A
PROJECT REPORT ON
“COST CONTROL C ONTROL & ANALYSIS ANALYSIS ” OF
ASHOK LEYLAND LTD.
1
ABSTRACT This This project project titled titled “cost “cost control control & analys analysis” is” at Asho Asho Leyla Leyland nd Ltd
is a st!dy st!dy at
cond!cted in this co"pany #or the p!rpose o# analy$in% cost control. ost analysis "eans “The econo"ic e'al!ation( e##iciency assess"ent( cost)*ene#it analysis and cost e##ecti'eness” are called as “cost control and analysis”. +t is "ainly depends on ost allocation and deter"ination( ost e##ecti'e analysis Econo"ic *ene#its The o*jecti o*jecti'e 'e o# this decision aid is to #acilitate the cost calc!lation #or the ranch pic!p and,or a li'estoc li'es toc trailer. The decision aid calc!lates the per "ile and ann!al costs o# a pic!p or trailer( the th e cost o# "ain% a trip -ith li'estoc( and also allo-s #or calc!lation o# costs #or enterprises *y allocatin% the percent costs *et-een #ora%es( li'estoc( and crops. The pro%ra" is !se#!l #or enterprise *!d%etin%( esti"atin% transportation costs and e'al!atin% p!rchasin% alternati'es. ro"ote the acco!nta*ility( to increase the pro#ita*ility o# the co"pany( to st!dy the per#or"ance o# the or%ani$ation.
+np!ts are /0 'aria*les that are !sed to descri*e the pic!p and trailer. These can
*e o*ser'ed o*ser' ed in the attached decision aid e1a"ple. !rrent "aret 'al!e can *e the p!rchased p!rchas ed 'al!e on a ne- pic!p or trailer or the "aret 'al!e 2net3 #or a !sed pic!p or trailer. Total "iles !sed sho!ld e4!al re"ainin% "iles o# !se #or a ne- pic!p or trailer. 5e"ainin% 5e"ainin% "iles o# !se -o!ld re#lect "iles le#t #or !se #or !sed pic!p or trailer. See the de#inition section #or a description o# other inp!t ite"s.
+t can *e concl!ded that o!tp!ts are three sections o# o!tp!t #or the decision aid6 per "ile and ann!al costs( trip costs and allocated costs. The trip cost cos t or allocated cost section can *e i%nored i# they are not desired. The pic!p cost can *e calc!lated -itho!t the trailer7 ho-e'er( to calc!late the co"*ined pic!p and trailer cost( the pic!p "!st *e incl!ded to %enerate these costs.
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INDEX S.No.
TOPIC
P.No.
INTRODUCTION: CHAPTER - 1
COST ANALYSIS IN EVALUATION
01-08
TYPES OF O F COST ANALYSIS ANALYSIS
ADVANTAGES ADVANTAGES & DISADVA DISAD VANTAGES NTAGES CONCEPTIONAL FRAE !OR"S THEROTICAL STUDY CHAPTER - 2
USING !ITH THE STATE STATE
0#-20
STRENGTHENING BUDGET & ALLOCATION COST EFFICIENCY & EFFECTIVENESS COST BENEFIT BE NEFIT ANALYSIS ANALYSIS
APPLICATIONS AND HISTORY COST OVERRUN CHAPTER - $
COST ANALYSIS ANALYSIS & CONTROL
21-%
ETHODS COST ANALYSIS RATIO CHAPTER - % COPANY PROFILE
%'-%
DATA DATA ANALYSIS ANALYSIS AND INTERPRE INTE RPRETA TATION TION LOST PRODUCTION COST CHAPTER -
OE RESPONCE TIE
-'1
ANNUAL OE COST
CHAPTE CHAPTER R - ' FINDI FINDINGS NGS(( SUGG SUGGES ESTI TIONS ONSAND AND CONCLUSIONS BIBLIOGRAPHY
$
'2-''
CHAPTER )+ INTRODUCTION
%
8HAT +S OST ANALYS+S9 ost analysis 2also called econo"ic e'al!ation( cost allocation( e##iciency assess"ent( cost)*ene#it analysis( or cost)e##ecti'eness analysis *y di##erent a!thors3 is c!rrently a so"e-hat contro'ersial set o# "ethods in pro%ra" e'al!ation. One reason #or the contro'ersy is that these ter"s co'er a -ide ran%e o# "ethods( *!t are o#ten !sed interchan%ea*ly. At the "ost *asic le'el( cost allocation is si"ply part o# %ood pro%ra" *!d%etin% and acco!ntin% practices( -hich allo- "ana%ers to deter"ine the tr!e cost o# pro'idin% a %i'en !nit o# ser'ice 2Kettner( :oroney( & :artin( /;;<3. At the "ost a"*itio!s le'el( -ell) p!*lici$ed cost)*ene#it st!dies o# early inter'ention pro%ra"s ha'e clai"ed to shos!*stantial lon%)ter" social %ains #or participants and cost sa'in%s #or the p!*lic 2=erre!ta) le"ent( Sch-einhart( =arnett( et al.( /;>03. =eca!se these st!dies ha'e *een -idely cited and credited -ith con'incin% le%islators to increase their s!pport #or early childhood pro%ra"s( so"e practitioners ad'ocate "ain% "ore !se o# cost)*ene#it analysis in e'al!atin% social pro%ra"s 2=arnett( /;>>( /;;?3. Others ha'e ca!tioned that %ood cost)*ene#it or cost) e##ecti'eness st!dies are co"ple1( re4!ire 'ery sophisticated technical sills and trainin% in "ethodolo%y and in principles o# econo"ics( and sho!ld not *e !ndertaen li%htly 28hite( /;>>3. 8hate'er position yo! tae in this contro'ersy( it is a %ood idea #or pro%ra" e'al!ators to ha'e so"e !nderstandin% o# the concepts in'ol'ed( *eca!se the cost and e##ort in'ol'ed in prod!cin% chan%e is a concern in "ost i"pact e'al!ations 25ossi & @ree"an( /;;?3.
COST ANALYSIS IS OF THREE IN EVALUATION: /. ost Allocation .
ost ) E##ecti'eness analysis
?.
ost ) =ene#it analysis 5epresent a contin!!" o# types o# cost analysis -hich can ha'e a place in
pro%ra" e'al!ation. They ran%e #ro" #airly si"ple pro%ra")le'el "ethods to hi%hly technical and speciali$ed "ethods. Ho-e'er( all ha'e speciali$ed and technical aspects. +# yo! are not already #a"iliar -ith these "ethods and the lan%!a%e !sed( yo! sho!ld plan to -or -ith a cons!ltant or read so"e "ore in)depth te1ts 2see so"e s!%%ested re#erences at the end o# this disc!ssion3 *e#ore decidin% to atte"pt the".
COST ALLOCATION: ost allocation is a si"pler concept than either cost)*ene#it analysis or cost) e##ecti'eness analysis. At the pro%ra" or a%ency le'el( it *asically "eans settin% !p *!d%etin% and acco!ntin% syste"s in a -ay that allo-s pro%ra" "ana%ers to deter"ine a !nit cost or cost per !nit o# ser'ice. This in#or"ation is pri"arily a "ana%e"ent tool. Ho-e'er( i# the !nits "eas!red are also o!tco"es o# interest to e'al!ators( cost allocation pro'ides so"e o# the *asic in#or"ation needed to cond!ct "ore a"*itio!s ost ontrol Analysiss!ch as cost)*ene#it analysis or cost)e##ecti'eness analysis. @or e1a"ple( #or e'al!ation p!rposes( yo! "i%ht -ant to no- the a'era%e cost per child o# pro'idin% an a#ter)school t!torin% pro%ra"( incl!din% the costs o# sta## salaries( snacs( and other o'erhead costs. =esides *!d%et in#or"ation( *ein% a*le to deter"ine !nit costs "eans that yo! need to *e collectin% the ri%ht ind o# in#or"ation a*o!t clients and o!tco"es. +n "any a%encies( the in#or"ation recorded in ser'ice records is *ased on reportin% re4!ire"ents( -hich are not al-ays in a #or" that is !se#!l #or e'al!ation. +# sta## in a prenatal clinic si"ply report the n!"*er o# clients ser'ed *y %ender( #or e1a"ple( yo! "i%ht no- only that /BC #e"ales -ere ser'ed in :arch. @or an e'al!ation( ho-e'er( yo! "i%ht -ant to *e a*le to *rea do-n that n!"*er in di##erent -ays. @or e1a"ple( do yo!n% #irst)ti"e "others !s!ally re4!ire "ore 'isits than older -o"en9 Do sin%le "others or -o"en -ith se'eral children "iss "ore appoint"ents9 +s transportation to appoint"ents "ore o# a pro*le" #or -o"en -ho li'e in r!ral areas9 Are any client characteristics co""only related to i"portant o!tco"es s!ch as *irth -ei%ht o# the *a*y9 Decidin% ho- to collect eno!%h client and ser'ice data to %i'e !se#!l in#or"ation( -itho!t o'er*!rdenin% sta## -ith !nnecessary paper-or re4!ire"ents( re4!ires a lot o# plannin%.
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Lar%er a%encies o#ten hire e1perts to desi%n data syste"s( -hich are called :+S or "ana%e"ent)and)in#or"ation)syste"s. +# yo! are -orin% #or an e1istin% a%ency( yo!r a*ility to separate o!t !nit costs #or ser'ices or o!tco"es "ay depend on the syste"s that are already in place #or *!d%etin%( acco!ntin%( and collectin% ser'ice data. Ho-e'er( i# yo! are in a position to in#l!ence these #!nctions( or need to s!pple"ent an e1istin% syste"( there are a n!"*er o# te1ts that disc!ss the pros and cons o# di##erent -ays o# *!d%etin%( acco!ntin%( and desi%nin% :+S or "ana%e"ent)and)in#or"ation)syste"s 2see Kettner( :oroney & :artin( /;;<3.
OST ) E@@ET+ENESS ANALYS+S :ost o#ten( cost)e##ecti'eness and cost)*ene#it st!dies are cond!cted at a le'el that in'ol'es "ore than j!st a local pro%ra" 2s!ch as an indi'id!al State Stren%thenin% project3. So"eti"es they also in'ol'e #ollo-in% !p o'er a lon% period o# ti"e( to loo at the lon%)ter" i"pact o# inter'entions. They are o#ten !sed *y policy analysts and le%islators to "ae *road policy decisions( so they "i%ht loo at a lar%e #ederal pro%ra"( or co"pare se'eral s"aller pilot pro%ra"s that tae di##erent approaches to sol'in% the sa"e social pro*le". eople o#ten !se the ter"s interchan%ea*ly( *!t there are i"portant di##erences *et-een the". ost ) E##ecti'eness analysis ass!"es that a certain *ene#it or o!tco"e is desired( and that there are se'eral alternati'e -ays to achie'e it. The *asic 4!estion ased is( 8hich o# these alternati'es is the cheapest or "ost e##icient -ay to %et this *ene#it9 =y de#inition( cost)e##ecti'eness analysis is co"parati'e( -hile cost)*ene#it analysis !s!ally considers only one pro%ra" at a ti"e. Another i"portant di##erence is that -hile cost)*ene#it analysis al-ays co"pares the "onetary costs and *ene#its o# a pro%ra"( cost)e##ecti'eness st!dies o#ten co"pare pro%ra"s on the *asis o# so"e other co""on scale #or "eas!rin% o!tco"es 2e%.( n!"*er o# st!dents -ho %rad!ate #ro" hi%h school( in#ant "ortality rate( test scores that "eet a certain le'el( reports o# child a*!se3. They address -hether the !nit cost is %reater #or one pro%ra" or approach than another( -hich is o#ten "!ch easier to do( and "ore in#or"ati'e( than assi%nin% a dollar 'al!e to the o!tco"e 28hite( /;>>3.
COST - BENEFIT ANALYSIS6 )
The *asic 4!estions ased in a cost)*ene#it analysis are( Do the econo"ic *ene#its o# pro'idin% this ser'ice o!t-ei%h the econo"ic costs and +s it -orth doin% at all9 One i"portant tool o# cost)*ene#it analysis is the *ene#it)to)costs ratio( -hich is the total "onetary cost o# the *ene#its or o!tco"es di'ided *y the total "onetary costs o# o*tainin% the". Another tool #or co"parison in cost)*ene#it analysis is the net rate o# ret!rn( -hich is *asically total costs "in!s the total 'al!e o# *ene#its.
The idea *ehind cost)*ene#it analysis is si"ple6 i# all inp!ts and o!tco"es o# a proposed alternati'e can *e red!ced to a co""on !nit o# i"pact 2na"ely dollars3( they can *e a%%re%ated and co"pared. +# people -o!ld *e -illin% to pay dollars to ha'e so"ethin%( pres!"a*ly it is a *ene#it7 i# they -o!ld pay to a'oid it( it is a cost. +n practice( ho-e'er( assi%nin% "onetary 'al!es to inp!ts and o!tco"es in social pro%ra"s is rarely so si"ple( and it is not al-ays appropriate to do so 28ei"er & inin%( /;;7 Tho"pson( /;>7 Fecha!ser( /;CB3. An e1a"ple -ill ill!strate so"e o# the di##erences *et-een ost)E##ecti'eness and ost)=ene#it st!dies( -hat they can tell yo!( and so"e o# the iss!es that neither can e##ecti'ely address6 S!ppose the drop)o!t rate in an inner)city hi%h school is B>( p. 0?<3
8
ADVANTAGES AND DIS ADVANTAGES OF COST CONTROL !HAT COST ANALYSIS CAN TELL YOU: •
ost ontrol Analysiscan pro'ide esti"ates o# -hat a pro%ra"Js costs and *ene#its are liely to *e( *e#ore it is i"ple"ented. E1)ante or *e#ore the #act ost ontrol Analysis"ay ha'e to *e *ased on 'ery ro!%h esti"ates o# costs and e1pected *ene#its. Ho-e'er( i# a pro%ra" is liely to *e 'ery e1pensi'e to i"ple"ent( 'ery di##ic!lt to !n)do once it is in place( or 'ery di##ic!lt to e'al!ate( e'en a ro!%h esti"ate o# e##iciency "ay *e 4!ite 'al!a*le in the plannin% sta%es 25ossi & @ree"an( /;;?3.
