BEVCON WAYORS Cost Analysis
BEVCON WAYORS Cost Analysis
BEVCON WAYORS Cost Analysis
Project Report
Submitted to the Bharathidasan University, Tiruchirappalli
in Partial fulfillment of the requirements for the award of the degree of
Submittedby
Ms. V. CHRISTIYA
(Reg.No.21291013)
APRIL - 2023
0
Date……………
Certificate
This is to certify that the project entitled on “A STUDY ON COST
ANALYSIS IN THE FINANCIAL STATEMENTS OF BEVCON
WAYORS UPPAL” is a record of project work done by
Ms.V.CHRISTIYA (Reg.No.21291013) under my guidance and the
project has not previously formed the basis for the award of any degree,
diploma associateship, fellowship or similarly other titles and that is
independent work done by her.
(Dr.C.SURESH) (Dr.R.RAJKUMAR)
Place: Kumbakonam
Date:
DECLARATION
My floral tribute to the almighty that has been the initiating and
guiding light in all my endeavors.
Finally, thank to my parents, friends and all the respondents for their
valuable support towards the successful completion of project.
TABLE OF CONTENT
CONTENT PAGE NO
1. INTRODUCTION 1
1.3 SCOPE 11
2. COMPANY PROFILE 12
6. BIBLIOGRAPHY 48
CHAPTER-I
INTRODUCTION
The economic development of any country depends upon the Existence of a well
organized financial system. It is the financial system which supplies the necessary
financial inputs for the Production of goods and services which in turn promote the
well being and standard of living of the people of a country.
Finance is the life blood of business without finance, the heart and brain of
business organization cannot function implying there by its natural death. Right from
conceiving the idea of birth of a business to its liquidation, finance is required
Inputs are made available only with finance. Even managerial ability can be had
with only finance. So, finance is the pivot around which the whole business operations
cluster.
Therefore, there is an imperative need to efficiently manage the finances of a company.
Actually, sometimes, it is not the inadequate finance that is the cause of failure of a
business but the mismanagement of sources which is ultimately responsible for it.
Proper finance is the real key to the success of any business enterprise. Without proper
finance no business can survive nor can it be expanded and modernized.
In older times financial management was used periodically and its importance was
limited to the procurement of funds but in modern times finance is a continues
administrative function. Its Relation is with the procurement of capital, sources of
funds, capital budgeting decisions etc
1. Finance enhances for business promotion
2. Useful in decision making.
3. It is a key determinant of business success.
4. Financial information or results is useful in measurement of
performance.
5. It enables for basis of planning, coordination and control.
6. Useful to shareholders and investors.
1
Financial Management is an integral part of Business Management. Finance is one of
the key functions in an organisation. The other key functions in an organisation are:
Production
Human Resources
Marketing
Each of the above function has got sub-divisions – for example Production has
maintenance, Administration has purchases etc.
Finance deals with financial resources. Financial management as a corollary would deal
with management of financial resources and related areas.
Any activity in a business enterprise requires planning for proper execution in time.
Finance is required for any activity at least in the beginning and hence financial
planning is the prime function of “Finance”. This involves detailed study of any activity
from understanding the total funds requirement for that activity, when the funds will be
required and how much funds will be required at different stages. For a new enterprise
the entire resources have to come from outside (externally); for an existing enterprise, a
part of the resources at least will be available from the profits made in the past and
retained in business after declaring dividend.
Example No. 1:
We require Rs. 200 lacs for an activity. Let us see how it affects an existing enterprise.
Let us assume the profits available to be Rs. 60 lacs. Then we require further resources
2
of Rs. 140 lacs only. This is the difference between an existing enterprise and a new
one. Financial planning will take this into account.
This has been explained this in the above point. For reinforcement the student’s
attention is drawn to one of the objectives of financial management at least in the short
run, the objective of maximising profits of the organisation. The profits so maximised
in turn enhance the Earning Per Share (EPS – for formula please refer to Chapter no. 9).
Preparing the cash flow statement for a given period, taking all the cash inflows
and cash outflows during the period to determine whether there is a surplus or
deficit at the end of the period
Arranging for funds from outside especially through a bank with whom the
enterprise has loan facilities in case of deficit in the cash flow statement; if on
the contrary, the cash flow statement reveals a surplus, dealing with this surplus
in a suitable manner (For further details, please refer to chapter no. 7 on
“working capital management”)
Over a period of time the enterprise reinvests a part of the profits for future growth of
the organisation in business. The Finance manager can invest such funds outside the
business in other enterprises also provided the parent enterprise does not require them
immediately. Short-term surplus as revealed by the Cash flow statement is also invested
3
for short duration. Thus investment outside one’s own business becomes the
responsibility of the Finance Manager
A business enterprise may require imports and do exports also. Whenever this is done
the invoice is in foreign currency. In imports the business enterprise requires foreign
exchange while in exports it gets foreign exchange. There is a risk involved while doing
imports or exports. The risk is that the exchange rate of the foreign currency in terms of
Indian Rupees can keep changing. We will explain this through an example.
