One major role in owning a business is to be able to analyse the cost or gains of any given situation or decision you make. Whether deciding to open up a new office somewhere or starting a new project, it’s important to evaluate the impact that decision will have. There are 4 types of economic evaluations that a business will use: Cost Analysis, Cost-Benefit Analysis, Cost-Utility Analysis, and Cost-Effectiveness Analysis.
What Is a Cost Analysis?
A cost analysis focuses on the cost of any given decision, project, or action without considering what the total outcome will be. This type of analysis is the first step you would take before doing the other 3 economic evaluations to see if it is feasible or suitable for the company. It’s a process that many businesses utilize faced with a decision.
How do you do a Cost Analysis?
The first thing you need to do is to define the scope and purpose of the project. Ask yourself why you need to do a cost analysis and what its purpose is. This will help you to determine the scope of the cost analysis. List the major questions that you want a cost analysis to answer. For example, if you are working on setting a budget for your company, the scope of your cost analysis would include the entire business. If you were deciding on the cost of a specific service, the scope of your cost analysis would focus on the part of the company it would involve or impact.
Your next step would be to determine whose cost it is that you are analyzing to help you decide what data you will need to gather. An example would be when deciding on offering a service to a customer. You need to look at things from their perspective regarding how much you would be billing them. If the focus is on your business, you would be looking at the expenses of your company and any potential benefits. You would then need to group together or separate different costs to see if any of these will overlap or share resources.
The next step would be to set a time frame to analyze, such as over a period of 3 months or a year. For example, if your company wants to offer a new service to customers, you first need to see how much it will cost your company to do so. You would then look at whether your company could manage any type of loss that comes as an effect of offering that service.
Costs can fall into a couple of different categories:
- Direct Costs – anything that is specific to the project or plan being analyzed, such as materials, supplies, and salaries. Other direct costs would include any insurance, licensing, or contract costs.
- Overhead Costs – if your project required it’s own site or location, you would need to look at things like rent and utilities.
- Indirect Costs – this includes things like management and admin salaries, equipment, facilities, or benefits that are shared by other projects.
Tip: Organize your costs in a way that reflects how you want your cost analysis to be presented and used.
Gathering Data for Cost Analysis
Data gathering is the most important aspect of cost analysis. Be sure to get accurate data for each cost type you are going to use in your report. While you can use some estimates in determining cost, its best to use actual data for the best outcome.
Once you have all of your data, you can add up all of the costs relating to the project and then spread this out over your chosen time period to get your cost analysis figures. Usually, costs for a week or month are analyzed and then projected a few months further.
Once you have made conclusions from what your data has found, you can look at the purpose of the cost analysis to determine the action that you need to take.
Cost Analysis Templates
You can download one of our free templates or samples to see how Cost Analysis is done to get a better understanding of what you need.
Cost Analysis Template Spreadsheet
Cost Analysis Template for Excel (With Chart)
Cost Analysis Template for PDF
Cost-Benefit Analysis Template
Cost Comparison Template
Frequently Asked Questions
Cost analysis only focuses on the costs related to a project, whereas cost-benefit analysis looks at both the costs and the benefits the company can gain with the project.
Yes, a cost analysis can be helpful for both large organizations and small businesses. It’s a tool designed to help you make better decisions for your company.
This depends on how complex the categories and data being used are. For more complex figures, it is advisable to have an accountant go over costs with you.