Amity Institute of Information Technology

System Analysis & Design MCA-II Sem

Session-12 Cost/Benefit Analysis

Richa Mehra

Amity Institute of Information Technology

Data Analysis: Data analysis is a prerequisite to cost/benefit analysis. System investigation and data gathering lead to an assessment of current findings. Our interest is in determining how efficiently certain steps are performed, how they contribute to achieving the intended goals and the cost of making improvements.
Richa Mehra

Amity Institute of Information Technology

Cost/Benefit Analysis: In developing cost estimates for a system, we need to consider several cost elements. An analysis of the costs and benefits guides the selection process. Among them are hardware, personnel, facility, operating and supply costs.
Richa Mehra

Amity Institute of Information Technology

Cost/Benefit Analysis (Contd.): 1.Hardware costs: It relate to the actual purchase or lease of the computer and peripherals (for ex., printer, disk drive, tape unit). Determining the actual cost of hardware is generally more difficult when the system is shared by various users then for a dedicated stand-alone system. In some cases, the best way to control for this cost is to treat it as an operating cost.
Richa Mehra

Amity Institute of Information Technology

Cost/Benefit Analysis (Contd.): 2.Personnel costs: It includes EDP staff salaries and benefits (health insurance, vacation time, sick pay, etc.) as well as pay for those involved in developing the system. Costs incurred during the development of a system are one time costs and are labeled developmental costs. Once the system is installed, the costs of operating and maintaining the system become recurring costs.
Richa Mehra

Amity Institute of Information Technology

Cost/Benefit Analysis (Contd.): 3.Facility costs: These are expenses incurred in the preparation of the physical site where the application or the computer will be in operation. This includes wiring, flooring, acoustics, lighting and air conditioning. These costs are treated as one-time costs and are incorporated into the overall cost estimate of the candidate system.

Richa Mehra

Amity Institute of Information Technology

Cost/Benefit Analysis (Contd.): 4.Operating costs: It includes all costs associated with the day-to-day operation of the system; the amount depends on the number of shifts, the nature of the applications and the caliber of the operating staff. There are various ways of covering operating costs. One approach is to treat operating costs as overhead. Another approach is to charge each authorized user for the amount of processing they request from the system. Richa Mehra

Amity Institute of Information Technology

Cost/Benefit Analysis (Contd.): 5.Supply costs: These are variable costs that increase with increased use of paper, ribbons, disks and the like. They should be estimated and included in the overall cost of the system.

Richa Mehra

Amity Institute of Information Technology

Procedure for Cost/Benefit Analysis: It is a procedure that gives a picture of the various costs, benefits and rules associated with a system. The determination of costs and benefits entails the following steps:
1. Indentify the costs and benefits pertaining to a given project 2. Categorize the various costs and benefits for analysis 3. Select a method of evaluation 4. Interpret the results of the analysis 5. Take action

Richa Mehra

Amity Institute of Information Technology

Classification of Costs and Benefits: They can be fall in various categories like:
1. Tangible or Intangible Costs and Benefits 2. Direct or Indirect Costs and Benefits 3. Fixed or variable Costs and Benefits

Richa Mehra

Amity Institute of Information Technology

Evaluation methods of Costs and Benefits: When all of the financial data have been identified and broken down into cost categorizes, the analyst must select a method of evaluation. The common methods are:
1. 2. 3. 4. 5. 6.
Richa Mehra

Net benefit analysis Present value analysis Net present value analysis Payback analysis Break-even analysis Cash-flow analysis

Amity Institute of Information Technology

Cost/Benefit analysis: In summary, cost/benefit analysis is a tool for evaluating projects rather then a replacement of the decision maker. In real life business situations, whenever a choice among alternatives is considered, cost/benefit analysis is an important tool.

Richa Mehra