Section 4: Cost Analysis

Why Conduct a Cost Analysis?

Cost analysis can greatly facilitate an organization's policy development, program planning, and management. It also can help program administrators to improve operations and to develop more competitive proposals and funding requests. Cost estimates and justifications for costs can be arrived at more easily, and presentations of cost information can be more meaningful and authoritative.

A cost analysis can be a useful tool to:

• Improve fiscal management.
  Periodic cost analysis indicates when there is a need for budget revisions, and an ongoing data collection system simplifies the preparation of new budgets. Complete and accurate cost analysis reports can easily be related to other reports on services and clients (see Section 3, Subsection "Process Evaluation" for a discussion of data collection on services and clients).
• Expand the understanding of how programs operate and contribute to improved program and staff management.
  The major costs of any human service program are personnel costs-salaries and salary-related expenses. An analysis of a program's personnel costs will show how staff spend their time. Such a time analysis may foster improvements in time management and can contribute to the program's ability to communicate staff roles and responsibilities.
• Develop a true "picture of program costs."
  A detailed analysis can generate more accurate and complete cost figures and illuminate specific aspects of program costs (e.g., direct service costs, support service costs, administrative costs, and start-up costs vs. maintenance/ ongoing costs).
• Assist other service providers adopting the model for financial planning.
  One of the immediate needs of an organization seeking to implement or replicate a new service model is information on cost and level of effort for personnel. This will be especially relevant in a multi-site program where a demonstration program is developed at a set of selected sites and then replicated across all sites.
• Assist in weighing options when budgets are expanded or cut.
  A cost analysis can be used to find out how to get the greatest increase in numbers served with the least sacrifice in program quality. It can be used to find out what cuts minimize the effects on quality when budgets must be cut or the costs of important resources go up.

A Step-By-Step Approach To Cost Analysis

The process of conducting a cost analysis can be divided into two stages that together are composed of 9 steps. The first stage is defining the problem. The second stage is actually conducting the cost analysis. An outline and description of the steps in each are listed below.

• Defining the cost analysis problem
  • Identify the need for cost information
  • Identify the audience(s)
  • Specify goals for the analysis
• Conduct the cost analysis
  • Identify all ingredients and the required amounts of each
  • Estimate the costs per unit for each ingredient and calculate total cost
  • Account for the effects of time
  • Analyze the cost data
  • Examine the distribution of costs
  • Conduct sensitivity analysis