•
ost ontrol Analysis"ay i"pro'e !nderstandin% o# pro%ra" operation( and tell -hat le'els o# inter'ention are "ost cost)e##ecti'e. A care#!l cost analysis -ithin a pro%ra" "i%ht tell yo!( #or e1a"ple( that it doesnJt so "!ch "atter -hether yo! ha'e a hal#) day pro%ra" or a #!ll)day preschool pro%ra" #or children( *!t that the teacher)to)child ratio does "atter 2that is( children *ene#it "ore #ro" lo- ratios than they do #ro" lon%er days3. This in#or"ation "i%ht in#l!ence decisions a*o!t ho- "any teachers yo! need to hire( or ho- "any classroo"s yo! need( or ho- "any children yo! can ser'e e##ecti'ely.
•
ost ontrol Analysis"ay re'eal !ne1pected costs. A speech therapy pro%ra" "i%ht !ne1pectedly #ind that it costs "ore to !se parapro#essionals to -or -ith children than pro#essionals( *eca!se the parapro#essionals need "ore trainin% and s!per'ision( or -or -ith #e-er children at a ti"e 28hite( /;>>3. Or( c!ttin% the n!"*er o# ho"e 'isits allo-ed *y case-orers ser'in% a lar%e r!ral area 2in order to sa'e on "ilea%e
#
rei"*!rse"ents3 "i%ht ha'e the !nplanned res!lt o# hi%her lon%)distance phone *ills( *eca!se the -orers still #eel a need to stay in close to!ch -ith their clients.
!HAT COST ANALYSIS CANNOT TELL YOU: •
8hether or not the pro%ra" is ha'in% a si%ni#icant net e##ect on the desired o!tco"es. nless yo! no- #or s!re that the pro%ra" is prod!cin% a *ene#it( it doesnJt "ae sense to tal a*o!t the cost o# prod!cin% that *ene#it 25ossi & @ree"an( /;;?3. ost analysis "ay *e considered an e1tension o# an i"pact or o!tco"e e'al!ation( *!t it cannot tae the place o# one.
•
8hether the least e1pensi'e alternati'e is al-ays the *est alternati'e. O#ten political or social 'al!es other than cost need to deter"ine pro%ra" and policy choices. 8hen there are co"petin% 'al!es or %oals in'ol'ed( cost analysis is o#ten j!st one #actor to *e considered( and -e need to ha'e so"e other -ay o# decidin% -hich #actors sho!ld tae priority.
ADVANTAGES OF USING COST ANALYSIS: •
ro"otes #iscal acco!nta*ility in pro%ra"s. Too o#ten( pro%ra" "ana%ers canJt easily deter"ine the cost o# pro'idin% partic!lar ser'ices or achie'in% certain o!tco"es( *eca!se they arenJt syste"atically collectin% the necessary data( either a*o!t clients or a*o!t costs. At the least( pro%ra"s sho!ld *e a*le to tell #!nders 2or potential #!nders3 that d!rin% a %i'en ti"e period( they pro'ided a certain le'el o# ser'ices to a speci#ic n!"*er o# clients( and at -hat cost 2aco*s( /;>>3.
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•
Helps set priorities -hen reso!rces are li"ited. ro%ra" "ana%ers can !se cost in#or"ation in desi%nin% pro%ra"s( and in *!d%etin% and allocatin% #!nds to %et the "ost o!t o# their reso!rces.
•
an *e e1tre"ely po-er#!l and pers!asi'e to le%islators( policy "aers( and other #!nders. :ay help con'ince the" to in'est in partic!lar inds o# pro%ra"s. So"e ar%!e that this ad'anta%e o# cost)*ene#it analysis "ay hold tr!e e'en -hen it is not possi*le to assi%n "onetary 'al!es to all pro%ra" costs and o!tco"es7 i# the e##ect is stron% eno!%h( e'en a relati'ely inco"plete cost)*ene#it analysis "ay *e pers!asi'e 2=arnett( /;;?3.
DISADVANTAGES OF USING COST ANALYSIS: •
5e4!ires a %reat deal o# technical sill and no-led%e. A tr!e cost)*ene#it analysis re4!ires a solid %ro!ndin% in econo"ic theory and techni4!es( -hich is *eyond the trainin% o# "any e'al!ators. +t "ay *e necessary to hire a cons!ltant i# this type o# analysis is desired.
•
ritics #eel that "any ost ontrol Analysisare o'erly si"plistic( and s!##er #ro" serio!s concept!al and "ethodolo%ical inade4!acies. There is a dan%er that an o'erly) si"plistic cost)*ene#it analysis "ay set !p an inter'ention to #ail( *y pro"otin% e1pectations that are !nrealistically hi%h( and cannot really *e achie'ed. This "ay res!lt in political *aclash -hich act!ally h!rts #!t!re #!ndin% prospects instead o# helpin%.
•
There are no standard -ays to assi%n dollar 'al!es to so"e 4!alitati'e %oals( especially in social pro%ra"s. @or e1a"ple( ho- do -e 'al!e thin%s lie ti"e( h!"an li'es sa'ed( or 4!ality o# li#e9
•
:aret costs 2-hat people act!ally pay #or so"ethin%3 donJt al-ays re#lect real social costs. @or e1a"ple( so"eti"es one personJs cost is another personJs *ene#it. Also( "aret costs donJt necessarily re#lect -hat econo"ists call the opport!nity costs o# choosin% to do one thin% instead o# another.
11
•
So"eti"es there are "!ltiple co"petin% %oals( so -e need to -ei%ht the" or prioriti$e the" in so"e -ay. +# a pro%ra" leads to i"pro'e"ent in one area( *!t "ore pro*le"s in another( is it still -orth doin%9
•
So"eti"es costs and "onetary 'al!es are considered less i"portant than other( "ore intan%i*le 'al!es or pro%ra" o!tco"es.
•
The *est)no-n cost)*ene#it st!dies ha'e looed at lon%)ter" o!tco"es( *!t "ost pro%ra" e'al!ations donJt ha'e the ti"e or reso!rces to cond!ct lon%)ter" #ollo-)!p st!dies.
CHAPTER-II CONCEPTIONAL FRAE !OR" THEORITICAL STUDY
12
USING
COST
CONTROL
ANALYSIS!ITH
THE
STATE
STRENGTHENING EVALUATION GUIDE: +# yo! are !sin% the @i'e)Tiered Approach to ro%ra" E'al!ation o!tlined in the State Stren%thenin% E'al!ation M!ide( ost ontrol Analysiscan *e !sed at se'eral le'els6
T*+, 1 - P,o,/ D+***o At this sta%e( yo! -ill pro*a*ly *e !sin% cost st!dies *ased on other peopleJs e1perience in si"ilar pro%ra"s( since yo! are !nliely to ha'e cost data o# yo!r o-n yet. This "eans that the esti"ates yo! !se -ill only *e appro1i"ations( and "ay not acc!rately re#lect -hat yo!r pro%ra"Js e1perience -ill *e. Ho-e'er( e1)ante cost analyses( done in the plannin% sta%es *e#ore i"ple"entin% a pro%ra"( can potentially pre'ent so"e 'ery costly "istaes. +# yo! ha'e access to cost)e##ecti'eness st!dies o# pro%ra"s si"ilar to the one yo! are considerin%( especially i# they allo- yo! to co"pare the relati'e costs and *ene#its o# se'eral di##erent -ays o# deli'erin% a ser'ice( *e#ore yo! ha'e "ade s!*stantial in'est"ents o# ti"e or "oney( so"e pro%ra" desi%n decisions "ay *e easier. One co""on e1a"ple in co""!nity)*ased pro%ra"s is sta##in% 2e%.( decidin% -hether to !se hi%hly)trained pro#essionals to deli'er ser'ices( or to rely on less hi%hly)paid parapro#essionals or 'ol!nteers3. 8hile "any people ass!"e that the parapro#essionals or 'ol!nteers are al-ays less e1pensi'e( cost)e##ecti'eness st!dies in so"e cases ha'e #o!nd that the pro#essionals "ay *e less costly in the lon% r!n *eca!se they can see "ore clients( re4!ire less s!per'ision ti"e( or are "ore e##ecti'e. O# co!rse( costs also need to *e -ei%hed a%ainst other considerations( s!ch as the #act that
1$
parapro#essionals recr!ited #ro" the co""!nity ser'ed "ay "ore easily %ain the tr!st o# clients.
T*+, 2 - A33o45*6*7 learly( #iscal acco!nta*ility is one o# the pri"ary reasons #or !sin% any ind o# cost analysis as part o# yo!r e'al!ation. Any responsi*le pro%ra" sho!ld eep ser'ice statistics and #inancial records that are acc!rate and !p)to)date eno!%h to *e a*le to deter"ine so"e 'ery *asic in#or"ation a*o!t !nit costs( and #!nders !s!ally re4!ire this. Ho-e'er( the "ini"al in#or"ation ro!tinely collected *y pro%ra"s #or #iscal and reportin% p!rposes is not al-ays in a #or" that lends itsel# to e'al!ation !ses. O#ten( !nless ad'ance plannin% has taen
place( this data is too a%%re%ated to re#lect o!tco"es o# interest to researchers and e'al!ators. At this sta%e 2or earlier3( care#!l consideration sho!ld *e %i'en to the inds o# client and cost data that -ill *e needed later( so that it can *e *!ilt into the acco!ntin% and record)eepin% syste"s o# the pro%ra" 2see Kettner( :oroney & :artin( /;;<3.
T*+, $ - U+,9* R+** Lie any other type o# in#or"ation %athered #or e'al!ation p!rposes( the cost in#or"ation collected in Tier #or acco!nta*ility p!rposes pro'ides pro%ra"s -ith a *asis #or "id)co!rse adj!st"ents and pro%ra" re#ine"ents( either at the end o# a #!ndin% cycle( or in the co!rse o# i"ple"entation.
T*+, % - P,o,+99 o, O5;+3*<+9 sin% cost in#or"ation in Tier 0 is closely tied to the pro%ra" desi%n iss!es o# Tier /( and the acco!nta*ility iss!es o# Tier . +# appropriate pro%ra" o!tco"es and indicators ha'e *een identi#ied in Tier /( and the appropriate !nit cost in#or"ation is incl!ded in the ro!tine data that is collected as part o# Tier ( then the jo* o# identi#yin% pro%ress to-ard o*jecti'es in Tier 0 *eco"es "!ch easier.
T*+, - P,o,/ I/=3 8hen it has *een possi*le to cond!ct a #!ll)scale cost)*ene#it analysis o'er a lon% period o# ti"e( and it sho-s si%ni#icant lon%)ter" %ains and cost sa'in%s in a partic!lar
1%
pop!lation or pro*le" area( the policy i"plications "ay *e %reat. One o# the *est)no-n e1a"ples is the erry reschool St!dy 2disc!ssed earlier3( -hich has *een credited -ith pers!adin% la-"aers to s!stain or si%ni#icantly increase their s!pport #or early inter'ention pro%ra"s( incl!din% Head Start. +t is -idely *elie'ed that one reason that this st!dy -as so in#l!ential -as the #act that it incl!ded a cost)*ene#it analysis. 8hile "onetary cost is not the only *asis #or policy decisions( it is !s!ally a 'ery salient one #or 'oters and politicians.
HO! TO BUDGET & ALLOCATE COSTS FOR COST EFFECTIVENESS STUDIES: The type o# *!d%etin% and acco!ntin% syste" yo!r pro%ra" or a%ency !ses "ay -ell deter"ine ho- "!ch !se#!l cost data is a'aila*le #or e'al!atin% yo!r pro%ra"( or co"parin% it to others. Three "ajor types o# *!d%etin% #or"ats co""only !sed in social ser'ice pro%ra"s -ill pro'ide di##erent types and a"o!nts o# in#or"ation 2Kettner( :oroney( & :artin( /;;<3. The "ost co""on #or"at is the Line)+te" =!d%et #or"at( -hich si"ply loos at re'en!es 2"oney co"in% in #ro" 'ario!s so!rces( incl!din% %rants( !ser #ees or nited 8ay #!nds3 and e1pendit!res 2costs *roen do-n into *road cate%ories lie salaries( rent( !tilities( and posta%e3( and tries to ens!re that they *alance. The "ain p!rpose o# a line)ite" *!d%et is #inancial control( and the cate%ories are !s!ally too *road to %i'e "!ch in#or"ation a*o!t the cost o# pro'idin% a partic!lar ser'ice or o*tainin% a partic!lar res!lt. The @!nctional =!d%et #or"at starts -ith a line)ite" *!d%et( and taes it a step #!rther. +t #oc!ses on process( or the cost o# pro'idin% a ser'ice. @or e1a"ple( -ith a @!nctional =!d%et( -e co!ld deter"ine that it cost an adoption a%ency 0B(<<< to cond!ct /<< ho"e st!dies 2an acti'ity -hich is a necessary part o# the process o# placin% children in per"anent ho"es3.
1
The ro%ra" =!d%et( -hich also starts -ith a line)ite" *!d%et( loos at the sa"e in#or"ation #ro" the point o# 'ie- o# o!tco"es( or the cost o# achie'in% a res!lt. @or e1a"ple( i# the /<< ho"e st!dies res!lted in act!ally placin% B< children in adopti'e ho"es( the ro%ra" =!d%et -o!ld allo- !s to say that it cost the a%ency 0B(<<< to place B< children( -hich is an o!tco"e. Another -ay to loo at this is that #!nctional *!d%ets "eas!re prod!cti'ity( and pro%ra" *!d%ets "eas!re the cost o# achie'in% %oals and o*jecti'es.
