Cost-effective analysis is an evaluation that takes into account both the costs, as well as, the consequences of alternatives. As a decision-oriented tool, it is designed to establish the most effective ways of reaching certain accounting or educational goals. There are a number of methods that an evaluator can use to evaluate activities and programmes.
This methodology can be used to evaluate the net benefits building to society as a whole because of a policy, programme or project. In principle, CBA can be carried out from the perspective of a local community, state or region; however, such restricted approaches are rare. CBA can be conducted during the projected life of the programme or project. The CBA methodology takes into account the flow of real costs and benefits of resources but leaves out transfer payments such as subsidies or taxes. It tries to measure the overall value of costs and benefits expected out of the activity. It encompasses estimating costs and benefits that are not priced and not in the usual market transactions; nonetheless, they include the use of real resources.
It is conducted from the individual firm perspective and not from the community vantage point as a whole. It assesses the impact a project or programme has on the financial performance of the organization. It can be used in answering questions about whether a proposal gives a return that is acceptable to an organization. It can also used for several other reasons like establishing the lowest cost procurement method. In this method, only cash flows in and out of the firm. Unlike CBA, it also includes subsidies and taxes.
Cost Effective Analysis
CEA determines the cost of attaining a specific physical target. Here, benefits are expressed using physical units and not money units. It is efficient in areas dealing with accident safety, health, and education since it is easier to put benefits into quantities than deal with them in dollars. It is preferable when prices or markets do not fully reflect all the costs and benefits. CEA comes in handy when it is hard to quantify the benefits of a proposal in monetary terms.