Description
1. A technique to measure the costs of an alternative course of action to achieve some objective against the benefits resulting from taking that course. It is used where important factors in a problem cannot be measured in monetary terms, or where such measurement is very difficult and uncertain, or where monetary values are only part of total values. Associated with systems analysis, it has had its greatest development in dealing with military problems. Through the Planning-Programming-Budgeting system (PPBS), use of this technique has been extended to all types of organizations.
2. A distinction is made between cost-benefit and cost-effectiveness analysis. The cost-effective method assumes the outputs from a system to be fixed in quantity and quality. It then explores the comparative cost of various methods of producing the fixed output. That system which can produce the fixed output at lowest cost is selected as being the most efficient system (i.e. it provides the lowest input/output ratio). The cost-effective approach assumes that although the inputs to a system were variable, the output was fixed. The cost-benefit approach removes the latter constraint and allows both the inputs and the outputs from the alternative systems to vary, and then attempts to measure which of these systems is the most efficient (that is, has the lowest input/output ratio).