Short-term objective
Long-term objective
4
In order to understand financial management better, we need to understand the
“Financial System” that exists in India. Any country needs a system to regulate,
supervise, monitor and control the players, intermediaries, the investors etc. who take
part in the financial markets in the system. Further an efficient system alone can ensure
that the national objective on “Economy” of the country is met by aligning the
developments in the system with the national priorities. An example of the national
priority deciding the development in the financial markets is – “infrastructure
development and need for longer duration financial resources” and development of
“deep discounted bonds” to meet this requirement. (For further details please refer to
Chapter no. 4 – Financial sources)
At the most basic level, cost allocation is simply part of good program budgeting
and accounting practices, which allow managers to determine the true cost of providing
a given unit of service (Kettner, Moroney, & Martin, 1990). At the most ambitious
level, well-publicized cost-benefit studies of early intervention programs have claimed
to show substantial long-term social gains for participants and cost savings for the
public (Berreuta-Clement, Schweinhart, Barnett, et al., 1984). Because these studies
have been widely cited and credited with convincing legislators to increase their
support for early childhood programs, some practitioners advocate making more use of
cost-benefit analysis in evaluating social programs (Barnett, 1988, 1993). Others have
cautioned that good cost-benefit or cost-effectiveness studies are complex, require very
sophisticated technical skills and training in methodology and in principles of
economics, and should not be undertaken lightly (White, 1988). Whatever position you
take in this controversy, it is a good idea for program evaluators to have some
understanding of the concepts involved, because the cost and effort involved in
producing change is a concern in most impact evaluations (Rossi & Freeman, 1993).
5
COST ANALYSIS IS OF THREE IN EVALUATION:
1. Cost Allocation
2. Cost - Effectiveness analysis
3. Cost - Benefit analysis
COST ALLOCATION:
Besides budget information, being able to determine unit costs means that
you need to be collecting the right kind of information about clients and outcomes. In
many agencies, the information recorded in service records is based on reporting
requirements, which are not always in a form that is useful for evaluation.
6
different ways. For example, do young first-time mothers usually require more visits
than older women? Do single mothers or women with several children miss more
appointments? Is transportation to appointments more of a problem for women who live
in rural areas? Are any client characteristics commonly related to important outcomes
such as birth weight of the baby? Deciding how to collect enough client and service
data to give useful information, without overburdening staff with unnecessary
paperwork requirements, requires a lot of planning. Larger agencies often hire experts
to design data systems, which are called MIS or management-and-information-systems.
If you are working for an existing agency, your ability to separate out unit costs
for services or outcomes may depend on the systems that are already in place for
budgeting, accounting, and collecting service data. However, if you are in a position to
influence these functions, or need to supplement an existing system, there are a number
of texts that discuss the pros and cons of different ways of budgeting, accounting, and
designing MIS or management-and-information-systems (see Kettner, Moroney &
Martin, 1990).
7
program, cost-effectiveness studies often compare programs on the basis of some other
common scale for measuring outcomes (eg., number of students who graduate from
high school, infant mortality rate, test scores that meet a certain level, reports of child
abuse). They address whether the unit cost is greater for one program or approach than
another, which is often much easier to do, and more informative, than assigning a dollar
value to the outcome (White, 1988).
The basic questions asked in a cost-benefit analysis are, "Do the economic
benefits of providing this service outweigh the economic costs" and "Is it worth doing
at all"? One important tool of cost-benefit analysis is the benefit-to-costs ratio, which is
the total monetary cost of the benefits or outcomes divided by the total monetary costs
of obtaining them. Another tool for comparison in cost-benefit analysis is the net rate of
return, which is basically total costs minus the total value of benefits.
The idea behind cost-benefit analysis is simple: if all inputs and outcomes of a
proposed alternative can be reduced to a common unit of impact (namely dollars), they
can be aggregated and compared. If people would be willing to pay dollars to have
something, presumably it is a benefit; if they would pay to avoid it, it is a cost. In
practice, however, assigning monetary values to inputs and outcomes in social
programs is rarely so simple, and it is not always appropriate to do so (Weimer &
Vining, 1992; Thompson, 1982; Zeckhauser, 1975).
8
of comparing unit costs, would require estimating the dollar value of high school
graduation
• All the data collection process has been carried out through the constitutions
with the staff members concerned in the department of finance in the
organization.
• Direct interactions with the manager, The accountants and the related staff
concern helped me in gathering of the required data.
• Took the help of the management from the other departments and the
guidance from the internal guide.
Certain assumptions have been made in regard to the future projects of the
company.
The data have been prepared in the consultation with the various personals of
the organization indirectly.
The changes in capital due to expected better management have been taken in
the account while calculating the related capital structures.
The results of the capital structures forecasts have been analyzed to give
suggestions for improvement of the performance of the Organization.
9
PERIOD OF STUDY :
The study has been conducted taking into an account the past five years data i.e.
from 2002 – 03 to 2006 – 07
• Whether or not the program is having a significant net effect on the desired
outcomes. Unless you know for sure that the program is producing a benefit, it
doesn't make sense to talk about the cost of producing that benefit (Rossi &
Freeman, 1993). 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.
