Budget Analysis
Module 3b
See Chapter 11 Welch and Comer
Cost Benefit-Analysis
Use Formula Auditing to Keep
Things Straight
Advanced Agency or Department
Level Budgeting Analyses
THREE TYPES OF COST
ANALYSIS IN EVALUATION:
1. Cost allocation,
(how much per kid)
2. cost-effectiveness analysis,
(which daycare to fund)
3. cost-benefit analysis
(fund daycare or something else)
USING COST ANALYSIS

1.
THREE TYPES OF COST ANALYSIS IN
EVALUATION:
Cost allocation,
simple
2.
Cost-effectiveness analysis, and
3.
Cost-benefit analysis
complex
represent a continuum of types of cost analysis which
can have a place in program evaluation.
http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm
http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm
USING COST ANALYSIS

1.
2.
3.
THREE TYPES OF COST ANALYSIS IN
EVALUATION:
Cost allocation,
Cost-effectiveness analysis, and
Cost-benefit analysis
At the program or agency level, it basically means setting up
budgeting and accounting systems in a way that allows program
managers to determine a unit cost or cost per unit of service.
For example, for evaluation purposes, you might want to
know the average cost per child of providing an after-school
tutoring program, including the costs of staff salaries, snacks,
and other overhead costs.
http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm
http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm
Open the lab excel file and follow
along.
Breakeven Analysis
 Breakeven analysis is a simple technique for making rough
estimates of what it would take for revenues to cover costs.
 It requires that all costs be broken down into fixed and
variable costs (which you have done with your
spreadsheet).
 Question 1: Given the existing costs and the competitive
price (or the reimbursement rate), what is the quantity of
service required to breakeven.
 Question 2: Given the level of output and competitive
price, how much would fixed or variable costs have to be
reduce to breakeven.
Source: Bretschneider
You can either do it by hand or use
goal seek:
The next 2 (cost effectiveness and cost benefit ) have to
do with Deciding How To Spend Limited Resources
Wasserman 1994:7
USING COST ANALYSIS

THREE TYPES OF COST ANALYSIS IN
EVALUATION:
1. Cost allocation,
2. Cost-effectiveness analysis, and
The outcomes of a cost3. Cost-benefit analysis
effective program are
achieved at a lower cost per
unit of outcome than other
programs seeking to affect
the same
variables.
Wasserman 1994:7
address whether the unit cost is greater for one program or approach
than another, which is often much easier to do, and more informative,
than assigning a dollar value to the outcome (White, 1988).
i.e. which daycare program is less expensive to put a child through?
http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm
http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm
USING COST ANALYSIS

1.
2.
3.
THREE TYPES OF COST ANALYSIS IN
EVALUATION:
Cost allocation,
Cost-effectiveness analysis, and
Cost-benefit analysis
Forces you to translate all costs
and benefits to dollar amounts –
this can be difficult and sometimes
impossible to do
Answers basic question: "Do the economic benefits of
providing this service outweigh the economic costs" and "Is it
worth doing at all"?
Wasserman 1994:7
http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm
http://ag.arizona.edu/fcs/cyfernet/cyfar/Costben2.htm
Many public dilemmas to be
addressed in this way
 Harvesting an old forest v saving the
endangered spotted owl species
 Popularity of Australian coast fishing v
depriving local squid of their primary food
source
 Proposed new ballpark v other city needs
like a library, sanitation, and downtown
homeless.
Gupta 2001:26
When outcomes of a program can be expressed in dollars, (only) then a
cost-benefit study can be done.
Weimar and Vining Ch 16 Use this for C B Analysis
Choose the alternative with the largest benefit in
comparison with the cost.
Fundamental Principles of CostBenefit Analysis
(Gupta 2001:358)
I.
II.
When considering a single project,
accept it if its benefits are greater than
the costs.
When considering alternative projects,
choose the one that gives you the highest
benefits in relation to the costs.
(p358 6 steps to the C-B process)
Gupta 2001 Ch 14
Choosing the Best
Alternative C0st
Benefit Analysis p360
Gupta 2001 Ch 14
Choosing the Best
Alternative C0st
Benefit Analysis p360
Choose the Correct Answer
A problem with using cost-benefit analysis is that
 while the value of benefits is easy to calculate, the
costs of the program are difficult to estimate.
 many benefits, especially in human service
settings, are hard to place a dollar value on.
 the dollar unit is not that important in human
service settings.
 it does not add much information to program
evaluation reports.
 In judging the usefulness of a cost-benefit evaluations one must be
wary of:
– values assumed in the choice of outcome variables.
– the validity of the evaluations from which program benefits have
been estimated.
– the assumptions used in assigning dollar values to the outcomes.
End
Beyond here FYI
Cost Analysis: What you have nearly
done with Lab 3b
 Cost Analysis=estimate the true costs (resources
used) to produce a unit of output.
 i.e. what is the cost per child in the daycare?
– Simply take any given month and divide the cost for the
month by the number of children.
– Or do it for the full year.
– Notice it will vary …remember this is an ESTIMATE
Source: Bretschneider
Divide Costs (Separate Mission
Centers)
 Define Cost Unit
– i.e. unit of activity your agency performs
(visits, miles, coverage units of time)
 Define Workload
– i.e. meters repaired, shifts covered, (3:1 ratio,
24 hours a day, 27 people/3=9*3 shifts a day)
 Indirect Costs
– To be allocated by salary, square footage, units
of service, direct costs
Source: Bretschneider
Cost Definitions-Direct vs. Indirect
 Direct costs: are costs that are easily tied to the
mission center. Typically include personnel,
materials, supplies, facilities, etc. used by center.
 Indirect costs: are costs that can not presently be
tied directly to mission center. May include many
costs of service centers, and central administration
of the agency.
Goal is to eventually turn most indirect costs into
direct costs.
Source: Bretschneider
5.
Indirect costs are
 those that are incurred in providing services
for specific clients.
 those that cannot be associated with specific
individual clients.
5.
Indirect costs are
 those that are incurred in providing services
for specific clients.
 those that cannot be associated with specific
individual clients.
Divide Costs (Separate Mission
Centers)
 Direct Costs
– variable
– semi variable
– step (personnel) staff
hours=workload/productivity (output per unit)
– fixed
 Sum of Each
The value of income one forgoes by
attending college instead of getting a job
right after high school is called
 a sunk cost.
 an opportunity cost.

14.
The value of income one forgoes by
attending college instead of getting a job
right after high school is called
 a sunk cost.
 an opportunity cost.

14.
Evaluators using cost-effectiveness and
cost-benefit analyses have been criticized
for
17.
 placing a value on priceless human lives.
 valuing all people equally.