essential part of a business planning but no doubt it is an arduous work to do. Managers can perform the cost analysis effectively by utilizing the proper steps and tools or previous cost analysis template.
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