A PROJECT REPORT

ON

COST ANALYSIS

AT
BEVCON WAYORS PVT.LTD, UPPAL

SUBMITTED BY
M.SHIVA KUMAR
(07M11E0014)
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CHAPTER - 1

INTRODUCTION :
FINANCE 3
COST ANALYSIS 7
OBJECTIVES 12
SCOPE 13
METHODOLOGY 14
LIMITATIONS 15

CHAPTER - 2

COMPANY PROFILE : 17

CHAPTER – 3

THEORITICAL FRAME WORK : 28

CHAPTER – 4

DATA ANALYSIS & INTER PRETATION : 50

CHAPTER – 5

FINDINGS & SUGGESITIONS : 60

CONCLUSION : 61

CHAPTER – 6

BIBLIOGRAPHY : 63
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INTRODUCTION TO FINANCE

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.
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:
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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.

Some of the key finance functions are:

Financial planning and estimation of finance required for the organisation

Mobilisation of financial resources required as above
Ensuring that the funds are available in adequate quantity at appropriate time and at
an affordable cost
Management of cash in the organisation through cash flow statement
Management of investment outside the business enterprise in other organisations

above functions with some examples.

Financial planning and estimation of finance required for the organisation

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 of Rs. 140 lacs only. This is the difference between an existing
enterprise and a new one. Financial planning will take this into account.

Mobilisation of financial resources:

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Adequacy (availability in adequate quantity)

Timely (availability in time) and
At an affordable cost

Adequate supply in time etc.

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).

Management of cash in the organisation

This involves the following steps:

Ascertaining the average cash requirement by looking at the past figures and for a
new enterprise, estimating this figure.

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”)

Management of investment outside the organisation

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 for short duration. Thus investment outside one’s own business becomes the
responsibility of the Finance Manager

Management of risk in foreign exchange etc.

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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 and long-term objectives of Financial Management

Short-term objective

The short-term objective of Financial Management is to procure financial resources at

an affordable cost thereby increasing the return to the shareholders in the form of
Earnings Per Share (EPS). EPS comprises two elements namely Dividend per share
(DPS) and Retained Earnings per share (REPS or Reserves per share). This objective
is often times referred to as “profit maximisation”. This is known as the short-term
objective as it is done on a continuous, year-to-year basis. One or more of the
following measures can achieve this:
Monitoring of costs on a continuous basis through budgets
Suitable cost reduction techniques wherever the costs are high
Minimisation of cost of borrowed capital from outside through financial discipline
Proper mix of equity and debt (known as financial leverage – for further details please
refer to Chapter no. 5 – Operating and financial leverages
Control over liquidity available in the organisation so as to minimise the cost of
carrying too much cashi etc.

Long-term objective

The long-term objective of financial management is to increase the wealth of the

shareholders. The term “wealth” refers to various business assets of the
enterprise that are free of debt. This means that this wealth belongs to the equity
shareholders. It is often reflected in the “book value” of the share as reflected in
the balance sheet Financial system in India

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
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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)

WHAT IS COST ANALYSIS?

Cost analysis (also called economic evaluation, cost allocation, efficiency

assessment, cost-benefit analysis, or cost-effectiveness analysis by different authors)
is currently a somewhat controversial set of methods in program evaluation. One
reason for the controversy is that these terms cover a wide range of methods, but are
often used interchangeably.

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).

COST ANALYSIS IS OF THREE IN EVALUATION:

1. Cost Allocation
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2. Cost - Effectiveness analysis

3. Cost - Benefit analysis

represent a continuum of types of cost analysis which can have a place in

program evaluation. They range from fairly simple program-level methods to
highly technical and specialized methods. However, all have specialized and
technical aspects. If you are not already familiar with these methods and the
language used, you should plan to work with a consultant or read some more in-
depth texts (see some suggested references at the end of this discussion) before
deciding to attempt them.

COST ALLOCATION:

Cost allocation is a simpler concept than either cost-benefit analysis or cost-

effectiveness analysis. At the program or agency level, it basically means setting up
budgeting and accounting systems in a way that allows program managers to
determine a unit cost or cost per unit of service. This information is primarily a
management tool. However, if the units measured are also outcomes of interest to
evaluators, cost allocation provides some of the basic information needed to conduct
more ambitious cost analyses such as cost-benefit analysis or cost-effectiveness
analysis. For example, for evaluation purposes, you might want to know the average
cost per child of providing an after-school tutoring program, including the costs of
staff salaries, snacks, and other overhead costs.

