What is a Cost Benefit Analysis?

Posted by: Jannike Post Date: 29th January 2015

One area that learners often struggle with is cost benefit analysis.

The objective of a cost benefit analysis is to compare the costs of implementing proposed changes to a system, with the benefits of implementing the system.

Types of cost

The cost benefit analysis is designed to show how much it will cost to implement the proposed changes, and these can be broken down into initial one-off costs and ongoing costs for the business.

What is a Cost Benefit Analysis?

So, for example, a one-off cost would be a proposal to implement a computerised accounts package, while an ongoing cost would be a maintenance contract.

Types of benefit

Once all of the costs have been identified and listed, the next step is to look at the benefits of implementing the system.

It is easy to identify the value of financial benefits. An example of a financial benefit is time saved. If implementing a computerised accounts package means that the accounting entries will take a day less per week, we can attribute a precise saving to this. If, say, that an hourly rate for the accounts clerk is £20 per hour, a day is 7 hours, and 5 days per week are worked, each week we have saved £700.

Some of the benefits can be qualitative, and it is more difficult to define exactly what financial benefit they will bring. For example, the computerised accounts package may mean that accurate reports can be generated more efficiently, giving management the information they require to streamline the sales processes, and this means more sales can be generated. To come up with a figure for this, you would need to estimate the amount of sales it could generate.

The main objective of the cost benefit analysis is to show whether the costs outweigh the benefits, or the benefits outweigh the costs.

If the costs outweigh the benefits, this is a clear indication that it would not be worthwhile implementing the proposed changes.

How to do a cost analysis is covered in more depth in AAT level 4 Professional Diploma.

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