• Cost analyses 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
analyses may have to be based on very rough estimates of costs and expected
benefits. However, if a program is likely to be very expensive to implement,
very difficult to "un-do" once it is in place, or very difficult to evaluate, even a
rough estimate of efficiency may be quite valuable in the planning stages (Rossi
& Freeman, 1993).
• Cost analyses may improve understanding of program operation, and tell what
levels of intervention are most cost-effective. A careful cost analysis within a
program might tell you, for example, that it doesn't so much matter whether you
have a half-day program or a full-day preschool program for children, but that
the teacher-to-child ratio does matter (that is, children benefit more from low
10
ratios than they do from longer days). This information might influence
decisions about how many teachers you need to hire, or how many classrooms
you need, or how many children you can serve effectively.
• Cost analyses may reveal unexpected costs. A speech therapy program might
unexpectedly find that it costs more to use paraprofessionals to work with
children than professionals, because the paraprofessionals need more training
and supervision, or work with fewer children at a time (White, 1988). Or,
cutting the number of home visits allowed by caseworkers serving a large rural
area (in order to save on mileage reimbursements) might have the unplanned
result of higher long-distance phone bills, because the workers still feel a need
to stay in close touch with their clients.
1.3 SCOPE :
Cost analysis can be used at several levels . At the most basic level, cost
allocation is simply part of good program budgeting and accounting practices , which
allow managers to determine the true cost of providing a given unit of service. it deals
with cost allocation , cost effectiveness and cost benefit.
Five Tiers :
Tier 2 – Accountability
11
CHAPTER-II
2. COMPANY PROFILE:
BW’s expertise, Virtually in all areas of civil and engineering construction, is best
reflected in the successful execution of following projects.
• Rs.350 Cores Koteshwar Dam for the Tehri Hydro Electric power project in
Uttaranchal,
• Rs.250 - Crores project for transportation of iron ore form Kalta iron ore mines to
SAIL in orissa state engaging an unprecedented workforce of 4000 people.
• Rs.150-crores project for construction of B.G. single Line Tunnel No.5 (Bakkal
Tunnel) form Km 43.040 to 48.940 on the Katra-Laole section of the Udahampur
srinagar- Baramulla Rail Link.
12
BOARD OF DIRECTORS
Mr. C. M. Ramesh, Chairman & Managing Director
Mr. CM Ramesh, Chairman and Managing Director of Bevcon Projects
Limited, comes form a value-based business family in Kadapa district of Andhra Pradesh.
His entrepreneurial success within a short span of five years is exponential.
13
is recognized as the most significant in its class for implementation of the power
industry’s best practices.
vision :
we envisage being a market leader by 2010 in bulk material processing &
Handeling solutions through satisfy Customers , stakeholders and Employee needs.
Mission :
As a part of our vision we are bringing in business and manufacturing experts from
global players and forge new business alliances to bring in futuristic technologies to
Indian markets.
INTERNATIONAL ALLIANCES:
MISSION:
14
QUALITY IS NOT A MERE LABEL FOR US BUT IT IS AN ORGANIC REALITY.
We provide turnkey solutions for company Bulk material handling needs for Crushing,
Screening, conveying.
Our expertise is based on nearly decade and half experience in designing custom
material handling solutions for various sectors of Production Industry. The Turnkey
Material Handling Solutions can be a combination of Crushing - Screening - Conveying
Systems coupled with Pneumatic Handling and cartridge dust extraction system are
Engineered and Executed as per the needs.
OUR PROMOTORS:
P SUNEEL LAKSHMAN
Managing Director
He is the driving force behind the Company and has a clear Vision of making our
organization as the best Project Engineering Company in Bulk Material Handling, Dust
Extraction and Pneumatic Handling.
Y.SRINIVASREDDY
Technical Director
A Mechanical Engineer with 20 years of experience in material handling equipments
technology. He is the founder director of the company and heads our manufacturing
facility. His forte is Design and Engineering for complex Material Handling
requirements. He is also the key force in new product development at our company.
15
OUR FACTORY AND OFFICE INFRASTRUCTURE
16
OUR COLLABORATORS
As part of merging the business & manufacturing expertise with global players and
forge new business alliances to bring in Futuristic Technologies to Indian Markets,
Bevcon Wayors has formed JV/Technology tie-up with companies like Burwell-
Australia, Nergeco Australia, Sanland - China, Friedrich & Noma - Germany, Statec –
Austria, SBS Belting - UK, Airtec Systems - Italy, Aerobelt – Australia.
MILESTONES:
The first major product introduction, the Comet truck, is reflective of the role
this Company has played over the years. Built keeping in mind the operating conditions
obtained at that time, the product became a major success and robustness and reliability
became integral brand values of the Company’s products.
Over the years, the Company created a creditable track record of moulding a
nascent commercial vehicle sector in the country with pioneering technologies and
product concepts. No doubt, access to global technology was an advantage enjoyed by
the Company. More importantly, the choice of technology was determined by the
unique requirements of the Indian market. Somewhat incredibly, in the 90s, in the face
of bulk handling shortage in relation to freight availability, registering authorities used
to permit 25 percent overload, marked up on the manufacturer’s recommendation and
some States even allowed up to 50 percent overload.
