Arda ÇELİK DEÜ Endüstri Mühendisliği

ABSTRACT Cost analysis can play strategic roles in organizations and plans. As industrial engineers, we have to make these analyses adaptable, efficient and effective for our labor units; therefore, cost strategies according to cost analysis may be guide for us.

Cost analysis is a continuous process. It can provide estimates of what a program’s costs and benefits are likely to be, before it is implemented. A careful cost analysis may improve understanding of program operation, and tell what levels of intervention are the most cost effective

Cost In accounting, costs are the monetary value of expenditures for suppliers, services, labour, products, equipment and other items purchased for use by a business or other accounting entity.

In engineering economics there are many types of costs, each is classified differently according to the immediate needs of management. For example; engineers may want cost data to prepare external reports, to prepare planning budgets, or to make decisions.

Manufacturing Costs In converting raw materials into finished goods, a manufacturer incurs various costs of operating a factory. Most manufacturing companies divide manufacturing costs into three broad categories; direct materials, direct labor, manufacturing overhead.

Non-manufacturing Costs There are two additional costs in supporting any manufacturing operations. They are marketing or selling costs and administrative costs. Marketing or selling costs include all costs necessary to secure customer orders and get the finished product or service into the hands of customer.

Cost breakdown of these types provide data for control over selling and administrative functions in the same way that manufacturing cost breakdowns provide data for control over manufacturing functions

Periodic Costs They are those costs that are charged to expenses in the period in which they are incurred. The underlying assumption is that the associated benefits are received in the same period as the cost is incurred. Some specific examples are all general and administrative expenses, selling expenses.

Therefore, advertising, sales commissions, public relations and other nonmanufacturing costs discussed earlier would be periodic costs.

Product Costs Some costs are better matched against products than they are against periods. Costs of this type –called product costs- consist of the costs involved in the purchase or manufacturing of goods. Product costs are not viewed as expenses; they are the cost of creating inventory

COST ANALYSIS There are different definitions of cost analysis. The first one is that the process of analyzing and estimating resources required to support past, present, and future forces, unit systems and equipment

The second definition of cost analysis is that the emphasis is an assessing the costs incurred by the sales organization to generate the achieved levels of sales.

The other definition, the general approach is to compare the costs incurred with planned costs as defined by selling budgets.

Cost Analysis Process Cost analysis should become increasingly detailed and accurate as the development process moves forward. In the early phases estimates based on square foot costs, modified by costs associated with special site conditions, will be sufficient.

Functions of cost analysis process;  Develop and apply internal cost estimates.  Know when to use “should cost” analysis.  Understand profit as a reward for risk concept.  Identify sources of cost data.

Cost Analysis Products According to the definitions of cost analysis, there are many cost analysis products which are used by companies. These are; economic analysis (EA), analysis of alternatives (AOA), program office estimate (POE), component cost analysis (CCA), cost analysis brief (CAB) and the last one is army cost position (ACP).These products effect the cost analysis process.

What Cost Analysis Can Tell Us? Cost analysis can provide estimates of what a program’s costs and benefits are likely to be, before it is implemented. “Ex-ante” or “before the fact” cost analysis may have to be based on very rough estimates of cost and expected benefits. Cost analysis may improve understanding of program operation, and tell what levels of intervention are most cost-effective. Cost analysis may reveal unexpected costs.

What Cost Analysis Cannot Tell Us? Whether or not the program is having a significant net effect on the desired outcomes. Cost analysis may be considered an extension of an impact or outcome evaluation, but it cannot take the place of one.

Whether the least expensive alternative is always the best alternative. Often political or social values other than cost need to determine program and policy choices. When there are competing values or goals involved, cost analysis is often just one factor to be considered, and we need to have some other way of deciding which factors should take priority.

Main Types of Cost Analysis Cost-of-illness analysis is a determination of the economic impact of an illness or condition e.g., of smoking, including associated treatment costs.

Cost-minimization analysis is a determination of the least costly among alternative interventions that are assumed to produce equivalent outcomes. When the total cost of an alternative is a function of increasing and decreasing cost components, most likely a value exists for the common variable that will result in a minimum cost for the alternative.

Cost-effectiveness analysis (CEA) is a comparison of costs in monetary units with outcomes in quantitative non-monetary units e.g., reduced mortality and morbidity. Cost-effectiveness analysis had its origin in the economic evaluation of complex defense and space system. The basic concepts inherent in costeffectiveness analysis are now being applied to a broad range of problems in both the defense and the civil sectors of public activities.

Cost-utility analysis (CUA) is a form of costeffectiveness analysis that compares costs in monetary units with outcomes in terms of their utility, usually to the patient, measured.

Cost-consequence analysis is a form of costeffectiveness analysis that presents costs and outcomes in discrete categories, without aggregating or weighting them.

Cost-benefit analysis (CBA) compares costs and benefits, both of which are quantified in common monetary units.

Advantages of Using Cost Analysis Too often, program managers cannot easily determine the cost of providing particular services or achieving certain outcomes, because they are not systematically collecting the necessary data. At the least programs should be able to tell funders that during a given time period (Jacobs, 1998). At this point, cost analysis promotes fiscal accountability in programs.

Cost analysis helps set priorities when resources are limited. Program managers can use cost information in designing programs. Using cost analysis can be extremely powerful and persuasive to legislators, policy makers, and other funders. May help convince them to invest in particular kinds of programs. Some argue that this advantage of cost-benefit analysis may hold true even when it is not possible to assign monetary values to all program costs and outcomes; if the effect is strong enough, even a relatively incomplete costbenefit analysis may be persuasive (Barnett, 1993).

Disadvantages of Using Cost Analysis Cost analysis requires a great deal of technical skill and knowledge. Critics feel that many cost analysis are overly simplistic, and suffer from serious conceptual and methodological inadequacies. There is a danger that an overly-simplistic cost-benefit analysis may set up an intervention to fail, by promoting expectations that are unrealistically high, and cannot really be achieved. This may result in political backlash which actually hurts future funding prospects instead of helping

There are no standard ways to assign dollar values to some qualitative goals, especially in social programs. For example, how do we value things like time, human lives saved or quality of life? Market costs (what people actually pay for something) do not always reflect “real” social costs. Sometimes one person’s cost can be the other’s benefits. Sometimes there are multiple competing goals, so we need to weight them or prioritize them in some way