Classifications Of Costs And Benefits

The next step in cost and benefit determination is to categorize cost and benefits. They may be tangible or intangible, direct or indirect, fixed or variable. Let us review each category.

Tangible or Intangible Costs and Benefits. Tangibility refers to the ease with which costs or benefits can be measured. An outlay of cash for a specific item or activity is referred to as a tangible cost. They are usually shown as disbursements on the books. The purchase of hardware or software, personnel training, and employee salaries are examples of tangible costs. They are readily identified and measured.

Costs that are known to exist but whose financial value cannot be accurately measured are referred to as intangible costs. For example, employee morale problems caused by a new system or lowered company image is an intangible cost. In some cases, intangible costs may be easy to identify but difficult to measure. For example, the cost of the breakdown at an online system during banking hours will cause the bank to lose deposit and waste human resources. The problem is by how much? In other cast intangible costs may be difficult even to identify, such as an improvement in customer satisfaction stemming from a real-time order entry system.

Benefits are also classified as tangible or intangible. Like costs, they are often difficult to specify accurately. Tangible benefits, such as campier jobs in fewer hours or producing reports with no errors, are quantifiable Intangible benefits, such as more satisfied customers or an improved carper rate image, are not easily quantified. Both tangible and intangible costs benefits, however, should be considered in the evaluation process.

Management often tends to deal irrationally with intangibles by ignoring them. According to oxenfeldt, placing a zero value on intangible benefits is wrong.1 Axel rod reinforces this point by suggesting that if intangible costs and benefits are ignored, the outcome of the evaluation may be quite different from when they are included. It indicates the degree of uncertainty surrounding the estimation costs and bet1efits. If the project is evaluated on a purely tangible basis, benefits exceed costs by a substantial margin; therefore, such a project is considered cost effective. On the other hand, if intangible costs and benefits included, the total tangible and intangible costs exceed the benefits, which makes the project an undesirable investment. Furthermore, including   all costs increases the spread of the distribution (compared with the tangible-only distribution) with respect to the eventual outcome of the project.