COST - BENEFIT

ANALYSIS
 Cost and Benefit Analysis

The ultimate aim of a business organization is to make profits.

Therefore, any system in the organization must produce more
benefits as compared to its costs for the organizationto
survive & prosper.
MIS must yield higher benefits than the costs. For
this, cost – benefit
analysis (CBA) is important.

BENEFITS > COSTS

 What is Cost - Benefit
Analysis?
 CBA has been established primarily as a tool for use by
governments in makingtheir social and economic
decisions.
 CBA measurescosts and benefits to the
community of adopting a particular course ofactione.g.
Constructing a dam, by-pass etc.
 CBA is a decision making device for
evaluating activities that are not priced by
the market.
 CBA attempts to simulate a market result in areas where
the market does not operate to establish
prices.
3  Or attempts to quantifyand include in estimatesof cost
 Cost Benef it
Analysis
Decision making is about choices

 For an individual
 They might rely on intuition, a “gut feel” for the right choice. They decide to do
an analysis of the choices or it may be a combination of both of these.
 For a company
 Being concerned with the profit earning capacity and income flow, they may
undertake a cash flow analysis or a full financial appraisal of the project.
 For the Government
 Decision making for governments is much harder. Not only are they
expected to consider the profitability (or at least neutrality) of the
costing but must also include consideration of the social cost and benefits
of their choices. They are also expected to act within the political
environment to satisfy the political agenda set by the government of the
day and finally, must also comply with environmental considerations.

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 Cost – Benef it
Analysis
Other issues
 Is the project worthwhile
financially?
 Is it the best option?
 Should it be undertaken at all?

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 Process of Cost – Benefit
Analysis

: -
CBA is a process that presents a picture of various costs
& benefits associated
Identification of with an information
Evaluation of system. Choice of System
costs & benefits
CBA as a process consists ofcosts & benefits 3 basic
activities viz.
1 . Identification of Costs & Benefits :
Identify the costs & benefits associated with a
task/ operation, or investment project.
2. Evaluation of costs ( tangible, intangible, fixed,
variable, direct, & indirect) & benefits associated with
each task/operation/investment project.

3. Choice of system : Select thebest system which

involves least cost & yields maximum benefits.
Cost s & Benef it s of Information
Syst ems
COSTS BENEFITS
Hardware Tangible
Telecommunications Increased Productivity
Software Low Operating Costs
Personnel Reduced Workforce
Lower Computer Costs
Accessories : Lower Outside Vendor Costs
Computer Forms Reduced rate of growth in
expenses
Computer ink/ribbon Reduced Facility Costs
UPS Intangible
Improved Organizational Planning
Services : Increased Organizational Flexibility
Insurance Improved Decision making
Maintainance Improved Operations
Improved Asset Utilisation
Physical Facilities : Enhanced Employee Morale
Building Increased Job Satisfaction
Furniture Higher Customer Satisfaction
Improved Organizational Image
 Problems Associat ed wit h
CBA
Measurement Problems
 Difficulties encounter in measuring intangible costs such as

foul atmosphere or intangible benefits such as a peaceful

neighbourhood.
 Assuming several other costs & benefits associated
with the activities; and estimating the costs and
benefits involves.
 Affects by Market condition, state of economy etc.

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 Uneven distribution of benefit to the community.
Time Problems
 Tackling future time problems by discounting future costs
and benefits.
 Calculating the correct rate for future rupees value as well as
accounting for additional benefits and costs associated.