COON STEPS IN DEVELOPING PROGRA & FUNCTIONAL BUDGETS 2Kettner( et al.( /;;<36 /. De'elop a line)ite" *!d%et that sho-s all e1pendit!res. This is the "ini"al le'el o# *!d%etin% and acco!ntin% that is re4!ired *y "any #!nders( s!ch as the nited 8ay. So"e #!nders re4!ire a speci#ic #or"at( so that the cate%ories !sed are standard across the pro%ra"s that they #!nd. . Deter"ine the a%encyJs pro%ra" str!ct!re. A distinct pro%ra" is a set o# acti'ities or ser'ices desi%ned to acco"plish a speci#ic set o# a%ency %oals and o*jecti'es. :any a%encies ha'e se'eral di##erent pro%ra"s. ?. +denti#y all direct costs and indirect costs. Direct costs are those that *ene#it only one pro%ra" 2#or e1a"ple( salaries o# sta## -ho -or only #or one pro%ra"( or s!pplies and e4!ip"ent !sed only #or that pro%ra"3. +ndirect costs or o'erhead costs are those that *ene#it or are shared *y "ore than one pro%ra" 2#or e1a"ple( se'eral pro%ra"s in an a%ency "i%ht share the sa"e *!ildin%( and *e ser'ed *y the sa"e *ooeepin% and secretarial sta##( !tilities( or janitorial ser'ices3. 0. Assi%n direct costs to the appropriate pro%ra" or project. This is !s!ally #airly strai%ht#or-ard. +# one co!nty a%ent has #!ll)ti"e responsi*ility #or operatin% yo!r State Stren%thenin% project( #or e1a"ple( then /<
1'
her ti"e on the State Stren%thenin% Stren%thenin% project and B
Kettner( et al.( /;;<3. Altho!%h cost allocation o# indirect costs can *e a ti"e)cons!"in% step( it is considered -ell -orth doin% *eca!se o# the increased in#or"ation it pro'ides a*o!t the real costs o# pro'idin% ser'ices. I. Deter"ine total pro%ra" costs. The total cost o# a partic!lar pro%ra" 2s!ch as yo!r State Stren%thenin% project3 is the s!" o# the direct costs( and the portion o# indirect costs that is allocated to that pro%ra". Once -e ha'e this in#or"ation a*o!t total pro%ra" costs( then -e can calc!late !nit costs. @or a @!nctional =!d%et( this in'ol'es de#inin% the !nits o# ser'ice #or each pro%ra" 2e%.( ho!rs o# day care pro'ided( "eals deli'ered( ho"e st!dies cond!cted3( and calc!latin% the the cost cost per per !nit !nit o# ser' ser'ic ice. e. +n the the adop adopti tion on a%en a%ency cy e1a" e1a"pl plee a*o' a*o'e( e( the the !nit !nit cost cost o# cond!ctin% a ho"e st!dy -o!ld *e 0B< 2total pro%ra" cost di'ided *y n!"*er o# !nits o# ser'ice ser'ice pro'ided3. pro'ided3. @or a ro%ra" ro%ra" =!d%et( =!d%et( the #inal steps steps are deter"inin deter"inin% % the total cost o# achie'in% the o!tco"e o*jecti'es #or the year( and calc!latin% the cost per o!tco"e. sin% the the adop adopti tion on e1a" e1a"pl plee a%ai a%ain( n( -e can can say say that that the the adop adopti tion on a%en a%ency cy desc descri ri*e *ed d a*o' a*o'ee s!ccess#!lly s!ccess#!lly placed children in adopti'e ho"es at a !nit cost o# ;<<,child ;<<,child 2total pro%ra" costs di'ided *y the n!"*er o# s!ccess#!l o!tco"es3.
1)
COST - EFFICIENCY & COST - EFFECTIVENESS STUDIES: @ro" the point o# 'ie- o# pro%ra" e'al!ation( *oth the ro%ra" and @!nctional =!d%etin% syste"s are "ore !se#!l than a Line)+te" =!d%et. nit cost in#or"ation allo-s #or !se#!l !se#!l co"p co"pari arison sonss o# the costs costs o# deli' deli'er erin% in% ser'i ser'ice cess and %etti %ettin% n% res!lt res!lts. s. 8ith this this in#or"ation( in#or"ation( -e can loo at the !nit cost o# one adoption a%ency co"pared to another( to see -hether one operates "ore e##iciently. 8e can also co"pare the !nit cost 2per child3 o# adopti'e place"ent to the !nit cost 2per child3 o# place"ent in #oster care or residential treat"ent. This is *asically -hat happens in a cost)e##ecti'eness st!dy. +n %eneral( a cost)e##ecti'eness st!dy is "ore appropriate than a cost)*ene#it analysis -hen yo!r %oals or o!tco"es canJt easily *e 4!anti#ied or "oneti$ed( or -hen there are "!ltiple co"petin% %oals. As -ith *!d%etin% and cost allocation( there are a 'ariety o# approaches to cost)e##ecti'eness st!dies. The approach that is *est #or yo!r p!rposes -ill depend on a n!"*er o# #actors. A %ood so!rce o# "ore detailed in#or"ation a*o!t decidin% -hat approach is "ost appropriate( and cond!ctin% the 'ario!s types o# cost)e##ecti'eness st!dies( is 8ei"er & inin% inin% 2/;;3. 2/;; 3.
HO! TO CONDUCT CON DUCT A COST - BENEFIT BENEF IT ANALYSIS: ANALYSIS:
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ost)*ene#it analysis is *y #ar the "ost co"ple1 and contro'ersial o# the three "ethods o# costs analysis -e ha'e disc!ssed. +t sho!ld not *e atte"pted *y those -ho lac technical e1pertise in this area. Ho-e'er( #or so"e p!rposes( it is also one o# the "ost po-er#!l "ethods. @or those -ho decide to !ndertae a cost)*ene#it analysis in spite o# the di##ic!lties( =arnett 2/;;?3 o!tlines a nine step process. ario!s standard te1ts are reco""ended #or "ore in)depth in#or"ation 2see *elo-3. •
S+= 1: De#ine the Scope or erspecti'e o# the Analysis ) The #irst step is to descri*e the
alternati'e2s3 to *e e'al!ated( and deter"ine -hose perspecti'e -ill %!ide the e'al!ation. A narro- cost analysis "i%ht loo only at the "onetary costs and *ene#its to the indi'id!al participant or tar%et o# ser'ices( or to a partic!lar #!nder or a%ency. A *roader perspecti'e "i%ht atte"pt to loo at a -ide ran%e o# costs and conse4!ences 2intended and !nintended( direct and indirect3 #or society as a -hole. A pro%ra" that is not cost)e##ecti'e #ro" the
perspecti'e o# a partic!lar p artic!lar a%ency -ithin its li"ited "ission and *!d%et "ay -ell -e ll *e * e cost) c ost) e##ecti'e #ro" the perspecti'e o# society( *eca!se it sa'es e1penses or pre'ents pro*le"s in other areas. 5ossi and @ree"an 2/;;?3 note that *eca!se di##erent staeholders "ay ha'e di##erent 'al!es and priorities( "i1in% di##erent 'ie-points is liely to res!lt in con#!sed speci# speci#ic icati ations ons and and o'erl o'erlap appin pin% % or do! do!*l *lee co!nt co!ntin% in%. . 8het 8hether her -e lie lie it or not( not( the the perspecti'e chosen #or cost e'al!ation "ay ha'e political i"plications. There#ore( -hile there are li"itations to any one perspecti'e( perspecti'e( it is i"portant i"portant #or the e'al!ator to clearly state his or her position. •
S+= 2: ond!ct ost Analysis ) The ne1t step is to identi#y and esti"ate the "onetary
'al!e 'al!e o# all reso!rces reso!rces !sed in the inter'enti inter'ention( on( not j!st the *!d%etar *!d%etary y costs. costs. So"e costs( costs( s!ch as salaries o# direct ser'ice sta##( rental o# o##ice space( or pro%ra" s!pplies( are o*'io!s and si"ple to deter"ine. •
+ndire +ndirect ct costs costs o# s!p s!per' er'isi ision on and and ad"ini ad"inist strat ration ion need need to *e incl! incl!ded ded as -ell -ell.. Othe Other r reso!rces and costs "ay %o -ell *eyond the ite"s that are !s!ally incl!ded in an a%ency *!d%et. So"eti"es o'erhead 2lie o##ice space or s!per'ision3 is pro'ided as an in)ind ser'ice *y an e1istin% a%ency( a%ency( *!t since there are pro*a*ly so"e additional de"ands "ade on the ti"e o# the a%ency sta##( this sho!ld *e #i%!red into the real cost o# the inter'ention 2-hat -o!ld yo! ha'e to pay i# the ti"e or space had not *een donated39. 8hat a*o!t the 'al!e o# the ti"e o# pro%ra" 'ol!nteers 2-hat -o!ld yo! ha'e to pay the" i# they -erenJt 'ol!nteerin% their ser'ices39 =arnett ar%!es that parent ti"e is a #re4!ently i%nored cost
1#
#actor in inter'ention pro%ra"s #or children7 i# a hi%h le'el o# parent in'ol'e"ent is re4!ired 2#or e1a"ple( teachin% the child( cond!ctin% physical therapy e1ercises( or attendin% "any "eetin%s and appoint"ents3( it "ay represent a cost sa'in%s to the a%ency( *!t a cost to the parent *eca!se there "ay *e less ti"e a'aila*le #or paid -or( ho!se-or( spendin% ti"e -ith other children in the #a"ily( or j!st the c!ddlin% and n!rt!rin% aspects o# *ein% a parent. •
S+= $: Esti"ate ro%ra" E##ects ) This is -here "ore traditional i"pact or o!tco"e
e'al!ation "ethods co"e in. As noted earlier( i# -e donJt no- that there is a si%ni#icant *ene#icial e##ect o# o!r pro%ra"( there is little point in asin% ho- "!ch it costs to %et the e##ect( or -hether it is "ore cost)e##ecti'e than another ind o# pro%ra". :any te1ts on e'al!ation can assist yo! in desi%nin% a 'alid e'al!ation 25ossi & @ree"an( /;;?7 State Stren%thenin% E'al!ation M!ide( /;;C3. O#ten it is not possi*le to !se a tr!e e1peri"ental
desi%n in e'al!atin% co""!nity)*ased pro%ra"s( *!t there are a n!"*er o# 4!asi) e1peri"ental desi%ns a'aila*le 2oo & a"p*ell( /;C;3. Also( donJt #or%et that it is o#ten possi*le to !se e1istin% data to esti"ate pro%ra" e##ects( as -ell. +# yo! are looin% at an on%oin% pro%ra"( or one that is *ased on a national "odel 2s!ch as the arents As Teachers pro%ra"3( chec to see i# #or"al e'al!ations ha'e already *een done else-here. Yo! "ay also *e a*le to %et !se#!l in#or"ation #ro" the pro%ra"Js ser'ice statistics( or #ro" local( state( or #ederal cens!s data insert lin here to sin% E1istin% Data 5L. •
S+= %: Esti"ate the :onetary al!e o# O!tco"es ) This is one o# the "ost di##ic!lt and
contro'ersial aspects o# cond!ctin% a cost)*ene#it analysis( and it "ay re4!ire the help o# cons!ltants. So"e cost)sa'in%s are easier to esti"ate than others. @or e1a"ple( -e "ay ha'e data that the a'era%e cost o# placin% a child in residential treat"ent is <(<<< a year( so i# -e are a*le to pre'ent < children #ro" *ein% placed in residential treat"ent( the esti"ated sa'in%s is < P <(<<<. Ho-e'er( other i"portant o!tco"es "ay *e "!ch less o*'io!s( and "!ch harder to esti"ate. •
S+= : Acco!nt #or the E##ects o# Ti"e ) One o# the triciest and "ost technical aspects o#
cost)*ene#it analysis( especially #or lon%it!dinal st!dies that #ollo- clients or o!tco"es o'er a period o# years( is disco!ntin% o# costs and calc!latin% rates o# ret!rn #or alternati'e !ses o# the "oney 2s!ch as in'estin% it3. This incl!des tain% into acco!nt the e##ects o# in#lation on the 'al!e o# the dollar o'er ti"e( or #i%!rin% the depreciation in the 'al!e o# thin%s lie *!ildin%s and other capital e4!ip"ent. Si"ilar iss!es apply in esti"atin% the
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'al!e o# *ene#its o'er a period o# ti"e. @or e1a"ple( i# -e -ant to loo at the projected li#e)ti"e earnin%s o# a teena%er -ho stays in school d!e to a drop)o!t pre'ention pro%ra" co"pared to one -ho does not( -e need to "ae projections a*o!t -a%es. +# -e -ant to loo at -hether the %o'ern"ent -ill e'ent!ally reco'er its in'est"ent in the drop)o!t pro%ra" thro!%h the ta1es he or she -ill pay on the increased inco"e( -e need to "ae projections a*o!t #!t!re ta1 rates as -ell. These projections all re4!ire ass!"ptions. nless yo! or so"eone on the pro%ra" sta## has e1pertise in this area( it is stron%ly ad'ised that yo! see o!t a silled cons!ltant to help -ith this step. •
S+= ': A%%re%ate and Apply a Decision 5!le ) +# yo! are looin% at the costs and *ene#its
on se'eral o!tco"es 2-hich is o#ten the case3( ho- -ill yo! decide -hich has priority9 +# a pro%ra" #or pre%nant teena%ers res!lts in healthier *a*ies 2and lo-er hospital costs3( *!t not in #e-er repeat pre%nancies( -hich o!tco"e is "ore i"portant9
•
S+= ): Descri*e Distri*!tional onse4!ences ) This is related to choosin% yo!r perspecti'e
o# analysis. +t in'ol'es speci#yin% -ho %ains and -ho loses !nder di##erent conditions 2*eca!se in so"e cases( one partyJs *ene#it is another partyJs loss3. This "ay *e a hi%hly contro'ersial and political step in the process. •
S+= 8: ond!ct Sensiti'ity Analysis ) This step in'ol'es identi#yin% the ass!"ptions
*ehind yo!r cost esti"ates( and considerin% ho- critical they are to yo!r calc!lations. +# one o# yo!r ass!"ptions t!rns o!t not to *e acc!rate( or i# conditions chan%e d!rin% the ti"e o# yo!r st!dy 2#or e1a"ple( the "ini"!" -a%e %oes !p( a##ectin% salary costs3( -ill that chan%e yo!r -hole concl!sion( or is the e##ect stron% eno!%h that there is so"e lee-ay9 •
S+= #: Disc!ss the Q!alitati'e 5esid!al ) Since there are al"ost al-ays so"e thin%s that
canJt *e 4!anti#ied or %i'en "onetary 'al!es( it is i"portant that yo!r report incl!de so"e disc!ssion o# these iss!es. A #ran description o# so"e o# these 4!alitati'e iss!es in yo!r report can help ro!nd o!t yo!r concl!sions( and red!ce the chances o# yo!r st!dy *ein% !sed inappropriately.