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.

If staff in a prenatal clinic simply reports the number of clients served by

gender, for example, you might know only that 157 females were served in March.
For an evaluation, however, you might want to be able to break down that number in
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
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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).

COST - EFFECTIVENESS ANALYSIS :

Most often, cost-effectiveness and cost-benefit studies are conducted at a

level that involves more than just a local program (such as an individual State
Strengthening project). Sometimes they also involve following up over a long period
of time, to look at the long-term impact of interventions. They are often used by
policy analysts and legislators to make broad policy decisions, so they might look at a
large federal program, or compare several smaller pilot programs that take different
approaches to solving the same social problem. People often use the terms
interchangeably, but there are important differences between them.

Cost - Effectiveness analysis assumes that a certain benefit or outcome is

desired, and that there are several alternative ways to achieve it. The basic question
asked is, "Which of these alternatives is the cheapest or most efficient way to get this
benefit?" By definition, cost-effectiveness analysis is comparative, while cost-benefit
analysis usually considers only one program at a time. Another important difference is
that while cost-benefit analysis always compares the monetary costs and benefits of a
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
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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).

COST - BENEFIT ANALYSIS :

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).

"Suppose the drop-out rate in an inner-city high school is 50%. Prevention

Program A enrolls 20 students, costs $20,000, and 15 of the 20 students (75%)
graduate. Thus Program A resulted in 5 additional graduates at a cost of $20,000, or
one additional graduate for every $4,000. Prevention Program B enrolls 20 students,
costs $15,000, and 12 of the 20 students (60%) graduate. Thus Program B resulted in
2 additional graduates at a cost of $15,000, or one additional graduate for every
$7,500 spent. Although Program B is cheaper ($15,000 compared to $20,000),
Program A is more COST-EFFECTIVE ($4,000/each additional graduate, compared
to $7,500/additional graduate). A COST-BENEFIT ANALYSIS in this situation,
instead of comparing unit costs, would require estimating the dollar value of high
school graduation

OBJECTIVES OF STUDY
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• 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 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.

SCOPE :
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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 1 – Program definition

Tier 2 – Accountability

Tier 3 – Understanding & refining

Tier – 4 Progam towards objective

Tier 5 – Program impact

COST ANALYSIS METHODOLOGY :

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PRIMARY DATA COLLECTION :-

• 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.

SECONDATY DATA COLLECTION :-

 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.

PERIOD OF STUDY :
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The study has been conducted taking into an account the past five years data
i.e. from 2002 – 03 to 2006 – 07

LIMITATIONS OF COST ANALYSES :

• 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.
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COMPANY PROFILE:

Bevcon Wayors Limited is a leading manufacturer of material handling

equipment company that operates out of Hyderabad, the Capital of South Indian State
of Andhra Pradesh. This particular unit has Established in 1999, BW’s registered an
exponential growth within the first five years under the sterling leadership of the
company’s chairman C.M. Ramesh.

BW’s expertise is outstanding in following project areas: masonry / Concrete

dams spill ways, tunneling, formation of earth dams and bunds, canals, bridges, roads
and buildings. befittingly, the company has the privilege of working for or on behalf
of such infrastructure majors as the Tehri Hydro power development corporation,
steel Authority of India Limited, NTPC, NHPC, Reliance, and Engineering projects
India Limited.
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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.

Environments, Mr., Ramesh plans to bank from when the change of

• Rs.8-crores Owk Reservoir Complex in Andhra Pradesh, and
• Rs22-cores project for construction of barrage across ponnai River near
Kalavagunta, Chittoor district in Andhra Pradesh.

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.

As his first major business diversification effort, Mr. Ramesh established

Bevcon Wayors Limited in 1999 in Hyderabad, the state capital of Andhra Pradesh.
Within the next couple of years, he shaped the company into an outstanding
infrastructure development leader with specific thrust on mega construction and mining
projects. Mr. Ramesh also has the distinction of conceiving and development a
profitable 6MW Bio-Mass-based electricity project in Khammam district of Andhra
Pradesh. This project is recognized as the most significant in its class for industry best
practices.
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A commerce graduate with a sharp insight into national infrastructure

requirement, Mr. Ramesh has a decade and half experience in developing mega
projects. In addition to managing his own enterprises successfully Mr. Ramesh takes
time out to provide professional consultancy to several infrastructure leaders such as the
Hyderabad-based Progressive Constructions Limited,
Operating efficiently out of a network of corporate and project offices across the
country, Mr. Ramesh presents the picture of a cutting edge entrepreneur endowed with
exemplary vision, leadership, resource mobilization, and management skills.
Current diversification plans of Mr. Ramesh include tapping the excellent hydropower
generation opportunities that the highly progressive State of Sikkim is unfolding.

