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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 intangible cost analysis will be introduced. Then, the results and findings of the research paper will be illustrated. Finally, few recommendations that are based on the results and findings will be made. Literature Review:
Due to its high importance in the decision making process, cost analysis has been discussed in many books by several authors who illustrated different aspects of cost analysis. In his book “cost-benefit analysis,” E.J. Mishan discussed in depth the concept of cost-benefit analysis, which is a form of cost analysis. Professor Mishan focused on some of the key concepts that are related to cost-benefit analysis. The author started his book with few examples of cost analysis in order to illustrate to the reader the meaning of cost-benefit analysis. Then, Mr. Mishan illustrated the economical aspect of cost-benefit analysis and showed how opportunity cost could be related to cost-benefit analysis. Furthermore, Mr. Mishan tried to show how cost-benefit analysis is limited and can be used partially in the decision making process. A notable section of Mr. Mishan’s book is certainty equivalence. In this section, the author developed an assumption that “enables us formally to rank a number of alternative uncertain benefits without first reducing each to a certainty equivalent. In his article “Ways to Deliver More for Less,” Harry E. Roberts, Senior Vice President and Chief Information Officer of Boscov’s Department Stores, discussed how cost analysis can be used to reduce IT spending. Mr. Roberts discussed how the IT budgeting has changed over time. The author suggested ways to enable Information Technology, which is a cost center rather than a profit center, to “deliver more than what is expected and at a lower cost than what was budgeted.” Then, Mr. Roberts suggested that a revision for different costs, such as variable costs, fixed costs, and payroll costs, should be made. The author concluded his research by emphasizing on the fact that “every dollar invested on a cost item must deliver as much value to the business as its highest-margin product or service.” Cost Analysis: Definition
According to The U.S. Office of Surface Mining Reclamation and Enforcement, cost analysis can be defined as “the process of obtaining cost breakdowns, verifying cost data, evaluating specific elements of costs and examining data to determine necessity, reasonableness, and appropriateness of the costs.” Both financing and investment decisions are highly affected by cost analysis as corporations usually pay a great deal of attention to the different types of costs that are involved in the different projects that will be taken into consideration either to raise funds or to invest surplus funds that a corporation has. Sometimes cost analysis is perceived as a tool that is used only to reduce costs. In contrast to this point of view, cost analysis is believed to be a tool that helps management to choose the best possible solution or project among many different alternatives. In their article ““Using Cost Analysis In Evaluation,” Meg Sewell and Mary Marczak believe that cost analysis methods and uses are “complex, require very sophisticated technical skills and training in methodology...
Bibliography: Mishan, E.J. Cost Benefit Analysis: An Informal Introduction, 1982.
Ramji, Al-Noor, Linda Reino, Harry E. Roberts, eds., Inside The Minds: Ways To Reduce It Spending : Leading Executives On Managing Costs, Negotiating Pricing & Reducing Overall Technology Expenditures. United States of America: Aspatore, 2004.
Sewell, Meg and Mary Marczak. Using Cost Analysis In Evaluation. The University of Arizona; available from http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm; Internet; accessed 1 November 2008.
Stanfield, Ken. Intangible Management: Tools for Solving the Accounting and Management Crisis. Academic Press; 1st edition (July 1, 2002).
The U.S. Office of Surface Mining Reclamation and Enforcement: Federal Assistance Manual. Washington, D.C., 1998; available from http://www.osmre.gov/fam/defin.htm; Internet; accessed 16 November 2008.
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