Co9 - B++* A679*9 ost)*ene#it analysis is a ter" that re#ers *oth to6
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•
a #or"al discipline !sed to help appraise( or assess( the case #or a project or proposal( -hich itsel# is a process no-n as project appraisal7 and
•
an in#or"al approach to "ain% decisions o# any ind. nder *oth de#initions the process in'ol'es( -hether e1plicitly or i"plicitly( -ei%hin%
the total e1pected costs a%ainst the total e1pected *ene#its o# one or "ore actions in order to choose the *est or "ost pro#ita*le option. The #or"al process is o#ten re#erred to as either =A 2ost)=ene#it Analysis3 or =A 2=ene#it)ost Analysis3. A hall"ar o# =A is that all *ene#its and all costs are e1pressed in "oney ter"s( and are adj!sted #or the ti"e 'al!e o# "oney( so that all #lo-s o# *ene#its and #lo-s o# project costs o'er ti"e 2-hich tend to occ!r at di##erent points in ti"e3 are e1pressed on a co""on *asis in ter"s o# their “present 'al!e.” losely related( *!t sli%htly di##erent( #or"al techni4!es incl!de ost)e##ecti'eness analysis( Econo"ic i"pact analysis( @iscal i"pact analysis and Social 5et!rn on +n'est"ent2S5O+3 analysis. The latter *!ilds !pon the lo%ic o#
ost)*ene#it analysis( *!t di##ers in that it is e1plicitly desi%ned to in#or" the practical decision)"ain% o# enterprise "ana%ers and in'estors #oc!sed on opti"i$in% their social and en'iron"ental i"pacts.
Theory ost =ene#it Analysis is typically !sed *y %o'ern"ents to e'al!ate the desira*ility o# a %i'en inter'ention. The ai" is to %a!%e the e##iciency o# the inter'ention relati'e to the stat!s 4!o. The costs and *ene#its o# the i"pacts o# an inter'ention are e'al!ated in ter"s o# the p!*licJs -illin%ness to pay #or the" 2*ene#its3 or -illin%ness to pay to a'oid the" 2costs3. +np!ts are typically "eas!red in ter"s o# opport!nity costs ) the 'al!e in their *est alternati'e !se. The %!idin% principle is to list all o# the parties a##ected *y an inter'ention( and place a "onetary 'al!e o# the e##ect it has on their -el#are as it -o!ld *e 'al!ed *y the". The process in'ol'es "onetary 'al!e o# initial and on%oin% e1penses 's. e1pected ret!rn. onstr!ctin% pla!si*le "eas!res o# the costs and *ene#its o# speci#ic actions is o#ten 'ery di##ic!lt. +n practice( analysts try to esti"ate costs and *ene#its either *y !sin% s!r'ey "ethods or *y dra-in% in#erences #ro" "aret *eha'iors. @or e1a"ple( a prod!ct "ana%er "ay co"pare "an!#act!rin% and "aretin% e1penses to projected sales #or a proposed
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prod!ct( and only decide to prod!ce it i# he e1pects the re'en!es to e'ent!ally reco!p the costs. ost)*ene#it analysis atte"pts to p!t all rele'ant costs and *ene#its on a co""on te"poral #ootin%. A disco!nt rate is chosen( -hich is then !sed to co"p!te all rele'ant #!t!re costs and *ene#its in present)'al!e ter"s. :ost co""only( the disco!nt rate !sed #or present) 'al!e calc!lations is an interest rate taen #ro" #inancial "arets 25.H. @ran <<<3. This can *e 'ery contro'ersial ) #or e1a"ple( a hi%h disco!nt rate i"plies a 'ery lo- 'al!e on the -el#are o# #!t!re %enerations( -hich "ay ha'e a h!%e i"pact on the desira*ility o# inter'entions to help the en'iron"ent( and so on. E"pirical st!dies ha'e s!%%ested that in reality( peopleJs disco!nt rates do decline o'er ti"e. =eca!se =A ai"s to "eas!re the p!*licJs tr!e -illin%ness to pay( this #eat!re is typically *!ilt into st!dies.
D!rin% cost)*ene#it analysis( "onetary 'al!es "ay also *e assi%ned to less tan%i*le e##ects s!ch as the 'ario!s riss -hich co!ld contri*!te to partial or total project #ail!re7 loss o# rep!tation( "aret penetration( lon%)ter" enterprise strate%y ali%n"ents( etc. This is especially tr!e -hen %o'ern"ents !se the techni4!e( #or instance to decide -hether to introd!ce *!siness re%!lation( *!ild a ne- road or o##er a ne- dr!% on the state healthcare. +n this case( a 'al!e "!st *e p!t on h!"an li#e or the en'iron"ent( o#ten ca!sin% %reat contro'ersy. The cost)*ene#it principle says( #or e1a"ple( that -e sho!ld install a %!ardrail on a dan%ero!s stretch o# "o!ntain road i# the dollar cost o# doin% so is less than the i"plicit dollar 'al!e o# the inj!ries( deaths( and property da"a%e th!s pre'ented 25.H. @ran <<<3. ost)*ene#it calc!lations typically in'ol'e !sin% ti"e 'al!e o# "oney #or"!la. This is !s!ally done *y con'ertin% the #!t!re e1pected strea"s o# costs and *ene#its to a present 'al!e a"o!nt.
OBJECTIVES OF STUDY
2$
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ost ontrol Analysis can pro'ide esti"ates o# -hat a pro%ra"Js costs and *ene#its are liely to *e( *e#ore it is i"ple"ented. E1)ante or *e#ore the #act ost ontrol Analysis "ay ha'e to *e *ased on 'ery ro!%h esti"ates o# costs and e1pected *ene#its. Ho-e'er( i# a pro%ra" is liely to *e 'ery e1pensi'e to i"ple"ent( 'ery di##ic!lt to !n)do once it is in place( or 'ery di##ic!lt to e'al!ate( e'en a ro!%h esti"ate o# e##iciency "ay *e 4!ite 'al!a*le in the plannin% sta%es 25ossi & @ree"an( /;;?3.
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ost ontrol Analysis "ay i"pro'e !nderstandin% o# pro%ra" operation( and tell -hat le'els o# inter'ention are "ost cost)e##ecti'e. A care#!l cost analysis -ithin a pro%ra" "i%ht tell yo!( #or e1a"ple( that it doesnJt so "!ch "atter -hether yo! ha'e a hal#)day pro%ra" or a #!ll)day preschool pro%ra" #or children( *!t that the teacher) to)child ratio does "atter 2that is( children *ene#it "ore #ro" lo- ratios than they do #ro" lon%er days3. This in#or"ation "i%ht in#l!ence decisions a*o!t ho- "any teachers yo! need to hire( or ho- "any classroo"s yo! need( or ho- "any children yo! can ser'e e##ecti'ely.
•
ost ontrol Analysis"ay re'eal !ne1pected costs. A speech therapy pro%ra" "i%ht !ne1pectedly #ind that it costs "ore to !se parapro#essionals to -or -ith children than pro#essionals( *eca!se the parapro#essionals need "ore trainin% and s!per'ision( or -or -ith #e-er children at a ti"e 28hite( /;>>3. Or( c!ttin% the n!"*er o# ho"e 'isits allo-ed *y case-orers ser'in% a lar%e r!ral area 2in order to sa'e on "ilea%e rei"*!rse"ents3 "i%ht ha'e the !nplanned res!lt o# hi%her lon%)distance phone *ills( *eca!se the -orers still #eel a need to stay in close to!ch -ith their clients.
SOE 6 ost analysis can *e !sed at se'eral le'els . At the "ost *asic le'el( cost allocation is si"ply part o# %ood pro%ra" *!d%etin% and acco!ntin% practices ( -hich allo- "ana%ers to deter"ine the tr!e cost o# pro'idin% a %i'en !nit o# ser'ice. it deals -ith cost allocation ( cost e##ecti'eness and cost *ene#it.
@i'e Tiers 6 T*+, 1 > P,o,/ +***o
2%
T*+, 2 > A33o45*6*7 T*+, $ > U+,9* & ,+** T*+, > % P,o/ o,9 o5;+3*<+ T*+, > P,o,/ */=3
COST ANALYSIS ETHODOLOGY : PRIARY DATA COLLECTION :-
•
All the data collection process has *een carried o!t thro!%h the constit!tions -ith the sta## "e"*ers concerned in the depart"ent o# #inance in the or%ani$ation.
•
Direct interactions -ith the "ana%er( The acco!ntants and the related sta## concern helped "e in %atherin% o# the re4!ired data.
•
Too the help o# the "ana%e"ent #ro" the other depart"ents and the %!idance #ro" the internal %!ide.
SECONDATY DATA COLLECTION :-
2
ertain ass!"ptions ha'e *een "ade in re%ard to the #!t!re projects o# the co"pany.
The data ha'e *een prepared in the cons!ltation -ith the 'ario!s personals o# the or%ani$ation indirectly.
The chan%es in capital d!e to e1pected *etter "ana%e"ent ha'e *een taen in the acco!nt -hile calc!latin% the related capital str!ct!res.
The res!lts o# the capital str!ct!res #orecasts ha'e *een analy$ed to %i'e s!%%estions #or i"pro'e"ent o# the per#or"ance o# the Or%ani$ation.
PERIOD OF STUDY : The st!dy has *een cond!cted tain% into an acco!nt the past #i'e years data i.e. #ro" << R
LIITATIONS OF COST CONTROL ANALYSIS: •
8hether or not the pro%ra" is ha'in% a si%ni#icant net e##ect on the desired o!tco"es. nless yo! no- #or s!re that the pro%ra" is prod!cin% a *ene#it( it doesnJt "ae sense to tal a*o!t the cost o# prod!cin% that *ene#it 25ossi & @ree"an( /;;?3. ost analysis "ay *e considered an e1tension o# an i"pact or o!tco"e e'al!ation( *!t it cannot tae the place o# one.
•
8hether the least e1pensi'e alternati'e is al-ays the *est alternati'e. O#ten political or social 'al!es other than cost need to deter"ine pro%ra" and policy choices. 8hen there are co"petin% 'al!es or %oals in'ol'ed( cost analysis is o#ten j!st one #actor to *e considered( and -e need to ha'e so"e other -ay o# decidin% -hich #actors sho!ld tae priority.
2'
CHAPTER-III APPLICATION & HISTORY
2)
A==6*3*o H*9o,7 ost)*ene#it analysis is "ainly( *!t not e1cl!si'ely( !sed to assess the 'al!e #or "oney o# 'ery lar%e pri'ate and p!*lic sector projects. This is *eca!se s!ch projects tend to incl!de costs and *ene#its that are less a"ena*le to *ein% e1pressed in #inancial or "onetary ter"s 2e.%. en'iron"ental da"a%e3( as -ell as those that can *e e1pressed in "onetary ter"s. ri'ate sector or%ani$ations tend to "ae "!ch "ore !se o# other project appraisal techni4!es( s!ch as rate o# ret!rn( -here #easi*le. The practice o# cost)*ene#it analysis di##ers *et-een co!ntries and *et-een sectors 2e.%. transport( health3 -ithin co!ntries. So"e o# the "ain di##erences incl!de the types o# i"pacts that are incl!ded as costs and *ene#its -ithin appraisals( the e1tent to -hich i"pacts are e1pressed in "onetary ter"s and di##erences in disco!nt rate *et-een co!ntries. A%encies across the -orld rely on a *asic set o# ey cost)*ene#it indicators( incl!din%6 •
= 2present 'al!e o# *ene#its37
•
2present 'al!e o# costs37
•
N 2= less 37
•
N, 2-here is the le'el o# #!nds a'aila*le3 and
•
=5 2*ene#it cost ratio( = di'ided *y 3. The concept o# =A dates *ac to an />0> article *y D!p!it( and -as #or"ali$ed in
s!*se4!ent -ors *y Al#red :arshall. The practical application o# =A -as initiated in the S *y the Ar"y orps o# En%ineers( a#ter the @ederal Na'i%ation Act o# /;?I e##ecti'ely re4!ired cost)*ene#it analysis #or proposed #ederal -ater-ay in#rastr!ct!re. / S!*se4!ently( cost)*ene#it techni4!es -ere applied to the de'elop"ent o# hi%h-ay and "otor-ay in'est"ents in the S and K d!rin% the /;B
28
e1tent that s!*stantial %!idance no- e1ists on ho- transport projects sho!ld *e appraised in "any co!ntries aro!nd the -orld.
+n the K( the Ne- Approach to Appraisal 2NATA3 -as introd!ced *y the then Depart"ent #or Transport( En'iron"ent and the 5e%ions. This *ro!%ht to%ether cost)*ene#it res!lts -ith those #ro" detailed en'iron"ental i"pact assess"ents and presented the" in a *alanced -ay. NATA -as #irst applied to national road sche"es in the /;;> 5oads 5e'ie-( *!t s!*se4!ently rolled o!t to all "odes o# transport. +t is no- a cornerstone o# transport appraisal in the K and is "aintained and de'eloped *y the Depart"ent #or Transport./<
The EJs JDe'elopin% Har"onised E!ropean Approaches #or Transport ostin% and
roject Assess"entJ 2HEATO3 project( part o# its Si1th @ra"e-or ro%ra""e( has re'ie-ed transport appraisal %!idance across E "e"*er states and #o!nd that si%ni#icant di##erences e1ist *et-een co!ntries. HEATOJs ai" is to de'elop %!idelines to har"onise transport appraisal practice across the E./// Transport anada has also pro"oted the !se o# =A #or "ajor transport in'est"ents since the iss!ance o# its M!ide*oo in /;;0. :ore recent %!idance has *een pro'ided *y the S Dept. o# Transportation and se'eral state transportation depart"ents( -ith disc!ssion o# a'aila*le so#t-are tools #or application o# =A in transportation( incl!din% HE5S( =A.Net( Stat=enost( al=( and T5ED+S. A'aila*le %!ides are pro'ided *y the @ederal Hi%h-ay Ad"inistration0B( @ederal A'iation Ad"inistrationI( :innesota Depart"ent o# TransportationC and ali#ornia Depart"ent o# Transportation 2altrans3 D!rin% the early /;I<s( =A -as also e1tended to assess"ent o# the relati'e *ene#its and costs o# health care and ed!cation in -ors *y =!rton 8eis*rod.;/<. Later( the S Dept. o# Health and H!"an Ser'ices iss!ed its =A M!ide*oo // .
Accuracy problems
The acc!racy o# the o!tco"e o# a cost)*ene#it analysis is dependent on ho- acc!rately
costs and *ene#its ha'e *een esti"ated. A peer)re'ie-ed st!dy /? o# the acc!racy o# cost
2#
esti"ates in transportation in#rastr!ct!re plannin% #o!nd that #or rail projects act!al costs t!rned o!t to *e on a'era%e 00.C percent hi%her than esti"ated costs( and #or roads <.0 percent hi%her 2@ly'*jer%( Hol"( and =!hl( <<3. @or *ene#its( another peer)re'ie-ed st!dy /0 #o!nd that act!al rail ridership -as on a'era%e B/.0 percent lo-er than esti"ated
ridership7 #or roads it -as #o!nd that #or hal# o# all projects esti"ated tra##ic -as -ron% *y "ore than < percent 2@ly'*jer%( Hol"( and =!hl(
/. 5ely hea'ily on past lie projects 2#re4!ently di##erin% "aredly in #!nction or si$e( and certainly in the sill le'els o# the tea" "e"*ers3( . 5ely hea'ily on the projectJs "e"*ers to identi#y 2remember #ro" their collecti'e past e1periences3 the si%ni#icant cost dri'ers( ?. 5ely on 'ery cr!de he!ristics 2Jr!les o# th!"*J3 to esti"ate the "oney cost o# the intan%i*le ele"ents( and 0. Are !na*le to co"pletely dispel the !s!ally 2!nconscio!s3 *iases o# the tea" "e"*ers 2-ho o#ten ha'e a 'ested interest in a decision to J%o aheadJ3 and the nat!ral psycholo%ical tendency to "think positive" 2-hate'er that in'ol'es3. Another challen%e to cost)*ene#it analysis co"es #ro" deter"inin% -hich costs sho!ld *e incl!ded in an analysis 2the si%ni#icant cost dri'ers3. This is o#ten contro'ersial as or%ani$ations or interest %ro!ps "ay #eel that so"e costs sho!ld *e incl!ded or e1cl!ded #ro" a st!dy.
$0
+n the case o# the @ord into 2-here( d!e to desi%n #la-s( the into -as lia*le to *!rst into #la"es in a rear)i"pact collision3( the @ord co"panyJs decision -as not to iss!e a recall. @ordJs cost *ene#it analysis had esti"ated that6 *ased on the n!"*er o# cars in !se and the pro*a*le accident rate( deaths d!e to the desi%n #la- -o!ld r!n a*o!t 0;.B "illion 2the a"o!nt @ord -o!ld pay o!t o# co!rt to settle -ron%#!l death la-s!its3. This -as esti"ated to *e less than the cost o# iss!in% a recall 2/?C.B "illion3 /I. +n the e'ent( @ord o'erlooed 2or considered insi%ni#icant3 the costs o# the ne%ati'e p!*licity so en%endered( -hich t!rned o!t to *e 4!ite si%ni#icant 2since it led to the recall any-ay and to "eas!ra*le losses in sales3. +n the #ield o# Health Econo"ics( so"e analysts #eel that cost)*ene#it analysis can *e an inade4!ate "eas!re( as -illin%ness)to)pay "ethods o# deter"inin% the 'al!e o# h!"an li#e can *e s!*ject to *ias accordin% to inco"e ine4!ity. They s!pport !se o# 'ariants s!ch as cost)!tility analysis and 4!ality)adj!sted li#e year to analy$e the e##ects o# health policies.
Co9 o<+,,4 ost o'err!n is de#ined as e1cess o# act!al cost o'er *!d%et. ost o'err!n is also so"eti"es called cost escalation( cost increase( or *!d%et o'err!n. Ho-e'er( cost escalation and increases do not necessarily res!lt in cost o'err!ns i# cost escalation is incl!ded in the *!d%et. ost o'err!n is co""on in in#rastr!ct!re( *!ildin%( and technolo%y projects. One o# the "ost co"prehensi'e st!dies / o# cost o'err!n that e1ists #o!nd that ; o!t o# /< projects had o'err!n( o'err!ns o# B< to /<< percent -ere co""on( o'err!n -as #o!nd in each o# < nations and #i'e continents co'ered *y the st!dy( and o'err!n had *een constant #or the C< years #or -hich data -ere a'aila*le. @or +T projects( an ind!stry st!dy *y the Standish Mro!p 2<<03 #o!nd that a'era%e cost o'err!n -as 0? percent( C/ percent o# projects -ere o'er *!d%et( o'er ti"e( and !nder scope( and total -aste -as esti"ated at SBB *illion per year in the S alone. Spectac!lar e1a"ples o# cost o'err!n are the Sydney Opera Ho!se -ith /(0<< percent( and the oncorde s!personic aeroplane -ith /(/<< percent. The cost o'err!n o# =ostonJs =i% Di% -as CB percent( or S// *illion. The cost o'err!n #or the
$1
hannel t!nnel *et-een the K and @rance -as >< percent #or constr!ction costs and /0< percent #or #inancin% costs.
Three types o# e1planation o# cost o'err!n e1ist6 technical( psycholo%ical( and political)econo"ic. Technical e1planations acco!nt #or cost o'err!n in ter"s o# i"per#ect #orecastin% techni4!es( inade4!ate data( etc. sycholo%ical e1planations acco!nt #or o'err!n in ter"s o# opti"is" *ias -ith #orecasters. @inally( political)econo"ic e1planations see o'err!n as the res!lt o# strate%ic "isrepresentation o# scope and,or *!d%ets. All o# the e1planations a*o'e can *e considered a #or" o# ris. A projectJs *!d%eted costs sho!ld al-ays incl!de cost contin%ency #!nds to co'er riss 2other than scope chan%es i"posed on the project3. As has *een sho-n in cost en%ineerin% research /( poor ris analysis and contin%ency esti"atin% practices acco!nt #or "any project cost o'err!ns. N!"ero!s st!dies ha'e #o!nd that the %reatest ca!se o# cost %ro-th -as poorly de#ined scope at the ti"e that the *!d%et -as esta*lished. The cost %ro-th 2o'err!n o# *!d%et *e#ore cost contin%ency is added3 can *e predicted *y ratin% the e1tent o# scope de#inition( e'en on co"ple1 projects -ith ne- technolo%y. ost o'err!n is typically calc!lated in one o# t-o -ays. Either as a percenta%e( na"ely act!al cost "in!s *!d%eted cost( in percent o# *!d%eted cost. Or as a ratio( 'i$. act!al cost di'ided *y *!d%eted cost. @or e1a"ple( i# the *!d%et #or *!ildin% a ne- *rid%e -as /<< "illion and the act!al cost -as /B< "illion then the cost o'err!n "ay *e e1pressed as B< percent or *y the ratio /.B.
$2
COST ANALYSIS ETHODS •
:ain Types o# ost Analysis
•
Q!adrants o# ost)E##ecti'eness
•
Key Attri*!tes o# ost Analyses
•
ollectin% ost Data Alon%side linical St!dies St!dies o# costs and related econo"ic i"plications co"prise a "ajor %ro!p o#
"ethods !sed in HTA. These st!dies can in'ol'e attri*!tes o# either or *oth o# pri"ary data collection and inte%rati'e "ethods. That is( cost data can *e collected as part o# 5Ts and other clinical st!dies( as -ell as ad"inistrati'e data*ases !sed in health care pay"ent. ost data #ro" one or "ore s!ch so!rces o#ten are co"*ined -ith data #ro" pri"ary clinical st!dies( epide"iolo%ical st!dies( and other so!rces to cond!ct cost)e##ecti'eness analyses and other cost st!dies that in'ol'e -ei%hin% health and econo"ic i"pacts o# health technolo%y. +nterest in ost ontrol Analysishas acco"panied concerns a*o!t risin% health care costs( press!res on health care policy"aers to allocate reso!rces( and the need #or health prod!ct "aers and other technolo%y ad'ocates to de"onstrate the econo"ic *ene#its o# their technolo%ies. This interest is re#lected in a considera*le increase in the n!"*er o# reports o# ost ontrol Analysisin the literat!re and #!rther re#ine"ent o# "ethods.
* T7=+9 o Co9 A679*9 There is a 'ariety o# approaches to cost analysis( the s!ita*ility o# any o# -hich depends !pon the p!rpose o# an assess"ent and the a'aila*ility o# data and other reso!rces. +t is rarely possi*le or necessary to identi#y and 4!anti#y all costs and all *ene#its 2or o!tco"es3( and the !nits !sed to 4!anti#y these "ay di##er.
$$
* 7=+9 o 3o9 679*9 *364+ ?+ o66o*. •
Co9-o-*66+99 679*9 : deter"ination o# the econo"ic i"pact o# an illness or condition 2typically on a %i'en pop!lation( re%ion( or co!ntry3 e.%.( o# s"oin%( arthritis or *edsores( incl!din% associated treat"ent costs
•
Co9-/**/*@*o 679*9 : deter"ination o# the least costly a"on% alternati'e inter'entions that are ass!"ed to prod!ce e4!i'alent o!tco"es
•
Co9-++3*<++99 679*9 CEA ): a co"parison o# costs in "onetary !nits -ith o!tco"es in 4!antitati'e non)"onetary !nits( e.%.( red!ced "ortality or "or*idity
•
Co9-4*6*7 679*9 CUA: a #or" o# cost)e##ecti'eness analysis that co"pares costs in "onetary !nits -ith o!tco"es in ter"s o# their !tility( !s!ally to the patient( "eas!red( e.%.( in QALYs
•
Co9-3o9+4+3+ 679*9 : a #or" o# cost)e##ecti'eness analysis that presents costs and o!tco"es in discrete cate%ories( -itho!t a%%re%atin% or -ei%htin% the"
•
Co9-5++* 679*9 CBA : co"pares costs and *ene#its( *oth o# -hich are 4!anti#ied in co""on "onetary !nits.
The 'al!ation o# costs and o!tco"es a"on% these alternati'e econo"ic analyses. Di##erent Types o# Econo"ic Analysis al!ation o#
al!ation o# O!tco"es
osts ost o# +llness
's.
None
ost :ini"i$ation
's.
Ass!"e sa"e
ost E##ecti'eness
Nat!ral !nits
%$ ost tility
ost =ene#it
tile 2e.%.( QALYs3
or )
ost ) :ini"i$ation Analysis( EA and A necessarily in'ol'e co"parisons o# alternati'e inter'entions. A technolo%y cannot *e si"ply cost e##ecti'e( tho!%h it "ay *e cost e##ecti'e co"pared to so"ethin% else. Altho!%h =A typically in'ol'es co"parisons o# alternati'e technolo%ies( this is not necessary. =eca!se it "eas!res costs and o!tco"es in "onetary 2not disease)speci#ic3 ter"s( =A ena*les co"parison o# disparate technolo%ies( e.%.( coronary artery *ypass %ra#t s!r%ery and screenin% #or *reast cancer. A dra-*ac o# =A is the di##ic!lty o# assi%nin% "onetary 'al!es to all pertinent o!tco"es( incl!din% chan%es in the len%th or 4!ality o# h!"an li#e. EA a'oids this li"itation *y !sin% "ore direct or nat!ral !nits o# o!tco"es s!ch as li'es sa'ed or stroes a'erted. As s!ch( EA can only co"pare technolo%ies -hose o!tco"es are "eas!red in the sa"e !nits. +n A( esti"ates o# !tility are assi%ned to health o!tco"es( ena*lin% co"parisons o# disparate technolo%ies. T-o *asic approaches #or cost)*ene#it analysis 2=A3 are ratio approach and the net *ene#it approach. The ratio approach indicates the a"o!nt o# *ene#its 2or o!tco"es3 that can *e reali$ed per !nit e1pendit!re on a technolo%y 's. a co"parator. +n the ratio approach( a technolo%y is cost *ene#icial 's. a co"parator i# the ratio o# the chan%e in costs to the chan%e in *ene#its is less than one. The net *ene#its approach indicates the a*sol!te a"o!nt o# "oney sa'ed or lost d!e to a !se o# a technolo%y 's. a co"parator. +n the net *ene#its #or"!lation( a technolo%y is cost)*ene#icial 's. a co"parator i# the net chan%e in *ene#its e1ceeds the net chan%e in costs. The choice *et-een a net *ene#its approach or a *ene#it,cost approach #or a =A can a##ect #indin%s. The approach selected "ay depend !pon s!ch #actors as -hether costs "!st *e li"ited to a certain le'el( -hether the intent is to "a1i"i$e the a*sol!te le'el o# *ene#its( -hether the intent is to "ini"i$e the cost,*ene#it ratio re%ardless o# the a*sol!te le'el o# costs( etc. +ndeed( !nder certain circ!"stances these t-o *asic approaches "ay yield di##erent pre#erences a"on% alternati'e technolo%ies.
$
=o1 /; sho-s *asic #or"!las #or deter"inin% EA( A( and =A.
COST ANALYSIS RATIO
$'
Q!adrants o# ost)E##ecti'eness A *asic approach to portrayin% a cost)e##ecti'eness 2or cost)!tility3 co"parison o# a ne- inter'ention to a standard o# care is to consider the cost and e##ecti'eness o# a neinter'ention in the space o# #o!r #ields as sho-n in =o1 <( startin% -ith the !pper #i%!re. The le'el o# costs and the le'el o# e##ecti'eness #or the standard o# care are indicated *y the P in the "iddle o# the #i%!re. A ne- inter'ention "ay ha'e hi%her or lo-er costs( and hi%her or lo-er e##ecti'eness( s!ch that its plot "ay #all into one o# the #o!r 4!adrants
s!rro!ndin% the costs and e##ecti'eness o# the standard o# care. +# it is no-n that the plot o# the ne- inter'ention #alls into either o# t-o o# the 4!adrants( i.e.( -here the ne- inter'ention has hi%her costs and lo-er e##ecti'eness 2indicatin% that it sho!ld *e rejected3( or it has lo-er costs and hi%her e##ecti'eness 2indicatin% that it sho!ld *e adopted3( then no #!rther analysis "ay *e re4!ired. +# it is no-n that the plot o# the ne- inter'ention #alls into either o# the other t-o 4!adrants( i.e.( -here the ne- inter'ention has hi%her costs and hi%her e##ecti'eness( or it has lo-er costs and lo-er e##ecti'eness( then #!rther analysis -ei%hin% the "ar%inal costs and e##ecti'eness o# the ne- inter'ention co"pared to the standard o# care "ay *e re4!ired. 8ithin either o# the t-o 4!adrants that entail -ei%hin% tradeo##s o# costs and e##ecti'eness( it "ay *e apparent that the "ar%inal tradeo## o# costs and o!tco"es is so hi%h or lo- as to s!%%est rejection or adoption. As sho-n in the lo-er #i%!re o# =o1 <( this arises -hen the ne- inter'ention yields only 'ery lo- "ar%inal %ain in e##ecti'eness at a 'ery hi%h "ar%inal cost 2reject3( or yields 'ery hi%h "ar%inal i"pro'e"ents in e##ecti'eness at a 'ery lo- "ar%inal cost 2adopt3.
"+7 A,*54+9 o Co9 A679+9 The approaches to acco!ntin% #or costs and o!tco"es in ost ontrol Analysiscan 'ary in a n!"*er o# i"portant respects( so"e o# -hich are addressed *rie#ly *elo-. These sho!ld *e care#!lly considered *y assessors( as -ell as the policy"aers -ho intend to "ae !se o# assess"ent #indin%s. Mi'en the di##erent -ays in -hich costs and o!tco"es "ay *e deter"ined( all st!dies sho!ld "ae clear their "ethodolo%y in these respects 2=y#ord /;;>7 Dr!""ond /;;C7 Mold /;;I3.
$)
Co/=,o,. Any cost analysis o# one inter'ention 'ers!s another "!st *e speci#ic
a*o!t the co"parator. This "ay *e standard o# care 2c!rrent *est practice3( "ini"!" practice( or no inter'ention. So"e analyses that declare the s!periority o# a ne- inter'ention "ay ha'e !sed a co"parator that is no lon%er in practice or is considered s!*)standard care or that is not appropriate #or the patient pop!lation o# interest.
P+,9=+3*<+. The perspecti'e o# a cost analysis re#ers to the standpoint at -hich
costs and o!tco"es 2or conse4!ences or *ene#its3 are reali$ed. @or instance( the perspecti'e o# an analysis "ay *e that o# society o'erall( a third)party payer( a physician( a hospital( or a patient. learly( costs and o!tco"es are not reali$ed in the sa"e -ay #ro" each o# these perspecti'es. :any analysts #a'or !sin% the *road perspecti'e o# society and identi#yin% all costs and all o!tco"es accordin%ly. Ho-e'er( society as s!ch "ay not *e the decision "aer( and -hat is cost e##ecti'e #ro" that perspecti'e "ay not *e -hat is cost e##ecti'e #ro" the standpoint o# a "inistry o# health( third)party payer( hospital "ana%er( patient( or other decision "aer. +t is possi*le that this perspecti'e "ay rese"*le that o# a national or re%ional %o'ern"ent( i# indeed that %o'ern"ent e1periences 2or is responsi*le #or representin% the perspecti'es o# those that e1perience3 all o# the costs and o!tco"es that are incl!ded in a societal perspecti'e.
4,9 o Co9-E+3*<++99
D*,+3 Co996 Dependin% !pon the perspecti'e taen( ost ontrol Analysissho!ld
identi#y t-o types o# direct costs. Direct costs represent the 'al!e o# all %oods( ser'ices( and other reso!rces cons!"ed in pro'idin% health care or dealin% -ith side e##ects or other c!rrent and #!t!re conse4!ences o# health care. T-o types o# direct costs are direct health care costs and direct non)health care costs. D*,+3 ?+6? care costs incl!de costs o# physician ser'ices( hospital ser'ices(
dr!%s( etc. in'ol'ed in deli'ery o# health care. Direct non)health care costs are inc!rred in connection -ith health care( s!ch as #or care pro'ided *y #a"ily "e"*ers and transportation to and #ro" the site o# care. +n 4!anti#yin% direct health care costs( "any analyses !se readily a'aila*le hospital or physician char%es 2i.e.( price lists3 rather than tr!e costs, -hose
$8
deter"ination "ay re4!ire special analyses o# reso!rce cons!"ption. Ho-e'er( char%es 2as -ell as act!al pay"ents3 tend to re#lect pro'ider cost shi#tin% and other #actors that decrease the 'alidity o# !sin% char%es to represent the tr!e costs o# pro'idin% care.
$#
I*,+3 Co996 Analyses sho!ld acco!nt #or indirect costs( so"eti"es no-n as
prod!cti'ity losses. These incl!de the costs o# lost -or d!e to a*senteeis" or early retire"ent( i"paired prod!cti'ity at -or( and lost or i"paired leis!re acti'ity. +ndirect costs also incl!de the costs o# pre"at!re "ortality. +ntan%i*le costs o# pain( s!##erin%( and %rie# are real( yet 'ery di##ic!lt to "eas!re and are o#ten o"itted #ro" cost analyses.
T*/+ Ho,*@o 6 +nterpretation o# ost ontrol Analysis"!st consider that the ti"e
hori$on 2or ti"e)#ra"e3 o# a st!dy is liely to a##ect the #indin%s re%ardin% the relati'e "a%nit!des o# costs and o!tco"es o# a health care inter'ention. osts and o!tco"es !s!ally do not accr!e in steady strea"s o'er ti"e. o"parisons o# costs and o!tco"es a#ter one year "ay yield "!ch di##erent #indin%s than co"parisons "ade a#ter B( /<( or B years. The "eanin%#!l ti"e hori$ons #or assessin% the cost hori$ons o# each o# e"er%ency appendecto"ies( cholesterol)lo-erin% in hi%h)ris ad!lts( and s"oin% cessation in teena%ers are liely to *e 4!ite di##erent. @or e1a"ple( an analysis cond!cted #or the :edicare pro%ra" in the S to deter"ine cost and ti"e tradeo##s o# he"odialysis and idney transplantation sho-ed that the ann!ali$ed e1pendit!re *y the :edicare End)Sta%e 5enal Disease ro%ra" #or a dialysis patient -as ?(<<<. Altho!%h patients -ith #!nctionin% transplanted idneys re4!ired a #irst)year e1pendit!re o# BI(<<<( they cost :edicare only an a'era%e o# I(0<< in s!cceedin% years. On a'era%e( esti"ated c!"!lati'e dialysis and transplantation costs reach a *rea)e'en point in a*o!t three years( a#ter -hich transplantation pro'ides a net #inancial %ain co"pared to dialysis. Ti"e hori$ons sho!ld *e lon% eno!%h to capt!re strea"s o# health and econo"ic o!tco"es 2incl!din% si%ni#icant intended and !nintended ones3. These co!ld enco"pass a disease episode( patient li#e( or e'en "!ltiple %enerations o# li#e 2s!ch as #or inter'entions in -o"en o# child)*earin% a%e or inter'entions that "ay ca!se herita*le %enetic chan%es3. Q!antitati'e "odelin% approaches "ay *e needed to esti"ate costs and o!tco"es that are *eyond those o# a'aila*le data. O# co!rse( the hi%her the disco!nt rate !sed in an analysis( the less i"portant are #!t!re o!tco"es and costs. A<+,+ Co99 <9. ,*6 Co99: Assess"ents sho!ld "ae clear -hether
average costs or "ar%inal costs are *ein% !sed in the analysis. 8hereas a'era%e cost analysis
considers the total 2or a*sol!te3 costs and o!tco"es o# an inter'ention( "ar%inal cost analysis considers ho- o!tco"es chan%e -ith chan%es in costs 2e.%.( relati'e to a co"parator3( -hich "ay pro'ide "ore in#or"ation a*o!t ho- to !se reso!rces e##iciently. :ar%inal cost analysis "ay re'eal that( *eyond a certain le'el o# spendin%( the
%0
Additional *ene#its are no lon%er -orth the additional costs. @or e1a"ple( as sho-n in =o1 /( the a'era%e cost per desired o!tco"e o# an iterati'e screenin% test "ay appear to *e 4!ite accepta*le -hereas "ar%inal cost analysis de"onstrates that the cost o# addin% the last test 2i.e.( the additional cost o# the si1th test per person3 to detect another case o# cancer -o!ld *e astrono"ical.
A<+,+ Co9 A679*9 <9. ,*6 Co9 A679*9 The i"portance o# deter"inin% "ar%inal costs is apparent in the analysis *y Ne!ha!ser and Le-ici o# a proposed protocol o# se4!ential stool %!aiac testin% #or colon cancer. Here( a'era%e cost #i%!res o*sc!re a steep rise in "ar%inal costs o# testin% *eca!se the hi%h detection rate #ro" the initial tests is a'era%ed o'er s!*se4!ent tests that contri*!te little to the detection rate. This type o# analysis helps to de"onstrate ho- it is possi*le to spend steeply increasin% health care reso!rces #or di"inishin% ret!rns in health *ene#its. C3+, 93,++* ++3*o 3o99 *? 9+4+*6 4*3 +99
No. No. o# Additional Total cost 23 Additional A'era%e :ar%inal o# cancers cancers o# dia%nosis 23 cost o# cost 23 cost 23 tests detected detected dia%nosis per cancer per cancer detected detected / ? 0 B I
IB.;0I;
IB.;0I;
CC(B//
CC(B//
/(/CB
/(/CB
C/.000 C/.;<<0 C/.;?>B C/.;0/C C/.;0<
B.0;BI <.0B>< <. <.<
/(//I /I?(/0/ /CI(??/
?<(/C; (B<; /C(;/C /B(<0 /?(/;<
/(B/< ( (0B/
B(0; 0;(/B< 0I;(B?0 0(C0(I;B 0C(/
This analysis ass!"ed that there -ere C tr!e cancer cases per /<(<<< pop!lations. The testin% protocol pro'ided si1 stool %!aiac tests per person to detect colon cancer. +# any one o# the si1 tests -as positi'e( a *ari!")ene"a test -as per#or"ed( -hich -as ass!"ed to yield no #alse positi'e and no #alse)ne%ati'e res!lts. Other ass!"ptions6 the tr!e)positi'e cancer detection rate o# any sin%le %!aiac test -as ;/.IICG7 the #alse)positi'e rate o# any sin%le %!aiac test -as ?I.B<>G7 the cost o# the #irst stool %!aiac test -as 0 and
%1
each s!*se4!ent %!aiac test -as /7 the cost o# a *ari!")ene"a -as /<<. The "ar%inal cost per case detected depends on the pop!lation screened and the sensiti'ity o# the test !sed.
D*93o4*: ost ontrol Analysissho!ld acco!nt #or the e##ect o# the passa%e o# ti"e on
the 'al!e o# costs and o!tco"es. osts and o!tco"es that occ!r in the #!t!re !s!ally ha'e less present 'al!e than costs and o!tco"es reali$ed today. Disco!ntin% re#lects the ti"e pre#erence #or *ene#its earlier rather than later7 it also re#lects the opport!nity costs o# capital( i.e.( -hate'er ret!rns on in'est"ent that co!ld ha'e *een %ained i# reso!rces had *een in'ested else-here. Th!s( costs and o!tco"es sho!ld *e discounted relati'e to their present 'al!e 2e.%.( at a rate o# #i'e percent per year3. Disco!ntin% allo-s co"parisons in'ol'in% costs and *ene#its that #lo- di##erently o'er ti"e. +t is less rele'ant #or pay as yo! %o *ene#its( s!ch as i# all costs and *ene#its are reali$ed to%ether -ithin one year. +t is "ore rele'ant in instances -here these do not occ!r in parallel( s!ch as -hen "ost costs are reali$ed early and "ost *ene#its are reali$ed in later years. Disco!nt rates !sed in ost ontrol Analysisare typically *ased on interest rates o# %o'ern"ent *onds or the "aret interest rates #or the cost o# capital -hose "at!rity is a*o!t the sa"e as the d!ration o# the e##ecti'e ti"e hori$on o# the health care inter'ention o# pro%ra" *ein% e'al!ated. =o1 sho-s the *asic #or"!la #or calc!latin% present 'al!es #or a %i'en disco!nt rate( as -ell as ho- the present 'al!e o# a cost or *ene#it that is disco!nted at selected rates is a##ected o'er ti"e. ost ontrol Analysissho!ld also correct #or the e##ects o# inflation 2-hich is di##erent #ro" the ti"e pre#erence acco!nted #or *y disco!ntin%3( s!ch as -hen costs or cost) e##ecti'eness #or one year are co"pared to another year. S+9**<*7 A679*9: Any esti"ate o# costs( o!tco"es( and other 'aria*les !sed in
a cost analysis is s!*ject to so"e !ncertainty. There#ore( sensiti'ity analysis sho!ld *e per#or"ed to deter"ine i# pla!si*le 'ariations in the esti"ates o# certain 'aria*les tho!%ht to *e s!*ject to si%ni#icant !ncertainty a##ect the res!lts o# the cost analysis. A sensiti'ity analysis "ay re'eal( #or e1a"ple( that incl!din% indirect costs( or ass!"in% the !se o# %eneric
%2
as opposed to *rand na"e dr!%s in a "edical therapy( or !sin% a pla!si*le hi%her disco!nt rate in an analysis chan%es the cost)e##ecti'eness o# one inter'ention co"pared to another.
Co66+3* Co9 D 6o9*+ C6**36 S4*+9 The 'alidity o# a cost)related st!dy depends !pon the so!rces o# the data #or costs and o!tco"es. +ncreased attention is *ein% %i'en to collection o# cost data in "ore ri%oro!s( prospecti'e st!dies( partic!larly 5Ts. The closer inte%ration o# econo"ic and clinical st!dies raises i"portant "ethodolo%ical iss!es. +n order to pro"ote "ore rational di##!sion o# ne- technolo%ies( it -o!ld *e desira*le to %enerate relia*le cost and o!tco"es data d!rin% the early part o# a technolo%yJs li#ecycle( s!ch as d!rin% 5Ts re4!ired prior to "aretin% appro'al. An 5T -o!ld *e e1pected to yield the "ost relia*le data concernin% e##icacy o# an inter'ention7 ho-e'er( the care %i'en in an 5T and the costs o# pro'idin% it "ay *e atypical co"pared to "ore %eneral settin%s. @or e1a"ple( 5Ts "ay in'ol'e "ore e1tensi'e and #re4!ent la*oratory tests and other patient "onitorin%( and "ay occ!r "ore o#ten in acade"ic "edical centers -hose costs tend to *e hi%her than in co""!nity health care instit!tions. Other aspects o# trial desi%n( sa"ple si$e( choice o# o!tco"e "eas!res( identi#ication and ta*!lation o# costs( *!rden on in'esti%ators o# data collection and related "atters a##ect the !se#!lness o# clinical trial data #or "eanin%#!l econo"ic st!dies 2=ri%%s <
%$
D*93o4 R+ C6346*o U9+ * D++,/** P,+9+ V64+ o F44,+ Co99 B++*9
+n practice( there is -ide 'ariation in econo"ic st!dy "ethodolo%ies 2Eli1ha!ser /;;>7 Ni1on <<<3. Altho!%h so"e 'ariation is !na'oida*le( "any di##erences in perspecti'e( acco!ntin% #or direct and indirect costs( ti"e #ra"es( disco!ntin% and other aspects are o#ten ar*itrary( res!lt #ro" lac o# e1pertise( and "ay re#lect *iases on the part o# in'esti%ators or sponsors. This di"inishes co"para*ility and trans#era*ility o# st!dy res!lts as -ell as credi*ility o# #indin%s. National and international %ro!ps ha'e de'eloped and re'ised 'ol!ntary standards #or cond!ctin% and reportin% econo"ic st!dies o# health care technolo%ies 2Dr!""ond 3. A recent re'ie- o# B %!idelines #ro"
%%
North A"erica( E!rope( and A!stralia #o!nd a %eneral trend to-ard har"oni$ation in "ost "ethodolo%ical aspects( altho!%h there -ere "ore di##erences in s!ch di"ensions as choice o# econo"ic perspecti'e( reso!rces( and costs to *e incl!ded in analysis 2Hjel"%ren <
Co9 B++* A679*9 E<64* 4**<+67 !?+?+, o Fo66o Co4,9+ o A3*o Yo! "ay ha'e *een intensely creati'e in %eneratin% sol!tions to a pro*le"( and ri%oro!s in yo!r selection o# the *est one a'aila*le. Ho-e'er( this sol!tion "ay still not *e -orth i"ple"entin%( as yo! "ay in'est a lot o# ti"e and "oney in sol'in% a pro*le" that is not -orthy o# this e##ort. ost =ene#it Analysis or =A is a relati'elyU si"ple and -idely !sed techni4!e #or decidin% -hether to "ae a chan%e. As its na"e s!%%ests( yo! si"ply add !p the 'al!e o# the *ene#its o# a co!rse o# action( and s!*tract the costs associated -ith it. osts are either one)o##( or "ay *e on%oin%. =ene#its are "ost o#ten recei'ed o'er ti"e. 8e *!ild this e##ect o# ti"e into o!r analysis *y calc!latin% a pay*ac period. This is the ti"e it taes #or the *ene#its o# a chan%e to repay its costs. :any co"panies loo #or pay*ac on projects o'er a speci#ied period o# ti"e e.%. three years.
Ho- to se the Tool6 +n its si"ple #or"( cost)*ene#it analysis is carried o!t !sin% only #inancial costs and #inancial *ene#its. @or e1a"ple( a si"ple cost *ene#it ratio #or a road sche"e -o!ld "eas!re the cost o# *!ildin% the road( and s!*tract this #ro" the econo"ic *ene#it o# i"pro'in% transport lins. +t -o!ld not "eas!re either the cost o# en'iron"ental da"a%e or the *ene#it o# 4!icer and easier tra'el to -or. A "ore sophisticated approach to *!ildin% a cost *ene#it "odels is to try to p!t a #inancial 'al!e on intan%i*le costs and *ene#its. This can *e hi%hly s!*jecti'e ) is( #or e1a"ple( a historic -ater "eado- -orth B(<<<( or is it -orth B<<(<<< *eca!se i# its en'iron"ental i"portance9 8hat is the 'al!e o# stress)#ree tra'el to -or in the "ornin%9
%
These are all 4!estions that people ha'e to ans-er( and ans-ers that people ha'e to de#end.
The 'ersion o# the cost *ene#it approach -e e1plain here is necessarily si"ple. 8here lar%e s!"s o# "oney are in'ol'ed 2#or e1a"ple( in #inancial "aret transactions3( project e'al!ation can *eco"e an e1tre"ely co"ple1 and sophisticated art. The #!nda"entals o# this are e1plained in rinciples o# orporate @inance *y 5ichard =realey and Ste-art :yers ) this is so"ethin% o# an a!thority on the s!*ject.
E/=6+: A sales director is decidin% -hether to i"ple"ent a ne- co"p!ter)*ased contact "ana%e"ent and sales processin% syste". His depart"ent has only a #e- co"p!ters( and his salespeople are not co"p!ter literate. He is a-are that co"p!teri$ed sales #orces are a*le to contact "ore c!sto"ers and %i'e a hi%her 4!ality o# relia*ility and ser'ice to those c!sto"ers. They are "ore a*le to "eet co""it"ents( and can -or "ore e##iciently -ith #!l#il"ent and deli'ery sta## . His #inancial cost,*ene#it analysis is sho-n *elo-6
Co99: Ne- co"p!ter e4!ip"ent6 •
/< net-or)ready s -ith s!pportin% so#t-are V (0B< each
•
/ ser'er V ?(B<<
•
? printers V /(<< each
•
a*lin% & +nstallation V 0(I<<
•
Sales S!pport So#t-are V /B(<<<
T,** 3o99: •
o"p!ter introd!ction ) > people V 0<< each
•
Key*oard sills ) > people V 0<< each
•
Sales S!pport Syste" ) / people V C<< each
O?+, 3o99: %'
•
Lost ti"e6 0< "an days V << , day
•
Lost sales thro!%h disr!ption6 esti"ate6 <(<<<
•
Lost sales thro!%h ine##iciency d!rin% #irst "onths6 esti"ate6 <(<<<
To6 3o9: 11%(000
B++*9: •
Triplin% o# "ail shot capacity6 esti"ate6 0<(<<< , year
•
A*ility to s!stain telesales ca"pai%ns6 esti"ate6 <(<<< , year
•
+"pro'ed e##iciency and relia*ility o# #ollo-)!p6 esti"ate6 B<(<<< , year
•
+"pro'ed c!sto"er ser'ice and retention6 esti"ate6 ?<(<<< , year
•
+"pro'ed acc!racy o# c!sto"er in#or"ation6 esti"ate6 /<(<<< , year
•
:ore a*ility to "ana%e sales e##ort6 ?<(<<< , year
"+7 =o*9: ost,=ene#it Analysis is a po-er#!l( -idely !sed and relati'ely easy tool #or decidin% -hether to "ae a chan%e. To !se the tool( #irstly -or o!t ho- "!ch the chan%e -ill cost to "ae. Then calc!late the *ene#it yo! -ill #ro" it. 8here costs or *ene#its are paid or recei'ed o'er ti"e( -or o!t the ti"e it -ill tae #or the *ene#its to repay the costs. ost,=ene#it Analysis can *e carried o!t !sin% only #inancial costs and #inancial *ene#its. Yo! "ay( ho-e'er( decide to incl!de intan%i*le ite"s -ithin the analysis. As yo! "!st esti"ate a 'al!e #or these( this ine'ita*ly *rin%s an ele"ent o# s!*jecti'ity into the process. Lar%er projects are e'al!ated !sin% #or"al #inance,capital *!d%etin%( -hich taes into acco!nt "any o# the co"ple1ities in'ol'ed -ith #inancial Decision :ain%. This is a co"ple1 area and is *eyond the scope o# this site. 8hene'er people decide -hether the ad'anta%es o# a partic!lar action are liely to o!t-ei%h its dra-*acs( they en%a%e in a #or" o# *ene#it)cost analysis 2=A3. +n the p!*lic
%)
arena( #or"al =A is a so"eti"es contro'ersial techni4!e #or thoro!%hly and consistently e'al!atin% the pros and cons associated -ith prospecti'e policy chan%es. Speci#ically( it is an atte"pt to identi#y and e1press in dollar ter"s all o# the e##ects o# proposed %o'ern"ent policies or projects. 8hile not intended to *e the only *asis #or decision "ain%( =A can *e a 'al!a*le aid to policy"aers.
Altho!%h concei'ed "ore than /B< years a%o *y the @rench en%ineer !les D!p!it( =A sa- its #irst -idespread !se in the e'al!ation o# #ederal -ater projects in the nited States in the late /;?
DE@ENSE( EDAT+ON( and
the en'iron"ent.
=eca!se so"e o# =As "ost i"portant and contro'ersial applications ha'e *een in en'iron"ental policy( this disc!ssion o# ey iss!es in =A is ill!strated -ith e1a"ples #ro" the en'iron"ental arena. To ascertain the net e##ect o# a proposed policy chan%e on social -ell)*ein%( -e "!st #irst ha'e a -ay o# "eas!rin% the %ains to the %ainers and the losses to the losers. +"plicit in this state"ent is a central tenet o# =A6 the e##ects o# a policy chan%e on society are no "ore or no less than the a%%re%ate o# the e##ects on the indi'id!als -ho constit!te society. Th!s( i# no indi'id!al -o!ld *e "ade *etter o## *y a policy chan%e( there are no *ene#its associated -ith it7 nor are there costs i# no one is "ade -orse o##. +n other -ords( =A co!nts no 'al!es other than those held *y the indi'id!al "e"*ers o# society. +t is e4!ally i"portant to note that *ene#its and costs( e'en tho!%h they are al"ost al-ays e1pressed in dollar ter"s in =A( %o -ell *eyond chan%es in indi'id!als inco"es. +# so"eones -ell)*ein% is i"pro'ed *eca!se o# cleaner airWthro!%h i"pro'ed 'isi*ility( #or instanceWhe e1periences a *ene#it e'en tho!%h his inco"e "ay not chan%e. Si"ilarly( an increase in poll!tion that p!ts people at hi%her ris o# disease i"poses a cost on the" e'en tho!%h their inco"es "ay not #all. +ndeed( a person -o!ld *ear a cost 2*e "ade -orse o##3 i# the poll!tion posed a threat to an e1otic and little)no-n species o# ani"al that he cared a*o!t. So"e critici$e =A on the %ro!nds that @5EE :A5KET and
it s!pposedly enshrines the
disco!ra%es %o'ern"ent inter'ention. Ho-e'er( =A e1ists precisely
*eca!se econo"ists reco%ni$e that #ree "arets so"eti"es allocate reso!rces ine##iciently( ca!sin% pro*le"s s!ch as dirty air and -ater.
%8
Ho-( then( are *ene#its and costs esti"ated9 8hile it is %enerally ass!"ed that they are "eas!red di##erently( *ene#its and costs are act!ally #lip sides o# the sa"e coin. =ene#its are "eas!red *y the -illin%ness o# indi'id!als to pay #or the o!tp!ts o# the policy or project in 4!estion. The proper calc!lation o# costs is the a"o!nt o# co"pensation re4!ired to e1actly o##set ne%ati'e conse4!ences. 8illin%ness to pay or co"pensation re4!ired sho!ld each *e the dollar a"o!nt that -o!ld lea'e e'ery indi'id!al j!st as -ell o## #ollo-in% the i"ple"entation o# the policy as *e#ore it.