Mr. C.M. Rajesh Director

Mr. C.M. Rajesh, Director of Bevcon Wayors Limited A graduate in the Arts
from Andhra Loyola College, Vijayawada, Andhra Pradesh is yhe current successful
Director of the profit-making Bevcon Power Projects Limited in Khammam district of
Andhra Pradesh. He brings a sharp sense of focus, dynamism, dedication and
competitive spirit to the company to shape into a successful, professionally managed
enterprise.

A hands-on leader, Mr. Rajesh’s experience is significant in successful

management of the 6 MW Bio-Mass-based electricity projects in Khammam. This
project is recognized as the most significant in its class for implementation of the power
industry’s best practices.
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Vision & mission of the organization:

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:
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We have Technology tie-ups with companies such as Burwell Technologies of

Australia, Sanland - China, Friedrich & Noma - Germany, Statec – Austria, Nergeco
France-Australia, Thermo stop - Canada.

MISSION:

Our Mission is to create Smarter Engineering & Management Solutions

evolved by a technology driven team. The Mission is achieved by the following
edicts.

 Strong Engineering & Management skills by Design and Quality base.

 Strict conformance and compliance to quality of equipment and work procedures.

 Excellence in service to Customers & Clients

 Honesty, Integrity and Transparency in all relationships.
 Respect for the Individual.

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.
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OUR PROMOTORS:

P SUNEEL LAKSHMAN
Managing Director

A Mechanical Engineer from BITS Pilani with 25 years of experience in Engineering

Sector, especially in Material Handling Industry.

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.

OUR FACTORY AND OFFICE

INFRASTRUCTURE
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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.
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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.

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.

The next significant chapter in your Company's history was marked by

economic liberalization. In seizing the new opportunities that opened up in the years
that followed, the backing and support of the Bevcon Group in the last two decades
has been crucial. The infusion of vital capital and technology triggered the
modernization of the Company’s physical infrastructure which still continues. New
benchmarks have since been set in manufacturing, product development and HR
infrastructure and processes. The first decade after the economic liberalization was
marked by quality and efficiency improvements to reach global competitiveness. That
set the stage for the multi-pronged growth plans - capacity expansion, globalization
and diversification.
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FUTURE FORAYS:
The Bevcon Group has repeatedly reiterated its commitment to the growth of its
Indian flagship - and has followed that up with matching action, creating the
confidence to seek global growth. The holding company of Bevcon Wayors
spearheads the ambitious growth plans of the Group to achieve significant presence
and leadership in the Bulk Handling industry, across geographies and in adjacent
sectors including auto components, foundry products, technology and engineering
services, automotive electronics, construction equipment and even defence products.

ABOUT BEVCON WAYORS PVT. LTD.

MISSION

Convergence of ideas, experience, competencies and an unflinching

ambition. At the heart of this convergence is a grand vision.

 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 redefine the expectation levels of our customers, partners and employees.

 To deliver the highest levels of service and provide maximum value to our
customers.
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VISION:

Bevcon Wayors is grounded on the fundamentally strong idea of making a

significant impact while serving consumers across diverse industry segments.
Keeping in line with this philosophy and vision, Bevcon Wayors has a highly
diversified product offering; serving Home Users, SME users, Large Corporate & also
providing Customized Internet and Networking

BROADBAND INTERNET

The Honorable TRAI has defined broadband as "an always-on data

connection with minimum speeds of 256Kbps”. The company have many Pure
Broadband packages on offer.

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.

BEST SOLUTIONS OF BEVCON WAYORS PRIVATE Ltd.