ACHIEVEMENTS:
Introduction of these required corresponding development of engines,
transmissions and axles. Company led with the country's first turbo charged engine and
gearboxes and axles to go with the higher power engines. Company has also been
proactive in improving safety of Bulk handling, by introducing Air Lock Valves with
dual line safety systems. Along with power steering, another first from your Company,
these have since become standard fitment. Recognition of product development as a
customer-inspired function came early in your Company. The series of products that
anticipated market requirements is a testimony to the well-entrenched practice of
keeping one’s ears close to the ground.
17
At the end of the decade came the expansion phase, with units set up at Hosur,
Bhandara and Alwar to create an all India manufacturing presence. This was also the
time long-term partnerships were forged with global technology leaders.
18
❖ To be the best in every field that we operate in.
❖ To be the market leader and set higher standards of performance for the
industry.
❖ To deliver the highest levels of service and provide maximum value to our
customers.
VISION:
BROADBAND INTERNET
Bevcon Wayors System has redundant bandwidth connections to the Internet via fiber
optic cable systems to ensure maximum uptime and availability. Comprehensive
peering arrangements with other players in the industry ensure maximum redundancy
and optimum traffic routing. Beam Cable System customers enjoy the benefits of a
global backbone, high-performance network architecture and industry-leading peering
arrangements which comes together to offer maximum site availability.
• CORPORATE SOLUTIONS
• SME SOLUTIONS
19
CHAPTER-III
• Quandrants of Cost-Effectiveness
Interest in cost analyses has accompanied concerns about rising health care
costs, pressures on health care policymakers to allocate resources, and the need for
health product makers and other technology advocates to demonstrate the economic
benefits of their technologies. This interest is reflected in a considerable increase in the
number of reports of cost analyses in the literature and further refinement of methods.
20
Main types of cost analysis include the following.
21
Cost - minimization analysis, CEA and CUA necessarily involve comparisons of
alternative interventions. A technology cannot be simply cost effective, though it may
be cost effective compared to something else. Although CBA typically involves
comparisons of alternative technologies, this is not necessary.
Two basic approaches for cost-benefit analysis (CBA) are ratio approach and
the net benefit approach. The ratio approach indicates the amount of benefits (or
outcomes) that can be realized per unit expenditure on a technology vs. a comparator.
In the ratio approach, a technology is cost beneficial vs. a comparator if the ratio of the
change in costs to the change in benefits is less than one. The net benefits approach
indicates the absolute amount of money saved or lost due to a use of a technology vs. a
comparator. In the net benefits formulation, a technology is cost-beneficial vs. a
comparator if the net change in benefits exceeds the net
change in costs. The choice between a net benefits approach or a benefit/cost approach
for a CBA can affect findings. The approach selected may depend upon such factors as
whether costs must be limited to a certain level, whether the intent is to maximize the
absolute level of benefits, whether the intent is to minimize the cost/benefit ratio
regardless of the absolute level of costs, etc. Indeed, under certain circumstances these
two basic approaches may yield different preferences among alternative technologies.
Box 19 shows basic formulas for determining CEA, CUA, and CBA.
22
3.2 COST ANALYSIS RATIOS :
Quadrants of Cost-Effectiveness
Within either of the two quadrants that entail weighing tradeoffs of costs and
effectiveness, it may be apparent that the marginal tradeoff of costs and outcomes is so
high or low as to suggest rejection or adoption. As shown in the lower figure of Box 20,
this arises when the new intervention yields only very low marginal gain in
effectiveness at a very high marginal cost (reject), or yields very high marginal
improvements in effectiveness at a very low marginal cost (adopt).
The approaches to accounting for costs and outcomes in cost analyses can vary in a
number of important respects, some of which are addressed briefly below. These should
be carefully considered by assessors, as well as the policymakers who intend to make
use of assessment findings. Given the different ways in which costs and outcomes may
23
be determined, all studies should make clear their methodology in these respects
(Byford 1998; Drummond 1997; Gold 1996).
Comparator. Any cost analysis of one intervention versus another must be specific
about the comparator. This may be standard of care (current best practice), minimum
practice, or no intervention. Some analyses that declare the superiority of a new
intervention may have used a comparator that is no longer in practice or is considered
sub-standard care or that is not appropriate for the patient population of interest.
24
Quadrants of Cost-Effectiveness
25
Direct Costs. Depending upon the perspective taken, cost analyses should
identify two types of direct costs. Direct costs represent the value of all goods, services,
and other resources consumed in providing health care or dealing with side effects or
other current and future consequences of health care. Two types of direct costs are
direct health care costs and direct non-health care costs.
Direct health care costs include costs of physician services, hospital services,
drugs, etc. involved in delivery of health care. Direct non-health care costs are incurred
in connection with health care, such as for care provided by family members and
transportation to and from the site of care. In quantifying direct health care costs, many
analyses use readily available hospital or physician charges (i.e., price lists) rather than
true costs, whose determination may require special analyses of resource consumption.
However, charges (as well as actual payments) tend to reflect provider cost shifting and
other factors that decrease the validity of using charges to represent the true costs of
providing care.
Indirect Costs. Analyses should account for indirect costs, sometimes known
as "productivity losses." These include the costs of lost work due to absenteeism or
early retirement, impaired productivity at work, and lost or impaired leisure activity.
