strategy

Using cost-benefit analysis

Synonyms:

Employing risk-benefit accounting
Using cost effectiveness analysis
Applying cost-utility analysis

Description:

Measuring the costs of an alternative course of action to achieve some objective against the benefits resulting from taking that course. It is used where important factors in a problem cannot be measured in monetary terms, or where such measurement is very difficult and uncertain, or where monetary values are only part of total values. Associated with systems analysis, it has had its greatest development in dealing with military problems.

Context:

A distinction is made between cost-benefit and cost-effectiveness analysis. The cost-effective method assumes the outputs from a system to be fixed in quantity and quality. It then explores the comparative cost of various methods of producing the fixed output. That system which can produce the fixed output at lowest cost is selected as being the most efficient system ([ie] it provides the lowest input/output ratio). The cost-effective approach assumes that although the inputs to a system were variable, the output was fixed. The cost-benefit approach removes the latter constraint and allows both the inputs and the outputs from the alternative systems to vary, and then attempts to measure which of these systems is the most efficient (that is, has the lowest input/output ratio).

COST-BENEFIT ANALYSIS (C-B analysis) assigns monetary values to the benefits of a programme/project. The latter is relatively straight-forward when there exists a market for the outputs. In the same way a commercial enterprise calculates the return on an investment, a C-B analysis will result in an estimation of the net present value or the internal rate of return of programme/project. C-B analysis is, however, normally concerned with the social costs and the social benefits of projects rather than pure market values. The measurements will differ if and when the markets in which the inputs and/or the outputs are traded are distorted. In order to calculate the social return on a programme/project, the costs and benefits will have to be adjusted upwards or downwards in relation to their observed market values. C-B analysis can also be used to analyse programmes/projects which result in non-marketed outputs if a value for the latter can be deduced with some reasonable degree of confidence. Thus a full cost-benefit approach can be used with education programmes/projects calculating the benefits of education on the basis of estimates of future earnings for different cohorts stratified by educational level.

Implementation:

The Planning-Programming-Budgeting System (PPBS) is a form of cost-benefit analysis associated with systems analysis and used as an operational tool in a wide variety of contexts (government agencies, universities, corporations, nonprofit centres, etc). The integrated PPBS provides relatively few innovations for the individual elements of planning, programming, and budgeting; its value lies in its systematic coordination of all of these. A conceptual basis for the total allocation process is provided. Planning, programming, and budgeting constitute the process by which objectives and resources, and the interrelations among them, are combined to achieve a coherent and comprehensive programme of action for any organization conceived as a whole. The need for a holistic approach arises from the indissoluble connection between the allocation of human and material resources, or budgeting, and the formulation and conduct of policy. It provides a conceptual framework for delineating the complexities of purposive, goal-seeking public policy.

Broader:

Using systems analysis
Conducting environmental audits
Determining flow of social benefits
Adopting planning approaches serving multiple goals
Capturing environmental value

Narrower:

Undertaking project cost-benefit analyses
Setting guidelines for cost/benefit assessment of cleaner production

Facilitates:

Containing health costs
Ensuring mutual economic benefit
Developing cost effective merchandise

Facilitated by:

Stimulating cost benefit effectiveness
Specifying benefits and conditions in production systems

Subjects: