Question

1. In the context of benefit – cost analysis what criteria can be used to classify benefits on one hand and costs on the other hand?

Answer 1

In a broad sense the expenses can be divided into 2 kinds-

1. Developmental costs-

Developmental costs which are incurred in the course of the development of the system are a single time investment.

• For example:Equipment

2. Operating costs-

For example- Wages, overheads

Another categorization of the expenses can be:

Software/ hardware costs-

It comprises the cost of buying/ leasing of computers & it's peripherals. Software expenses comprises needed software costs.

Personnel costs-

It is the funds spent on the persons engaged in the development of the system. These expenses include wages, other benefits like medical insurance, conveyance allowance, etc.

Facility costs-

Expenditures incurred in the course of the preparation of the physical location where the system will be functional. These can be flooring, wiring, lighting,& air conditioning.

Operating costs-

Operating costs are the expenditures needed for the day to day functioning of the system. This includes the system’s maintenance. That can be on account of application programs / maintaining the hardware/ monies paid to professionals responsible for operating / maintaining the system.

Supply costs-

These are variable expenses which vary proportionately with the amount of utilization of ribbons, paper, disks etc. These should be estimated & incorporated in the total cost of the system.

Benefits

Benefits can be defined as
Benefit = Income - Expenses

They can be accrued thru -

- Augmenting income, or
- Reducing costs, or
- both

The system will give some benefits also. They can be tangible / intangible, direct / indirect. In cost -benefit analysis, the 1^st task is to identify every benefit and assign a monetary worth to it.

The 2 chief benefits are enhanced performance & minimized processing expenses.

Further benefits & costs can be classified as-

Tangible or Intangible Costs & Benefits-

Tangible cost & benefits can be calculated. Hardware expenses, compensation for professionals, software expenses are all tangible costs. They are identifiable and measurable. The purchase of hardware / software, employee training, and personnel salaries are examples of tangible costs. Costs whose worth can’t be measured are known as intangible costs. The cost of a breakdown of an online system in the course of a bank’s working hours will cause the bank to miss out on deposits.

Benefits are also tangible / intangible. For instance, more consumer satisfaction, enhanced corporate status, etc are all intangible benefits. While bettered response time, generating error free output like producing reports are all tangible benefits. Both intangible & tangible costs and benefits should be considered in the evaluation activity.

Direct / Indirect Costs & Benefits

From the cost accounting viewpoint, the expenses are treated as either direct / indirect. Direct costs are having rupee worth linked with it. Direct benefits are also assignable to a specific project. For instance, if the proposed system can handle more transactions say 25 per cent more than the prevailing system then it is direct benefit.

Indirect costs stem from the functions which aren’t directly linked with the system. Insurance, heating, air conditioning are all indirect costs.

Fixed / Variable Costs & Benefits

Some benefits & costs are fixed. Fixed costs do not change. Depreciation , Insurance, etc are all fixed costs. Variable expenses are incurred on routine basis. Recurring cycle may be weekly / monthly depending on the system. These are proportional to the work volumes & continue so long as the system is in operation.

Fixed benefits do not change. Variable benefits are realized on a routine basis.