Indirect costs also include the costs of premature mortality. Intangible costs of pain,
suffering, and grief are real, yet very difficult to measure and are often omitted from
cost analyses.
Time Horizon. Interpretation of cost analyses must consider that the time
horizon (or time-frame) of a study is likely to affect the findings regarding the relative
magnitudes of costs and outcomes of a health care intervention. Costs and outcomes
usually do not accrue in steady streams over time. Comparisons of costs and outcomes
after one year may yield much different findings than comparisons made after 5, 10, or
25 years. The meaningful time horizons for assessing the cost horizons of each of
emergency appendectomies, cholesterol-lowering in high-risk adults, and smoking
cessation in teenagers are likely to be quite different.
26
For example, an analysis conducted for the Medicare program in the US to determine
cost and time tradeoffs of hemodialysis and kidney transplantation showed that the
annualized expenditure by the Medicare End-Stage Renal Disease Program for a
dialysis patient was $32,000. Although patients with functioning transplanted kidneys
required a first-year expenditure of $56,000, they cost Medicare only an average of
$6,400 in succeeding years. On average, estimated cumulative dialysis and
transplantation costs reach a break-even point in about three years, after which
transplantation provides a net financial gain compared to dialysis (Rettig 1991).
Average Costs vs. Marginal Costs. Assessments should make clear whether
average costs or marginal costs are being used in the analysis. Whereas average cost
analysis considers the total (or absolute) costs and outcomes of an intervention,
marginal cost analysis considers how outcomes change with changes in costs (e.g.,
relative to a comparator), which may provide more information about how to use
resources efficiently. Marginal cost analysis may reveal that, beyond a certain level of
spending, the
Additional benefits are no longer worth the additional costs. For example, as
shown in Box 21, the average cost per desired outcome of an iterative screening test
may appear to be quite acceptable (e.g.,$2,451 per case of colorectal cancer detected
assuming a total of six tests per person), whereas marginal cost analysis demonstrates
that the cost of adding the last test (i.e., the additional cost of the sixth test per person)
to detect another case of cancer would be astronomical.
27
USING COST ANALYSES WITH THE STATE STRENGTHENING
EVALUATION GUIDE:
If you are using the Five-Tiered Approach to Program Evaluation outlined in the
State Strengthening Evaluation Guide, cost analyses can be used at several levels:
At this stage, you will probably be using cost studies based on other people's
experience in similar programs, since you are unlikely to have cost data of your own
yet. This means that the estimates you use will only be approximations, and may not
accurately reflect what your program's experience will be. However, "ex-ante" cost
analyses, done in the planning stages before implementing a program, can potentially
prevent some very costly mistakes. If you have access to cost-effectiveness studies of
programs similar to the one you are considering, especially if they allow you to
compare the relative costs and benefits of several different ways of delivering a service,
before you have made substantial investments of time or money, some program design
decisions may be easier. One common example in community-based programs is
staffing (eg., deciding whether to use highly-trained professionals to deliver services, or
to rely on less highly-paid paraprofessionals or volunteers). While many people assume
that the paraprofessionals or volunteers are always less expensive, cost-effectiveness
studies in some cases have found that the professionals may be less costly in the long
run because they can see more clients, require less supervision time, or are more
effective. Of course, costs also need to be weighed against other considerations, such as
the fact that paraprofessionals recruited from the community served may more easily
gain the trust of clients.
Tier 2 - Accountability
Clearly, fiscal accountability is one of the primary reasons for using any kind
of cost analysis as part of your evaluation. Any responsible program should keep
service statistics and financial records that are accurate and up-to-date enough to be
able to determine some very basic information about unit costs, and funders usually
require this. However, the minimal information routinely collected by programs for
fiscal and reporting purposes is not always in a form that lends itself to evaluation uses.
28
Tier 3 - Understanding and Refining
Like any other type of information gathered for evaluation purposes, the cost
information collected in Tier 2 for accountability purposes provides programs with a
basis for mid-course adjustments and program refinements, either at the end of a
funding cycle, or in the course of implementation.
Using cost information in Tier 4 is closely tied to the program design issues of
Tier 1, and the accountability issues of Tier 2. If appropriate program outcomes and
indicators have been identified in Tier 1, and the appropriate unit cost information is
included in the routine data that is collected as part of Tier 2, then the job of identifying
progress toward objectives in Tier 4 becomes much easier.
The type of budgeting and accounting system your program or agency uses
may well determine how much useful cost data is available for evaluating your
program, or comparing it to others. Three major types of budgeting formats commonly
used in social service programs will provide different types and amounts of information
(Kettner, Moroney, & Martin, 1990).
29
The most common format is the Line-Item Budget format, which simply looks
at revenues (money coming in from various sources, including grants, user fees or
United Way funds) and expenditures (costs broken down into broad categories like
salaries, rent, utilities, and postage), and tries to ensure that they balance. The main
purpose of a line-item budget is financial control, and the categories are usually too
broad to give much information about the cost of providing a particular service or
obtaining a particular result.
