Indirect costs are not directly accountable to a service or product, such as overhead costs.Directs costs are associated with the production of a product or service.Real costs are considered to be expenses in developing a program or service, such as labor costs.The primary cost categories that should be considered are: It is important to distinguish whether costs are one-time, fixed or variable. Assumptions can be made regarding cost and should be disclosed and supported with evidence. To clearly compile a comprehensive list of costs, as a best practice, consider the external and internal costs of the project. Once the scope is defined, costs should be identified and categorized. Total utility = explicit costs + implicit costs A time frame or period should be determined related to the decision-making process and implementation of the change or new program. Key stakeholders should be identified and taken into consideration during the decision-making process. Demographics need to be determined related to the decision and the population that it will impact.This would include identifying the background, current challenges and performance of the environment related to the change or program. Once the change or new program is outlined in detail, the current state of that environment will need to be outlined. This allows organizations to understand what is being evaluated, as well as the relationship it has to the problem or challenge being addressed. To establish a framework, details of the proposed program, new project, strategic initiative or service offering must be outlined. Identify the scope – likely a project, initiative, program or service offering It is often used when considering a new program, eliminating services or even deciding which initiatives the organization will support as a component of its strategic mission.Ĭost-benefit analysis includes the five fundamental steps outlined below. A cost-benefit analysis is simply a systematic approach that individuals and organizations can use to analyze the risks and rewards of a project and select the optimal solution.Ĭost-benefit analysis is a vital component of the decision-making process for governments and not-for-profit organizations. It can also be more complex, such as deciding whether to purchase a property in a suburb with a large yard or a luxury loft condominium with breathtaking city views. The decision can be for something simple, for example, choosing whether to use beef or a plant-based alternative to make chili. Most people do not realize that they conduct a cost-benefit analysis when making everyday decisions. A cost-benefit analysis is a critical tool for all public sector managers to leverage when making difficult financial decisions that will become commonplace as COVID-19 response and recovery processes continue. It is essential for decision-makers to understand the impacts of their decisions, as they have a fiduciary responsibility as stewards of the public funds they manage. The current COVID-19 crisis places a microscope on the decisions governments and not-for-profit organizations make.
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