Cost Analysis

2362 Words Mar 20th, 2010 10 Pages
Table of content Introduction: Financing decisions and investment decisions are considered to be two of the most vital decisions that corporations have to take. Cost analysis is one of the factors that should be taken into consideration while evaluating financial and investment decisions. This paper reviews the concept of cost analysis, how it is used in decision making, and how firms usually involve cost analysis in evaluating different projects. Furthermore, the paper discusses some of the main concepts that are derived from cost analysis such as cost allocation, cost-effectiveness analysis, and cost-benefit analysis. In addition, some of the advantages and disadvantages of cost analysis will be discussed. Moreover, the concept of …show more content…
These three methods are usually used simultaneously in order for corporations to evaluate different decisions or projects. Some of these methods might seem simple and easy to use; however, they should never be ignored or taken slightly as they can be of great benefit in determining the right decisions. Cost Allocation: Cost allocation is the simplest among the three concepts that were mentioned earlier. Sewell and Marczak stated that cost allocation refers to “setting up budgeting and accounting systems in a way that allows program managers to determine a unit cost or cost per unit of service.” Furthermore, Sewell and Marczak illustrated that in many corporations, cost allocation is used to provide “some of the basic information needed to conduct more ambitious cost analyses such as cost-benefit analysis or cost-effectiveness analysis.” Therefore, it can be concluded that cost allocation is a prerequisite to both cost-benefit analysis and cost-effectiveness analysis. Example: The following table shows the monthly cost allocation for 3 different projects It is important to note that firms usually allocate their costs based on previous experience and estimation. However, firms should expect costs to change, which can be due to financial crises, inflation, or other factors, and try to adapt their cost allocation systems in such a way

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