The Functional Budget format starts with a line-item budget, and takes it a step
further. It focuses on process, or the cost of providing a service. For example, with a
Functional Budget, we could determine that it cost an adoption agency $45,000 to
conduct 100 home studies (an activity which is a necessary part of the process of
placing children in permanent homes).
The Program Budget, which also starts with a line-item budget, looks at the
same information from the point of view of outcomes, or the cost of achieving a result.
For example, if the 100 home studies resulted in actually placing 50 children in
adoptive homes, the Program Budget would allow us to say that it cost the agency
$45,000 to place 50 children, which is an outcome.
Another way to look at this is that functional budgets measure productivity, and
program budgets measure the cost of achieving goals and objectives.
1. Develop a line-item budget that shows all expenditures. This is the minimal level of
budgeting and accounting that is required by many funders, such as the United Way.
Some funders require a specific format, so that the categories used are standard across
the programs that they fund.
30
2. Determine the agency's program structure. A distinct program is a set of activities or
services designed to accomplish a specific set of agency goals and objectives. Many
agencies have several different programs.
3. Identify all direct costs and indirect costs. Direct costs are those that benefit only one
program (for example, salaries of staff who work only for one program, or supplies and
equipment used only for that program). Indirect costs or "overhead" costs are those that
benefit or are shared by more than one program (for example, several programs in an
agency might share the same building, and be served by the same bookkeeping and
secretarial staff, utilities, or janitorial services).
4. Assign direct costs to the appropriate program or project. This is usually fairly
straightforward. If one county agent has full-time responsibility for operating your State
Strengthening project, for example, then 100% of his or her salary and benefits would
be assigned as an expense to that project in the budget. If a staff member spends 50% of
his or her time on the State Strengthening project and 50% on another assignment, then
half of that person's salary and benefits would be assigned to the State Strengthening
project as a direct cost.
5. Allocate indirect costs to programs. Deciding how to divide up the indirect (shared)
cost pool among several programs in the agency can be much more complicated and
technical. The actual practice of allocating or dividing up the indirect costs is usually
best left to an accountant. There are several methods for doing this, each with particular
advantages and disadvantages
6. Determine total program costs. The total cost of a particular program (such as your
State Strengthening project) is the sum of the direct costs, and the portion of indirect
costs that is allocated to that program.
Once we have this information about total program costs, then we can calculate
unit costs. For a Functional Budget, this involves defining the units of service for each
program (eg., hours of day care provided, meals delivered, home studies conducted),
and calculating the cost per unit of service. In the adoption agency example above, the
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unit cost of conducting a home study would be $450 (total program cost divided by
number of units of service provided). For a Program Budget, the final steps are
determining the total cost of achieving the outcome objectives for the year, and
calculating the cost per outcome. Using the adoption example again, we can say that the
adoption agency described above successfully placed children in adoptive homes at a
unit cost of $900/child (total program costs divided by the number of successful
outcomes).
From the point of view of program evaluation, both the Program and Functional
Budgeting systems are more useful than a Line-Item Budget. Unit cost information
allows for useful comparisons of the costs of delivering services and getting results.
With this information, we can look at the unit cost of one adoption agency compared to
another, to see whether one operates more efficiently. We can also compare the unit
cost (per child) of adoptive placement to the unit cost (per child) of placement in foster
care or residential treatment. This is basically what happens in a cost-effectiveness
study.
Cost-benefit analysis is by far the most complex and controversial of the three methods
of costs analysis we have discussed. It should not be attempted by those who lack
technical expertise in this area. However, for some purposes, it is also one of the most
powerful methods. For those who decide to undertake a cost-benefit analysis in spite of
the difficulties, Barnett (1993) outlines a nine step process. Various standard texts are
recommended for more in-depth information (see below).
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• Step 1: Define the Scope or Perspective of the Analysis - The first step is to describe
the alternative(s) to be evaluated, and determine whose perspective will guide the
evaluation. A narrow cost analysis might look only at the monetary costs and benefits
to the individual participant or target of services, or to a particular funder or agency.
A broader perspective might attempt to look at a wide range of costs and
consequences (intended and unintended, direct and indirect) for society as a whole. A
program that is not cost-effective from the perspective of a particular agency within
its limited mission and budget may well be cost-effective from the perspective of
society, because it saves expenses or prevents problems in other areas. Rossi and
Freeman (1993) note that because different stakeholders may have different values
and priorities, mixing different viewpoints is likely to result in "confused
specifications and overlapping or double counting." Whether we like it or not, the
perspective chosen for cost evaluation may have political implications.
• Step 2: Conduct Cost Analysis - The next step is to identify and estimate the
monetary value of all resources used in the intervention, not just the budgetary costs.
