What Is a Cost Analysis?

A cost analysis is a process of modeling cost to support strategic planning, decision making, and cost reduction. It is often used and applied in benefits, transaction, life cycle, volume profits, cost-effectiveness, and financial purposes.

It is commonly used in businesses because it helps them compare the likely costs and benefits of the potential project plans which they think would bring them the greatest net benefit. One advantage of conducting a cost analysis is because it helps simplify complicated business decisions. It gives them a great overview of the total benefits, minus total cost equals net benefit. In general, cost analysis is really important because it gives you an idea of how much you will lose and how much would you gain if you will invest in a certain project.

How To Create a Cost Analysis?

cost analysis template

According to an article in the University of Pennsylvania, there are six elements that should be observed and applied in a cost analysis. This is the costs, volume, market, rates, assumptions, and constraints. If you are assigned to do this very time-consuming task, you need to properly read and analyze how it is done. We have come up with these simple steps on how you can make a credible and professional marketing analysis.

1. Figure Out Its Use

Before you start making a cost analysis in Microsoft Excel, ask yourself first. Why am I making a cost analysis? What is my purpose in doing this? Where am I going to use this? Figure out why you need it in the first place. Your response to these questions will give you a head start on how you should begin your cost analysis and how you should end it.

2. Know Your Viewpoint

The second step would be knowing whose cost should you be analyzing. For example, if you're going to make a labor price sheet analysis, then you should look at cost from their perspective, taking into account all the expenses that they spend from transportation, bills, food, and other costs.

3. Identify Costs and Benefits

In identifying your costs and benefits you need to categorize them according to their types. Cost for objects, services, customers, and projects falls under the direct cost category. Fixed cost from an overhead department or cost center is categorized as an indirect cost. Measurable and quantifiable costs are considered as tangible cost while the intangible cost are difficult to identify and measure. Lastly, real costs are expenses associated with producing an offering.

4. Calculate Cost and Benefits

Now that you have identified the costs and benefits in your analysis, it's now time to outline the overall cost sheet needed and the number of benefits you will get. An important tip to remember in calculating them is to factor in the future cost and benefits. Always remember to adjust the figures and change them to present values in order to attain exact amounts.

5. Analyze The Results

The last step is to conduct data analysis and attain results from calculating everything. With all the given data provided, you can now form a basis for your decision. Will investing in this project brings a lot of great benefit for me and my business? This question would be made justifiable now that you have all the cost data information needed.