• CORPORATE SOLUTIONS

• SME SOLUTIONS

• HOME USERS SOLUTIONS

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Chapter- 3
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THEORITICAL FRAME WORK:

COST ANALYSIS METHODS

• Main Types of Cost Analysis

• Quandrants of Cost-Effectiveness
• Key Attributes of Cost Analyses
• Collecting Cost Data Alongside Clinical Studies

Studies of costs and related economic implications comprise a major group of

methods used in HTA. These studies can involve attributes of either or both of
primary data collection and integrative methods. That is, cost data can be collected as
part of RCTs and other clinical studies, as well as administrative databases used in
health care payment. Cost data from one or more such sources often are combined
with data from primary clinical studies, epidemiological studies, and other sources to
conduct cost-effectiveness analyses and other cost studies that involve weighing
health and economic impacts of health technology.

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.

Main Types of Cost Analysis

There is a variety of approaches to cost analysis, the suitability of any of

which depends upon the purpose of an assessment and the availability of data and
other resources. It is rarely possible or necessary to identify and quantify all costs and
all benefits (or outcomes), and the units used to quantify these may differ.
 29

Main types of cost analysis include the following.

• Cost-of-illness analysis : determination of the economic impact of an

illness or condition (typically on a given population, region, or country) e.g.,
of smoking, arthritis or bedsores, including associated treatment costs
• Cost-minimization analysis : determination of the least costly among
alternative interventions that are assumed to produce equivalent outcomes
• Cost-effectiveness analysis (CEA): a comparison of costs in monetary
units with outcomes in quantitative non-monetary units, e.g., reduced
mortality or morbidity
• Cost-utility analysis (CUA): a form of cost-effectiveness analysis that
compares costs in monetary units with outcomes in terms of their utility,
usually to the patient, measured, e.g., in QALYs
• Cost-consequence analysis: a form of cost-effectiveness 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.
 30

The valuation of costs and outcomes among these alternative economic

analyses.

Different Types of Economic Analysis

Valuation Valuation of Outcomes

of Costs
Cost of Illness $ vs. None
Cost Minimization $ vs. Assume same
Cost Effectiveness $ ÷ Natural units
Cost Utility $ ÷ Utiles (e.g., QALYs)
Cost Benefit $ ÷ or - $

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.

Because it measures costs and outcomes in monetary (not disease-specific)

terms, CBA enables comparison of disparate technologies, e.g., coronary artery
bypass graft surgery and screening for breast cancer. A drawback of CBA is the
difficulty of assigning monetary values to all pertinent outcomes, including changes in
the length or quality of human life. CEA avoids this limitation by using more direct or
natural units of outcomes such as lives saved or strokes averted. As such, CEA can
only compare technologies whose outcomes are measured in the same units. In CUA,
estimates of utility are assigned to health outcomes, enabling comparisons of disparate
technologies.
 31

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.

Basic Formulas for CEA, CUA, and CBA

 32

COST ANALYSIS RATIOS :

 33

Quadrants of Cost-Effectiveness

A basic approach to portraying a cost-effectiveness (or cost-utility)

comparison of a new intervention to a standard of care is to consider the cost and
effectiveness of a new intervention in the space of four fields as shown in Box 20,
starting with the upper figure. The level of costs and the level of effectiveness for the
standard of care are indicated by the "X" in the middle of the figure. A new
intervention may have higher or lower costs, and higher or lower effectiveness, such
that its plot may fall into one of the four quadrants surrounding the costs and
effectiveness of the standard of care. If it is known that the plot of the new
intervention falls into either of two of the quadrants, i.e., where the new intervention
has higher costs and lower effectiveness (indicating that it should be rejected), or it
has lower costs and higher effectiveness (indicating that it should be adopted), then no
further analysis may be required. If it is known that the plot of the new intervention
falls into either of the other two quadrants, i.e., where the new intervention has higher
costs and higher effectiveness, or it has lower costs and lower effectiveness, then
further analysis weighing the marginal costs and effectiveness of the new intervention
compared to the standard of care may be required.

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).

Key Attributes of Cost Analyses

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
 34

outcomes may 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.

Perspective. The perspective of a cost analysis refers to the standpoint at

which costs and outcomes (or consequences or benefits) are realized. For instance, the
perspective of an analysis may be that of society overall, a third-party payer, a
physician, a hospital, or a patient. Clearly, costs and outcomes are not realized in the
same way from each of these perspectives. Many analysts favor using the broad
perspective of society and identifying all costs and all outcomes accordingly.
However, "society" as such may not be the decision maker, and what is cost effective
from that perspective may not be what is cost effective from the standpoint of a
ministry of health, third-party payer, hospital manager, patient, or other decision
maker. It is possible that this perspective may resemble that of a national or regional
government, if indeed that government experiences (or is responsible for representing
the perspectives of those that experience) all of the costs and outcomes that are
included in a societal perspective.
 35

Quadrants of Cost-Effectiveness
 36

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.
 37

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).

Time horizons should be long enough to capture streams of health and

economic outcomes (including significant intended and unintended ones). These
could encompass a disease episode, patient life, or even multiple generations of life
(such as for interventions in women of child-bearing age or interventions that may
cause heritable genetic changes). Quantitative modeling approaches may be needed to
estimate costs and outcomes that are beyond those of available data. Of course, the
higher the discount rate used in an analysis, the less important are future outcomes
and costs.

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.

.
 38

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:

Tier 1 - Program Definition

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.
 39

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.

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.

Tier 4 - Progress Toward Objectives

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.

Tier 5 - Program Impact

When it has been possible to conduct a full-scale cost-benefit analysis over a

long period of time, and it shows significant long-term gains and cost savings in a
particular population or problem area, the policy implications may be great. One of
the best-known examples is the Perry Preschool Study (discussed earlier), which has
been credited with persuading lawmakers to sustain or significantly increase their
support for early intervention programs, including Head Start.
 40

HOW TO BUDGET & ALLOCATE COSTS FOR COST EFFECTIVENESS

STUDIES:

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).

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.
 41

COMMON STEPS IN DEVELOPING PROGRAM & FUNCTIONAL

BUDGETS (Kettner, et al., 1990):

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.

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
 42

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 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).

EFFICIENCY & COST - EFFECTIVENESS STUDIES:

 43

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.

In general, a cost-effectiveness study is more appropriate than a cost-benefit

analysis when your goals or outcomes can't easily be quantified or monetized, or
when there are multiple competing goals. As with budgeting and cost allocation, there
are a variety of approaches to cost-effectiveness studies. The approach that is best for
your purposes will depend on a number of factors. A good source of more detailed
information about deciding what approach is most appropriate, and conducting the
various types of cost-effectiveness studies, is Weimer & Vining (1992).

HOW TO CONDUCT A COST - BENEFIT ANALYSIS:

 44

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).

• 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
 45

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 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
 46

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 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?

• Step 7: Describe Distributional Consequences - This is related to choosing

your perspective of analysis. It involves specifying who gains and who loses under
different conditions (because in some cases, one party's benefit is another party's
loss). This may be a highly controversial and political step in the process.
• Step 8: Conduct Sensitivity Analysis - This step involves identifying the
assumptions behind your cost estimates, and considering how critical they are to
your calculations. If one of your assumptions turns out not to be accurate, or if
conditions change during the time of your study (for example, the minimum wage
goes up, affecting salary costs), will that change your whole conclusion, or is the
effect strong enough that there is some leeway?
• Step 9: Discuss the Qualitative Residual - Since there are almost always some
things that can't be quantified or given monetary values, it is important that your
report include some discussion of these issues. A frank description of some of these
qualitative issues in your report can help round out your conclusions, and reduce the
chances of your study being used inappropriately.
 47

Cost - Benefit Analysis

From Wikipedia, the free encyclopedia
Jump to: navigation, search

Cost-benefit analysis is a term that refers both to:

• 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.

Under both definitions the process involves, whether explicitly or implicitly,

weighing the total expected costs against the total expected benefits of one or more
actions in order to choose the best or most profitable option. The formal process is
often referred to as either CBA (Cost-Benefit Analysis) or BCA (Benefit-Cost
Analysis).

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.
 48

Chapter- 4
 49

ANALYSIS PART IS CALCULATED:

The data is collected by using website bin95@bin95.com after

the receiving permission from business industrial networks. This database and
documentation is the confidential and proprietary information of Business Industrial
Network ("Confidential Information"). I tried my best to get this data , cost details can
t be disclosed in detail being a confidential data .

Analysis is done industry wise.

 50

DATA ANALYSIS & INTERPRETATION :

Business Industrial Network

Don't be laymen by the low bars for the "Paper" industry. The survey
participants did not supply monthly T&M cost. This could be a result of participants
not being aware of cost, or not trusting that they remain anonymous in this survey.

Lost Production Cost

Industry
 51

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.)

This database and documentation is the confidential and proprietary

information of Business Industrial Network ("Confidential Information"). You shall
not disclose such Confidential Information and shall use it only in accordance with
the terms of the license agreement you entered into with Business Industrial Network.