S!ppose( #or e1a"ple( -e -ished to e'al!ate the *ene#its and costs o# a proposal to control air poll!tion e"issions #ro" a lar%e #actory. On the positi'e side( poll!tion a*ate"ent -ill "ean red!ced da"a%e to e1posed "aterials( di"inished health riss to people li'in% near*y( i"pro'ed 'isi*ility( and e'en ne- jo*s #or those -ho "an!#act!re poll!tion control e4!ip"ent. On the ne%ati'e side( the re4!ired in'est"ents in poll!tion control "ay ca!se the #ir" to raise the price o# its prod!cts( close do-n se'eral "ar%inal operations at its plant and lay o## -orers( and p!t o## other planned in'est"ents desi%ned to "oderni$e its prod!ction #acilities. Ho- do -e deter"ine the -illin%ness to pay #or the #a'ora*le e##ects9 @irst( it is relati'ely easy to 'al!e the red!ced da"a%e to "aterials. +#( say( a-nin%s -ill no- last ten years rather than #i'e years( it is strai%ht#or-ard to "!ltiply the n!"*er o# a-nin%s ti"es their price to %et an idea o# sa'in%s to cons!"ersWso lon% as the price o# a-nin%s is not a##ected *y the policy. +# red!ced poll!tion "eant "ore a%ric!lt!ral o!tp!t( it -o!ld *e si"ilarly easy to 'al!e *eca!se crops ha'e -ell)de#ined "aret prices. +n other -ords( -hen *ene#its in'ol'e "areted o!tp!ts( 'al!in% the" is not di##ic!lt. =!t -hat a*o!t red!ced health riss or i"pro'ed 'isi*ility9 =eca!se these are not thin%s that people *!y and sell directly( it is "!ch less clear ho- to esti"ate the -illin%ness to pay 2the 'al!e o# the *ene#its3. T-o "ajor techni4!es are a'aila*le. One( called the contin%ent
'al!ation
"ethod(
in'ol'es
asin%
people
directly(
'ia
sophisticated
4!estionnaires( ho- "!ch they -o!ld pay #or red!ced health riss or i"pro'ed 'isi*ility. This approach "aes it possi*le to esti"ate the *ene#its o# pro%ra"sW#or e1a"ple( the preser'ation o# a re"ote -ilderness areaW#or -hich other techni4!es %enerally are inapplica*le. Ho-e'er( this approach has its li"itations. One is that it o#ten re4!ires indi'id!als to place dollar 'al!es on thin%s they are !n!sed to 'ie-in% in econo"ic ter"s. As
%#
a res!lt( their responses "ay not *e as relia*le as -e -o!ld lie. Also( responses to s!r'eys are hypothetical7 econo"ists pre#er 'al!es re'ealed in act!al "aret transactions. Another approach is to o*ser'e ho- "!ch people are -illin% to pay #or %oods that ha'e an
EN+5ON:ENTAL
QAL+TY
co"ponent. @or e1a"ple( ho!ses in !npoll!ted
nei%h*orhoods sell #or "ore than those in poll!ted areas. sin% statistical techni4!es to hold constant the other characteristics o# ho!ses and the nei%h*orhoods in -hich they are located( it is possi*le to identi#y a “clean air pre"i!".” This pro'ides i"portant +N@O5:AT+ON on the 'al!e to indi'id!als o# air 4!ality i"pro'e"ents. A si"ilar approach #or esti"atin% ho- "!ch people 'al!e poll!tion control and other p!*lic policies that red!ce health riss is to esti"ate ho- "!ch o# a -a%e pre"i!" they are paid to -or in jo*s that pose health riss. Yet other techni4!es in#er 'al!es #ro" s!ch thin%s as the ti"e and "oney people spend tra'elin% to and #ro" desira*le recreation sites. +t is %enerally ass!"ed that cost esti"ation in'ol'es a "ere totin% !p o# the e1pendit!res that a##ected parties "!st "ae( as in o!r e1a"ple o# the #ir" controllin% air poll!tion. As s!%%ested a*o'e( ho-e'er( "atters are "ore co"plicated than this. So"e #ir"s not initially a##ected *y 5EMLAT+ON -ill inc!r hi%her costsWthose p!rchasin% the prod!ct o# the re%!lated #ir"( #or e1a"ple. These “ripple” e##ects "!st *e taen into acco!nt. Or i# the poll!tin% #ir" closes do-n so"e operations rather than p!rchase poll!tion control de'ices( its e1pendit!res -ill *e $ero *!t the social costs are still positi'e. +n s!ch cases the costs are *orne *y e"ployees( shareholders( and p!rchasers o# its o!tp!t. n#ort!nately( techni4!es #or "ain% these "ore sophisticated cost esti"ates are still in their in#ancy7 #or this reason( 'irt!ally all =As still !se direct e1pendit!res as ro!%h "eas!res o# tr!e social costs. Three additional iss!es in =A *ear "ention. @irst( %o'ern"ent policies or projects typically prod!ce strea"s o# *ene#its and costs o'er ti"e rather than in one)shot incre"ents. o""only( in #act( a s!*stantial portion o# the costs is inc!rred early in the li#e o# a project( -hile *ene#its "ay e1tend #or "any years 2perhaps *e%innin% only a#ter so"e delay3. Yet( *eca!se people pre#er a dollar today to one ten years #ro" no- 2see +NTE5EST
5ATES3(
=A
typically disco!nts #!t!re *ene#its and costs *ac to present 'al!es. Not only are there technical disa%ree"ents a"on% econo"ists a*o!t the interest rate 2or rates3 at -hich these #!t!re i"pacts sho!ld *e disco!nted( *!t disco!ntin% raises ethical pro*le"s as -ell. At a disco!nt rate o# /< percent( #or instance( / "illion in *ene#its to people #i#ty years #ro" nohas a 5ESENT
ALE
o# only >(B<<. This po-er#!l e##ect o# disco!ntin% is o# concern -hen
=A is applied to the e'al!ation o# policies -ith si%ni#icant inter%enerational e##ects( s!ch as
0
those pertainin% to the pre'ention o# %lo*al cli"ate chan%e or the disposal o# hi%h)le'el radioacti'e -astes 2-hich -ill *e lethal #or h!ndreds o# tho!sands o# years3. A second sticin% point in =A is the #act that the -illin%ness to pay #or the #a'ora*le e##ects o# a project or policy depends on the D+ST5+=T+ON O@ +NO:E6 a *illionaire -o!ld *e a*leWand there#ore -illin%Wto pay "ore than a pa!per #or the sa"e i"pro'e"ent in en'iron"ental 4!ality( e'en tho!%h *oth cared a*o!t it -ith e4!al intensity. So"e critics dislie =A *eca!se it red!ces *ene#its to p!re dollar a"o!nts.
Third( s!ppose that the a#ore"entioned pro*le"s -ere to disappear( and that *ene#its and costs co!ld *e easily e1pressed in dollar ter"s and con'erted to present 'al!es. Accordin% to "odern =A( a project or policy -o!ld *e attracti'e i# the *ene#its it -o!ld prod!ce e1ceed the costs. This is *eca!se( in theory( those %ainin% #ro" the project co!ld co"pensate those "ade -orse o## and still *e *etter o## the"sel'es. +n o!r #actory e1a"ple( #or instance( those enjoyin% the *ene#its o# cleaner air %ain "ore than the losses to cons!"ers -ho "!st pay "ore #or the #actorys o!tp!t or to -orers -hose jo*s are eli"inated. Th!s( the -inners co!ld co"pensate the losers and still co"e o!t ahead. +n practice( o# co!rse( this co"pensation is seldo" paid. There#ore( e'en the "ost e##icient projects create so"e losers. This can !nder"ine s!pport #or =A in %eneral and o#ten "aes it politically di##ic!lt to enact e##icient policiesWor( con'ersely( to *loc 'ery ine##icient projects( -hose costs e1ceed *ene#its. +n spite o# these sticin% points( =A see"s to *e playin% an increasin%ly i"portant role in %o'ern"ent decision "ain%. One reason "ay *e that sh!nnin% a co"prehensi'e( analytical approach to decision "ain% si"ply *eca!se it has #la-s ine'ita*ly p!shes decisions *ac into the real" o# the ad hoc and p!rely political. 8hile =A does ha'e 'ery real shortco"in%s( it appears pre#era*le to s"oe)#illed roo"s.
SEA5HES 5ELATED TO6 OST ANALYS+S ost Analysis
Li#e ycle ost Analysis =ene#it ost Analysis
ost Acco!ntin%
E1a"ple
1
Transaction ost
:ar%inal ost Analysis rod!ct ost Analysis
Analysis
onstr!ction ost Analysis
CHAPTER-IV COPANY PROFILE
2
COPANY PROFILE The ori%in o# Asho Leyland can *e traced to the !r%e #or sel#)reliance( #elt *y independent +ndia. andit a-aharlal Nehr!( +ndiaJs #irst ri"e :inister pers!aded :r. 5a%h!nandan Saran( an ind!strialist( to enter a!to"oti'e "an!#act!re. +n /;0>( Asho :otors -as set !p in -hat -as then :adras( #or the asse"*ly o# A!stin ars. The o"panyJs destiny and na"e chan%ed soon -ith e4!ity participation *y =ritish Leyland and Asho .Leyland
co""enced
"an!#act!re
o#
co""ercial
'ehicles
in
/;BB
Since then Asho Leyland has *een a "ajor presence in +ndiaJs co""ercial 'ehicle ind!stry -ith a tradition o# technolo%ical leadership( achie'ed thro!%h tie)!ps -ith international technolo%y
leaders
and
thro!%h
'i%oro!s
in)ho!se
5&D
Access to international technolo%y ena*led the o"pany to set a tradition to *e #irst -ith technolo%y. =e it #!ll air *raes( po-er steerin% or rear en%ine *!sses( Asho Leyland pioneered all these concepts. 5espondin% to the operatin% conditions and practices in the co!ntry( the o"pany "ade its 'ehicles stron%( o'er)en%ineerin% the" -ith e1tra "etallic "!scles. Desi%nin% d!ra*le prod!cts that "ae econo"ic sense to the cons!"er( !sin% appropriate technolo%y( *eca"e the desi%n philosophy o# the o"pany( -hich in t!rn has ."o!lded
cons!"er
attit!des
and
$
the
*rand
personality
Asho Leyland has*!ilt a rep!tation #or relia*ility and r!%%edness. The B( <<(<<< 'ehicles -e ha'e p!t on the roads ha'e considera*ly eased the additional press!re placed on .road transportation in independent +ndia +n the pop!lo!s +ndian "etros( #o!r o!t o# the #i'e State Transport ndertain% 2ST3 *!ses co"e #ro" Asho Leyland. So"e o# the" lie the do!*le)decer and 'esti*!le *!ses . are !ni4!e "odels #ro" Asho Leyland( tailor)"ade #or hi%h)densityro!tes
+n /;>C( the o'erseas holdin% *y Land 5o'er Leyland +nternational Holdin%s Li"ited 2L5L+H3 -as taen o'er *y a joint 'ent!re *et-een the Hind!ja Mro!p( the Non)5esident +ndian transnational .%ro!p and +EO. 2Since !ly
The *l!eprint prepared #or the #!t!re re#lected the %lo*al a"*itions o# the co"pany( capt!red in #o!r -ords6 Mlo*al Standards( Mlo*al :arets. This -as at a ti"e -hen li*erali$ation and %lo*ali$ation -ere not yet in the air. Asho Leyland e"*ared on a "ajor prod!ct . and process !p %radation to "atch -orld)class standards o# technolo%y
+n the jo!rney to-ards %lo*al standards o# 4!ality( Asho Leyland reached a "ajor "ilestone in /;;? -hen it *eca"e the #irst in +ndiaJs a!to"o*ile history to -in the +SO ;<< certi#ication. The "ore co"prehensi'e +SO ;< and +SO /0< seater to > seater do!*le)decer *!ses( #ro" C.B tone to 0; tone in ha!la%e 'ehicles( #ro" n!"ero!s special application 'ehicles to diesel en%ines #or ind!strial( ."arine and %enet applications( Asho Leyland o##ers a -ide ran%e o# prod!cts
Co,=o,+ =,o*6+ @or o'er #i'e decades( Asho Leyland( the #la%ship o# Hind!ja Mro!p in +ndia( has *een a "ajor presence in +ndiaJs o""ercial ehicle ind!stry.
%
The o"panyJs prod!ct ran%e spans #ro" C.B T M8 to 0;T MT8 in %oods transport and #ro" /; seaters to >< seaters in passen%er transport( a host o# special application 'ehicles and diesel en%ines. Ser'ed *y its o-n co"prehensi'e 5&D *ase( co"ple"ented *y colla*orations -ith %lo*al technolo%y leaders( Asho Leyland has esta*lished a tradition o# technolo%ical
leadership and a stron% rep!tation #or prod!ct relia*ility. The history o# the o"pany has *een p!nct!ated *y a n!"*er o# technolo%ical inno'ations( -hich ha'e since *eco"e ind!stry nor"s. +t -as the #irst to introd!ce "!lti)a1led tr!cs( #!ll air *raes and a host o# inno'ations lie the rear)en%ine and artic!lated *!ses in +ndia. +n /;;C( the o"pany la!nched the co!ntryJs #irst NM *!s and in <<( the #irst Hy*rid Electric ehicle. 8ith si1 "an!#act!rin% locations in +ndia and one in ra%!e 2$ech3 prod!cin% A+A ran%e o# tr!cs( the o"pany has an ann!al prod!ction capacity o# ><(<<< 'ehicles and ;<(<<< en%ines. +ts 3 and +SO /0<
Ei%ht o!t o# ten "etro state transport *!ses in +ndia are #ro" Asho Leyland. 8ith o'er I< "illion passen%ers Xa day( Asho Leyland *!ses carry "ore people than the entire +ndian rail net-or
CORPORAT GOVERNANCE The =oard o# Directors and the :ana%e"ent o# Asho Leyland are co""itted to the enhance"ent o# shareholder 'al!e. Thro!%h so!nd *!siness decisions( pr!dent #inancial "ana%e"ent and hi%h standards o# ethics thro!%ho!t the or%ani$ation *y ens!rin% transparency and pro#essionalis" in all decisions and transactions and Achie'in% e1cellence in orporate Mo'ernance *y con#or"in% to( and e1ceedin% -here'er possi*le( the pre'alent "andatory %!idelines on orporate Mo'ernance and *y re%!larly re'ie-in% the =oard processes and the :ana%e"ent syste"s #or #!rther i"pro'e"ent. The co"pany has adopted a ode o# ond!ct #or the "e"*ers o# the =oard and senior "ana%e"ent( -ho ha'e all a##ir"ed in -ritin% their adherence to this ode.
O"*!ds"an Another si%ni#icant step has *een the appoint"ent o# an O"*!ds"an to deal -ith any re#erences( co"plaints or %rie'ances a*o!t the o"pany( its e"ployees or its dealin%s.
'
+# the s!ppliers( e"ployees or c!sto"ers ha'e any s!%%estions on %o'ernance iss!es or %rie'ances or co"plaints on Asho LeylandJs practices ) incl!si'e o# its e1ec!ti'es in 'ario!s #!nctions ) -hich they #eel o!%ht to *e raised -ith the O"*!ds"an and not -ith the !s!al channels o# *!siness( they "ay do so.
+t is ad'ised that the re%!lar *!siness dealin%s sho!ld *e thro!%h the !s!al *!siness #!nctional channels. The O"*!ds"an -ill not deal -ith the" !nder nor"al circ!"stances.
The O"*!ds"an is :r. T. Anantha Narayanan( a #or"er E1ec!ti'e Director o# the o"pany( -ith an e1cellent !nderstandin% o# Asho Leyland as an or%ani$ation and its #!nctionin%( ha'in% *een -ith the co"pany #or nearly ?< years.
)
8
ONTHLY PRODUCTION & SALES FOR AY 200#-0)-0 B4o o Fo,/
:D rod!ction assen%er Sales Do"estic Sales E1ports :D rod!ction Moods Sales Do"estic Sales E1ports Total :D Do"estic Sales L rod!ction Sales Do"estic Sales E1ports Total rod!ction Sales Do"estic Sales E1ports Total Sales Y+,
:ayJ
:ayJ
AprJ
< 0 0CC0 ?>;< /0< B?C<
C<> BB< /0 B//; 0C? ;B B>
/C>C /<;C ?B 0>0I 0?II /C B0I?
< II 0 I>B? B0?I ?I> B><0
B> 0< ) B>>B B? ?<; BI?/
/? 0 < II0I B0>C ?I B>0;
YTD AprJII BCC 0B; ;I< >BI IC /<>??
YTD AprJ 0C ;
/? ;< 0 /?0;; /<;? C?< //IB?
/B? BC < //0 /
Y
X-0%
X2
XY
<
?(/(>
)
0
)I(BI0
<
?(B/(>I
)/
/
)?B(/>I
?(>/(C
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0(/>(I<
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0/(>I<
0(BC(I<
0
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ZZZZZZZZZZZZZ /(;(I<
#
Asho Leyland
ZZZZZZZZ ZZZZZZZZZZZZZZ /< ?B(I?<