Some costs, such as salaries of direct service staff, rental of office space, or program
supplies, are obvious and simple to determine. Indirect costs of supervision and
administration need to be included as well. Other resources and costs may go well
beyond the items that are usually included in an agency budget. Sometimes
"overhead" (like office space or supervision) is provided as an in-kind service by an
existing agency, but since there are probably some additional demands made on the
time of the agency staff, this should be figured into the "real" cost of the intervention
• Step 3: Estimate Program Effects - This is where more traditional impact or outcome
evaluation methods come in. As noted earlier, if we don't know that there is a
significant beneficial effect of our program, there is little point in asking how much it
costs to get the effect, or whether it is more cost-effective than another kind of
program. Many texts on evaluation can assist you in designing a valid evaluation
(Rossi & Freeman, 1993; State Strengthening Evaluation Guide, 1997). Often it is not
possible to use a true experimental design in evaluating community-based programs,
but there are a number of quasi-experimental designs available (Cook & Campbell,
1979). Also, don't forget that it is often possible to use existing data to estimate
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program effects, as well. If you are looking at an ongoing program, or one that is
based on a national model (such as the Parents As Teachers program), check to see if
formal evaluations have already been done elsewhere. You may also be able to get
useful information from the program's service statistics, or from local, state, or federal
census data [insert link here to Using Existing Data URL].
• Step 4: Estimate the Monetary Value of Outcomes - This is one of the most difficult
and controversial aspects of conducting a cost-benefit analysis, and it may require the
help of consultants. Some cost-savings are easier to estimate than others. For
example, we may have data that the average cost of placing a child in residential
treatment is $20,000 a year, so if we are able to prevent 20 children from being placed
in residential treatment, the estimated savings is 20 X $20,000. However, other
important outcomes may be much less obvious, and much harder to estimate.
• Step 5: Account for the Effects of Time - One of the trickiest and most technical
aspects of cost-benefit analysis, especially for longitudinal studies that follow clients
or outcomes over a period of years, is discounting of costs and calculating rates of
return for alternative uses of the money (such as investing it). This includes taking
into account the effects of inflation on the value of the dollar over time, or figuring
the depreciation in the value of things like buildings and other capital equipment.
Similar issues apply in estimating the value of benefits over a period of time. For
example, if we want to look at the projected life-time earnings of a teenager who stays
in school due to a drop-out prevention program compared to one who does not, we
need to make projections
about wages. If we want to look at whether the government will eventually recover its
investment in the drop-out program through the taxes he or she will pay on the
increased income, we need to make projections about future tax rates as well. These
projections all require assumptions. Unless you or someone on the program staff has
expertise in this area, it is strongly advised that you seek out a skilled consultant to help
with this step.
• Step 6: Aggregate and Apply a Decision Rule - If you are looking at the costs and
benefits on several outcomes (which is often the case), how will you decide which has
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priority? If a program for pregnant teenagers results in healthier babies (and lower
hospital costs), but not in fewer repeat pregnancies, which outcome is more
important?
• a formal discipline used to help appraise, or assess, the case for a project or
proposal, which itself is a process known as project appraisal; and
• an informal approach to making decisions of any kind.
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A hallmark of CBA is that all benefits and all costs are expressed in money terms,
and are adjusted for the time value of money, so that all flows of benefits and flows of
project costs over time (which tend to occur at different points in time) are expressed on
a common basis in terms of their “present value.” Closely related, but slightly different,
formal techniques include Cost-effectiveness analysis, Economic impact analysis,
Fiscal impact analysis and Social Return on Investment(SROI) analysis. The latter
builds upon the logic of cost-benefit analysis, but differs in that it is explicitly designed
to inform the practical decision-making of enterprise managers and investors focused
on optimizing their social and environmental impacts.
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CHAPTER-IV
37
Analysis:
This graph shows us just how unaware each industry is, of the "True Cost" of
downtime. For example it has been calculated in some paper facilities, that a corrugator
down cost $10K per hour. One might construed the bar for paper industry indicates the
corrugator has not been down for more than an hour the entire year! The graph
indicates the Automotive, Food and Metal industries are most aware of "True Cost" of
downtime.
Once the tools and articles at bin95.com are used to calculate, track, and
benchmark the "True Cost" of downtime, this information should be used in daily
management decisions. (Such as repair or replace.)
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OEM Response Time
lndustry
_ = Highest Maximum time reported by any one facility, waiting on OEM to respond.
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Analysis:
Note: These are averages among industry of maximum respond time. Not average
respond time of OEM. This graph is just to show extreme cases, to bring attention to
cost involved.
For example if you calculated your true cost of down time as $1,000 per hour,
some instances cost as much as $50,000. If that breakdown was a bottle neck, the
hourly cost could escalate to over a half a million!
This is yet another example of why you should take out insurance against costly
downtime, and subscribe to Business Industrial Network's technical resources.
(If you only shave 10% off one instance, with our services, you could see a ROI of
more than 500%.)
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Annual OEM Cost
Analysis:
With an increase in outsourcing, industry wide, $100K a year is not bad. If you dig deeper,
you'll find these figures to be actual dollars paid out. Not actual cost of downtime related to OEM
service.
You will find that service is not the only OEM related cause for downtime cost. Most
facilities do not track downtime cost related to OEM warranty work, and OEM new
installations/upgrades.
The first step is to accurately track cost related OEM service, warranty, and installations.
Then you will see the "True Cost", and potential for savings. (Lack of standards for dealing with
OEMs is the primary reason for cost ten times the scale in the graph above. BIN95 is working on a
set of tools and standards you can use to save thousands.)
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.