No portion of these proceedings or exhibits may be copied, duplicated, used

or referenced without written permission from Business Industrial Network.
bin95@bin95.com

OEM Response Time

 52

lndustry

_ = Highest Maximum time reported by any one facility, waiting on OEM to respond.

_ = Average maximum time for industry that OEM took to respond.

Analysis:
 53

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%.)
 54

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.)
 55

_ = Average number of PLC techs per industry

_ = Average number of PLCs per industry

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.
 56

_ = Average monthly downtime for industry

_ = Average total annual downtime for industry

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.

1. They are not aware of the true monthly average downtime.

2. They had one or more major break downs that where not calculated in monthly
averages

Cancer screening and detection costs with sequential guaiac tests

 57

No. No. of Additional Total cost Additional Average Marginal

of cancers cancers ($) of ($) cost of cost ($) cost ($)
tests detected detected diagnosis diagnosis per cancer per cancer
detected detected
1 65.9469 65.9469 77,511 77,511 1,175 1,175
2 71.4424 5.4956 107,690 30,179 1,507 5,492
3 71.9004 0.4580 130,199 22,509 1,810 49,150
4 71.9385 0.0382 148,116 17,917 2,059 469,534
5 71.9417 0.0032 163,141 15,024 2,268 4,724,695
6 71.9420 0.0003 176,331 13,190 2,451 47,107,214

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.

Source: Neuhauser 1975.

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).

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
 58

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.

Sensitivity Analysis. Any estimate of costs, outcomes, and other variables

used in a cost analysis is subject to some uncertainty. Therefore, sensitivity analysis
should be performed to determine if plausible variations in the estimates of certain
variables thought to be subject to significant.
 59

CHAPTER- 5

FINDINGS & SUGGESTIONS :

FIND A SOLUTION TO THE BUSINESS DILEMMA:

YOU WANT TO CONTROL

Travel & Telephony Costs IT Maintenance Costs
Energy consumption Server Hardware Purchases
Slower Decision-Making Problematic Content Workflow
Ineffective Reporting Formats Multiplicity of Software Licenses
 60

Unproductive Customer Service Poor IT Service Levels

Upfront payment for Software
Licenses

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:

12.7% savings due to sourcing efforts based on spend analysis data

9.1% reduction in manual correction of spend cleansed and classified
73% rate of compliance to contractual agreements

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
 61

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.
 62

CHAPTER- 6

BIBLOGRAPHY

Cost Analysis, Cost Recovery, Marketing, and Fee-based Services: A Guide for ...
by M. Sandra Wood - Medical libraries - 268 pages
 63

Benefit-cost Analysis: Financial and Economic Appraisal Using Spreadsheets

by Harry F. Campbell, Richard P. C. Brown - Business & Economics - 2003 - 345
pages
Throughout the text of this introduction to benefit cost analysis, emphasis is
on applications, and a worked case study is progressively undertaken as Limited
preview - About this book - Add to my shared library

Cost-Benefit Analysis and Health Care Evaluations

by Robert J. Brent - Health & Fitness - 2004 - 400 pages
This book attempts to build a bridge between cost-benefit analysis, as developed by
economists, and the health care evaluation literature which relies on other...

Cost-benefit Analysis: Theory and Application

by Tevfik F. Nas - Political Science - 1996 - 220 pages
This book has been designed specifically with the non-economist in mind, for
example, students in public administration, urban studies and health care who may

Probability Methods for Cost Uncertainty Analysis: A Systems Engineering - Page

1
by Paul R. Garvey - Technology & Engineering - 2000 - 401 pages
"How much could cost overrun!" "What are the uncertainties and how do they drive
cost!" Cost uncertainty analysis provides decision-makers insight into ...
Limited preview - About this book - Add to my shared library

Cost-benefit Analysis
by Richard Layard, Stephen Glaister - Business & Economics - 1994 - 497
pages

Covering all the main problems that arise in a typical cost-benefit exercise, this
second edition reflects the most recent research in the area.
 64

Cost Analysis Applications of Economics and Operations Research: Proceedings

by Institute of Cost Analysis. National Conference, Thomas R.
Gulledge, Lewis A. Litteral - Business & Economics - 1989 - 422 pages
Literaturangaben

Cost-benefit Analysis: An Informal Introduction

by Edward J. Mishan - Business & Economics - 1988 - 461 pages
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