Analysis:
Its amazing to find out how many don't know exactly how many PLCs are in
their facility. Injection Molding was the lowest in our survey. But with just about every
Molding machine and extruder having some flavor of PLC in it, I suspect the numbers
are a lot higher than surveyed.
TIPS:
1. Take an inventory of all machines.
2. Insure you have manuals and preferably software on hand, for each brand
Business Industrial Network has personnel who will inventory for you, and
make back up copies of all programs.
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.
Analysis:
The Automotive, metal and paper industries reported monthly averages where
off by an average of 30% of what they reported for an annual downtime. One of 2
conclusion can be drawn from this fact.
2. They had one or more major break downs that where not calculated in monthly
averages
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Cancer screening and detection costs with sequential guaiac tests
This analysis assumed that there were 72 true cancer cases per 10,000
population. The testing protocol provided six stool guaiac tests per person to detect
colon cancer. If any one of the six tests was positive, a barium-enema test was
performed, which was assumed to yield no false positive and no false-negative results.
Other assumptions: the true-positive cancer detection rate of any single guaiac test was
91.667%; the false-positive rate of any single guaiac test was 36.508%; the cost of the
first stool guaiac test was $4 and each subsequent guaiac test was $1; the cost of a
barium-enema was $100. The marginal cost per case detected depends on the
population screened and the sensitivity of the test used.
Discounting. Cost analyses should account for the effect of the passage of time
on the value of costs and outcomes. Costs and outcomes that occur in the future usually
have less present value than costs and outcomes realized today. Discounting reflects the
time preference for benefits earlier rather than later; it also reflects the opportunity costs
of capital, i.e., whatever returns on investment that could have been gained if resources
had been invested elsewhere. Thus, costs and outcomes should be discounted relative to
their present value (e.g., at a rate of five percent per year).
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Discounting allows comparisons involving costs and benefits that flow differently
over time. It is less relevant for "pay as you go" benefits, such as if all costs and
benefits are realized together within one year. It is more relevant in instances where
these do not occur in parallel, such as when most costs are realized early and most
benefits are realized in later years. Discount rates used in cost analyses are typically
based on interest rates of government bonds or the market interest rates for the cost of
capital whose maturity is about the same as the duration of the effective time horizon of
the health care intervention of program being evaluated. Box 22 shows the basic
formula for calculating present values for a given discount rate, as well as how the
present value of a cost or benefit that is discounted at selected rates is affected over
time.
Cost analyses should also correct for the effects of inflation (which is different
from the time preference accounted for by discounting), such as when costs or cost-
effectiveness for one year is compared to another year.
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CHAPTER-V
COST ANALYSIS:
The Aberdeen's Spend Analysis Benchmark Study - 2007 while enterprises are clearly
able to recognize and communicate the benefits of utilizing spend analysis technology,
they have not yet bridged the gap to action. Sixty percent of organizations currently rely
on manual tools to collect and analyze spend data, resulting in limited spend visibility
and the inability to improve cost savings.
Best-in-Class Performance
Aberdeen evaluated over 700 enterprises in July and August of 2007 and
distinguished Best-in-Class enterprises by the percentage of enterprise spend under
management. Best in Class enterprises in this study are notable for their superior
performance and credit spends analysis solutions for delivering the following benefits:
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CONCLUSION :
• The goal of this primer has been to describe the major principals, concepts and
methods for doing economic analysis of highway projects. The coverage of these
subjects has been necessary brief . For the interested reader, a wealth of additional
information from publicly accessible sources.
• First and foremost, economic analysis provides valuable information to the
planning, design, construction, preservation, and operation of the transportation
infrastructure. The limited supply of transportation dollars must be invested in a
manner that gives the greatest return to the public .The most objective way to
accomplish this is to compare the benefits and costs of transportation projects
through the standard unit of the discounted dollar over the life cycle of projects.
• Benefit cost analysis is the most comprehensive method to evaluate the
reasonableness of highway projects in economic terms. In some cases, when it is
clear that a project must be undertaken regardless of its cost. (e.g., a critical bridge
on a inter state highway must be repaired or replaced in kind).
• State agencies and other practitioners typically must invent some effort to establish
the skills and procedures needed to conduct economic analysis. Once established
,however, economic analysis integrates with existing planning, environmental, and
engineering practices with minimal additional work
• Uncertainty is a complicating factor in economic analysis as it is in virtually every
area of human endeavor. Uncertainty can be measured and quantified as risk
through risk analysis methods.
• Finally, through the mechanism of the marketplaces, the direct benefits and costs of
highway projects will cause various indirect effects on local and regional
economies, including impacts on employment levels, wages, business activity and
housing prices. EIA tools can measure these indirect effects of highway projects
based on the findings of BCA. Indirect effects are often of major interest to decision
makers and the public and particularly for large projects, can be presented in a
complementary analysis to the BCA.
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CHAPTER-VI
BIBLOGRAPHY
Cost Analysis, Cost Recovery, Marketing, and Fee-based Services: A Guide for ...
by M. Sandra Wood - Medical libraries - 268 pages
Cost-benefit Analysis
by Richard Layard, Stephen Glaister - Business & Economics - 1994 - 497
pages
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Covering all the main problems that arise in a typical cost-benefit exercise, this second
edition reflects the most recent research in the area.
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